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EPL Oil & Gas (NYSE:EPL)

Q2 2013 Earnings Call

August 01, 2013 10:30 am ET

Executives

Tiffany J. Thom - Chief Financial Officer and Senior Vice President

Gary C. Hanna - Chairman, Chief Executive Officer, President and Member of Environmental, Health and Safety Committee

Andre J. Broussard - Senior Vice President of Geosciences

W. Mac Jensen - Senior Vice President of Business Development

Analysts

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Dan McSpirit - BMO Capital Markets U.S.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

David Amoss - Howard Weil Incorporated, Research Division

William Christopher McDougall - Westlake Securities LLC, Research Division

Patrick B. Rigamer - Iberia Capital Partners, Research Division

Raymond J. Deacon - Brean Capital LLC, Research Division

Operator

Good morning, my name is Wanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the EPL Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. T.J. Thom. Please go ahead, ma'am.

Tiffany J. Thom

Good morning, everyone, and welcome to EPL's Second Quarter 2013 Earnings Conference Call. My name is T.J. Thom. I'm the Senior Vice President and Chief Financial Officer here at EPL. We're very glad you could join us to hear about the results we've posted for this past quarter. We'll begin today's call with some comments, including operational and financial highlights, and then provide you with our outlook, including guidance for the remainder of the year.

Joining me today from EPL is Gary Hanna, our Chairman, President and Chief Executive Officer. Also on the call and available to answer questions are Andre Broussard, Senior Vice President, Geosciences; and Mac Jensen, Senior Vice President, Business Development.

Before we begin with our prepared remarks, I'd like to bring your attention to certain disclaimers and other cautionary statements contained within our call today as it pertains to forward-looking information and statements regarding EPL. Those forward-looking statements are contained in our most recent press release issued this morning and are also applicable to this conference call.

After our prepared remarks, we'll have some time to take some of your questions. I'll now turn the call over to Gary for some comments.

Gary C. Hanna

Thank you, T.J. Good morning to everyone. As always, we appreciate your time and interest. Hopefully, most of you have had an opportunity to review this morning's press release, which shows that we remain focused on delivering solid consistent results on our expanded asset base. Once again, we reported material increases in our financial performance over the same quarter a year ago, including increased production, up 91% to 23,940 barrels of oil equivalent per day; revenue, up 85% to $184 million; increased EBITDAX of 84% to $132 million and increased adjusted net income of 67% to $36 million or $0.91 per share.

We posted record high oil production for the past quarter at 17,851 barrels of oil per day, an 83% increase over the same quarter a year ago, and on the high-end side -- on the high side of our guidance range. The integration of the Hilcorp acquisition is behind us, and our total company assets are exceeding our original planned projections. We are, therefore, raising our 2013 annual production, EBITDAX and capital budget guidance as we continue and expect to continue ramping up our oil production by maintaining high activity levels throughout the remainder of this year.

First, on the oil side, we're increasing our forecast oil production to between 17,750 to 18,750 barrels of oil per day. While we're focused on oil, you may have noted that our natural gas assets are performing nicely. The combined effect of strong oil production growth and decent gas performance is leading us to boost our total annual production guidance to between 22,750 and 24,750 barrels of oil equivalent per day. This is up substantially from our original guidance range of 21,000 to 23,500 barrels of oil equivalent per day.

It follows that given the strong production growth, we're increasing our EBITDAX guidance range to between $500 million and $550 million using prevailing oil prices. As you saw in this morning's press release, we have modestly increased our 2013 capital budget to $330 million from $300 million. The 2013 program is going well, with 25 successful projects and an overall 83% success rate to date. Our drill program continues in full swing, with 5 rigs running within our core field areas. Our increased budget allows us to maintain our high activity levels throughout the remainder of this year, providing good production momentum as we head into 2014.

We've also increased our P&A budget from $30 million to $45 million. The program continues to be efficient as we are ahead of schedule and have increased the budget to accommodate additional idle iron removal work for the remainder of the year. The bottom line is that with our revised upward guidance on EBITDAX and modest increases to our budget, our free cash flow is still expected to be very strong in excess of $100 million, using the midpoint of our estimates.

Shifting to our longer-term growth potential, as expected, we're working on the reprocess seismic data over our new Hilcorp properties. The state has started coming in-house late last quarter. The technical teams are jumping right in, and we are very pleased with the opportunities taking shape. Our initial review of the high quality data and ongoing field studies focused at Ship Shoal 208, South Pass 78 are encouraging. Within our short review time of the data, less than 2 months to be exact, we have seen our total company 2P drilling inventory in the shallow depths expand to 79 projects, up 36%. This ramps the reserve estimate on our shallow drilling inventory to 65 million barrels of oil equivalent. This is an addition to the 16 million barrels of oil equivalent on the base legacy assets, and the Hilcorp 2P currently being evaluated by NSAI. And we're confident that based on our limited time with the data that we're just scratching the surface. So while 2013 is shaping up to be a great year, we are already looking out ahead towards executing our expanding inventory in the years to come.

Given that the future growth potential squarely in front of us, we still do not believe that our stock price currently trading around our 1P PV-10 values the quality of long-lived oily assets, much less our financial discipline or our substantial upside potential in the form of 2P and 3P. Over the last few years, we've tripled our reserves in oil production while maintaining a conservative balance sheet. Arguably, we're underlevered today at 1.2x debt to EBITDAX. And we've done this without issuing equity. In fact, over the past 24 months, we've repurchased almost 5% of our outstanding shares. As you saw on this morning's release, we continued to repurchase shares this past quarter and have expanded our share repurchase program from $40 million to $80 million, reflecting the confidence in our growth potential and our ability to deliver, as we have the past. With that, I'll turn the call back to T.J. for more detail on our finances. T.J.?

Tiffany J. Thom

Thank you, Gary. Reflecting on this morning's reported earnings, our focus remains squarely on our assets, as past quarter's results were once again driven by record oil production, advantaged by solid operational performance of our assets and by strong realized oil prices. We reported net income to common stockholders for the quarter at $69.6 million or $1.75 per diluted share compared to net income of $35.4 million or $0.90 per diluted share for the same period a year ago. The net income for the quarter included $26.9 million of total gains on sale of assets, mainly comprised of our previously announced nonoperating Bay Marchand divestiture. Net income also included noncash unrealized gains on derivative instruments of $34.7 million and $8.4 million of noncash cost attributable to a small gas field impairment, dry-haul cost and a little loss on abandonment activities. Excluding the impact of these items, our adjusted second quarter net income, a non-GAAP measure, would've been $35.8 million or $0.91 per diluted share compared to $21.4 million or $0.55 per diluted share for the same period a year ago.

It's also worth noting that our income taxes related to our net income for the second quarter were deferred. EBITDAX for the quarter was $131.6 million, and discretionary cash flow was $121.6 million or $3.09 per share. Cash flow from operating activities in the quarter was $114.2 million. Oil production for the quarter averaged 17,851 barrels per day, and as Gary mentioned, was on the high side of our guidance range, and again, a new quarter natural record high.

Natural gas production for the quarter averaged 36.5 million cubic feet per day. And while we've continued our focus on oil with minimal expenditures, our natural gas assets are solidly contributing rate. Total company production was above guidance, averaging 23,940 barrels of oil equivalent, dominated by oil at 75%. Price realizations for the quarter, all of which are stated before the impact of derivative instruments, were strong, averaging $177.34 per barrel for crude oil and $4.04 per 1,000 cubic feet of natural gas. Our crude oil remains advantaged by receiving HLS/LLS crude oil basis differentials, currently at a significant premium to Brent.

Now to our major operating expense items for the quarter. Before we get into the numbers, it's important to note our staff is doing an excellent job of continuing to control cost in our expanded and oily asset base, while continuing to drive increases in production. LOE for the quarter totaled $42.8 million, which included approximately $4.5 million of non-retained workover expenses. The necessary expense workovers contributed to record oil production for the quarter, providing restored initial rate of 150 barrels of oil per day. Without these expenses, LOE would've been $38.3 million or below $18 per barrel of oil equivalent.

Turning to G&A expenses. They were $7.4 million for the quarter, including stock-based compensation at $1.8 million. Both reported LOE and G&A increased over the same periods a year ago, mainly due to our expanded asset base.

Turning to the balance sheet, our net debt sits currently at approximately $620 million, comprised mainly of $510 million aggregate principal amount of 8 1/4% senior notes due 2018, approximately $55 million in cash, and $165 million outstanding on the revolver. Our current liquidity is substantial at $315 million, and leverage low, as Gary mentioned, at 1.2x net debt to projected 2013 EBITDAX. Our projected free cash flow will continue to enhance our liquidity, lower our leverage, preserving our financial flexibility as we continue to grow both organically and through additional acquisitions.

Speaking of organic growth, I'd like to move now into third quarter and full year 2013 guidance. As you saw on this morning's press release, and as Gary highlighted, we've made some significant upward changes to our guidance and tightened ranges where we could with half the year behind us. So with that, I'll spend just a few moments highlighting some of the major items.

As a recap to Gary's earlier comments, turning first to oil production volumes, still the lion share of our revenue and production, we expect it to average between 17,500 and 18,500 barrels of oil per day for the third quarter. For full year, we are raising guidance to between 17,750 and 18,750 barrels of oil per day, up from 17,800 -- 18,500 barrels of oil per day. We're modestly increasing our 2013 capital budget to total approximately $330 million, up from $300 million, in order to accommodate additional development activities, mainly workovers in the latter part of the year.

Turning to EBITDAX, based on our strong oil projections, we're raising guidance and are now projecting EBITDAX to range between $500 million to $550 million, up from $475 million to $525 million. Free cash flow potential remains high with a midpoint in $105 million and is expected to further drive down acquisition revolver debt.

Our cash flow is protected, our solid hedge position, mainly Brent swaps averaging $106 for 2013. And just as a note, our hedging program remains active. And with the current recent uptick in oil prices, we have continued to layer in additional projections and protection using Brent swaps in 2014.

Now turning to major expense items for the quarter. For LOE in the third quarter, we expect it to range from $37 million to $42 million, and for full year, from $155 million to $165 million. We'll spend just a few more dollars in the third quarter on routine maintenance expenses and expect LOE to trend down in the fourth quarter.

Moving to G&A expenses, including noncash compensation. We expect this line item to range between $7 million and $7.5 million for the third quarter. And for full year, our guidance range is between $28.5 million and $29.5 million.

Turning to DD&A, the guidance for the third quarter and full year is $23 to $26 per Boe. We're currently running in the middle of this range, based on organic and acquisition growth achieved at reasonable cost. For interest expense, the bulk of which is our semiannual payments on our outstanding $510 million of senior notes, we would expect it will range between $12.5 million and $13.5 million in the third quarter, and from $51 million to $53 million for full year 2013.

Again, as a reminder, our full year guidance is contained in this press release, issued earlier this morning. And with that, I'll take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes of the line of Michael Glick with Johnson Rice.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

I was wondering if you could walk us through kind of the activity and spending levels on the Hilcorp properties from now and into 2014?

Gary C. Hanna

T.J., go ahead.

Tiffany J. Thom

Sure. We're still around that same level of spending that we project an earlier this year, about 1/3 of the budget go into Hilcorp. We started activities and we're making nice progress there, started that, what around June time frame, Andre?

Andre J. Broussard

Yes.

Tiffany J. Thom

And we'll, of course, be looking at next year to ramp that up. We've said anywhere from $150 million to $200 million being spent on the Hilcorp assets.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

That $30 million incremental CapEx, how is that located between your legacy and the Hilcorp properties?

Tiffany J. Thom

Sure. We've increased Hilcorp roughly $10 million, and the remainder over the current asset base.

Gary C. Hanna

So ratio is consistent, Michael.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Okay. And I guess, how much of that CapEx raise is contributing to the production guidance increase?

Gary C. Hanna

Very little. It's -- most of that is in the fourth quarter, Michael. So it's really about ramping up and going with a lot of momentum into '14. T.J., I think you have, probably, a reasonable estimate of what that contributes in 2013, but it's fairly nominal.

Tiffany J. Thom

Yes, about 100 barrels per day.

Gary C. Hanna

Yes, roughly.

Tiffany J. Thom

And again, it's because we're seeing the impact as you ramp-up in that November, December time frame so...

Operator

Your next question comes from David Deckelbaum with KeyBanc Capital.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

I just had a quick question. I'm not sure if you gave color on this earlier, but you talked about the 79 projects now at Hilcorp from some of the preliminary seismic work from, I guess, like 58 before. How much of those 21 projects were included in that like 22 million-barrel equivalent to 2P that you disclosed at the Analyst Day that was attributable to Hilcorp?

Tiffany J. Thom

They're all brand new, so they've been additive. So if we looked at the combined drilling inventory, we've started with about 50 million barrels of oil equivalent, we're up to 65 million barrels now. And as we noted, there was a subset, obviously, afforded to the Hilcorp properties, all of our ads in this last go around as we've looked at the data coming in-house has come from the Hilcorp property.

Gary C. Hanna

And that's still, again, in those shallow horizons. It's not in the that flank play that we've talked about. That's really more over in the 3P number Dave so -- and again, we're just scratching the surface here that fellows have had us in, right at 2 months. And it is really digging in and [indiscernible].

Andre J. Broussard

Yes. We reprocessed some D&L]. Correct.

Gary C. Hanna

Yes, and continues. So I think we're just getting warmed up.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Sure. If I could ask a couple of questions just around production. For 3Q, there's obviously some downtime included in that guidance for hurricane season, I would presume. Could you elaborate, I guess, on how much downtime your including right now? And what we, I guess, we might expect if there was a benign hurricane season?

Tiffany J. Thom

Well, as we've tended to deliver in the past, if it's a pretty benign season, we're going to be on the high side of those ranges, which by design, I think is a prudent approach as we're sitting here in early August and we've got quite a bit of hurricane season ahead of us. So we have allowed for a little bit of weather downtime, if you will, in the event we do have some disruption. And you can see that in the lower end of the range.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Yes, for sure. I was just sort of curious if -- your answers didn't in quantify at all whether it's 15 days of downtime or -- sort of like a 10% for the quarter?

Tiffany J. Thom

I would say that it roughly works out to about 10% for the quarter. But again, the problem with doing it on a daily basis is that you've got ramp-up, so you may half of your production down, so it tends to be a little bit hokey. So overall downtime, we're generally layering in around the 10%.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Sure. I guess the last one for me, just again on the production side is I know that the gas production stream is a little bit hard to predict. How would you, I guess, attribute some of that gas growth sequentially? Is it more just -- is it early gas caps that you're working down right now from some of the projects you brought on in the second quarter? Or is it just associated gas that you hadn't necessarily included in your earlier characterization of the reservoir? Or was it just sort of up-dip opportunities that were inexpensive to turn on?

Andre J. Broussard

David, this is Andre. Yes, the -- a lot of the gas you see associated with that as well have been drilled in an up-dip position that are -- that may become half gas for a while and then move more and more towards oil as time goes on. So we're getting some gas there, as well as of our older fields. We're seeing some gas up the Hil and like East Bay and places like that. So yes, that is what you're seeing with the gas production.

Gary C. Hanna

I think there is some contribution from South Pass 49 as well that's...

Andre J. Broussard

Still get gas, correct.

Gary C. Hanna

Yes.

Tiffany J. Thom

We spend some nominal dollars to look at some low-contrast pay, just getting warmed up on that side of the business. And so far, the performance has been very good. We've tested it in...

Gary C. Hanna

Outstanding, outstanding.

Tiffany J. Thom

South Pass 49, those wells are contributing very nicely. So that all combines to a relatively flat gas production over what our forecast would've been.

Operator

Your next question comes from the line of Richard Tullis with Capital One.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Gary or T.J., looking at your guidance for this year, what do you expect you could exit 2013 production exit?

Gary C. Hanna

Yes. Go ahead, T.J.

Tiffany J. Thom

Yes, we're still on-clip, as we released earlier that we could be approaching that 19,000, 20,000 barrels a day. So obviously, with this guidance range and the way that we've forecasted, we're still in that hunt.

Gary C. Hanna

Yes, it ramps up throughout the remainder of the year. So obviously as you get to the back, it affects the 365 days prior to it, but I'm fairly comfortable in that 19,000 to 20,000-barrel range, Richard.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. Jumping over to the deep shelf drilling potential that was highlighted at the analyst meeting earlier this year, given what you've seen thus far with the Hilcorp properties, what's your estimate for 3P at this point for total inventory?

Andre J. Broussard

Yes, Richard. This is Andre Broussard. We're still at the very early stages -- we just got this seis again a couple of months ago, as Gary mentioned, so our guys have been primarily focused on those properties, in looking at some of the shallow opportunities. So I suspect, as the next month, 1.5 year -- year or so rolls around, that you're going to begin to see that inventory build as we begin to get to look at that stuff, but we think there is beat, the 100 million, 150 million barrels of equivalent down in the South Pass especially and in the Ship Shoal area as well.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. When do you expect to start again the drilling program for the deeper targets? I know up here recently had a pretty nice well, I think it was Ship Shoal announced just in the past couple of weeks.

Andre J. Broussard

Correct.

Gary C. Hanna

Yes, that was an encouraging well. It -- as we said before, this is an evolutionary process and we'll move prudently through the programs. so in actuality, we've already started drilling some of those wells. We completed even some of them. And then late last year, starting -- some of the wells we drilled at Main Pass along [indiscernible]. You'll see those begin to leg in over the next, what, 12 to 18 months as we learn more about those plays. A lot of them have development potential behind them, where you're drilling one and it's an analog to others. So you'll see that program ramp up. We look at this as 2, 3- to 5-year kind of a play, a tremendous upside. We want to be careful and prudent about how we attack that program. We know we're very excited about it. it's easy to get giddy on our side, but we'll take a prudent approach to those wells. So you'll see those start to leg in over the next 12 months and they'll be exciting to see.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. And what generally run you to drill to that depth? Say, 15,000 to 17,000?

Gary C. Hanna

Yes, these wells, they'll run about $15 million to $20 million a well, somewhere in that range. And again, as we've said in the past, a typical profile for us on the shallow wells, where we're drilling, 85% success rates on wells down to 10,000 feet. Typically, we'll take 100% of those wells. We're very comfortable drilling those wells. On the deeper, we'll shed some of that interest off, leverage our bets, if you will, on those deeper plays. So I think you'll see us average closer to 50% ownership on those deeper plays. So still exposing the same kind of capital on these very, very large reserve bases.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. And then just lastly for me. What's with the outlook on acquisitions at midyear this year, are you seeing much coming your way, deal flow?

Gary C. Hanna

Yes, it's -- that is a bunch of deal flow. We have Mac here. So Mac, why don't you...

W. Mac Jensen

Sure, you bet. The pipeline is good. There was a number of shelf packages that are out that we're reviewing to see what assets included in those might fit our criteria. We're also engaged in a number of private conversations, which could bear fruit for the future as well. So in general, I think it's a very robust list of primary targets, as we call them, and we're excited about pursuing them.

Operator

Your next question also the line of Dan McSpirit with BMO Capital Markets.

Dan McSpirit - BMO Capital Markets U.S.

So the share repurchase program is alive and well, it appears.

Gary C. Hanna

It is.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

I've asked this question before and I guess, I'll ask it again. At today's much higher trading levels for the stock, how do you weigh opportunities in the field to generate returns versus buying back stock, again, at today's prices? I recognize that question is maybe more theoretical than not.

Gary C. Hanna

It is theoretical, Dan. It's a hard one to answer and there's a lot of variables that we probably don't have time to get into. As I've said, as a general philosophy, if we feel like the value of the stock does not reflect our reserve base or where we are, we'll continue to aggressively buy those shares. Historically, we've purchased what -- just under a couple of million shares of stock. To date, return on those has been very good. Return on them is good even at the ones we acquired at $28. So we'll continue that program as long as we think that we're undervalued. We're obviously throwing off a lot of free cash. At some point in time, it's a real exercise to go through and look at where you can put your capital to work best. But sometimes, pushing that back to the shareholders in the form of stock buyback is just the right thing to do, Dan.

Dan McSpirit - BMO Capital Markets U.S.

And then your view on the crude oil differentials here for the back half of the year?

Tiffany J. Thom

We're cautious. We're watching that market. Obviously, we're seeing a significant premium as we have seen the forecast kind of flip around from projections that said we'll be down on HLS/LLS below Brent, we're now still quite of a bit of a premium, $3, $4 up. So our models do show it backward dating again, just to keep in step with how the forward projections are looking on those curves. Particularly, I'm watching the LLS curve. But who knows, it might hold up a bit here.

Dan McSpirit - BMO Capital Markets U.S.

Okay. And any detail on workovers that you can relay that are planned for the back half of this year, and what that might mean for capital investment?

Tiffany J. Thom

Sure. Just to give you a feel, third and fourth quarter, we're going to stay a little bit heavier-weighted towards the third where most of our drilling activity is going on. About $90 million to $100 million being spent, very -- on par with the second quarter. And then we'll back off to $60 million, $70 million spent in the fourth. And again, workover is just, obviously, a prudent dollar to spend, a little bit less capital that need to go into it, a lot of activities still. We'll be running roughly 4 rigs to these numbers as part of that total.

Dan McSpirit - BMO Capital Markets U.S.

Okay, great. And then one last one for me. In the press release, you used the words just scratching the surface, and you repeated those words in your prepared remarks in talking about the company's opportunities you said. Does that tell me that, that maybe acquisitions really are on the back burner here, that you do have enough on your plate?

Gary C. Hanna

I wouldn't read that into it at all, Dan. We really never take our foot off the accelerator when it comes to acquisitions. We always have 2 or 3 or 4 of those in the mill remaining opportunistic to acquire the good assets. We are very patient buyers, as you know. So the fact that we don't close the deal a month, don't read anything into it. Between our 2 large transactions, there's 18 months between there. Those 2, it could be 18 months, it could be 8 months between the next 2. So no, I wouldn't read that into it at all. We look at acquisitions, not to buy necessarily the PDP. We think that's swapping dollars. We're looking for assets that we can add to our inventory base and our project inventory base, and double and triple those assets. So to a degree that they roll in to the other programs, we can execute efficiently on those, we can cherry pick those types of projects. Constant feeding of new, high quality assets is key to our programs, so I wouldn't read that into it at all.

Operator

Your next question comes from the line of David Amoss with Howard Weil.

David Amoss - Howard Weil Incorporated, Research Division

Just 1 question this morning for me, and probably for Andre. Can you give us more detail on the projects you've undertaken so far since May at Hilcorp? I mean it sounds like you're working Ship Shoal 208 to start. I mean, can you just tell us a little bit about what you've done there in terms of the type of projects and what you've seen so far early on in that campaign?

Andre J. Broussard

Bless you, David. Since May, we've executed on a couple of 3 workovers as well as 2 drill wells within the field, and we've been a very pleased with the results to date. And we have continued activity in those -- in the Ship Shoal 208 still pretty much all the way through the end of the year.

David Amoss - Howard Weil Incorporated, Research Division

Okay. And just one follow-up. Is that -- I mean, are you going to stay on Ship Shoal 208 in terms of the Hilcorp program? That's the only asset you'll hit in 2013?

Andre J. Broussard

No, that's not right. We've actually already started doing some workover projects within the South Pass 78 field. And as we mentioned at the analyst day presentation, we're starting to build the drilling inventory in South Pass 78. If you'll recall, that recalls -- that requires a platform rig, and so we'll be looking in putting a platform rig out at South Pass 78 next year and starting the drilling campaign as well as continuing the workover campaign in 2014.

Operator

[Operator Instructions] Your next question comes of the line of Chris McDougall with Westlake Securities.

William Christopher McDougall - Westlake Securities LLC, Research Division

So I want to drill down a little bit more on your activities year-to-date. So how has the capital been split between -- the vast majority of your work has been development or at least your projection, work those development and then exploration, I think you had a percentage there. How is that split for the year? Is it pretty consistent across the year?

Tiffany J. Thom

Pretty consistent. Obviously, we have a bit of a categorization issue because a lot of times we're drilling development wells that actually have reserve adds. So it's a little bit of a misnomer to say that we haven't had reserve-adding projects. If you think about it in terms of reserve adds, it's equally split throughout the year. We're in good shape, we think, with what we've been able to add at the bit, with our programs to date, with the mid-80% range on the success rate and we're feeling confident as we head into the remainder of the year that we'll have continued reserve exposure.

Gary C. Hanna

Okay. Remember, Chris, at the beginning of the year, we said out -- out of the $300 million, about $160 million of that spend exposed us to reserve adds. I think that ratio, as T.J. said, is staying pretty consistently. I think with the ones that we've added on, that ratio is probably even maybe a little higher.

Andre J. Broussard

A little higher.

Gary C. Hanna

Yes, so where that extra $30 million is probably exposing us on a percentage basis to more reserve adds so -- and T.J. is absolutely right. I mean, a lot of times when we'll do an exploration work, that's why we take our time and really study these fields, because you can do -- drill an exploration leg to a particular drill and you're going through 3 or 4 for the development productive zones up hole, so if deeper one works out, great. You'll drill an acceleration well on those upper sections. If it doesn't, you'll just come of hole and produce those. So how do you categorize that? Some of it will be development, some of it will be exploration. That's a tough number to pull apart. But at the end of the day, we don't care. we want to add reserves. And what bucket that goes into, we're -- it's somewhat secondary to the thought process, Chris.

William Christopher McDougall - Westlake Securities LLC, Research Division

Sure -- no, that's what we've seen in past years.

Gary C. Hanna

Sure. Yes, that's -- I mean, what we've done in the past is a good indicator of what we're going to do going forward.

William Christopher McDougall - Westlake Securities LLC, Research Division

Okay, great. And then separately, in the past we've talked about horizontal wells in the Gulf and I mean, I think what we've heard from you is that it's certainly one piece in the toolkit, but not seeing as kind of a big component going forward. Has that thinking stayed the same or changed, or do you see any opportunities in your inventory going forward for horizontals?

Gary C. Hanna

I think our thoughts earlier are consistent with our thinking today. Certainly, again, it's got a place in our inventory. I think you're primarily referring to the 21 announcement here a couple of weeks ago. We're -- we've read what you've read on that. We're anxious to see that report in a little more detail and understand exactly what the nature of those adds are and how much of that application of horizontal is changing the landscape a little bit. Those assets are in our base, they're in our backyard. So it's in our best interest and we're keen to understand what that means. Does it provide an uplift to us? We have no idea. It's certainly not going to be negative. Anything that we find out on that would be positive. Until we know that, we see it in kind of the same way we have. We drilled a number of horizontal wells, we have some in the inventory. They have to come in and bang heads with all of the other plays that we have going on. If they make the financial cut, they do. Otherwise, they go back in the inventory for future drill dates, so -- And thus far, that's been, really, the case. We just have better return projects than what we have in our inventory from horizontals.

Operator

Your next question come from the line of Patrick Rigamer from Iberia Capital Partners.

Patrick B. Rigamer - Iberia Capital Partners, Research Division

I'm just curious with the incident in the Gulf last week, if you're seeing any issues, getting permits or kind of increased scrutiny on your existing operations?

Gary C. Hanna

Yes, that's a good question. Certainly, again, that well, the incident with Walter and Hercules was squarely in our basin. We're very, very keen to understand what happened on that well. I think, of course, everybody is, including Hercules. We're not going to know a lot until a relief well is drilled and they're able to get onto the platform and really study that. I think depending on that outcome will dictate somewhat whether there'll be increased scrutiny around, whether that be blind rams or deals or -- I honestly don't know, but I think, realistically, would I expect something to come out of that, that says, "Hey, we need to do this differently." I would expect that. Is it going to increase frequency or what's going on from inspection? I don't see that, but certainly, there'll be some type of results from that. Again, we're keen to understand what happened, not just out of curiosity but because we want to make sure that this doesn't happen going forward. That's our primary drivers. We'll just have to wait for a little more information.

Operator

Your next question comes from the line of Ray Deacon with Brean Capital.

Raymond J. Deacon - Brean Capital LLC, Research Division

I was wondering if you could give a little bit more detail on where the 5 rigs currently are active? And how does that look in the second half?

Andre J. Broussard

I will answer that. We've got a rig at Ship Shoal field. We've got one in East Bay right now. We've got a snubbing unit in Ship Shoal as well, and a snubbing unit at South Pass.

Tiffany J. Thom

Yes, we have 1 at Main Pass. And then, obviously, we continue on our drilling as we look at it. For the remainder of the year, we'll be still heavy on the Ship Shoal side, East Bay and as Andre mentioned, continue with the operations at South Pass.

Raymond J. Deacon - Brean Capital LLC, Research Division

Okay, got it. And I just wanted to understand the comment of increased P&A expenses. So basically, what you're saying is you want to utilize existing platforms more -- at a higher level and so you're accelerating some P&A work, is that I guess where...

Gary C. Hanna

Yes, the -- yes, I think that's somewhat accurate. I mean at the end of the day, we try to maintain a program that addresses idle iron aggressively. Over the last 3 years, we've plugged, in excess, I think 500 wells and 150 structures, and we've been aggressive about getting that out. In fact, over the next year or so, we're just running out of idle infrastructure. But we have some excess capacity through the year. We like to stay consistent in our program, as long as we can do that with a high degree of efficiency. So it's really just having that a little bit of capacity there in some wells and we're all dressed up, everybody is safe and efficient, so let's go ahead and knock out a few more. We have a couple of dollars come in from non-op parties that are in that number as well, so it's not our -- all our activity that we're operating internally. There are some external dollars being spent from -- as non-working interest and there's some non-operated pieces that is certainly contributing to that increase a little bit, but -- and that's hard for us to budget. We try to find that out at the end of the year. But a lot of times, we're a little bit surprised when we get one of those AFTEs. But it is what it is and they're taking theirs out. So I think it's just about remaining consistent and efficient going out through the year.

Raymond J. Deacon - Brean Capital LLC, Research Division

Okay, got it. And just one last question on the liquidity our number. That doesn't reflect the new redetermination in the quarter, but maybe by fourth quarter you'd have another redetermination, is that right?

Tiffany J. Thom

Right. We held fast to our original barren base that we got left, winter, so our spring determination, we've stayed at 425 on the barren base. And again, we review those semiannually so come fall, we'll take a look at it again. Keep in mind, with our current liquidity, really no push. We tend to be very conservative on our revolver and flex, as we need to, as we bring new assets in.

Operator

There are no further questions. I'd like to turn it back over to management for any closing remarks.

Gary C. Hanna

We appreciate everybody's participation again at the -- your interest means a lot to us, so we look forward to reporting our third quarter. Thank you.

Operator

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

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