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Bill Barrett (NYSE:BBG)

Q2 2013 Earnings Call

August 02, 2013 11:00 am ET

Executives

Jennifer C. Martin - Vice President of Investor Relations

R. Scot Woodall - Chief Executive Officer, President and Chief Operating Officer

Robert W. Howard - Chief Financial Officer and Treasurer

Analysts

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Andrew Venker - Morgan Stanley, Research Division

Carl Gardiner - Schafer Cullen Capital Management, Inc.

Nicholas P. Pope - Cowen and Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Bill Barrett Corporation Earnings Conference Call. My name is Patrick and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Jennifer Martin, Vice President of Investor Relations. Please proceed.

Jennifer C. Martin

Thank you, Patrick. Good morning. Thank you, everyone for joining us. Presenting today will be Chief Executive Officer, Scot Woodall; and Chief Financial Officer, Bob Howard.

A few quick notes before we get started. Our quarterly report on Form 10-Q is either filed or will be shortly, is available on our website under SEC filings. Second, as usual, I need to remind everyone of the forward-looking and other cautionary statements provided in yesterday's earnings release. In addition, during our discussion, we make reference to discretionary cash flow and adjusted net income, which are non-GAAP measures. Reconciliations to the appropriate GAAP measures may be found in the earnings release, which is posted on the home page of our website.

Lastly, we will be participating in a few upcoming conferences. Scot Woodall will present at the EnerCom Oil and Gas conference here in Denver on August 14 and at the Barclays Energy-Power Conference in New York on September 12. We look forward to seeing many of you in the coming weeks and with that, I will turn it over to Scot Woodall to get started. Scot?

R. Scot Woodall

Thank you, Jennifer, and good morning. There are a number of exciting things happening in the company. I will summarize the most important takeaways from this quarter's results. The DJ Northeast Wattenberg area continues to get better. Implementation of the larger frac combined with gas lift is looking very positive. We now have 30-day results from 3 additional wells, and as announced yesterday, the 30-day IP rate is 517 barrels of oil equivalent per day, or up about 100 barrels of oil equivalent per day, or 25%, over our previously released wells. We are enthusiastic about the DJ and we really have some good things going on in the coming months. I'll go into more detail in a minute.

In the Uinta, we are realizing increased efficiencies, both on the drilling site and in our daily operations. In addition, we are seeing strong results at our East Bluebell South Altamont area, where drilling will be focused for the remainder of this year. Third, the new wells in the Powder River Deep oil program are performing well. This is looking like a great play. Fourth, our asset sales program is in progress and we are confident that we can close our funding gap, CapEx to cash flow, by year end.

Before I go into more detail on all of the positive events, I will provide a little more color on the lower-production guidance. The 2 additional rigs in the DJ are projected to start 1 to 2 months later than we originally anticipated. It took several weeks longer to obtain the necessary permitting, surface use agreements, right-of-way agreements and to put infrastructure in place. This in turn pushed expected completion dates for our approximately 10 wells into 2014, thereby reducing production. Capital guidance is lower by $25 million at the midpoint, primarily in conjunction with this.

In the Uinta, there are a lot of little things that summed up to the underperformance. Not one single issue is the dominant culprit. The good news is that our future locations' inventory count for the remaining -- for the area remains unchanged. We have a large inventory of undrilled locations, our staff's encouraged to try different things to improve results. Sometimes these things work and sometimes these things do not work.

In Blacktail Ridge/Lake Canyon, we varied our development patterns to include the combinations of horizontal and vertical wells. Both the horizontal and vertical wells underperformed our expectations. We tried acid stimulation treatments for the Lower Green River interval in a number of wells that did not meet our expectations. Localized regional changes in the geology and reservoir makes this a statistical play. One specific area in Blacktail Ridge underperformed the type curve. The Uinta oil program is still an important asset to the company and we will continue to drive efficiencies in performance. All in, the impact to the 2013 production is about 20% from the DJ timing and about 80% from the Uinta results.

So now, let's turn our attention to the DJ. We couldn't be more pleased with our progress there and truly exciting activity we have lined up for the remainder of this year. The 3 new wells we announced yesterday are all located in the northern portion of the acreage position, not far from the Dutch Lake wells. The application of larger fracs, gas lift and putting the wells on lift early has successfully resulted in higher average rates. 24-hour IP rates on the 3 wells range from 981 to 1,030 barrels of oil equivalent per day, and the 30-day rates range from 464 to 546 barrels of oil equivalent per day. The wells were drilled at 6,300 feet vertical depth, 4,000-foot laterals, 17 frac stages for approximately $4.5 million each. We currently have 2 rigs in the area and we'll add 2 additional rigs this month.

We expect to spud 65 wells in 2013. It is currently taking us between 9 and 12 days to drill a well. We have spud 13 wells at the end of Q2 in the DJ Basin. We expect to spud approximately 20 to 25 wells in Q3 and between 25 and 30 wells in Q4. We have more than half of the remaining 2013 drilling well permits in hand and are confident the remainder will be received timely.

As we have talked about, we are pushing hard to delineate our acreage position by year end. Our planned 65-well program is primarily focused on the Niobrara B, where we expect to drill 15 Niobrara C wells and a few Codell wells and 1 extended-reach lateral. Additionally, we always get questions about delineation plans for the southern acreage position of the Northeast Wattenberg area. We expect to spud approximately 15 wells in the southern area in 2013. We expect to complete approximately 45 wells in the second half of 2013. Over the coming months, we will have the data set required to answer many of your questions regarding our acreage position and upside potential. There's a lot to look forward out here and we are very focused on bringing it to fruition.

In the Uinta oil program, we are wrapping up this year's drilling program, with approximately 10 wells to go. This is consistent with our original plan to focus on the Uinta oil play in the first half of the year and then switch the capital to the DJ for the second half of the year. We are currently testing 80-acre spacing. Our results are encouraging to date. I do not plan to elaborate on at this time, as it will take several months to evaluate performance. On the cost, side we continue to see savings in both the D&C side as well as in general operating efficiencies.

While the acidized wells were less expensive to complete, partially accounting for the original D&C cost estimates, we are still following a $3.3 million average expenditure out here as we continue to realize efficiencies across the board.

On the East Bluebell portion of the acreage, we have drilled and completed 11 wells. Our targets in this area are a little shallower and the geology is very predictable. We are pleased with the results to date. The acquisition of this position has improved our portfolio of opportunities.

Moving on to the Powder River oil program. This program is really going well. We have a history in the basin that gives us a very good understanding of the reservoirs. All of the targets are proved producers in older vertical fields, there is substantial subsurface control. This has allows us to map areas with potential where we apply current horizontal and completion technology. All 5 wells in this year's program are very strong. Three of the 5 had 24-hour IP rates at or above 1,000 barrels of oil equivalent per day. All of the wells are experiencing restrictive flow rates due to infrastructure constraints. The wells drilled in 2013 were drilled to around 8,500 feet, all targeting the Shannon formation. They have lateral lengths between 3,800 and 4,400-foot, to 17 to 18 frac stages.

In the play to date, we have drilled 7 Shannon wells, 1 Sussex well and 2 Frontier wells. We also have participated in a number of non-op wells. We continue to refine our assessment of this asset. On one hand, it is in a stage of relatively small cash flow and on the other hand, it offers some exciting upside. Bob will elaborate on the asset sale in the balance sheet.

I will sum up that we are well-positioned to deliver some quantifiable results between now and year end. I fully expect to delineate DJ Basin acreage, complete our 2013 Uinta oil program and complete a transaction that will fulfill our commitment to end the year with no increase in our year-over-year debt.

I look forward to our call in November and to speaking with many of you in the coming months. I will now turn the call over to Bob Howard.

Robert W. Howard

Well, thank you, Scot and good morning, everyone. I'll be brief, since it's Friday and since our financial results for the quarter are relatively straightforward. As a reminder, detailed financial information for the quarter is included in the earnings release and the Form 10-Q that we filed this morning.

For the quarter, 3-stream production was 21.4 Bcfe, and oil production for the quarter was up 30% over the second quarter of 2012. Oil production accounted for 23% of total production and oil and natural gas liquids combined were 33% of total production. Oil sales in the second quarter accounted for 47% of our pre-hedged production revenue. The discretionary cash flow for the quarter was $65.7 million, or $1.38 per share. As Scot mentioned, we have updated full year guidance. Capital expenditure guidance is reduced by $25 million at the midpoint. It is now $465 million to $485 million for the year, with the reduction primarily due to fewer expected well completions in the DJ Basin by year end, as well as overall cost efficiencies. Production guidance is revised to 83 to 86 Bcfe, which was down 4%, or 3.5 Bcfe at the midpoint, Scot has already reviewed with you.

Lease operating expense is coming in as expected, with a narrow range of $64 million to $67 million for the year. This does include $1.2 million of onetime charges related to the Dry Canyon compressor fire -- compression station fire at West Tavaputs that was discussed last quarter. Gathering, transportation and processing expense is unchanged, at $65 million to $68 million, and G&A expense before non-cash compensation is unchanged, at $50 million to $54 million.

Turning to the balance sheet. In mid-July, we redeemed the $250 million, 9.78% senior notes. The redemption credit price was $104 and 15/16, or almost $105, and was funded by the bank line of credit, which carries a much lower interest rate than the redeemed notes. Pro forma for the redemption, we continue to have good liquidity, with $457 million available on our $825 million credit facility.

We remain committed to keeping year end 2013 debt balances at or below the debt levels at the end of 2012. We're actually marketing certain assets with the intention of meeting our funding requirements through portfolio management. Our data room for the West Tavaputs property was opened in July and we continue to get direct inquiries on other assets. As discussed last quarter, our portfolio management may include the outright sale of properties or other methods of asset monetization. We are confident that we'll complete the sales process in the second half of the year.

That completes our prepared comments. We'll now open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ryan Oatman with SunTrust Bank.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

In the Uinta, can you discuss the performance issues there and perhaps provide an update to the estimated ultimate recovery of about 236,000 barrels of oil equivalent?

R. Scot Woodall

Like I said -- like I kind of said in the opening comments, Ryan, about the performance, it's a variety of a lot of things. Most of the underperformance was in 1 localized area. What we have done is, when we look at our midyear reserve internal process, the impacts of the underperformance didn't really impact our location count. Now in terms of the recoveries and things, that's really something that we'll get a little bit more data and look at more on the year end as a normal course of business. When publish type curves in our reserves and everything at year end, it's a reflection of the performance that we've seen over the prior year's drilling program. So if there's any updates, we'll make them at that time.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Got you. And then, how did those recoveries change as you move from, say, this area in Blacktail Ridge to Lake Canyon, South Altamont and East Bluebell? What are you seeing in kind of these newer areas such as South Altamont, East Bluebell, do you think that those locations could be additive, I guess, to what you've laid out before?

R. Scot Woodall

Yes. We expect that the 11 wells that we drilled in East Bluebell and South Altamont all are meeting our expectations. So, yes, we would expect some location and reserve expansion at year end based on the 2013 program.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then can you remind us what the location count was that we should be thinking about there?

R. Scot Woodall

In the East Bluebell, South Altamont area?

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Just overall, I guess, for the Uinta.

R. Scot Woodall

For the Uinta play, it's about 1,700 locations.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Okay, very good. And then I'm going to shift on a little bit and kind of leave the Northeast Wattenberg and Powder River basin questions to somebody else. I want to discuss some of the properties we don't talk about very much, Chalk Bluffs, San Juan Basin, Paradox Basin. We've seen Noble announce some good Niobrara results in its coming area, with an extended reach lateral producing 3x as much as the historical, regular lateral on that area. Do you think that, that has any implications for, say, your Chalk Bluffs acreage or your acreage in the southern part of the Northeast Wattenberg?

R. Scot Woodall

Sure, that's a great data point and does help the evaluation of that area. We still do see additional drilling locations and future potential in the Chalk Bluffs area. That's for the program that we outlined for 2013. And we thought it was most important to focus on the Northeast Wattenberg and the 40,000 acres in terms of bringing forward shareholder value and creating things within the company. Chalk Bluffs is still a very viable place to go drill and we do have future plans there. It just didn't involve 2013.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Have you seen differences in permitting around your acreage and do you think that that's something that probably makes sense to go after in 2014?

R. Scot Woodall

It could. Obviously, like I say, there's people -- the Noble results that you spoke to earlier -- there's another operator out there that is getting pretty high on the Codell, kind of close to the Chalk Bluffs area. So all those things will weigh into our '14 plans when we go down the path of making them.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Okay, and then shifting out on the San Juan basin, another competitor has been talking about an oil window there. I vaguely remember an agreement about a year or so ago with a private there, whatever came of that and do you have any exposure to the oil window there? Can you just refresh us on that program or position there?

Robert W. Howard

We did have an opportunity to drill and earn some acreage there. We allowed that opportunity to expire. We still hold a very small amount of acreage down there, like less than 4,000 acres down there. It's just an area that I think has some promise. We did think that our acreage was in the oil window. It just kind of fell behind some of the other opportunities in our portfolio.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Right. And then also on the Paradox basin, that also seems to have slowed behind some of these other opportunities that you have and I understand that. But it looks like there's been some increased permitting nearby, Anadarko Southwestern. Same type of question as the San Juan basin, can you just refresh us with your position and provide an update on kind of the industry activity nearby as you see it?

R. Scot Woodall

Sure. We have nearly 400,000 acres in our portfolio down there. We did a joint venture with an operator for about 120,000 of those acres. We expect that the joint venture party over the next several months will commence some operations and drill a few wells. And that we'll look for the results of those wells to dictate any future activity on our area. So really, we're awaiting the JV partner to drill a few wells before we do much else.

Operator

Your next question comes from the line of Pearce Hammond with Simmons.

Pearce W. Hammond - Simmons & Company International, Research Division

Scot, would love to get some perspective on step-out drilling in the DJ and in your 40,000 acres there in the Wattenberg. In the second half of the year, you're going to be drilling -- stepping out of at least a ways away from the Dutch Lake area. You're going to be moving kind of to the south and west of the Anschutz O'Brien well?

R. Scot Woodall

Yes, we're going to do some of all of that, Pearce. As I said, in 2013, we'll drill 15 wells on that Southern acreage position and so I think that will delineate really pretty well. When you think about the program this year, it's a combination of doing some 80-acre development drilling and it's also a combination of doing some single well pads that are delineating our acreage, as well as testing some Niobrara Cs, some Codells, and extended reach laterals. So I really think that when we get to year end this year, we're going to have answered almost every question that you could answer regarding this acreage position.

Pearce W. Hammond - Simmons & Company International, Research Division

Great. And then as you start to think about 2014 capital allocation, given the success you're having in the DJ right now and the rates of return being far superior to the Uinta, would you consider essentially putting all the capital dollars over in the DJ and just doing a very, very bare minimum amount of drilling in the Uinta?

R. Scot Woodall

I think that is one thing to consider. We have a handful, a very minor amount, of lease obligations in the Uinta that we would want to fulfill because we still do like that asset and it's an important asset in our portfolio. However, you are hitting the main point, is that the DJ returns, we think, are going to be superior to anything else that we have in the portfolio. So it will get the lion's share of the CapEx allocation in '14. I think I could say that pretty confidently, even though we haven't gone through the '14 budgeting process, that we will be wanting to invest most of our capital in that play.

Pearce W. Hammond - Simmons & Company International, Research Division

And then last one for me is on the wells that you reported with the earnings release, the 1,000 BOE per day IP rate. Can you give a little bit more specifics on the new frac design and completion that you applied to those wells versus your prior wells?

R. Scot Woodall

You may be mixing things there a little bit, Pearce. The 1,000-barrel oil a day IPs was up in the Powder, I believe, and that's in the Shannon formation. The improvement that we've seen in the DJ Basin, where we improved the results there by some hundred barrels of oil equivalent per day, is really just the result of larger fracture stimulations and so we've increased the amount of sand and water by about 30% over the previous wells and so that really, I think, is what's driving that additional performance.

Pearce W. Hammond - Simmons & Company International, Research Division

And you got them on artificial lifts earlier?

R. Scot Woodall

Yes, we did. We did a variety of things as we first entered the play. Everything from plunger lifts to rod pumping and I guess we're getting more and more in the camp that installing gas lift really upon immediate completion of the well gives you better results. We're further down the path of delineating our acreage position and we're further down the path of getting infrastructure in place that allows us to place those wells on gas lift immediately, and I think that's aiding in the results that we're seeing to date as well.

Operator

Your next question comes from the line of Jason Wangler with Wunderlich Securities.

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Sticking with the Niobrara quickly. As you bring on these 4 rigs, could you maybe just walk through what the plans are for them? I know you're kind of saying that you're going to branch out and develop everything, but I think you had plans for 1 to keep drilling pads on the east side, and would the other 3 kind of be rotating around the southern and northern portions and pushing out, I guess, both those ways and further east, or what are your thoughts there?

R. Scot Woodall

Yes it is kind of a scattering of a lot of things there, Jason. One of the rigs is sitting kind of on that interior, western portion of the acreage right now doing some 80-acre development. One of them is up in the Dutch Lake area, drilling some wells. The 2 that are come in, we'll do a variety of pad drilling and delineating in the southern area but really I think we are going to kind of test all corners of the acreage and test the productive horizons and also look at pad drilling and efficiencies. So I think we're going to have a great combination of results coming in the subsequent few months.

Jason A. Wangler - Wunderlich Securities Inc., Research Division

Great. And then as far as permitting, are you guys pretty well permitted as far -- I think you kind of made a comment there, are you permitted good through at least this year or even maybe next year as far as the Niobrara there?

R. Scot Woodall

We are. We've already started on our '14 plans. So yes, I feel very confident that we'll be able to bring in these 2 rigs here in the next few weeks and then be able to run them through the remainder of this year that we have all those permits in hand or about to be received and, like I say, the team's working hard on a plan for 2014 right now.

Jason A. Wangler - Wunderlich Securities Inc., Research Division

And then just one more if I could. In the Uinta, are you seeing any signs of price improvements or anything there as far as getting the oil out of the basin or moving it via rail or anything to that?

R. Scot Woodall

No changes in the net backs that we're receiving right now. There's a lot of discussion and momentum around rail, but it has not yielded any different -- different yields on our volumes of oil yet.

Operator

Your next question comes from the line of Brian Singer with will Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

You've talked about keeping that debt flat at year end with your asset sales program this year. As you start to think about next year, how do you think about balancing or not balancing capital spending versus cash flow and given the improvement in at least well performance coming from Wattenberg going the other direction from the Uinta basin, do you see potentially even further asset sales that pushed Bill Barrett towards becoming a single-asset type company in the Wattenberg area?

R. Scot Woodall

I don't know if I want to comment on becoming a single-asset company. Like I said earlier, obviously we're going to develop what we think is the highest rate of returns and that's where we want to put our capital and our effort and our manpower, thinking that creates the most shareholder value. In terms of future asset sales or outspends or debt levels, I just would say that we would like to operate the company at lower debt levels than where we are today. And when we look at things in terms of the debt to EBITDAX, and where we stand today, we would like to see that number closer to 2.5, and so we will continue to make strides to get it to that point.

Brian Singer - Goldman Sachs Group Inc., Research Division

And then we've all gotten the question of quarterly production trajectory, so I feel like it's a good time to ask. How should we think about whether the second half is back-end loaded and then how do we think about that regionally with the Wattenberg ramping up?

R. Scot Woodall

Clearly, we're still drilling in the Uinta oil. We still have some completions to do, so there will still be increases in production in the Uinta, in Q3. Obviously the second half of the production really is driven out of the Wattenberg as we stand up and we're running 4 rigs. Those 4 rigs will be operational by the end of this month so really, you're probably looking at a back end of the -- into the third quarter, into the fourth quarter for the significant production ramp.

Operator

Your next question comes from the line of Drew Venker with Morgan Stanley.

Andrew Venker - Morgan Stanley, Research Division

I wanted to just ask on the basic completions. I know you've just spoken to it a little bit today but you talked about 45 wells completed in the back half of the year in Wattenberg, can you speak to how many wells you completed so far in the play this year and if you'll kind of explain those completions evenly in the third and fourth quarter, or is it just lumped mostly in fourth?

R. Scot Woodall

I think we've only done about 5 completions year-to-date in the DJ. Yes, it's probably a little bit more back loaded on the completions just because we have the 2 rigs running now and you're going to go to 4. So I think the completion activity is weighted a little bit more towards the fourth quarter than the third quarter.

Andrew Venker - Morgan Stanley, Research Division

And in terms of testing the southern end of your acreage, do you think we'll see some results by third quarter or are you still getting drilling under way down there and maybe it's fourth quarter before we see results down there?

R. Scot Woodall

I think there'll be a few data points in the third quarter.

Operator

[Operator Instructions] Your next question comes from the line of Carl Gardiner with Schafer Cullen Capital Management.

Carl Gardiner - Schafer Cullen Capital Management, Inc.

This question's similar to what's been asked and that is, with the most recent results in the Uinta, does it change how you think about what you want to make your 2 core assets and does it change how you're thinking about what you may want to dispose or maybe kind of hold on to things longer while you kind of define what you have?

R. Scot Woodall

I don't think so. The underperformance in the Uinta was in a pretty localized area and I don't think it changes our overall perception of the entire basin or in all of our activities. You think about the hierarchy [ph] just scattered between East Bluebell, South Altamont, Blacktail Ridge, Lake Canyon. So there's still a tremendous amount of opportunity. We're anxious to see the results of the 80-acre down spacing pilots there and how we're able to drive performance and how that adds to our location inventory. So I do view it still as a key asset. However, I would couch that still. I've consistently, I think, said that the internal rate of returns in the DJ are the best they are in the company. So when we think about on a go-forward capital allocation, I do believe the DJ will receive more capital than any of our other plays on a point forward basis.

Carl Gardiner - Schafer Cullen Capital Management, Inc.

But then with, like, the Powder River, the near-term results looking encouraging, does it make -- does it increase that play in the hierarchy, make it look as good as Uinta or does it make you want to hold on to that longer as you define what you have there?

R. Scot Woodall

That's part of our internal debate that goes on right now, kind of like I said in my prepared remarks. We really like the results to date and have been very pleased with them and so part of you wants to kind of hang on to it and then the other thing when you think about selling assets, reducing debt and how that impacts your future cash flows, it cash flows very little right now. So you can get in the camp of that maybe it is an asset that we ought to be considering to sell. So that's part of the internal struggles within our own organization right now that we'll have to sort through over the coming weeks and months.

Operator

Your next question comes from the line of Nicholas Pope with Cowen and Company.

Nicholas P. Pope - Cowen and Company, LLC, Research Division

On the Powder River basin, I was just hoping to hear kind of what your thoughts are and where things are, I guess, with pipes, infrastructure. I mean what kind of time frame it might be to kind of get this thing into more actually development start to ramp this thing up and as you look at these different formations, I guess, do you all have a sense of which ones you all think are kind of the most prospective and which ones you're kind of most excited as you see some of the data start to come in in these different formations?

R. Scot Woodall

Sure. I'll take maybe the infrastructure question first. We are seeing some constraints currently right now on the infrastructure and we're working to try to work through some of those and it's just going to take a little bit of time in doing that. So we are seeing, like I say, some constraints in our production because of that. In terms of ranking the horizons, the one that seems the most prolific is probably the Frontier and so the initial results there are probably the strongest. However, we have an awful lot of opportunities in the Shannon. We've got some Turner opportunities, and so those 3 are probably our top 3, even though we have a little bit of Sussex as well, but the focus going forward is primarily I think going to be on the Shannon and the Frontier with, perhaps, some Turner.

Nicholas P. Pope - Cowen and Company, LLC, Research Division

And I think there's been a lot of discussion about, I guess, the view of, like, where the repeatability might be in this play and, I guess, what are your thoughts as you kind of -- I mean, it sounds like you have a lot of data at this point from vertical program. I mean, how comfortable, I guess, are you on some of the repeatability of the results you're seeing so far?

R. Scot Woodall

I think that's still somewhat a question to be answered. Right now, you're thinking parts of it are like a conventional play and you're drilling the thickest part on top of the structure and I think you are getting fairly repeatable results. What hasn't been tested is walking off the edges of those structures and can you make the thinner reservoirs or, perhaps, a little bit lower processing permeability of those reservoirs work and then what is the repeatability of them. So I think the aerial extent of the development is something that is still to be defined.

Operator

We have a follow-up question from the line of Ryan Oatman with SunTrust Bank.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

What was the oil cut of these wells in the Powder?

R. Scot Woodall

The Shannon is high. It's about 85% or so. The Frontier is more in the 50% or 60%. So you're kind of ranging between 50% and 60% all the way up to as high as, like, 90%.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then I saw that there was a 1,500-barrel-a-day rate for the 2Q. Do you have a current production rate?

R. Scot Woodall

No, I don't have that sitting in front of me, Ryan.

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then with the surface constraints, do you think that, that -- I mean, how is that impacting the production? Is there a chance that, even without drilling, those rates improve or do you expect them to kind of decline naturally?

R. Scot Woodall

That's a hard one. We probably are just modeling on just the decline naturally. You make get some bump if we're able to relieve the back pressure off the wells and some of those things. So they're carrying pretty high back pressures right now, but not something that we're really forecasting.

Operator

There are no additional audio questions. I would now like to turn the call back over to Ms. Jennifer Martin for closing remarks.

Jennifer C. Martin

Just thank you, everyone for joining us today. And feel free to give us a call, if you have any follow-up questions.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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