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Executives

Douglas H. Miller - Chairman and CEO

J. Douglas Ramsey - Vice President, CFO and Treasurer

Stephen F. Smith - Vice Chairman, President and Secretary

Paul B. Rudnicki - Vice President of Financial Planning and Analysis

Harold L. Hickey - Vice President and Chief Operating Officer

Wendy Straatmann - President North Coast Energy Inc.

Mark Wilson – VP & CAO

Paul Rudnicki – VP

Analysts

David Heikkinen - Tudor Pickering

Leo Mariani – RBC Capital Markets

Eric Anderson - Hartford Financial

Irene Haas - Canaccord Adams

Brian Singer – Goldman Sachs

Howard Flinker - Flinker & Co.

Jack Aydin - KeyBanc

Presentation

EXCO Resources, Inc. (XCO) Q3 2009 Earnings Call November 4, 2009 11:00 AM ET

Operator

Good morning. My name is Marcia and I will be your conference operator today. At this time I would like to welcome everyone to EXCO third quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator’s instructions) Mr. Miller, you may begin your conference.

Douglas H. Miller

Thank you very much Marcia. I’d like to welcome you to our third quarter conference call. I think we announced earnings last night, slide shows are out. We have 11 or 12 people in here with me today so we’re going to go through this quarterly review and try to get you up to snuff on everything we did in the third quarter and our plans. But before I begin I think Steve or who’s – what a minute, Ramsey has it too. Ramsey, you read it.

J. Douglas Ramsey

All right. I would like to remind everyone that you can go to www.excoresources.com and click on the investor relations tab on the left hand side of our home page to access today’s presentation slides. The first page that will come up after you hit the investor relations tab has the presentation slides link, just double click on the link and it will launch the slide presentation that you can follow along with. The statements that maybe made on this conference call regarding our future financial operating performance structure and results, business strategies, market prices and the future commodity price risk management activities, plans and forecast and other statements that are not historical facts or forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Please refer to pages 3 and 4 of the slide presentation for the complete text regarding our forward-looking statements.

In addition, please refer to our website for the earnings release which contains additional information regarding our forward-looking statements and the preparation of our financial disclosures including reconciliations and other statements regarding non-GAAP financial numbers which will be discussed on today’s call. Doug?

Douglas H. Miller

Thank you. Steve had a shorter version, but that’ll work. Like I said, we have 12 people here. We have lawyers, so I don’t announce an (inaudible) well today because we don’t have any acreage. But we have our financial people. We’re going to go through; we had a quite complicated first nine months. Which I think we’re going to start scrubbing and cleaning up. But more importantly we’ve got all our operating people, including the head of the East Texas/North Louisiana and Wendy Straatmann's here with us, from Appalachia. So any questions on Appalachia and what we’re planning on doing up there will be appropriate and we’ll be happy to answer them.

The quarter, the main thing that happened during the quarter was we closed our joint venture with BG. And we call it transformative. It was a billion dollar cash deal with a $400 million carry. It was something we worked on a long time. I think we’ve been talking about it probably for the better part of a year. And the dispositions that we have been working on, we told everybody we were going to do them. We were slightly slow but the market effected us a little bit. We’re getting them done.

We have two more deals to close this month. At that point in time we’ll be down to about a billion dollars in debt. But the BG deal with the big deal for the quarter. Goldman Sachs helped us on some joint ventures. They were actually working on three of them, which included the Haynesville Upstream, the Haynesville Midstream and the Marcellus (ph). We were trying to get one person that could do both of them because the Midstream is so important to the Haynesville process.

And BG was clearly the best one that we could find out of the 17 people we talked to. It is done. It is a great deal for both parties. We are working with them right now. We just came off of maybe four weeks of meetings with them in creating a budget for the rest of this year and next year, both on acquisitions. And our drilling. And we’ve been spending literally the last 30 days in-house getting ready for our budgeting meeting which we’ll do at our board meetings in two weeks.

We closed $440 million worth of asset sales. We have another almost $700 million to finish up in November. They’re both deposits in and I think they’re on target. John, I think one of them is next week and then – but by December 1st we’ll have the other $685.

The drilling success in the Haynesville continues. We had four rigs running at the end of the summer. We have just increased it to 10. I think the tenth one went to work last week, is that right, Mark? Yup. And we are proposing, I know in our budget we’re proposing going to four more rigs, is that right Hal?

Harold L. Hickey

Yes.

Douglas H. Miller

In January. So ramping up continuing to make acquisitions in the area. So we’re quite excited about that. Marcellus, we have been working hot and heavy there. We are doing leasing. We have five or six areas where we do have significant acreage. We’ve been doing vertical work. We’ve been doing coring. And we’ve also shot some 3D seismic. I think here over the next month or so we will be – we will continue to lease up there. We want to get bigger.

We have not done a deal, a joint venture. We have had a lot of discussions. But we are going to take our time on that. Goldman has been told to slow the process down as far as us meeting with anybody. We are really in the science phase, about a year behind where were in the Haynesville. But we’re going to continue drilling verticals, we’re going to continue coring and get our science work done. We probably will start drilling our first horizontal sometime in the fourth quarter. Hal and Wendy will go over that.

We did start a first cash dividend. Which I think is – it was only $0.02.5 but it’s a starter kit. And I think everybody’s excited. I noticed I got mine in this morning. Don’t tell my wife, please.

But the liquidity by the end of November looks like it’s going to exceed $800 million. Probably will be a total of $850 million. So we will continue and we will be consolidating our bank credit facilities sometime in the first quarter. We already started discussions on that.

The other thing that we’re doing is trying to figure out exactly how to book these reserves as we drill them. Our engineers have been working towards making sure we do it conservatively enough for the 10-K. Because these are big wells in the Haynesville. And making sure we book these right now and not over book them is something that we’re very interested in.

With that – we’ll get back on some questions. I think we’re going to clean up a lot of stuff during the call here. With that, I’m going to turn it over to Steve for a financial review.

Stephen F. Smith

Let’s flip over to Page 7 of the slide presentation. This is just really a reiteration of what Doug said. And I’m not going to go through it all. But we have done what we said we would do this year, through establishing the venture, the asset sales, the debt reduction and focusing on the shales and we’ll go through that in detail.

On Page 8, obviously we’ve got an exciting year ahead of us in ’10. Right now we’re very well hedged, over 60% for the year. We’re expecting very strong organic production growth in ’10 and in the future. I think at the analyst today we showed you information that showed better than 30% compounded annual growth rate on production. And we’re expecting to get to those kinds of levels.

The shale development and just the operating expense is in the shale areas are going to be very low. It looks like in the Haynesville we’re probably less than $0.15 an MCF. Our overall operating cost for the quarter were less than a buck at $0.99, and $0.90 if you exclude the work-overs that we’re doing in some of our older fields.

Load of element cost $1 (inaudible) in Haynesville. We expect the same in the Marcellus. So that’s going to speak well for the economics. Our carry with BG will carry us through on deep drilling through ’10 and part of ’11. And it’ll reduce our overall finding and development net to us by significant amount.

We also expect to generate free cash. And that’s – we’re very focused on free cash. And obviously we’re going to be making some acreage acquisitions. And normal acreage acquisitions will certainly (inaudible) with that scheme if we were to do something a little more expansive in terms of acreage blocks and obviously that might exceed the free cash for a little while. But overall we’re expecting free cash.

Like Doug said, we continue to pursue acreage every day. It’s an everyday affair. And we’re having pretty good success. Hal will get into it in a minute.

Over on Page 9, this is just a quick summary of the quarter and compared to last quarter and also the third quarter of ’08. Revenues were $239 million including the cash settlements of the hedges. That was $7.49 in Mcfe versus $7.89 in the second quarter and $9.09 in the third quarter of ’08. So obviously pricing has had an impact. I think we’re about – if you take those total revenues in the third quarter of ’08 and compare it to the third quarter of ’09 about 35% of the difference is price and about 64% is volume because of the hedging and because of the divestitures. So our hedging program has paid off extremely well.

Our cash operating margin is not shown on this slide but for MCF for the third quarter was $6.02 compared to $6.47 in the second quarter of ’09 and obviously a lot more than that in - $7.29 back in the third quarter of ’08. Again, thank you for the hedges are what really keep those numbers where they need to be.

Our overall production for the quarter was 347 million cubic feet of gas a day compared to 401 in last quarter. This is again; this is mainly impacted by the divestitures during the quarter. The price was down some but not dramatically.

We expect that right now I think that if you take the two pending sales that we’ll close in November and to account we’re 235 million in cubic feet of gas a day. We expect that to be back up to sort of the current levels by the end – certainly by the end of ’10. So we’ve shrunk it a little bit. But we’re going to be growing very rapidly thanks to our shale place in the Haynesville (inaudible) and the Marcellus.

I mentioned the cash operating costs. They were $0.99 this quarter, $1.05 last quarter, so we’re making a great deal of progress. That’s the result of the ramp up in the shales. But it’s also the result of some of the divestitures which were higher operating costs. And we’ll see a greater, an additional improvement as we go on through next year.

EBITDA cash flow were strong. And again, we’re going to hold our capital within those numbers. So we did have free cash for the quarter. And so it was over all it’s what we expected and it’s been a good quarter. Our Haynesville success we’ll get into in detail. But it’s been – I think we’ve averaged over $23 million (inaudible) for the eight wells that we did complete.

We got a $1.4 Cap billion of cash in from the joint venture and the asset sales. And we’ll have $1 billion of debt by the end of the year after the other sales have closed. We did redetermine our bar and basis with our bank group. And we came in at $1.7 billion, that’ll be $1.3 after we record the last two sales. So we’re doing what we thought and what we said we would do.

Next page is on accounting. We did book a gain. That obviously has been taken out of the numbers on the preceding slide. And in our adjusted net income that is not included. We reduced goodwill as a result of the JVs and divestitures by $145 million. We are probably recording an additional gain on the sale of the rest of our mid-continent division, but probably not on the sale of the properties in Appalachia because they’ll be immaterial.

Overall, we sold about 188 million cubic feet of gas a day and this is pro forma through the sales in November, and 899 BCF.

Page 11 is our liquidity and financial position slide. The first column is where we are as of September 30th. We pro forma in the effective of the divestitures that will close in November. And the pro forma column shows where we’ll be by the end of November. So, we’ll have bank debt of $554 million. Our senior notes are still outstanding. So net debt of $888 after $111 in cash and unused bar and base, plus the cash of $841 million.

There’s about $69 million of restricted cash in the cash balance. Which we have included in these calculations. That cash is set aside by us and BG strictly for joint venture expenditures and that’s the sole source, sole use of that cash. So that is just applied to the capital that is being spent by (inaudible).

I’m going to turn it over to Paul and let him deal with the hedging and kind of our guidance slide. So, Paul?

Paul B. Rudnicki

Thanks, Steve. Looking at Slide 12 with our current derivatives position, you can see as Steve mentioned we’re over 60% hedge for next year, 64% at an equivalent price of $8.84. On the gas alone, it’s $7.62 and the oil is just under $105. We are evaluating 2011 and beyond for additional hedges. With the economics that we have in these plays, if we can get close to $7 it makes a lot of sense to go ahead and lock that up.

The one thing to highlight on this is that we will be covering some of these hedges for 2010 in association with the asset divesture program. The net effect will be slightly less volumes but at a higher price as we’ll be getting out of some the lower priced hedges.

Going on to Slide 13, taking a look at the third quarter actuals compared to our guidance. As Steve mentioned our production came in at $347 million a day, which was slightly below the low end of our guidance. And that was mainly a result of the timing of the asset sales. We had assumed everything was going to happen mid quarter and it actually happened a little sooner which impacted us by about $4-$5 million a day.

Same thing goes with the differentials. As the mix change during the quarter, our actual differentials on a month by month basis were on oil were lower but the effective of NYMEX and lower volumes during the quarter made it look higher.

LOE came in right in line with where we expected it. The gathering expenses were a little bit higher mainly as a result of some of the accounting changes we have with the midstream business.

The production tax rate, on a percentage basis came in a percent about our high end of our guidance. And that’s really a function of the fact that Louisiana is a flat $0.33 per MCF. Severance tax rate, so as prices go up the percent will go down. Because that’s just going to stay fixed at $0.33.

Midstream revenues and expenses, again, resulting from the change in the accounting, going forward we will treat our net income in TGGT as an equity investment below the line.

And the one other thing to point out there, the cash G&A, we did book at $1.5 million credit for some reduced legal planes. That helped drive that G&A down. On a run rate it is obviously a little bit higher than what that shows.

The other thing to really point out is the non-cash interest expense. I think some of the estimates out there didn’t include the $20 million that we expensed. And all that really is, is prior payments made on debt that we’ve retired in the quarter.

Going on to Slide 14 as we look at fourth quarter guidance, we haven’t shown guidance for 2010 yet. We’ve got some preliminary guidance that was put out with our analyst day. As Doug mentioned, we’ll be finalizing our capital budget here this month. And at the appropriate time we’ll put out the new guidance for 2010.

But looking at the fourth quarter, we expect production in the range of 245-255 million a day. Again, that number is going to move around as the dispositions close. We’ve assumed basically, kind of, mid-quarter again. And if they close sooner or later that number will move around.

As I mentioned on the differentials, we expect our differentials to come in as a result in the change in the asset mix. Our LOE is down on a total gross dollar basis, again, as a result of the dispositions.

The gathering expenses as some of you might remember from our analyst day we talked about some of the changes in the accounting for our midstream business. And essentially this reflects what we will be paying to TGGT to move our gas to those systems.

Looking out into 2010 just be aware that number will go up as the firm transportation we have in the Haynesville starts coming online.

Going through – another thing to point, the cash, as you can see, the cash G&A as you can see we’ve raised that from the $19 million level that we were at in Q3 to $23-$25 million level in there. We do have some one-time costs for some expected severance payments related to the dispositions in the fourth quarter.

Interest expense, the cash obviously is going down as the debt balances come down. And the non-cash, since we’ve written off a lot during the third quarter the non-cash amortization will be a small number. We continue to see an effective tax rate of about 40% and we expect capital to come in between $120-$140 million.

Our fully diluted share count has gone up as the stock price has moved up. But we’re comfortable with that range for the quarter.

With that said, we expect adjusted EBITDA for fourth quarter, the midpoint of about $130 million.

With that, I’ll hand it over to Hal for the operations review.

Harold L. Hickey

Thanks, Paul. Let’s go to Slide 16 in your packet. Of course everyone’s aware our focus in 2009 has been on testing, developing and expanding our shales in our midstream. And of course on implementing on our asset divestiture program.

The asset divestiture program itself has actually resulted in selling production of about 100 million a day and 418-420 BCF proved reserves that we’re producing in about 590 BCF of total proved reserves. Now when you put the JV in there, that ramps up to 188 million that Steve referenced for production and 890 or so total prove reserves.

The other thing that I’m really happy about and Steve made an illusion to this as well, is that our operating costs have been a big focus of our guys in our development costs. And in fact our operating costs is about 20% below what our original budget projections were.

Slide 17, you can see a much focused company’s portrayed here. We’ve now on a pro forma basis have three divisions. The East Texas/North Louisiana division remains our largest in terms of production. About 75% of our productions comes from this region. The Appalachia region and East Texas/North Louisiana are filled with opportunities to go out and capture additional potential for contingent resources. We have nothing in here to portray the Bossier that I’m going to talk about in a minute. So we have some huge upside there as well.

The Permians, our smallest division but it’s our oiliest division. We’re actually going to start drilling out there as of this week to capture some of the oil upside.

Slide 18, starts to portray the Haynesville assets and efforts. The map that you see has the grey or dark colored counties and parishes which indicate where our area of mutual interest is that constitutes the JV with BG. And the orange blob portrays our continuing developed understanding of the Haynesville Shale.

In the Haynesville area we have about 44,000 net acres to our interest. We’re actively working to acquire some 15,000 net acres into the joint ventures. So that’ll add 7-7,500 acres net to EXCO. We’re continuing to see great opportunities being brought forward. So our guys are very active on both the leasing and the acquisitions of additional acreage from other companies. So we’re very optimistic this is going to be an area we’ll continue to grow our position.

Haynesville activity, very active, of course. We’ll spud 42 operated horizontal wells this year. We have 10 operated rigs running today. We’ll have 11 by year end and throughout virtually all of 2010 we’ll have 14 rigs running. Our average op pays remain outstanding. And we are going to be very active as we’ll drill over 100 operated wells in this region next year. About seven of those will be Bossier horizontals.

Slide 19, many of you have seen the graphic before. It’s just an outstanding portrayal of rapid growth and just a real complement to our teams to be able to ramp up in 11 months or so from just spudding and then completing our first horizontal well back in December of last year to getting to these large volumes of production that we’re seeing today.

Now, we have 18 wells producing now. We’re going to complete nine wells in the fourth quarter of ’09. They’re all in De Soto Parish. So we’ll have 27 well producing by year end. And then we’re going to get real active. We’re going to have 24 completions in the first quarter of 2010. So that’s going to be about two a week and that’s going to be pretty flat for the whole year.

Now, Slide 20, gives you a snap shot of where we are today, producing over 200 million gross, a little over 40 net to our interest. By far the most bulk of that is operated. Talked about how we’re going to be very active on the drilling front and our spud to rig release time continues to improve. Recent well was actually a 39 day well from spud to rig release. I’ve talked about our completions and how we’ve had outstanding results. We actually have three operated horizontal wells now in the completion phase, as of right now. We’ll actually have six new wells on line between now and Thanksgiving. And we expect that to add in well excess of 30 million a day IP net to EXCO’s interest.

Now the total program this year I talked about earlier, but we’ve spud 56, 10 of those are operated, 10 of those are vertical. And we’ve got 45 TD’d, 37 flow into sales. So it’s just going to continue to go up.

Now our well costs have still harbored around $9 million in De Soto Parish. We fully believe those will come down in to the $8.5 million range. A lot of that is going to be – the continued reduction in cost is going to be due to efficiencies that our guys are realizing. We fully believe that the service costs are about flat. They’re not going to be a large reduction in those service calls going forward from the venders that we’re using.

Now let's go to Slide 21 and talk about Bossier which is our next big frontier. The Bossier goes from the bottom of the Cotton Valley down to the top of the Handle. It's about 1,500 feet or so. We've got some 250 to 300 feet of sands in that 1,500 foot zone of the shales that we're interested in.

We're testing some six counties or parishes for Bossier potential. What we're actually doing is we're using a lot of the Haynesville vertical wells; we're setting plugs going in and testing the Bossier up above our Haynes villa zone. So a lot of this is in the same areas where we've been drilling and where we’ve been testing. We're actually going to spud our first horizontal Bossier test in De Soto parish later in this quarter. And you can see on this slide we're showing huge, huge net gas in place potential for the JV and this is very, very early. I'll stress that.

Our recovery factors have to be determined, we're sure the Bossier is going to be like the Haynesville or like the other shales and it's going to vary across the play, but we're very optimistic that this is going to be a great future for us and we have no reserves or contingent resources on our books at this time from the Bossier.

Slide 22, of course we're very convinced that it's a strategic thing for us to be involved in midstream operations to support our E&P in the Haynesville shale. We've been very active in this arena. Our throughput on our midstream is actually over $0.5 billion a day. Our guys are continuing to look at FT and I think we'll be coming out with some announcements shortly on how we're continuing to add FT. We've finalized the first stage of the 36 inch diameter Haynesville headers system. R Remember, we're going to lay about 29 miles of that and it'll be in place in the first quarter and it'll be able to handle up to about 1.8 BCF a day of throughput. Very, very important strategic piece of pipe for both us and for third parties who will flow through it. It will connect to several transportation or evacuation pipelines.

We're going to have the appropriate amine and glycol treating facilities in place and by sometime in 2010 we'll have over a billion a day of treating capacity for gas flow throughput. Today we have over 300 million a day of treating capacity.

Okay. I am going to shift on slide 23 and start talking about our activates in the Marcellus up in our Appalachian division. It is, of course, a huge aerial extent. We have over 340,000 net acres in the play and well over 200,000 acres in the area we've defined as the fairway. Most of our acreage is held by production and I think if you look at the northeast, a lot of than acreage is actually on primary term, but besides that, everything down in the central and southern sections of the play, we have HPB by shallow production, we have huge reserve potential here. We've drilled some 11 vertical wells to this point. We're continuing to test and core and we think this is going to be a great position for us as we go forward.

Looking on slide 24, I've talked a little bit about where we're drilling verticals. We're, of course, acquiring size. We're looking to grow in the areas around our positions. We're working very diligently on accessing gas markets and we've got a good inventory of permits to this point and we think that the regulatory environment up there is evolving and it's something that will very, very — it's very compatible for us to work in.

Now, our other operations areas, mid-continent will be exiting as of next couple of weeks. Rockies, we've gotten out of in total so it won't show up anymore. The Permian remains in our portfolio. It's our oiliest area. Like I've said, we've actually spud a well there to start drilling for oil, and this region we're probably drilling 40% oil, 60% gas.

Okay, slide 26; I'm going to take a couple of minutes on. It's our capital forecast for 2009. We've spent about $400 million through the third quarter. We're forecasting about $130 million in the fourth quarter. So our total capital expenditure will be about $535 billion, but, and I'm going to emphasize the but, you can look at the land number there and it shows about $110 million. $10 million of that was in Appalachia, $100 million of that is in east Texas and north Louisiana.

Of that $100 million than we’ve shown here to be spent, we fully expect about $40 million of that amount to be reimbursed to us by BG as they participate in some of the land acquisitions that we're undertaking. So our actual capital expenditure, instead of being in the $535 million range, will actually net out more into the $495-$500 million amount.

The other thing that's not shown on here is some expenditures beyond August 14th of the TGGT pipeline system, that's our midstream venture with BG. And we fully expect that to be funded by dollars we've already put into it. We put about $20 million of working capital into that venture upon closing, and since that time we've injected about $27.5 million of capital expenditure dollars into that entity and that will be funding our capital program all into next year for some brief period of time.

So we're in good shape, we're coming in right around where we said we would on the $500 million that' soigné to allow us to generate the free cash flow that we had rejected and we're going to our board in about two weeks, I think on November 19th exactly, to present our 2010 capital budget and we'll come forward with an announcement after the board approves what our budget levels are for you to show what our spending is going to be. So with that I will turn the floor back over to Mr. Miller.

Douglas H. Miller

Okay, thanks. I want to say a couple of things. I want everybody to be clear on what we're trying to do here. We are really down to major growth on our acreage and on our assets. We have sold off a lot of conventional. We determined last year that it took $6+ gas and our finding and development cost were $2.50-$3. We have three plays here that we think our F&D is $1-$1.50. We are one year into probably a 10-20 year process in the Haynesville. We are going to begin exploiting the Bossier and the Marcellus, both of which look like they have quite exciting upside.

Gas price, I think a lot of people ask what my opinion is, which is worth about a nickel, but the forward curve is five something for next year. My feeling is we're going to be somewhere 4-6 for next year. After that, I believe, and I really do believe this starting in '11, that we're going to have significant demand coming both from electricity and potentially maybe even an energy bill that Boone believes has a 50-50 chance of passing this year and 100% change of passing next year.

If we get demand put o 70 BCF a day, I believe starting in '11, that we're going to be somewhere between $7-$10. If that happens, this company is going to be off the charts as far as EBITDA and cash flow which is why we are now continuing to buy leases in the Haynesville, the Bossier, and the Marcellus. I think early on we said we were bought or negotiating on 10,000-15,000 acres in the Haynesville, I think that might be slightly slow. I think we probably closed 5,000 acres and I think, John, we're negotiating on 20 or 30,000 today.

So again, that isn't closed, but there are deals out there. I know that some operators have said they're drilling these wells for $6 million. We haven't figured that one out yet. We think we're $8.5 million and quite frankly that's where we are and I don't see, unless we can cut the time, of us beating that by more than about $500,000. So I can see us targeting $8 million, especially in De Soto Paris, maybe in shallow ones we could get it down to 7.5, but I can't wait to see a $6 million AFE.

With that I’m going to open it up for questions. I think we're done, and so we'll sit here as long as anybody has questions.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of David Heikkinen with Tudor Pickering.

David Heikkinen - Tudor Pickering

Good morning, guys. As you think about the Bossier plans and where you've tested in six counties, how many — can you talk about rates or any details on the vertical tests so far to give us an idea of how that's actually progressing?

Douglas H. Miller

Basically it's vertical so far, but Hal, do you have that?

Harold L. Hickey

Yeah. The rates are very comparable to what we saw on the verticals coming out of the Haynesville. And in fact, on a couple of them that we're producing now, we're seeing a little over 300 MCF a day.

Douglas H. Miller

I will note this, even though we've seen gas for sure drilling down through it, we've seen good gas on the verticals, but I will tell you, the pressures are quite different. So we don't expect any 20 or 30 million a die wells out of that, but we don't know, but I would say right now the pressures are significantly below. Is that right, Mark?

Mark Wilson

It depends on where you are.

Douglas H. Miller

Okay. Where are we?

Mark Wilson

We’re a little bit lower and the — if you look at De Soto parish, they're slightly lower. We're seeing a little bit lower pressures even than that up in Mercado (ph), but in De Soto I wouldn't say it's dramatically different. I mean, it's a little shallower so there's going to be a little lower pressure, but the gradients not dramatically different.

Douglas H. Miller

David I think our guys are excited, especially what we saw in De Soto parish, and after rag couple verticals they're ready to go on a horizontal and I think we got to move rigging in here — when are we going to start rest one?

Mark Wilson

By the end of the year.

David Heikkinen - Tudor Pickering

And as you think about next year you're still allotting one right to the Bossier out of your horizontal program, is that —

Douglas H. Miller

Yes, sir. And the good news about that is all of that is HPB, it's all on existing leases, and most importantly, the land work’s already been done and the pipelines are already in place. So our cost to get to market is going to go down with those.

Harold L. Hickey

They've targeted seven horizontal wells in the Bossier next year.

David Heikkinen - Tudor Pickering

Okay. And as you think about going into 2010's budget and your board meeting and then just how you're going to communicate and just timing of when you put out your budget and then when you put out your overall operating plan and targets, is that December? Is that a reasonable expectation?

Douglas H. Miller

Well, we pretty much gave you what we were going to go to the board with at the analyst day which was real close. It just hadn't been approved. We tweaked it a little. I'd say over the last three weeks Wendy's group is tweaking a little and we're tweaking a little. We're probably going to add a little capital to the pipeline and actually we're looking at maybe increasing, but I'd say it'll be finalized and by the first of December we'll have an announcement out. It'll probably be final approved on November 19th; we'll clean it up a little and get it to you as soon as we can.

David Heikkinen - Tudor Pickering

Okay. And then as part of that, your leasing plans and just kind of overall targets as far as how you would expect additional opportunities in both the Haynesville and the Marcellus just —

Douglas H. Miller

Yeah. I think we used $200 million total in the joint venture, 100 of which would be ours. That’s not a hard fast number. That was just an estimate for BG to get approved. If an opportunity comes along and we exceed that, we'll exceed it. Because where we're targeting right now is what I call ground zero.

Stephen F. Smith

Wendy, what is our budget right now on the Marcellus for land? It's in the $50 million, $100 million?

Wendy Straatmann

Thirty to 50.

Douglas H. Miller

Yeah. And I think as we get more data that budget could increase because we've got land people out in all areas right now still working on stuff. We're trying to figure out what opportunities are out there. There's a lot of Marcellus acreage on the market right tow. We're trying to determine which areas we want to concentrate in. This is an area that's 400 miles by 100 miles so there's a lot of acreage there. So I think we're going to have five areas and we're going to concentrate and we're going to try to get between 50 and 100,000 acres per area.

Paul Rudnicki

Hi, David. It's Paul. I think the way you really got to look at it for us we're going to have a budget for land and leasing, but the reality of it is it's going to be more like an acquisition. It's going to be opportunity driven and so we'll just deal with it as we get there. And with the benefit of our existing acreage being virtually all HBP, we can start drilling on those acres pretty much immediately.

Douglas H. Miller

Yeah. We move rigs around in all areas because we're HBP. That's the benefit of what we got.

David Heikkinen - Tudor Pickering

Okay. I'll let other people ask questions. Thanks.

Operator

Your next question comes from the line of Leo Mariani with RBC Capital Markets.

Leo Mariani – RBC Capital Markets

Hey. Good morning, guys. It sounds like in the Marcellus that your analyst guys had kind of talked about walking a little bit in the clay and not getting to some of your horizontal activity until maybe the middle of 2010. It sounds like you are getting ready to spud a horizontal by the end of the year. Just curious as to kind of what caused the change in strategy here?

Douglas H. Miller

Well, the thing about is I think what we're doing is we got — we're hiring a lot of people. We now have 75 people up there. Our confidence level is high. We have gotten some 3D seismic in, I think everybody's looked at it, and I think we're ready to go. So there is a rig available up there. I think we're spudding mid-November so there's gas in place, we're seeing a lot of — and we got to get going, and there's a lot of competition.

Harold L. Hickey

We're still ramping up slowly as pointed out in the analysts day meeting.

Douglas H. Miller

Yeah. We're not ready to move five rigs up there yet, but we're still doing vertical wells, we're still testing, but we've seen some real good positive results and I think our people are ready to go and we'll start one and see how it works. Again it'll be walking. We won't be running yet.

Harold L. Hickey

Well we'll move that rig in sometime in the first quarter and we'll just drill through that one year for the rig.

Douglas H. Miller

You do have a rig for November —

Harold L. Hickey

Right. But that's (inaudible) a one well rig contract.

Stephen F. Smith

And when you think about it, we talked about at the analysts day that we laid out what we thought was a pretty conservative program out there and as we said, we expected to ramp that up and I think this is kind of the first sign of that.

Leo Mariani – RBC Capital Markets

Okay. I'm looking at your growth forecast for next year, it looks like you guys have done a pretty big increase with your yearend '10 exit rate. In terms of just trying to get behind some of those numbers, is that pretty much driven by the Haynesville at this point in time?

Douglas H. Miller

Oh yeah, yes.

Stephen F. Smith

I mean we're still kind of sticking to what we put out in the analysts day. So when you go back and you see the program that we laid out, it's definitely heavily Haynesville.

Douglas H. Miller

That's really no Bossier and hopefully we'll be able to add to that and that's basically 100 Haynesville wells.

Leo Mariani – RBC Capital Markets

Right. Does that include any Marcellus ramp either?

Douglas H. Miller

It has a little.

Leo Mariani – RBC Capital Markets

Okay. And I guess on your hedges, just curious, have you guys bee monetizing at this point in time some of the hedges you had? In 2010 I know you were thinking about doing some additional monetization, but have you done any at this point?

Douglas H. Miller

We'll be, in this quarter as we close these sales, cleaning up the books to get back in line with the hedge percentages. Really it's the oil. We sold a lot of oily properties and so we'll be looking at oil this quarter.

Leo Mariani – RBC Capital Markets

Okay. Thanks, guys.

Operator

Your next question comes from the line of Eric Anderson with Hartford Financial.

Eric Anderson - Hartford Financial

Yes, good morning. Congratulations on a very transformative year and quarter. I wanted to followup the question on the Bossier, and specifically is there any possibility to use same well bore to get to the Bossier as well as Haynesville?

Douglas H. Miller

Good question. It's been asked many times.

Harold L. Hickey

For our vertical program definitely that's what we're using. And in fact we've got about 800-900 MCF of Bossier gas going to sales today so I mean we've been selling Bossier gas for awhile, but that's not what we're targeting for our horizontal program . We're targeting separate well bores right now for that.

Douglas H. Miller

Eric, the thing about it is we've had models run it, everything else, is it possible, yes, is it practical, no. There's too much risk.

Eric Anderson - Hartford Financial

Okay. Could you use a pad system where you've got —

Harold L. Hickey

It'll definitely be on the same pad and use the same surface locations and the same midstream takeaway facility.

Douglas H. Miller

And that goes the same thing for the Haynesville. I mean we're going to start pad drilling next year, again, as a benefit of having all of our acres HBP we can start going to that manufacturing mode —

Harold L. Hickey

Actually this quarter we're going to do our first pad.

Eric Anderson - Hartford Financial

Well, will the direction of the Bossier horizontal be falling in the same line as Haynesville or will you be trying to go different areas for different directions?

Douglas H. Miller

It'll be very similar.

Eric Anderson - Hartford Financial

Similar, okay. And one question on if you guys had any comments on the news that DEVIN announced in terms of their record well in St. Augustine parish?

Douglas H. Miller

Yeah. We did have some comments we wish we owned it (laughter).

Harold L. Hickey

We saw it. We know Crimson very well. Oak Tree is our largest shareholder and we were with them. We're not sure if it was a shale or a lime well. It's deeper, and I know Oak Tree is jumping for joy so we're rooting for them. We don't have any acreage down there, but we're rooting for them.

Eric Anderson - Hartford Financial

Okay. Thanks very much.

Operator

Your next question comes from the line of Irene Haas with Canaccord Adams.

Irene Haas - Canaccord Adams

Hi. I would like to have some more color on the Marcellus. This is a really huge trend. You've actually identified five areas, so I want to know how you would approach it. When it's really time of development would you go sequentially or would you go hit five areas at the same time? And also, some of the cluster that we saw on your maps of north, east, south, west, are those the sweeter areas that you're pursuing?

Wendy Straatmann

Well, in 2010 we're going to be pursuing our larger acreage position and we have drilled numerous vertical wells to date to help us identify those areas that we want to concentrate on. Again, much of our acreage is HBP which is a huge advantage to allow us to dictate the pace of our future development.

Irene Haas - Canaccord Adams

And so you would probably take a more measured approach and try to tackle your five areas sort of sequentially rather than parallel?

Douglas H. Miller

Well, I think the thing about is we're going to test each one of them and if they all work we're prepared to go in all five areas at the same time. I think we'll probably determine that next year. I'd say right now it's budgeted for one area, but we're not afraid to go at five at once.

Irene Haas - Canaccord Adams

Okay great. Thanks.

Operator

(Operator's Instructions) Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer – Goldman Sachs

Doug, can you talk to and I apologize if you already mentioned it, what you think the total dollars that you may spend and I guess potentially BG as well, on locking in additional acreage and what resource you expect to potentially come from that in the Haynesville?

Douglas H. Miller

You're killing me. I think the original budget when we closed the joint venture for next year that we put in was $200 million and I know that they would like to exceed that and so would we. So Jacobi's group right now is out looking. We've closed some. They participated. We have a bunch on the target list. So $200 million's the number we're using today, but I think both them and us, if we find the right acreage at the right price, we'll go up.

Brian Singer – Goldman Sachs

And can you characterize what is available in terms of call it high quality De Soto acreage versus maybe acreage moving to the north where there may be more questions or it may not necessarily be as core?

Douglas H. Miller

Most acreage is leased or held by production so what we're seeing is trades, we're seeing larger companies that might want to do a trade, and we're seeing small private companies that John knows or has known. We've been over there for 10 years so some of the private companies that might have 500 or 1,000 acres — I mean we've leased acreage 40 acres at a time in some of the units so every acre is valuable over there. It's ranged from 6,000 an acre to 15,000 an acre and the more we pay the more aggressive we're going to be as far as drilling. But I'd say John's got wide open in De Soto parish. Anything outside of De Soto's parish he has to come in and get Steve's permission.

Brian Singer – Goldman Sachs

Thanks. And I might kill you with this one as well, but I know you're obviously focusing almost exclusively here on the Haynesville and Marcellus, but if there were opportunities in some of the other emerging shale plays, would that be interesting to you and potentially would you look to use your Marcellus acreage as a swap or are you looking to potentially monetize that for cash or the covenantal JV as you've done in the Haynesville?

Douglas H. Miller

We have seen probably five deals in the last two weeks in Eagle Ford. We've passed. We don't even want to know about it. We're rooting for those guys to do good, but we have two areas with a lot of potential and I mean north of 25 TCF of potential. Our job is to educate ourselves and to become the best in those areas and we got plenty. We're not looking for anything. We wouldn't make any trades to get in somebody else's deal, but we will be aggressive in both areas.

Brian Singer – Goldman Sachs

Thanks.

Operator

Your next question comes from the line of Howard Flinker with Flinker & Co.

Howard Flinker - Flinker & Co.

Hi, Doug. I got a question, where did you get that 70 million a day?

Douglas H. Miller

Which 70 million a day?

Howard Flinker - Flinker & Co.

Well, if demand rises to 70 a day —

Douglas H. Miller

Oh, 70 BCF. I'm planning on an energy bill in both electricity and an energy bill that's going to have some incentives for heavy trucks. You need to call Boone.

Howard Flinker - Flinker & Co.

Oh, trucks, right. Otherwise it's 9-11 years from now.

Douglas H. Miller

Yeah, but stay tuned.

Howard Flinker - Flinker & Co.

I forgot about trucks.

Douglas H. Miller

There's two bills, one in the House and one in the Senate that are ramping up and if those happen that'll take care of it, heavy trucks.

Howard Flinker - Flinker & Co.

Trucks, you're right. Thanks for correcting me. That's it, thanks.

Operator

Your next question comes from the line of Jack Aydin with KeyBanc.

Jack Aydin - KeyBanc

Hi, Doug. Would you tell me where you're spotting your first horizontal in Appalachia, what county?

Douglas H. Miller

Center County.

Jack Aydin - KeyBanc

Okay, thanks.

Douglas H. Miller

I hope acreage doesn't go up because of that. Don't tell anybody, Jack. I think that's it.

Operator

Yes, sir. There are no further questions at this time.

Douglas H. Miller

Okay. I appreciate everybody tuning in and I think what we've accomplished has been a credit to our people. We're very excited A, about what we've done, and B, our potential going forward so stay tuned and we'll talk to you. I think we'll have our budget out by December 1st. Thank you very much, meeting adjourned.

Operator

This concludes today's conference call. You may now disconnect.

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