McMoRan Exploration Co. Q3 2009 Earnings Call Transcript

| About: McMoRan Exploration (MMR)

McMoRan Exploration Co. (NYSE:MMR)

Q3 2009 Earnings Call

October 19, 2009 10:00 am ET


Kathleen Quirk - Senior Vice President, Treasurer

Richard C. Adkerson - Co-Chairman

James R. Moffatt - Co-Chairman


Joseph Allman - J.P. Morgan

Nicholas Pope - Dahlman Rose

Noel Parks - Ladenburg Thalmann

Eric Anderson - Hartford Financial

Duane Grubert - CRT Capital

Richard Tullis - Capital One South Co.

Sean Laaman - J.P. Morgan


Welcome to the McMoRan Exploration third quarter conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Kathleen Quirk, Senior Vice President and Treasurer.

Kathleen Quirk

Good morning. Welcome to McMoRan Exploration's third quarter 2009 conference call. Our results were released earlier this morning and a copy of the press release is available on our Web site at

Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our Web site home page and clicking on the webcast link for the conference call. We also have several slides to supplement our comments this morning, and we will be referring to the slides during the call. They are accessible using the Web cast link at In addition to analysts and investors, the financial press has also been invited to listen to today's call, and a replay of the Web cast will be available on our Web site later today.

Before we begin our comments, I would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements. Please refer to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings.

On the call today are McMoRan's Co-Chairmen, Jim Bob Moffatt and Richard Adkerson. I'll briefly summarize our financial results, and then turn the call over to Richard who will be referring to the presentation on our Web site.

Today McMoRan reported a net loss applicable to common stock of $59.1 million, $0.60 per share, for the third quarter of 2009 compared with a net loss applicable to common stock of $6.1 million, or $0.10 per share, for the third quarter of 2008.

Our third quarter results from continuing operations totaled a loss of $46.0 million, which included $7.3 million in charges to exploration expense for non-production exploration well charges, primarily related to the Sherwood exploration well, which were determined to be non-commercial in the third quarter, an impairment charge of $11.2 million for certain fields to reduce their net carrying value to fair value.

Our third quarter production averaged 215 million cubic feet of natural gas equivalents per day [MMcfe/d] net to McMoRan and our third quarter 2009 oil and gas revenues totaled $106.0 million. That was essentially lower than last year's revenues of $295.0 million because of reduced prices for natural gas and oil.

I realize gas prices in the third quarter were $3.39 per Mcf [thousand cubic feet] were significantly than last year's average of $10.67 per Mcf and I realized oil and condensate prices averaged $66.81 per barrel. That was about 46% lower than the year ago's average of $124.00 per barrel.

Our earnings before interest, taxes, depreciation, and exploration expense, or EBITDAX, totaled $57.0 million in the third quarter of 2009. Year-to-date our EBITDAX was $184.0 million.

Operating cash flows for the third quarter totaled $31.9 million, bringing our year-to-date operating cash flows to $85.5 million.

Capital expenditures during the quarter totaled $29.0 million and for the nine-month period totaled $113.4 million.

We ended the quarter with no borrowings under our credit facility and unrestricted cash of $225.0 million. This was approximately the same level as what we had at the end of June.

We have about 86.0 million shares of common stock outstanding and 111.0 million assuming conversion of our newly-issued 8% convertible preferred perpetual stock and our outstanding 6.75% mandatory convertible preferred stock.

Now, I would like to turn the call over to Richard, who will be referring to the slide presentation materials.

Richard C. Adkerson

We will start with Slide 3 that has the third quarter highlights. Our production for the quarter increased as we were completing the remedial activities. At Flatrock, by far our most significant well where we have six productive wells, two of those wells will continue to have remedial work during the fourth quarter, but we recently added a well that's a very strong producer there.

We also, during the quarter, signed an exploration agreement for ultra-deep activities with W. A. Moncrief, Jr. Those of you who follow the oil and gas industry know that "Tex" Moncrief is a very well-known explorationist and investor and we're pleased to have him as a partner in our programs.

Currently we are drilling two important wells that we will give you the progress on today. Our Blueberry Hill side track well at Louisiana State Lease 340, and the Davy Jones ultra-deep prospect at South Marsh Island's 230. And Jim Bob will be talking about those in a moment.

Slide 4 includes the details of our financial results that Kathleen just reviewed with you.

On Slide 5, as I mentioned, our production in our Flatrock field was up 40% in the third quarter over the second quarter. We have, at this point, brought most of our wells that were affected by the 2008 hurricanes back on stream. We're still about 10.0 million a day short but most of those activities have been completed.

At Flatrock during the third quarter the field had gross production at average 280 MMcfe/d day, 52 MMcfe/d day net to our company. The Number 3 well and Number 4 well, which aggregate were significant producers during the third quarter, are currently shut in and will be brought back on stream before year end with remedial activities to be done.

The production that will be lost during the fourth quarter for that is essentially being offset by the Number 5 well, which was recompleted in the primary Rob-L Sand and began production in September. And so our Flatrock production during the fourth quarter is expected to be essentially flat with that in the third quarter, as is our total production for our company. We are estimating to approximately 215 MMcfe/d a day for the fourth quarter.

Our producing properties are shown on the map on Slide 6 and so you can see the spread of properties that we have on the Shelf of the Gulf of Mexico. You see where South Marsh Island is located just offshore Louisiana and producing at a rate of roughly 280 MMcfe/d a day in the fourth quarter.

Our exploration activities are summarized on Slide 7. The Sherwood well was determined to be non-productive during the quarter. We have seen positive drilling results at the Blueberry Hill Sidetrack. There is a lot to be learned from our drilling in this area and lots of opportunities that we're seeing in the drilling to date that we will be pursuing as we go forward. In the drilling that's gone on in this well, we have seen a 190 foot vertical column of hydrocarbons, really significant fixed sands, and will continue to determine what's the best way to pursue the production of the hydrocarbons that we've seen and the follow-on exploitation development opportunities there.

We are planning to initiate a sidetrack of a prospect at South Marsh Island Block 217, which is just south of the Flatrock field. The Hurricane Deep prospect, we are expecting to begin drilling this well in the fourth quarter and we are going to be targeting very thick gyro sands that we saw in the drilling of the initial well on this prospect, which we will be re-entering and sidetracking.

We re-entered an existing well bore at the end of June on South Marsh Island Rock 230 to test our Davy Jones prospect. We are currently drilling below 25,000 feet and expect to drill to a total depth of 28,000 feet. This is a very interesting well to test our geological analysis of drilling below the salt well to test older than Miocene H sands which have been seen to productive in the deep-water drilling that's been done to date.

At the South Timbalier Block 168 well, the Blackbeard West well, we are going to use the results that we see from the Davy Jones, from a geological analysis standpoint, to give us additional information in deciding where we're going next with this well. The options include deepening the existing well, drilling offset wells, or completing existing zones, but it has significant opportunities from what we've seen to date and what our analysis about this ultra-deep water play is showing us. All of this is leading to what we believe will be other significant opportunities for us.

On Slide 8 we have the schematic that we had previously released on the Blueberry Hill to show where we've been drilling to date. We have, of course, entered an existing well that we drilled several years ago and sidetracked it. Mechanical reasons caused us to bypass the initial sidetrack well. As I mentioned, we have seen 190 feet of gross column and mechanical problems in deepening the well led us to drill a second sidetrack well, which is now in progress, to continue to work to learn more about the geology but also to determine what is the optimum production take-point for the productive sands that we have seen.

The map of the prospect is shown on Page 19. We have a 43% working interest, almost a 30% net revenue interest, and we're currently drilling this well. I'm going to turn it over to Jim Bob to give you a current report about where we stand with Blueberry Hill.

James R. Moffatt

Where we stand with Blueberry Hill, we are trying to get this thing down and get it down to the pay zone. We didn't quite make it. We're sitting probably 150 feet above it. We're drilling below 21.5 TVD. The well to date, just to give you some up-to-date things, looking at the log as of this morning, right before this conference call, we saw the first sand that was in the original sidetrack that we drilled off the original Blueberry Hill well. That was the big sand that we reported was wet. And it's still wet in this well, running 250 feet high. I think we can much higher on that sand.

And then we pick up, very interestingly, two more sands, which were not in the original sidetrack 1 or the bypass hole. They are just two brand-new sands that pop in here and they are both very well developed, 150 feet to 200 feet, each of them. One of them has, in the top very part of it, and we logged this morning on an LWD, to redistribute it looks like the top bit may be hydrocarbon vein and it would be probably the first 25 feet of the sand and it's the full thickness—almost 200 feet gross.

And we don't know what that correlates to because in the down-dip well those two sands are not developed. And what this could be proving, and is probably proving if you look at the seismic, is we go back toward that escarpment that's separating us from the original hole, it gives us the trap in our deeper sand and that's probably what's happening.

We are just ponding these sands up and these sands come over the face of that wiggly line that's shown to the west of our first original hole. It's just ponding up, like water coming over Niagara Falls.

And then of course, so if you look at the diagram that you have on Slide 8, we see that one sand, that we call a wet sand, right about above the pay—well, now you have to put two more sands that we didn't see developed in the down-dip well. One is wet and one of them may have hydrocarbon in the top of it.

We think we are 100 feet to 150 feet off the top of the sand that we have the 190 feet of column. That's really difficult to correlate a well that's 1,000 feet away when you have two new sands that total about 250 feet to 300 feet gross, that aren't in the bore hole. So everybody needs to stay tuned. We don't need to get our expectations any higher or any lower, we're just trying to confirm that this 250 foot to 300 foot take-point exists on the structure that would give us a higher take-point on the sand.

And so hopefully sometime today and tomorrow, without any complications in drilling, we'll drill into it and see whether that equivalent is there. Once again, don't want to raise expectations, or lower the, these are just the two new sands that we see, one of which may have a hydrocarbon content at the top. We know we can get higher to those sands, just like we can to the first wet sand. We are trying to focus now on just getting the take-point on this deep sand which we are calling the 22,200-foot sand. So stay tuned; you'll be the first to know. We are watching this with one eye open. That's what's going on as of this morning at Blueberry Hill.

Now we have some other breaking news in the Davy Jones, which literally came in 15 minutes before we got on this call, and that is that we have just been told by the paleontologist that we have gotten into the Eocene based on a bug which I'm nicknaming the Hank Alabama. It's a very detailed name of the bug but for your purposes if you'll call it the Hank Alabama, which marks the top of the Eocene.

So at 25,220 feet, I was just told twenty minutes before we got on this call, that we had gotten into the top Eocene. Now why is that important? That confirms, if you will remember the correlation we made from Deporter to Blackbeard, where we put the Wilcox formation below the depth of the Blackbeard well that we drilled earlier and stopped at 33,000 feet because we weren't sure just exactly where the tie was. And all the activities gone on in the deep part of it has shown how wide-spread this tertiary, or Wilcox, as it's been known, all the recent discovery there has been to find the south end of it.

So what we are doing now is we are confirming on the north end of the basin that we have got Eocene that's age equivalent and appears to calibrate our correlations that we have been carrying all through at the Shelf. So, once again, now what we have to do is get deeper into the sand, or the stratographic unit I should say, and see what the lithology is going to be because as you know, we are tying all the way from the deep water up to this well, which is over a 100-mile tie.

And of course we are tying to the Wilcox sands onshore, which is 100 miles to the north. So this is real rock head but the seismic has done a great job of taking the—in the ultra-deep where we had this fold belt that we think is identical to the fold belt of the deep water. We think we have now gotten ourselves exactly where we wanted to be; we drilled through and we drilled through the Oligocene and had 2,600 feet of Oligocene in Vicksburg below the sale and now we are into the Eocene as of about 15 minutes ago, based on paleo.

So let's say tuned on that and keep our seat belts fastened and two wildcats have a big impact, not only as a discovery—or not a discovery at both our Davy Jones and Blueberry Hill hill, but the wells have something in common. The Blueberry Hill well is above the salt well. And the amount of sand we're seeing dumped in here, right juxtaposed to the original 340 well that had no sand, immediately to the east about a half of mile, we've got a hell of a dam that's shown as a squiggly line on Blueberry Hill and it also will have a major impact on all of the prospects that we have in this 200,000+ acre block that we've been working on with Chevron.

And of course confirming the correlation that we're in the Eocene at Davy Jones ties to all the other ten or eleven of these big structures that we've been mapping and have control of. So they both could light up a pinball machine. We will try to give you the information on Blueberry Hill immediately and on Davy Jones as it comes in to us.

Richard, I will let you continue the presentation.

Richard C. Adkerson

We will, of course, give everyone a chance for questions and I will quickly go through the remaining information on the slides.

Besides these two prospects, as I mentioned, we are also planning in the fourth quarter to re-enter a bore hole that we drilled in 2007 at South Marsh Island Block 217. It was a prospect called Hurricane Deep. You can see it on the map on page 10. We have a 25% working interest in this well and we are planning to deepen it to 21,750 feet.

After drilling the Hurricane Deep well we had the Flatrock discovery, which is just to the north and you can see those wells indicated on the map. So this is located on the southern flank of that Flatrock structure. Our analysis indicates significant potential on the risk at 350 Bcf equivalence.

Page 11 shows the schematic of the objectives of drilling this well. You can see the producing Flatrock wells drilled above the salt well, big blue fault, into the Rob-L and OPERC. And the 2007 well encountered an enormously large sand interval, 900 feet. Only the top 40 feet of that was hydrocarbon-bearing and we believe by drilling a sidetrack to go up this gives us a potential of finding a thicker hydrocarbon column.

It will also give us a chance to evaluate some deeper gyro sands and you can see the sidetrack in the red angular line coming off the original bore hole, how it follows the fault down into the structure.

Davy Jones is part of our ultra-deep play. Turning to page 12, we are testing these deep-seated reservoirs that have been found to be prolific in deep-water drilling. We are, of course, drilling them in the shallow waters of the gulf, very large structures, which gives us the potential to have very significant discoveries. We are drilling below 25,000 feet with these wells, whereas our original deep-gas plays have been, in rough terms, between 15,000 feet and 25,000 feet but by drilling in the shallow waters it gives us the advantages of being near infrastructures so discoveries would have a much shorter lead time to bring on stream and the cost of development would be significantly less than development in the deep water.

This whole play, of course, as Jim Bob said, is real wild-catting. It hasn't been drilled. The Blackbeard well was the initial wild-cat well in this area but the ability to drill that well to the depths that we drilled it, mechanically, and then to see the geology that we are seeing and correlate that to the deep-water geology and with what these sands we're seeing on shore, gives us a tremendous optimism about what we're doing.

James R. Moffatt

Richard, I might point out on Slide 14, which is a cartoon, it shows from the False river to [inaudible] onshore north of Baton Rouge, through Flatrock, and through Davy Jones, through Blackbeard, down to Shenandoah Kaskida/Tiber, Maddog/Tahiti, and then on to Cascade/Jack—and this is what we were talking about while ago when we said we have calibrated our data, because in the Davy Jones well, if you will focus on it for a minute and look on the cartoon and see the line that represents the hole that we're drilling, both the portion that we have drilled and then dotted in red to show our potential target, the purple that is shown there is Eocene.

What we are saying is the bug—again, I'll abbreviate it as Hank Alabama—that is the bug people call the top of the Eocene—we have just gotten that so you can take that purple area there and then move back to the south and go to Blackbeard and you can see we're in the middle Miocene, lower Miocene, the upper part of Oligocene in that well. And we had projected that the Wilcox Eocene/Wilcox zone would be below the TD of the Blackbeard well and we needed to deepen. Well, that seems to have been confirmed. And then of course, go on out into deep water.

So the cartoon is sort of an update, and fortunately, as I just reported to you this morning, we not only have a projection from the Blackbeard up to Davy Jones that we would be in Eocene at just above 25,000 feet—and now we see it's just slightly below 25,000 feet—has been confirmed.

And you will notice, also, that the yellow below it is the upper Cretaceous, which is shown up at False River field onshore and that's the big False River Cretacious play, known as the Tuscaloosa, and that seems to be a correlation to what's below the Eocene.

So once again, I hope this cartoon helps you understand going from the onshore to the deep water and then putting the piece of the puzzle in, which we are calling the Shelf Ultra-Deep play. And this cartoon shows you that this thing is really falling into place and we're getting more markers and more data points to be able to put those pieces of puzzle together.

Richard C. Adkerson

On page 17, from a regional basis, you can see the—in broad terms—where the deep water plays that the lower Miocene trend, which is directly south of our Blackbeard complex, and then this Eocene trend, which has the Jack field and others, indicated in the deep water and as indicated, we are simply—not simply by any stretch—but we are following this sand deposition from the onshore correlations to the deep water.

Davy Jones map is shown on page 16. It's located in 20 feet of water, testing these deep sands. We have a 32.7% working interest in which we are paying 25.7% on to give us net revenue interest of almost 26%.

We re-entered the existing Elizabeth well at the end of June. As Jim Bob indicated, we are below 25,000 feet, heading for 28,000 with multiple sand opportunities as we go forward. The schematic on the well is shown on page 17. Based on the sand deposition, the ultra-deep targets at Davy Jones, we believe have the opportunity to be present at shallower depths than Blackbeard but the closure of the structure is comparable to the structure at Blackbeard.

The cost to drill here and evaluate Davy Jones, because of its shallower depths and because we had the ability to use an existing bore hole, would be significantly less than drilling in the Blackbeard area and also we should encounter, or are encountering, lower temperatures and pressures. But the information from this is going to be an important data point in analyzing these relationships between the geology in the deep shelf and in the deep water.

As you know, we have been managing our cost exposure to this through partnership arrangements. We have had some very positive relationships with industry partners and investors throughout the years in our program and we were really pleased in September to enter into a new agreement with Mr. Moncrief, who will be our partner to participating in our ultra-deep program, who will be investing alongside us to help test these partnerships. The details of this arrangement are outlined on page 18 and this will give us the ability to spread our costs and to have a partner who could have the opportunity to participate with us on a broad basis as we go forward.

Page 19 gives an outlook for the remainder of 2009. For the year we now expect production to average 204 MMcfe/d a day, 215 MMcfe/d during the fourth quarter. This, of course, has been affected earlier in the year by the issues associated with downstream facilities from last year's hurricane and from our work that we've been doing at the Flatrock field.

At this production level our EBITDAX, using forward prices, would be $265.0 million. We are now estimating capital expenditures, which are always subject to variation, depending on the opportunities and events that we incur in our exploration and development activities, to be $155.0 million. And this is lower than our previous estimate because of the timing of our expenditures and our partnership arrangements.

We will continue to manage our spending by pursuing opportunities and managing our expenditures within our cash and cash flows and continue to work with partners in participating on our projects.

We are now estimating that our reclamation expenditures will be $60.0 million rather than the previous estimate of $80.0 million, as we continue to work with contractors to do this on an efficient basis and as we assess the appropriate timing to pursue these reclamation activities and in addition to that, we have a $15.0 million obligation to contribute to an escrow account.

So we are now in the process of completing and finalizing our 2010 budget and the results of the wells that we are currently drilling will have an important factor in determining what our budget for 2010 will be. We will continue to maintain our financial policy of having a strong balance sheet that will allow us to pursue these really significant opportunities that we have. Capital spending with these opportunities will be managed prudently. We will commit capital to our high potential opportunities and we will manage our risks through partnering, as we talked about earlier.

So our McMoRan strategy continues to give the same opportunity that we have been pursuing for several years now of looking for these large high-potential prospects on the deep Shelf and the Ultra-Deep prospects and we, of course, have been focused on this and have a significant position within the industry on it and we look forward to continuing this journey that we're on to analyze the opportunities that are available to us.

With that, we want to give you a chance to ask questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Joseph Allman - J.P. Morgan.

Joseph Allman - J.P. Morgan

Jim Bob, with the distance between the sidetrack—I'm talking about Blueberry Hill here—what's the distance between the sidetrack and the escarpment?

James R. Moffatt

The current sidetrack and the escarpment is somewhere in the vicinity of a half a mile. To the east. If you just look on your map and see the original hole, there's a about a half a mile between the wells we're drilling and frankly, based on the seismic, as I've said, we think we can now identify, and have even done that this morning as we got these additional two sands, as I explained to you, the stick that we can see into this escarpment is now obvious. It's always easier once you can calibrate it with a well. We didn't anticipate that the sands that we picked up would be so well developed.

But the wedging into this escarpment, as I say, the original hole was sitting up on a high ridge and this escarpment is about—it's not exactly vertical but it's a steep escarpment. In other words, I tried to say in my answer, just imagine sand going over an escarpment like water goes over Niagara Falls and the sand that hits right at the base of that escarpment gets deposited—some of it gets by the energy pushed on down into the little mini basin that we have between Blueberry Hill and JB Mountain, which is a significant basin. It's probably 100,000 acres big. So when we're together, and hopefully we'll have this log to calibrate it, you have seen it on some of our exhibits before, but we'll try to publish one in very graphic form—you can see this dadgum wedge.

The thing that's really amazing is how much sand in this current well, compared to the wells first few hundred or a thousand feet away, this sand is just really building. So, what we are hoping to do, since in another 100 feet we will be about 300 feet high to the main sand we had in the first well, we hope we will be able to report that we've got that thing, maybe even thicker than it was in the down-dip well if we continue this pattern.

And of course, if it's 300 feet high it ought to be full because that sand that we saw in the first sidetrack before we had to bypass had about 190 feet of gross section in it. So I hate to be sitting here telling you that we've tried to get this well so that we could talk about the complete sidetrack 3, but it just doesn't happen. But we're so close to getting that done now that it will happen sometime this week. If we don't get stuck or whatever, with all this sand in the hole.

When we have a chance to bring everybody up to date, you'll get the gist of why these sands I'm describing the way I am, because they're boxcars. They've got big gamma ray and obviously wet with the exception of this third of the three sands that we've cut, which it appears to have about 25 feet of hydrocarbons on water. So stayed tune. That's about as much as I know as of this morning.

Joseph Allman - J.P. Morgan

So like if I can picture this property, you didn't see these two sands in the original well drilled in 2005 and you didn't see the two sands in sidetrack 1 and you didn't see them in the bypass well. You're seeing them here in sidetrack 2, so the aerial extent of these two sands is probably not that great. Correct me if I'm wrong there.

And then second question, the sands—you found 150 feet of pay in sidetrack 1 and this sands above the four deeper formations and you say the same sands in the bypass. As you move closer to the escarpment, won't the sand that you found in sidetrack 1 and the bypass, won't it be thinner as you get closer to the escarpment?

James R. Moffatt

I didn't want to stop your answer. The fact that the two sands we've seen aren't in the down-dip well, indicate that the sands are thickening as we go to the east, so if you use that logic, the sand that we're hopefully going to see, and match up with our main base sand, would be thicker. Because the sands are thickening to the east and we're going to the east and if there's any rhythm to this thing, the sand should be thicker.

Now, let me correct one other statement and you'll see why when you see more data. The fact that the sands are not in the first two wells is not sand that they're going to be limited to any extent, we're saying that as you go back towards the escarpment that these things are thickening and therefore in a north/south direction, where we know we can get extremely high to this well—remember, when we made this location and had a target, we thought the sands were going to be developed deeper in the hole and be offset to the sands that we had in the original hole. Those were down between 23,000 feet and 24,000 feet. We haven't even gotten to those dudes yet. This thing is so much younger than that. Those are deep in the jaw. This is the upper part of the jaw.

So with all the people on the phone, I don’t want to leave the words unsaid, but when you see the—when I have a log on what we're calling the original pay in the down-dip well, we'll just have to see whether the sand is thicker or thinner or connected. But the point is, if you just talk about what we know this morning, you draw the line from the first two sidetracks to the escarpment with thickening and sand count, we're getting more sand than we had in the wells to the west. Let's see if the next sand is going to be thicker and hopefully higher and got hydrocarbon and see what else is below it. So I hope that clarifies the conclusions that you stated.

Joseph Allman - J.P. Morgan

Maybe I will get you offline for some more. But one last one, with Blueberry Hill, you expect this to be a productive field here. Based on what you know now, what is your best estimate of productivity here?

James R. Moffatt

Well, I said I didn't want to lower expectations or raise them, number one, since we haven't seen the equivalent of the pay sand and don't know whether it's going to be 190 feet thick or thinner or thicker. I'm not going to count our chickens before they hatch. So I will answer it in a very objective way; I'll answer it this way: if the correlation on seismic that says we're going to be 250 feet to 300 feet high turns out to be correct and we intersect the sand in the next couple of hundred feet of drilling, then we will know what the extent of that sand is, between the original holes and this hole, and then, of course, shape it with the seismic signature, and in that zone we've told you that if it covers 1,000 acres it's equivalent to 200 Bcf to 300 Bcf.

Now we need to get it in this well first before we can say. We drilled a confirmation to the first two sidetrack holes that had the pay in it. If the pay is not developed or changed, and it doesn't have the same water level, then we will have to stop and look and listen.

But in terms of the half a Tcf potential, we now have in this bore hole, which I've tried to explain to you and I'm sorry it's just come in over the last two days, where we've logged these two additional sands, we've got almost 600 feet of porosity and we're not even down to the zone that had the 190 feet of gross section in it. And we know we can get it high as all three of these sands that we've just drilled because of the fact that when we drilled this well we were expecting deeper sands and we know that you can get much higher to the south and east of this well.

Now you fill up the three sands that I've just told you about, or any one of them, and you added another reservoir that's as thick as the one we originally reported, that we hope to drill the equivalent of below the TD here. But let me say straight-forward, when you lay this log down and see the water sand which is shown on your diagram, which we call the jaw 1, and then this pay sand, with shale in between, and then you drill this down-dip and see these two sands blossom, it's very difficult when you have to correlate sand with shale.

So all we can do now is rely on our seismic, which by the way, is very well documented. There are no breaks on it and you can see the thickening, you can see the wedging back into this escarpment that we've been talking about. So I would like not to raise expectations from the half a T or lower expectations a half a T with all this reservoir quality block available to us, because I think it would be unfair since we're going to have some more data here hourly.


Your next question comes from Nicholas Pope – Dahlman Rose.

Nicholas Pope – Dahlman Rose

I just wanted you to clarify a little bit with Hurricane Deep that the 350 Bcf that you're talking about, I guess there's the potential there, how much of that in the formations that you've already drilled to in the original Hurricane Deep well versus some of the deeper targets?

James R. Moffatt

It's actually some of both. Remember, this happens to be in the same age cartography, the big sand we have in that run has the pay on water that we reduced and then when it went to water we left it shut in until we got to the Tom Sog well drill and this Blueberry Hill well drill, that if you look at the gyro dyna section at Hurricane Deep, it's exactly the same section that we're drilling right now at Blueberry Hill. What we're hoping to prove there is that as you go to the south, which is the seismic strongly suggests that you get high to the south—and if you remember, this is the south half of the Flatrock structure, and in that Flatrock structure to the north you have the Rob-L OPERC and this sierra[?] dyna is supposed to be the last compartment that we would see. So we got control.

They said we have a well that has got 900 feet of sand in one sand with pay on water. We hope to be able to sidetrack that down-dip and pull it up higher so that it will have a thicker column. And then we hope to prove that below that will be several other gyro dyna sands that were not seen in this well that would also continue to be higher because they are following the fog that's down to the southwest that separates you from JB Mountain on over to the east of here.

And so there you have basically an almost similar trap to Blueberry Hill where you're drilling the same age cartography, a slightly different structural environment where you don't have this big diapher yet that we can see, diapherage-looking structure that has this escarpment on it. We may find that there is a diapherage-looking escarpment to the south of the Hurricane Deep, which would be what our ultimate trap was, so we'll be trying to get high on the existing sand in the Hurricane Deep well and see whether or not there's any deeper sands. I think the diagram on Hurricane Deep shows that pretty straight forward.

Nicholas Pope – Dahlman Rose

And a little bit more on Blueberry Hill. These two new sands that you drilled into. I'm looking at the cartoon, trying to understand where they are positioned. Are these below that wet sand that you found and above those upper gyro dyna sands? Is that right?

James R. Moffatt

That's right. In sequence, as we see, when I drew the cartoon we hadn't drilled these sands yet or we would have stuck them in there for you so you wouldn't have to pencil them in yourself. But these, we just logged them overnight. And we've seen part of the first upper sand and just got the lower sand drilled up yesterday and last night.

But if you will take your cartoon on number 8 and where you see the main sand we've been talking about that's got the three penetrations—the two that have been drilled plus the proposaling, there is a wet sand that's noted above the pay sand. If you just take and pencil in between those two more yellow sands, then that's where they are in sequence in the third—the first sand is wet and the second sand is wet, and the one that is right above our pay, it looks like it may have 25 feet or so on water, by the LWD, that we don't have a sonic log on it, but it's got registivity and gamma ray. It looks like the other productive sands. So that's where you pencil those in.

And what's happened is it appears to just be thickening to the east into this escarpment that separates us from the original hole. I hope that answered your question.

Nicholas Pope – Dahlman Rose

It did. I appreciate it. And then, just to talk a little bit about ultra-deep, what are we waiting for in terms of like being able to test. I mean, I think Blackbeard has been on hold for a while now and whenever Davy Jones, if it encounters hydrocarbons, what would the timing be, in terms of being able to test, to do like a production test, on one of these ultra-deep wells. What are we looking at now?

James R. Moffatt

Well, let's just first take the first hand, that is the drilling, that is the drilling that we're doing on Davy Jones. And I don't want to make this a long answer, but let's try to see how we got here. If you will remember, if you look at Slide 14, if you look at Blackbeard, what we did at Blackbeard, we drilled and deepened the original hole that had been drilled by the initial operators. We drilled down through the middle and lower Miocene and got into the Oligocene.

At that time the Jack and the other Wilcox wells to the south were starting to get publicity but what hadn't been drilled was Kaskida, Tiber, and Shenandoah, which are north of Jack and Cascade. And those sands have been reported in the Wilcox to be much better developed, moving back to the north to what we considered is the center of the basin and the source for the Wilcox sand, which came in from the north.

So now once we saw those sands getting a lot better developed, that raised the expectations that if we deepened the Blackbeard well we would get into the Wilcox, but once we recognized the Davy Jones, to the north, as you can see on Slide 14, we realized that by re-entering this well that we have done—and I think we're somewhere right less than $50.0 million today that we drilled to 25,000 feet, almost 26,000 feet, for just less than $50.0 million as compared to some people spending $200.0 million drilling wells to test the deep zones in the deeper water, the deeper part of the basin.

So that's why we decided that we ought to wait and see what the results of the Davy Jones well was. Number one, could reconfirm that we could see Eocene at the Day Jones to that it would fit the correlations that we've been making miles and miles away on 3-D where we have complete coverage.

Well, this calibration point, this Eocene bug that we've seen this morning, just before I got on this phone call, has done that. The purple part of that is now confirmed. Now I think if you were the exploration manager and going to decide what to do with Blackbeard now, what you would want to see is okay, guys, we now think that we've pinned down that the correlation to the purple marker, or the Eocene, is there because it's to the south and to the north of us.

The next thing you want to know is, well, what's the rock quality? Well, we just topped the damned thing this morning. So now we've got to drill a couple of thousand of feet a section and see what is the lithology in the Wilcox at this dip position. If we get some big sands and they are hydrocarbon-bearing, well that's an obvious answer. If we get some big sands and they're not hydrocarbon-bearing, we can get much higher on the Davy Jones structure.

But the well that we've re-entered was where it was and it was simpler for us to take that well and deepen it with a straight hole just like we did at Blackbeard and that's what we did. That’s what we basically have done.

So just take a moment and go to the chart number 15 and you will see how much area we control land-wise and by having Davy Jones, now we've confirmed the Eocene up there, and if we can get to deepen the Blackbeard well. But we didn't want to go and try to complete the Blackbeard well and put holes in our pipe if we were going to use it to deepen the Wilcox. And that's why that's been in limbo.

But the Davy Jones is going to unlock all that hopefully and we will open up the Davy Jones locker and see what kind of strategraphy we have in the Wilcox. That's going to be extremely important. As you know, we think we're going back towards the source area and the big channel that fed all the Wilcox sands in the deep water appears to come right over the top of Flatrock so we ought to have a chance to see how many of those sands might have ponded up in the Davy Jones area.

That's why we're drilling the well because it's a missing link in the Wilcox, both for onshore and offshore. But if you take the Davy Jones prospect that's on page—cross-section, excuse me—it's on 17, we tried to show you there that because of the dip position and in Blackbeard we expect the Wilcox to come in around 35,000 feet, what we had said based on cross-correlations, all the way up to Davy Jones, that we thought we could correlate under the salt well and see the Wilcox at about 25,000 feet.

If you will notice that diagram, which is the same diagram we've been using, you see 20,000 feet and you see 30,000. Well, we've just gone into the Eocene, as we told you, which would be the top of that yellow marker, and then we've got our Hank Alabama marker, which is the same marker we'll be looking for at Blackbeard.

So that's why, to repeat myself now, now that we've got the Eocene, let's see what's in the dang thing, see how many different multiple levels there are. Is there some calcareous flashard limestone? Is there plastic sand? We think that it is more likely it will be plastic sand because of the way the deposition of the environment looks, just looking at the thickening off the flank of this structure in the yellow area, which we are calling Eocene. Then we've got the cretaceous below it.

So that's how the two relate. I hope that makes it simpler now that we actually know where the Eocene is and the Davy Jones, we don't know what kind of impact it will have on the decision to deepen Blackbeard.


Your next question comes from Noel Parks – Ladenburg Thalmann.

Noel Parks – Ladenburg Thalmann

Just one more thing about Blueberry Hill. Could it just be that these sands you've found are isolated or some sort of anomaly over just a small area?

James R. Moffatt

We don't think so. And the reason we don't think so and the reason why we said it had the earmarks of a major discovery when we drilled the initial well, is that you've got a very large structure at Blueberry Hill that was drilled originally on the original hole and so number one, it covers a big area and number two, if you look at JB Mountain to the west, and the deep-syncline between the two, it's an environment where you ought to, whatever the deposition of the sands are, the deep-channel sands, known as the gyro dyna, we saw the big sands in the Tom Salk well to the north, we just talked about the big sand in the Hurricane Deep well, and the big sands in the JB Mountain to west of us, so we don't think that the gyro dyna is going to be a spotty type of deposition.

We think you are going to have a trend that we hope we outlined to you that's going to have it sort of wrap like a doughnut around a doughnut hole, around this first well that was on this big high-pressured shale and this stuff has literally, as I said, draped over it like water over Niagara Falls.

So we think these sands will have some continuity based on the signatures that we're seeing on seismic. We have got 3-D all around it. And we just have to keep our cool here and not raise expectations or lower them.

For instance, let's just go back to the premise of the first prospect. You look at the diagram and say well, what was our objective when we drilled the first well. Well, we said we had a well that had shows and deeper sands. We thought that we would see a wedge down in the syncline. Those sands would thicken. That was our original concept. You can see the gas symbols on the page 8 that are on the shows that we had in the original hole.

But if you look at the zone that we have logged in both the sidetrack 1 and the bypass hole, the log was at LWD and the first sidetrack is a wireline log and the bypass, we have confirmed that that sand has hydrocarbons and is very well developed, 24% to 26% porosity.

Now that we have seen these other sands, we, frankly, underestimated the amount of sand that was being plopped into this—on the other side of this escarpment. If you just take the diagram on page 8, you can come away from the page and move to the south and the symmetry of the structures were easily mapped by seismic and you can get substantially high to these penetrations that we are showing by going to the south and east of this well, just like the hole we're digging now.

So we have no reason to raise expectations or lower them. This is a big structure that's got no sand in the upper part of the structure, up against high-pressured shale. Lower-pressured shales, big sands that are literally just dropped in here and draped across. As you will notice, the first shoal in the original hole is considerably below the depth as well as the rest of the shows that we had that were gas shows. These are sands that are younger than those shows and they're sands that were non-deposited on the pinnacle of this high that's got the doughnut draped around it. So we've got the whole north flank, west flank, and possibly south flank of this thing, depending on just how this wiggly trace lines you see cuts a core.

If you can just imagine this as an apple and just core out the core of the apple and leave the meat of the apple around it. If you can imagine that, that's what this thing appears to be like. The core of the apple is a high pressure zone with limited sands and the older section that we were going to try to take them off to. And then the younger section has gotten no sands that are equivalent to these big, boxcar sands. And let me reiterate to you, these sands look like they could be deposited in a well at 10,000 feet. They've got big gamma ray and very low resistivity and we've already seen some wireline log on the sidetrack. On the sidetrack number 1 we're already seeing very good, to 28% to 30% porosities in those zones. And the sands, frankly, look as good or better than any of the Flatrock wells that are flowing, 50.0 MMcfe/d to 100 MMcfe/d a day.

So when we've got this much sand, remember my guarding word. You take it and pile 500 feet or 1,000 feet of sand up against a barrier where there is fogs or salts, spine or shale ridge, something that separates the pressure, it creates a perfect entrapping position and 500 acres, you can put a spooky amount of reserves. And again, I don't want to raise expectations or lower them, but you can take 500 acres, take the 500 feet of porosity we have, and put that 500 feet in there, and that 500 feet of—potential reservoir with 500 acres to over the half of TCF we're talking about.

So I don't want to raise expectations, I don't want to lower them; I don't think you can jump to conclusions that we got unlucky enough to drill and see the only place that these sands were deposited and that they will all shale out 360 degrees away from here. Not in the way the seismic looks. If it had looked that way we would have been much more muted about announcing the first zone, which we announced was about 190 feet, and then confirmed it with what the water level was.

So we don't want to raise expectations—I'm going to say it for the tenth time—we don't want to lower them. I apologize that we don't have the well down. We thought we might get lucky and have it be deep enough to see the whole. But we'll have to come back to you. And we will immediately let everybody know what's going on when we drill deep enough to get through the projected top that we had following the seismic on this event, which we think is unbroken and should be something we can correlate.

But until we get that over the next couple of days, it's difficult but we had to give you our up-to-date information and that's what we've done.

Noel Parks – Ladenburg Thalmann

And my other question is, looking ahead of that, I seem to remember a few months back that there was some discussion or announcement about a rig option that you had taken for either late this year or early 2010. Given the progress you've made and where things stand so far, is that still on the table?

James R. Moffatt

Yes. The complement rig is on the table, the option is there. It's extremely important because it's got a 2.0 million pound hook load if they ever drill these deep holes. And it and Mississippi are unique in that fashion. So that's why we have a contract on the Mississippi and the option on the Conklin. Let's take an optimistic view point. Let's just say you porosity and hydrocarbons at Davy Jones. Well, that's going to light everything up with. We'll take that rig and either drill some development wells with it and send Mississippi down to deepen the Blackbeard or drill an offset prospect. We're going to have to get busy to our valuable acreage and get it into a production standpoint. And so that's why the second rig is so important for us to be able to execute. If we light up the pinball machine here, we've got to have enough balls in our pinball machine to go after each one of these lights.

Because all you have to do is look at what happened to the leases in the lease sale. I've explained to you before, when we showed the chart, it showed how these leases that were bought on Tahiti and K2 and some of these older features, were bought for $100,000 for 5,000 acres, and now the acreage onshore is selling—it could sell for the same amount if we had some success. So you can see how the value of our acreage could change because the acreage out in the deep waters are now going—instead of for $100,000 for 5,000 acre tracks, they're paying $50.0 million to $100.0 million for the damn things. And some of them are secondary structures.

So lighting up this shelf and proving that there is some hydrocarbons and obviously some porosity in the Wilcox and the Miocene is a huge opportunity for us. And right now we are trying to be sure we don't miss a trick. And having two rigs to pursue the development of this shelf is very important to the success of these big ideas we've had on this play.

Noel Parks – Ladenburg Thalmann

Until how long do you have that option, or at what point would you need to renew it or decide to take it or let it go?

James R. Moffatt

The words are what they are. We have released it. We've got an option. The rig is not out of the shipyard yet. As you can see, I've got the Davy Jones well, in the next month we'll be down. We've been making 250 feet of hole and in the next month we'll have 30 days of drilling, after we make a trip and all that stuff to get another bid probably. But if we can make 1,000 feet every four or five days, and then leave a week off for testing thinners and making a trip, and then another three weeks of 250 feet of hole a day, we can get this well down to 28,000 feet. And then I'm going to be a lot smarter and so is everybody else when we see this next 3,000 feet of section.

And as I've said to you all, very candidly, if I knew what was in this next 3,000 feet, now that we're into the Eocene marked by the Hank Alabama bug, you couldn't afford to be on this conversation. [Slight laugh.] That's what all of us have got our bets made for.

Richard C. Adkerson

And we have until December 31 this year on the rig option. And if we don't exercise it, there's an $18.0 million cancellation fee.


Your next question comes from Eric Anderson – Hartford Financial.

Eric Anderson – Hartford Financial

In the original Blueberry Hill well, did you find any hydrocarbons/oil or was it all gas?

James R. Moffatt

It appears to be typical gyro dyna. It's probably going to be gas condensate. Produce somewhere between 50.0 million and 100.0 million barrels of condensate per cubic feet. That's what we've seen in the gyro dyna wells in the area. Some of them produce as high as 100 barrels a million. So whatever—you can do your own numbers to see that if you have 100 Bcf of gas, you're going to have some high recoveries of condensate at 50 barrels of million. You can do the numbers at 100 barrels a million.

James R. Moffatt

Yes. It will be gas in the reservoir and gas condensate when it produces to surface. The OPERC is not as rich as the gyro dyna is and the Rob-L is less rich. They are anywhere from 20 to 30 barrels a million. Those Rob-L wells we have at Flatrock, when they are producing at that 80.0 million to 100.0 million day rate, they make 2,500 to 3,000 barrels of dislit, because they are about 25 to 30 barrels, and so if you get a gyro dyna well like that and let's say these sands, and they say, to porosities, by logging houses, just the look of these sands—I know you know what boxcar sand looks like. You've got big gamma ray and these sands when they're wet, they've got less than half resistivities, so they're very porous and permeable reservoirs and should flow at high rates. So 50.0 to 100.0 barrels of condensate is going to be a big home run for us.

That's why I don't want to raise expectations or lower them. Big sands can be big producers and if they doughnut around this big original high that we drilled the center of at Blueberry Hill, we're going to have some interesting numbers.

Eric Anderson – Hartford Financial

I was wondering if you were at liberty to say who approached who in terms of bringing Tex on board to the ultra-deep play.

James R. Moffatt

Tex Moncrief and I have been friends for more years than we probably want to talk about. He and I both are University of Texas graduates and we've been on a lot of committees and things together and we've looked at different deals and I would say just because of the notoriety of this shelf play, Tex and I talked about it and talked about it and finally he decided it was a wild-catter's dream and he's a wild-catter from the word go. And he sees the big potential of the fact that one of these structures is going to tell you a whole lot about all the structures on trend. Just like it has in the deep water, as we've talked about. You've got 40-something structures now that have been penetrated in the deep water immediately off the shelf, and there's not one structure out there that I'm aware of that is dry and either has got Miocene or Wilcox in it. And so these look like brothers and sisters. And I would just say the mutual friendship that I've got with Tex and his feeling for deep wild-cat have high potential is the reason we ended up with being partners in this well.

Eric Anderson – Hartford Financial

When you started the Davy Jones prospect, did you hope or expect to drill into the Eocene?

James R. Moffatt

Yes. Again, I hate to refer to these diagrams, but just to put it on record, the diagram that we've got on Davy Jones in this expiration diagram is exactly the same diagram that we've been using since before we spreaded the well. And based on our correlations from the Blackbeard well, once we got it down we told you that we thought we had been able to see the Eocene marker and tied to the deep water, we used our data base north of Blackbeard, between that and the Davy Jones, to tie it down. And if you look on Slide 17, the cross sections are the same ones we've been using. It shows Blackbeard to the east, on the right side, and it shows that we anticipated the Eocene at about 35,000 feet. We drug to the midland lower Miocene and based on our deepening of that well, we feel like if we deepened it we would get into the Wilcox.

And we showed that in the dip position that Davy Jones is to the north, that we would see the same marker, approximately 10,000 higher, at 25,000 feet. You can see we had the Eocene topped right there between the 20,000 and 30,000 foot horizon. So we picked the top of the salt because we knew that we re-entered, had seen the 100 feet of salt, and in that purple zone, we saw 1,500 feet of salt, exactly as it appeared on the geophysical section. We came out and we ran some Miocene rocks below the salt and then we drilled over 2,000 feet of freehold, which is the equivalent of the Karamina marge techs [inaudible] trend up to the north onshore, all across Acadia and into the big Jennings field. And all those big freehold fields that produced onshore.

And we are through that freehold section now and have this Eocene bug, so it's almost identically where we had predicted it on this cross section. I hope that answers your question.

Eric Anderson – Hartford Financial

Maybe it was on the last conference call you talked about the prospect being four-way closure.

James R. Moffatt

Say that again now.

Eric Anderson – Hartford Financial

I think it was on the last call, last quarter, or on some report, that you referred to this prospect as a four-way closure. The structure. Does that imply that necessarily, is hydrocarbon-bearing or in fact, could be all wet, just depending on where you're entering it?

James R. Moffatt

Let's turn to Slide 16 and what we did was to try to take a general circumference of what we could see is a large structure that covers approximately 20,000 acres. And if you look at this in seismic cross section, the seismic cross section was where we made the cartoon off of that you just looked at on the Davy Jones. This thing sits up here and all around it are big salt withdrawal areas and so you've got big, deep holes around—not only just on the edges of this. This thing sort of sits up. If you were sitting on the bottom of the ocean at Eocene time, based on the way this thing maps, what you would see is you would see about a 4,000 foot plateau or mesa sitting up there.

And our geology tends to suggest that this feature was growing as the sediments were being deposited, because we can see eisopac off the east and west flank. In other words, it's standing on top of the structure than it is off the flank and that suggests to us that it was growing at that position.

If that's the case, then whenever the hydrocarbons migrated through here and then it should trap, that's the sort of geology 303 for us and that's why we like to see the eisopac on these big structures. Now can an eisopac structure that's got 4,000 of vertical relief and cover 20,000 acres have all wet sand? I've never seen one. I'm sure that somebody can come up with one in the history books.

Most of the time the four-way closures that are all wet are structures that you can't see any growth on and you can't see eisopac off the flank. And it suggests that this structure came up very late in the evolution of the geology and the migration had already occurred and so you have a young structure. That's an example of that. It would be some of the young cookie-cutter salt domes that were bought in the lease sale out in the west side of Louisiana and south of the Sabine River. And they became known as cookie-cutter because they came up so late and they had almost no relief on them. So the salt was there but the sediments didn't get uplifted, they just got cookie-cuttered through.

This thing is not cookie-cuttered. This thing is draped over whatever the basement high is. And you can see that the structure has got 3,000 to 4,000 feet of relief. By the time you get to the salt water, the damned thing is flattened. So Mother Nature had come in and this big high sitting here to covered up. But by the time you got into the lower Miocene, it got fenaplaned. She's got a funny way of doing that kind of thing.

And of course, the fact that this is such a big plateau, or mesa, sitting out in the middle of this ultr-deep fold belt, which we think is the brother and sister of the deep-water fold belt, all those lower areas around this big four-way are what we call the fetch area because all the hydrocarbons that were moving to this area are going to go to that high area. And of course, some of you might say well how do you know the Wilcox is going to have hydrocarbons in it?

Well, you just have to know that the Wilcox is a very petroliferous member. Many people think that some of the Miocene gas that's in the deep water, based on the geochemical analysis, may have actually come from the Wilcox as the original source. So, it and the cretaceous below it, which is on the same four-way closure and appears to have similar depositional texture on seismic, is the equivalent of the Tuscaloosa to the north and the trend and it's equivalent to the Woodbine, which is the big east Texas oil field.

So you can see that across this four-way structure, we potentially have two very petroliferous biostratographic units that have been uplifted by this methodology I just told you. So that's what we pay our money for.

Let me just say again that they look very similar, this structure looks very similar to Blackbeard. Blackbeard looks very similar to all the structures in the deep water. And someone may find one that I'm not aware of but all those big primary closures have all produced in either the Miocene or Wilcox. I don' t know of any of those four-way out there that are dry.


Your next question comes from Duane Grubert - CRT Capital.

Duane Grubert - CRT Capital

Could you just walk us through what you will see on the logging while drilling and what quality of data you will get, so what are the things that you will be cautious on with logging while drilling tools versus later on going in there wire lines?

James R. Moffatt

Are you talking about at Blueberry Hill and Davy Jones?

Duane Grubert - CRT Capital

No, for Davy Jones.

James R. Moffatt

Here's the way we're trying to evaluate it. We've got a very detailed mud log and gas analysis on it. In the old days, as you remember before the days of log wire-driven mud logs and cuttings, examinations was how we found all of our shows before we logged the well. So we'll be looking at the samples very closely and we've got these high-tech gas analyses that literally we time the mud from the time it comes off bottom and if we have any gas bubble in the gas, we should see it at the surface.

So we've got that. And with the temperature and pressure we have here, we should be able to conventionally log this. I don't see that as a problem. Once we get it drilled. But while we're drilling, to make it clear, we will be very sensitive to changes in penetration rate, which we designate as a rate of ROP. It is being monitored from the bottom of the hole. We instantaneously get a ROP change where if you are drilling at 10 feet an hour and it jumps up to 25 feet an hour, and this suggests you may have a change in lithology, we're very cautious about that. And we generally stop and circulate that out. We can time from the bottom of the hole to the top of the hole where that information ought to be and see what it is.

If it's gas we ought to see a bubble at the surface and if it's water the mud ought to be diluted with water at the surface. That's one of the methods that we look at. So interestingly enough, as a side to that, we look at the shale densities as we drill and the shale densities are a key to what we call our pore pressures. And pore pressures, you can use that to estimate what you think that pressure is doing in terms of either the pressure going up or down.

Interestingly enough, in this well, from the time we've left the base of the salt and gotten down into the sediment part of this structure, the pressure has been regressing from an 18x mud environment to a 17.5x mud environment. In other words, you have pore pressure which is very bullish, in our opinion, because that means you've got these high-pressure shales that are draped over the top of these lower-pressured shales that were are seeing as we drill deeper. And if the regression continues it will be just like the regression we see in our Miocene deep-shale and sand packages. We talked about this in the Blackbeard.

So so far, to be driven at 25,000+ and be in the Eocene with 17.5 of pore pressure indication from shale densities, these are all the different parameters we can use to sort of predict where we think we are going and we clearly not only are into the Eocene by the 4M and metaflosa, but we are clearly into what is a much more carbonaceous section than you would have seen had you stayed in the eilogocene.

And now we have just got to see what the upper part of the Eocene is marked by the Vicksburg. We think we're through that based on the Hank Alabama bug that we've seen. And we believe that that puts us into the Eocene. And so we'll be looking now for a change in lithology and we should be able to see the classic material and if it's going to increase as opposed to carbonaceous limestone. Our cuttings are excellent quality and so we will use all of that to try to predict what's we're going to be seeing as we drill ahead. I hope that gives you some insight.


Your next question comes from Richard Tullis – Capital One South Co.

Richard Tullis – Capital One South Co.

I'm trying to size up the Blueberry Hill potential in relation to Flatrock. How large do you estimate Flatrock will ultimately be, reserves-wise.

James R. Moffatt

Well, at Flatrock we are still depending on how this gyro well to the south, which we call the Hurricane Deep, it's really the southern portion of the Flatrock. We've said we think we could be at a TCF, by the time we get through, if the gyro dyna sands have anywhere near the thickness that the OPERC and Rob-L. We think now we've got somewhere in the vicinity of a half a TCF, based on reservoir performance and the size of these reservoirs.

Blueberry Hill, as I said ten times this morning, I don't want to raise expectations or lower expectations. The thing that we predicted going in here was that we had indications on seismic that there was a big sand doughnut on the west flank and north flank of this high ridge that we apparently drilled into on our first well. When we first drilled the Blueberry Hill prospect it was the image of the Salaver Mount Point field to the north, and migrating it down on just subsurface, we drilled the highest area we could find on this big east/west/north/south axis and that's when we saw these standard sands and with this high-pressure shale. As we drilled around and saw the Hurricane Deep well with big sands, Tom Salk, Mountain Point South, even though some of those sands were wet, we know that there was some big sands that didn't get deposited on top of this Blueberry Hill structure and that's why we set up the test to the flanks.

And as I hope I've explained, this doughnut of sands that are draped around this Blueberry Hill prospect are on fairly steep dip, similar to a salt dome, but not quite the angle. A salt dome, you can get up to 60 degrees. We think these dips are more like in the 20s or 30s. But if you pile this big pile of sand that we saw the Tom Salk well just 2.5 miles to the north, around this structure, which is why we set out to drill the first well.

Now you can put some big numbers in these sands that would symmetrically be in an envelope around this barren, high area that we drilled with the first well. Well, the first well we drilled, we can move a half a mile to the west, we end up with a couple of sands, one of them wet and one them productive, and then in trying to delineate this stuff, we pop in a couple of more sands and as the questions have come out this morning, some people try to jump to the conclusion that they may mean the sands have limited extent.

I don't want to go there yet because you will just have to look at the rest of the data and trust our judgment that the data suggests that these things are symmetrically deposited along the front of this escarpment, which we've tried to indicate with a squiggly line on the slide that explains Blueberry Hill and I can't tell you what the exact sand demographics are going to be and what the population of sand is going to be around the flank of this other than to tell you that they're going to be a big sand dump that's even more than frankly, I could imagined a half a mile away.

I could have seen this much sand a mile further down in the basin, but when I publish the actual log and color it up for you, I hope they're not all wet. So far we've seen two sands out of four that we've seen develop. Actually three out of five have developed that had hydrocarbons in them and I think that the fact that we're seeing this lower-pressured shale which is one-over shale, and caisson knees up against the three-tenths of shale, it's in the original hole, gives you not only a stratographic trap but a pressure trap.

And so we are encouraged about this. We are encouraged about the magnitude of the sands and the thickness of the sands and is there a chance that this stuff was stuff thrown around like somebody throwing handfuls of sand in the water and have different little sand pods that aren't connected? I won't know that until we get through drilling this.

But it looks like on the seismic as much sand as was coming into this basin, based on the sand we see in the Tom Salk well to the north and I see in these other wells, that it was just a mountain of sand coming around here and I've tried to describe it as a Niagara Falls. I think there's going to be some big sand channels that are going to cover a lot of area. And the Hollywood, the planulina that I've worked on shore to the north, this is the kind of environment that I'm seeing happening here and some of these planulina and Hollywood sands that I would compare this to, they are a different age, but they were deposited in the same environment and they can have huge reserves. Just because of the thickness of the sand.

Now, I'll say it for the twelfth time, it's time for me to have to talk to you, I don't want to raise expectations, don't want to lower expectations. I hope we can drill up the rest of this hole mechanically and see the equivalent of the sand down depth. I hope that this sand, the two new sands that we've seen, one which appears to have pay on water, by LWD, are a precursor to how much sand we're going to see in this envelope.

And with three penetrations, the first sidetrack and the bypass and this now, we are getting delineation. And I will just say for the last time, these sands look just like the deep-water sands that have been found in the Miocene below the salt well out in the deep water and with the configurations they've got and the K2 type of development that we showed you on many of occasions where the sands were just deposited like in a doughnut fashion around there, these big highs that the sand couldn't get up on top of, those sands appear to have continuity based on production history.

And I've mentioned the planulina line and the Hollywood. All I can do is share my experience with you on that and give you my feelings of the seismic. This has the earmarks of a big discovery with the thickness of the sands and the fact that we've had one of them fill up and have almost 200 feet of column. That's the best lead in I can give us and the next week or so we'll all be back together and I'll see if I can understand what we've found and see if Mother Nature can get us some more keys to our puzzle so we can put the rest of the pieces in this puzzle for you and connect all the dots.

Richard Tullis – Capital One South Co.

Once you get to development of this, what sort of development costs are looking for? I know these shelf projects don't cost nearly what they do off shore, I mean in deep water, and that's one of the attractive qualities of it. What sort of development costs are you looking for here?

James R. Moffatt

Once we have some targets here and have hopefully three to five of these development wells, like we had at Flatrock, depending on how many sands we have and what thickness they are, we can set up—because this is in 10 feet of water—we just contracted a Drummond rig for $24,000 a day, a barge rig that's a big rig that can drill these holes, and I'm hoping that when we get in rhythm here, the Tom Salk well that we drilled to the north is a good example, I'm hoping we can drill these wells at these lower rigs rates for just over $20.0 million. And complete them for probably $15.0 million. So we should be able to take one of these big wells and somewhere between $30.0 million and $40.0 million, depending on the cost of the pipe and what happens in third-party services as we're developing it.

And I would hope that in order for us to go forward with that kind of development we're going to have enough data to know that we have got some reservoirs that will produce some multi TCS. And I've said, based on the logs analyses I've seen, on both the sand that we logged in the first sidetrack and bypass, on what I see on the log so far, on this new sidetrack 2, these are very well drugged sands. I'm going to guess they are going to have 24% porosity. With the thickness of it they will flow 50.0 million to 100.0 million a day with a lot of condense, just because of the comparison of what we've seen at JB Mountain and at Flatrock and at Mount Point.

So if we can complete these wells for somewhere $35.0 million and then we'll have one central production facility where we go to some of these existing facilities around us or if we have a big enough appetite, we'll just build us a facility there in this 10 feet of water and we'll just lay pipelines to each of the wells.

So I would say for $50.0 million, if we have to build our own structure, we should have that. So you can just do the numbers of say a development program of four to five wells at a $50.0 million cost to try to get the plan if we need to knock out sulphur or CO2. The gas itself will have to be processed like that. But I would anticipate, again, if this damned thing has any size to it, ladies and gentlemen, that we would be looking at a 250.0 million to 350.0 million cubic foot flow rate. If we don't think we see that when we drill up these development wells, we won't go forward. So you can do your economics of what that thing is going to do if we can stay with that model.

As you said, in ten feet of water it's a heck of a lot cheaper to do it than it is in a thousand feet of water or five-thousand feet of water. And there's a million of pipelines around here that will begging for this gas, because hopefully it will be some wells that will have multiple pays in them that have an extended life as opposed to some of the quick depletion you have on the shower plough plasine reservoirs.

Richard Tullis – Capital One South Co.

Looking at the recent unsuccessful wells Sherwood and Cordage and Ty Allen and West Cam areas, do you think you will go back to testing those areas or just focus more on say South Morse Island?

James R. Moffatt

We go where the success is. The Sherwood, Forest wells, those wells were trying to take velocity knowledge and extend the gyro dyna, the same gyro dyna sands we're looking for—OPERC and gyro dyna sands here and there were prospects, they were well-documented, they owned the leases, we joined them. The anomalies that were on the seismic indicated there should be some sands wedged in the salt box, similar to Flatrock. And both those prospects, Cordage and Sherwood Forest, we drilled some sandy-looking formation, had multiple zones, a couple of which had some pay in them, but unfortunately we sort of proved that we're getting to the western limit of this gyro dyna play so we'll take that data point and it just proves even more how valuable this several hundred thousand acres we've been playing for the last ten or eleven years on this old state track 340, OCS 310 is because we're seeing thicker gyro dyna sands here than any place across the trends.

So we obviously will focus on where our successes are and as you can see from the data we've been playing with here today, we have to be hugely focused to know the difference between a Blueberry Hill original hole and one off the flank that's got all this sand in it. We've got the amazo prospect that we drilled that surprised us and was barren of sand and got into the MA, which is an older bug. We now think we can see this wedge, now that we've got the calibration of the Blueberry Hill whether it could have an impact on a lot of these prospects in this immediate vicinity.

And that's data that we're getting pretty good at doing. And with the delineating of Flatrock and the signature we think we have there and the signature we hope we can develop at Blueberry Hill and the signature we developed from JB Mountain, this gyro and being able to sort of predict where these highs are that have the high-pressure shale as opposed to the big sands that are deposited off the flank, we think we are getting the signature on that, and if we do we've already got the acres under control, it's going to generate a lot of prospects away from Blueberry Hill and Flatrock.

So that's a very extensive answer to your question but that's what's going to be the focus of our exploration, is to take advantage of stuff where we have proprietary data and own the acreage, along with Chevron, and continue to learn more and get up to on reducing the risk of whether we're in the right fairway that has these big sands loaded up.


Your final question comes from Sean Laaman - J.P. Morgan.

Sean Laaman - J.P. Morgan

I noticed that you added some language to the press release, that you might consider some additional hedging in the future. Are you comfortable with your current hedging or what type of profile are you targeting?

Richard C. Adkerson

We are just reviewing the situation and looking at the production profile we have and where the market is. We really haven't made a decision so we don't have any specific objective that we can share with you.

Sean Laaman - J.P. Morgan

And also you mentioned that you expect the borrowing base to be re-determined lower. Do you have any estimate of about how much lower that might be?

Richard C. Adkerson

No, it's just too early in the process. The reasons for that is that banks across the industry are using a lot lower price deck and then we have the issue of the depletion of production and so forth, but we are beginning that process right now of talking with our banks.

I will just point out that we do have a substantial cash balance that resulted from our equity offerings earlier this year and our goal is to manage our business within that cash balance and our partners arrangements. And we're comfortable with what our liquidity is and our financial situation.


There are no further questions in the queue.

James R. Moffatt

Thank you for being on the call and I appreciate your patience and we will be back to you as soon as we can give you some more information.

Richard C. Adkerson

Thank you.


This concludes today’s conference call.

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