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Rosetta Resources Inc. (NASDAQ:ROSE)

Q3 2009 Earnings Call

November 9, 2009 11:00 pm ET

Executives

Michael Rosinski - EVP and CEO

Randy Limbacher - President and CEO

Jim Craddock - VP, Drilling and Production Operations

John Clayton - Vice President, Asset Development

Analysts

John Hayden - Rodman & Renshaw Investment Bank

Joe Magner - MacQuarie

Rehan Rashid - FBR Capital Markets

Mark Lear - Sidoti & Co

Irene Haas - Canaccord Adams

Welles Fitzpatrick - Johnson Rice

Richard Rossi - Wunderlich Securities

Joseph Magner - MacQuarie

Operator

Welcome to the Rosetta Resources third-quarter 2009 conference call. (Operator Instructions)

If you are not able to participate in the conference call, an audio replay will be available beginning later today, through 12 AM, on November 13, 2009 by dialing 888-203-1112 or for international 719-457-0820 and entering conference code 2423139. A replay of the call will remain online at www.rosettaresources.com for 60 days after the initial call. To access the replay, click on the Investor Relations section of our website and select 'Presentations and Events.'

At this time, I'd like to turn the call over to Mike Rosinski. Mr. Rosinski, you may begin your conference.

Mike Rosinski

Good morning and thank you for joining us for our third-quarter 2009 conference call. Before we proceed, I will read Rosetta's Safe Harbor statement. All statements other than statements of historical fact included in this presentation are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon current expectations and are subject to a number of risks, uncertainties and assumptions, which are more fully described in Rosetta Resources' Annual Report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission. These risks, uncertainties and assumptions could cause actual results to differ materially from those described in the forward-looking statements.

Rosetta Resources assumes no obligation and expressly disclaims any duty to update the information contained herein, except as required by law. By the way, please note that Rosetta filed its third quarter 2009, Form 10-Q last Friday. It can be accessed via our website under the Investor Relations tab.

Randy Limbacher will open this morning with some comments about Rosetta's performance and our business outlook. I'll come back for a brief financial review of the quarter, followed by Jim Craddock, who will review the operations highlights. Finally, John Clayton will provide an update on our Eagle Ford and Bakken plays, which are both very exciting pieces of business for our company. After our prepared remarks, we will go to the Q&A session.

Now, I'll turn the call over to Randy.

Randy Limbacher

Thank you, Mike, and thanks to all of you for joining us this morning. I know all of you are anxious to hear about our operations results, but before we go there, I want to first put some perspective on the significance of this quarter's results and how we are positioned as a company versus just a short time ago.

I'll make a few comments about the general environment in 2009 and how Rosetta approached the historic downturn that all industry has experienced.

We, like many smaller companies in the E&P sector, had to make some difficult choices this year. The approach we took in response to low commodity prices was to conserve, but more importantly, to prioritize our capital spending. We made a commitment at the beginning of the year to live within our means and we carefully managed our capital spending throughout the year to achieve that commitment.

Our challenge during 2009 was to defend an acceptable level of production from our core assets, while testing our emerging plays in the Eagle Ford and Bakken. We announced that our planned capital spending for 2009 is estimated at $125 million, up slightly from our previous estimate of $115 million. Virtually all of that incremental capital is directed towards the Eagle Ford and the Bakken, where we believe we are creating significant value for our shareholders.

We believe the decision to conserve capital in 2009, as well as our specific allocation decisions, served us very well. Despite a challenging year, we made a great progress in positioning Rosetta for the future, and we did so in a fiscally prudent manner that preserves liquidity and flexibility for the future. There's no doubt in my mind that this quarter was a very significant one for Rosetta.

We achieved two important discoveries in the Eagle Ford on about 30,000 acres net to the company, which represents over 60% of our Eagle Ford position today. Less than a year after securing a 230,000-acre net position in the Alberta Basin Bakken oil play, we spud, logged, cored and drilled a horizontal lateral there. We cataloged new identified inventory from our existing assets and we think our volume profile has bottomed and will improve from here. We have cash in the bank.

I believe these recent results are tangible evidence that our strategy shift is getting traction, and here's why. Recall when we started Rosetta's transformation about two years ago, we identified several objectives. We wanted to establish a portfolio of assets with extensive inventory potential that could fuel cost effective, predictable growth for many years. Our core existing assets are yielding significant inventory upside. Coupled with our new Eagle Ford and Bakken plays, this represents a very enviable position for a company our size.

As part of our transformation, we had a goal to achieve an inventory level of at least two times our proved reserved base, which was comparable to peers with similar business models. Now, we are going to wait until year-end to update our identified inventory, but I'm confident that we will demonstrate strong progress on this goal.

We also wanted to build the operating and execution capability to be a credible resource player. This meant developing the technical skills to be competitive in resource plays, including a low full-cycle cost structure and an ability to generate superior returns over time. Again, we are making great progress. We are three for three on technical drilling successes with our first horizontal wells, and we have some of the best talent in the industry on our team.

Finally, we wanted to be able to demonstrate breakout performance, especially in the area of reserve growth and reserve replacement costs, two areas where Rosetta lagged historically. We will discuss our performance outlook with the marketplace when our 2010 budget is approved in December, but we are comfortable guiding to growth in both volumes and reserves in 2010 and beyond.

Despite these results, we are not resting. In fact, we are more focused than ever on demonstrating to the marketplace that we can and we will do what we say. So far we have a solid track record of doing what we said we would do, and we hope you take some comfort that we can achieve the goals of our transformation. We won't be highly promotional, because our objective is to deliver consistent and reliable performance in every aspect of our business over time. That is what Rosetta is all about.

I'm very pleased with the core performance of our company this quarter, especially the ongoing progress of resource assessments in our existing producing areas and trends in our absolute cost. But the impactful news in the quarter was clearly our results in the Eagle Ford and Bakken programs. These two programs have the potential to meaningfully impact our future performance. John will tell you more about them shortly, but I want to make sure I set the expectations for what we are going to say about these plays today.

We fully appreciate that you would like to know every detail about our Eagle Ford and Bakken wells. However, it's very important to understand that we are still in active leasing negotiations in both plays. The point of this is to give you a heads up that we intend to keep some information about our Eagle Ford and Bakken activities tight at this time.

I will conclude my prepared remarks by giving you some thoughts about 2010 and beyond. A planning and budgeting exercise is well underway, but we've not yet approved a capital budget for next year. So bear in mind that my comments will be directional, not specific.

I can tell you that we have identified more projects for capital funding in 2010 than we have ever had in the past. Given our liquidity position, we are comfortable saying that, we expect to substantially increase our capital program in 2010, compared to 2009. I'm also comfortable saying that a significant portion of our 2010 capital will likely be directed toward our Eagle Ford and Bakken programs, which are really just getting started.

I should mention that we have a bias for living within our means, suggesting that we will probably ration capital among several attractive projects, both in our current producing areas and our new Eagle Ford and Bakken plays. I want to take a minute to discuss how we think about capital allocation and outline the priorities we will consider it our capital allocation process.

One of the strongest factors in our capital allocation decisions will be relative project economics. This is especially important in the current price environment. Our recent success in the oil window of the Eagle Ford and our Bakken potential gives the company much more exposure to oil than we've had in the past. We will increase our exposure to oilier projects and programs with low finding costs.

Despite today's lower commodity prices, a large percentage of our portfolio is still economically viable, particularly given the improvements in service costs we've seen, and our new plays look very attractive. As a part of our routine business, we will continue to test every project.

We will prioritize based on uplift efficiency. That is, we will favor spending in areas where we get efficient volume response to capital spending. This is important for driving our cash flows. This was a focus for us in 2009 and it will be a focus for us in 2010.

We are not prepared to provide production guidance for 2010 at this time, but I'm comfortable saying that we expect to grow volumes next year compared to 2009, consistent with our longer-term performance goals.

Another key priority for us will be to spend on programs where we can realize step-function improvement in reserve growth and, I will add, on a per-share basis. This is an area where Rosetta must improve, and I think we've positioned the company to achieve this objective in 2010 and beyond.

We have some obligations for maintaining leasehold. Overall, however, we consider this a relatively minor consideration given that our core properties are largely held by production and our new plays are early in term. We think this is a big advantage for Rosetta, by the way.

Finally and perhaps most importantly, we clearly have a desire to accelerate activity in our new plays. These have the potential to be very big pieces of business for our company. Our goal is to give our shareholders the best chance of participating in upside when the cycle turns by having exposure to these two potentially very large new plays. We are driven to direct our capital toward opportunities that can expand our multiple by proving up these new play concepts.

We expect to provide 2010 capital and production guidance when our final budget is approved in December. However, given our identified inventory in existing and new plays, we are comfortable saying that we expect to achieve step function growth in production and reserves in 2010 and beyond. Given our recent results, especially in our new plays, I believe Rosetta will emerge from 2009 as a significantly stronger company.

We took many steps during the past two years to improve the underlying quality of our company, both financially and operationally, and I believe we are at an inflection point on our performance. Our actions to position Rosetta for sustainable, predictable growth are going to pay off. We look forward to continuing to update the market on our emerging plays and on our 2010 plans.

Now, I'd like to turn the call back to Mike.

Mike Rosinski

Thank you, Randy. For the quarter ended September 30, 2009, Rosetta reported net income of $5.7 million or $0.11 per diluted share, an increase of $105.1 million from a net loss of $99.4 million or $1.96 per diluted share for the same period in 2008.

Production for the third quarter of 2009 averaged $120.7 million a day. Daily production was down 14% overall versus the third quarter of 2008, driven mostly by the decline in the company's non-core assets in the Gulf of Mexico and Texas State Waters.

As Randy mentioned, we believe our volume profile hit the low water mark during the third quarter and should improve from here.

Revenues for the third quarter of 2009 were $64.5 million, compared to $130 million for the same period in 2008. This decrease in revenues was primarily attributable to lower realized gas prices. Including hedging impacts, this year's realized gas prices were $5.61 per Mcf versus $9.47 per Mcf for the same period in 2008. Total revenue in this year's third quarter includes a benefit of $22.9 million due to the effect of natural gas hedging.

Total lease operating expenses, which includes direct LOE, workovers, ad valorem taxes and insurance, was $13.3 million, or $1.20 per Mcfe, during the third quarter. Direct LOE was $10 million or $0.90 per Mcfe. Workover costs were a negative $200,000, or $0.01 for Mcfe, as we booked Ike-related insurance recoveries received in the quarter as a reduction to workover expense. Ad valorem taxes were $3 million or $0.27 per Mcfe and insurance was $500,000 or $0.04 per Mcfe.

Production taxes were $1.1 million or $0.10 per Mcfe, and treating, transportation and marketing charges were $1.8 million or $0.16 per Mcfe.

Depreciation, depletion and amortization was $23 million, based on a D&A rate of $2.07 per Mcfe.

General and administrative costs were $10.4 million or $0.94 per Mcfe for the third quarter, including $2 million in non-cash stock compensation expense. Including this stock compensation expense, general and administrative costs were $0.76 per Mcfe.

This quarter's G&A included approximately $200,000 related to the insourcing of our gas marketing function, which was previously handled by Calpine and treated as marketing expense. Going forward, this G&A expense increase will be more than offset by lower marketing expense.

For the nine months ended September 30, 2009, Rosetta reported a loss of $228.4 million or $4.48 loss per diluted share, a decrease of $195.8 million from a net loss of $32.6 million or a $0.64 loss per diluted share for the same period in 2008. These results include a first-quarter non-cash charge of $238.1 million, net of tax, for impairment of oil and gas properties.

Production revenues for the nine months ended September 30, 2009, were $142.1 million a day and $217.5 million of revenues, respectively, compared to $148.8 million a day and $413 million in 2008.

Average realized gas prices in 2009, including hedges, decreased to $5.46 per Mcf from $9.51 per Mcf in 2008. Total revenue for the first nine months of 2009 included a benefit of $60.1 million due to the effect of natural gas hedging.

For the nine months ended September 30, 2009, LOE was $47.9 million, or $1.24 per Mcfe. Direct LOE was $32.3 million, or $0.83 per Mcfe. Workover costs were $3.1 million or $0.08 per Mcfe, ad valorem taxes, $11.4 million or $0.29 per Mcfe, and insurance was $1.1 million at $0.03 per Mcfe.

Production taxes were $4.2 million, or $0.11 per Mcfe, and trading, transportation and marketing charges were $5.2 million or $0.13 per Mcfe.

General and administrative costs were $32.4 million for the nine months ended September 30. This included $4.7 million in non-cash stock compensation expense.

Next, I would like to make a few comments on our financial position, which we have guarded jealously throughout the year. At the end of the third quarter, the company had approximately $65.7 million of cash on the balance sheet, up $16.2 million from the end of the second quarter. Additionally, during the quarter, the company reduced outstanding debt by $10 million.

We believe we are somewhat unique among smaller companies in having funded a high-caliber capital program this year and building cash on our balance sheet.

We recently completed our semiannual borrowing base re-determination with our bank group. Under the amended and restated revolving credit agreement, our borrowing base was reset to $350 million from a previous amount of $375 million. The company now has $190 million borrowed under the revolving credit agreement, with unused availability of $160 million. Based on quarter-ending cash balances and unused availability, the company 's liquidity position is unchanged from the prior periods and stands at about $225 million.

Finally, I will review the company's hedge position. Currently, we have $52 million a day hedge, at an average price of $7.64 for the remainder of 2009, along with $12.5 million a day for 2010, at an average price of $7.79 and $5 million a day for 2011 at an average price of $5.72.

The company has also entered into costless collar transactions, covering production from 2009 to 2011. The costless collars for 2009 consist of $5 million a day, with an average floor price of $8.00 and an average ceiling price of $10.05. For 2010, we have $5 million a day of collars. For 2011, we have $10 million a day of collars. For both years, the average floor price is $5.75 and the average ceiling price is $7.55.

With that, I'll turn the call over to Jim and John for some operational comments, including an update on our Eagle Ford and Bakken plays.

Jim Craddock

Thanks Mike. During the quarter, the company drilled nine gross and nine net wells, with a net success rate of 78%. Majority of this drilling activity took place in South Texas, where the company reinitiated drilling in the Lobo trend, as well as increased activity in the Eagle Ford trend. Overall, drilling activity was down compared to the third quarter of 2008, reflecting the company's decision to conserve capital.

Rosetta's average production volumes for the quarter were 121 million cubic feet a day equivalent, a decrease of 19 million a day or 14%, compared to last year's third quarter. This primarily reflects the impact of continued decline in the company's non-core assets in the Gulf of Mexico and Texas State Waters, as well as reduced capital spending earlier this year. At this point, we are comfortable that we will land within the upper end of the range of our full-year volume guidance of 130 million to 140 million a day equivalent.

In South Texas, Rosetta drilled eight gross wells in the third quarter, six being productive for a 75% success rate. Net production from South Texas was 46 million cubic feet a day equivalent for the quarter, down nine million a day compared to the third quarter of 2008. This reflects the impact of lower activity levels in the Lobo and Perdido trends, primarily in the second quarter of this year.

In the Rockies, net production was 17 million a day equivalent for the third quarter, up five million a day from the third quarter of 2008, driven by Pinedale acquisition volumes and field optimization in the DJ Basin. Due to low wellhead net back pricing, Rosetta has not drilled any development wells in the Rockies during 2009. Our Rockies asset team has not been idle, however. They've used the time profitably to advance our resource assessment studies, especially in the DJ Basin.

As a result, we've seen our inventory of commercial projects grow. At the same time, we've seen Rockies basis differentials contract and surface costs have continued to fall in the area. Rosetta intends to be prepared to reinitiate drilling in the DJ Basin when we think the timing is right.

In the Sacramento Basin, average net production was 41 million a day equivalent for the quarter, up one million a day, compared to last year's third quarter. I'm very proud of our asset team's efforts in the Sac Basin this year. Despite not being allocated any capital to drill new wells, the team initiated a low-cost re-completion program that continues to deliver success in the field.

The capital workover program, along with some field optimization work, has offset normal field decline and generated modest product growth. Recently, the company initiated a third phase of this re-completion program targeting an additional 14 re-completions. In all, the company expects to conduct about 36 re-completions during 2009.

The company's non-core properties in the Gulf of Mexico and Texas State Waters produced a combined seven million a day equivalent for the quarter, down 14 million a day from the third quarter of 2008. Currently, we are performing some optimization activities in these properties, including drilling a sidetrack well at Sabine Lake, but these non-core assets are still being contemplated for divestiture at some point in the future.

In other core non-core property activities, the company generated sales proceeds of $3.4 million in the third quarter, bringing total proceeds to-date to about $20 million. These divestitures have a negligible impact on reserves, annual production and net acreage.

During the fourth quarter, we will continue the California re-completion program, run one rig in the Lobo trend, wrap up the sidetrack work at Sabine Lake, and continue drilling exploration wells in our emerging Bakken and Eagle Ford acreage.

As both Randy and Mike have indicated, we expect that the third quarter will be our low water mark for Rosetta's volumes this year. During the fourth quarter, we expect to see uplift from our late year Lobo program, a full quarter's impact from our Eagle Ford wells, and continued uplift from the Sacramento Basin workover program.

We expect exit rates will be between 130 and 135 million a day equivalent, which will give us good momentum going into 2010.

During the remainder of the year, we will also continue the progress we've made on the inventory generation activities that Randy alluded to. As I stated earlier, we made good use of the slower program pace in 2009 to advance our inventory efforts in our existing core areas, such as the Lobo, the DJ Basin and the Sacramento Basin.

Our teams across the company have done an outstanding job of digging into their assets with an eye for opportunistic growth prospects. As a result, the company is in a stronger position today to choose from a growing suite of capital projects and to optimize that portfolio. We will update our overall capital inventory position after year end.

Now, I will turn the call over to John Clayton for some comments on the Eagle Ford and Bakken programs.

John Clayton

Thank you, Jim, and good morning, everyone. First, as Randy mentioned, I want to remind you that both of these plays are competitive and therefore some of the information we had is being held tight till such time we believe our existing shareholders would not be harmed. I appreciate your understanding with that point.

Last quarter, we told you that our first exploratory Eagle Ford well was a successful discovery. We also told you that we had spud our second exploratory well in the Eagle Ford. In the Bakken we told you that our plans were to drill at least two vertical wells before the end of the year. We further said that if were encouraged by what we saw through our drilling, logging and coring operations, we will consider taking the well horizontally. In a nutshell, that is where we last talked, so let's fast forward, starting with the Eagle Ford.

It has been a very busy, but exciting quarter for us. The initial Springer Ranch discovery well continues to meet our performance expectations. Our second exploratory well, the Gates Ranch, was also a success. We are preparing to drill our third horizontal well in the play, which we will spud later this quarter, and our lease position continues to grow.

Now, I will give you a bit more detail on each of these activities. The previously announced discovery in Southwest LaSalle County, the Springer Ranch number 1H, continues to perform well and meet our expectations. We have increased our Springer Ranch acreage position during the quarter and now have more than 14,000 net acres or about 30% of our total Eagle Ford acreage in the vicinity of this well.

Additionally, we have plans to spud our second exploratory well in this area, the Santa Cruz number 1H, during the fourth quarter of this year. This new well will test the southern limits of our Springer Ranch acreage position and will be located nearly nine miles south of the number 1H discovery well.

Also of note on the Santa Cruz well is that, we will test, increasing the density of our frac stages from roughly 400 feet apart down to roughly 300 feet apart. By doing this, we will better understand rock characteristics and fluid flow, which will help us continually optimize the development of our leasehold.

As part of our 2010 planning and budgeting exercise, we are evaluating possible development trends in the Springer Ranch area. Although we will not announce our capital plans for a month or so, I think it's safe to say that we will be active in this area during 2010.

Our second horizontal exploratory well in the play, the Gates Ranch 5D number 9H, is located in Northwestern Webb County and is about 30 miles west of our Springer Ranch area. This well has been successfully drilled horizontally to a total measured depth of 12,400 feet, with a lateral length of approximately 3,700 feet. The well was completed using a 10-stage frac and was first delivered to sale on October 6 of this year.

After seven days, the well was producing on a 24/64 inch choke at a rate of 3.5 million cubic feet of gas per day and 337 barrels of condensate per day. If you do the math, the condensate yield calculates out to roughly 90 barrels per million cubic feet, which is one, if not the highest, condensate yields in the area. That's a gas equivalent rate of roughly 5.5 million cubic feet using a six-to-one oil conversion and 8.5 million cubic feet using a 15-to-1.

I also want to add that, in addition to the condensate, the gas stream has a very high liquid content resulting in a BTU factor of 1,320 BTU per cubic feet. Cumulatively, the Gates well has produced 25 million cubic feet of gas and 2,200 barrels of condensate during the initial seven days of production. Given the high condensate yield and the richness of the gas stream, you can see why this is a high-value area for Rosetta, and we think it has the potential to impact our oil production over time.

Since last quarter, we have also added to our leasehold position in the Gates area as well. We now have more than 17,000 net acres under lease or committed, making the Gates area 36% of our total Eagle Ford acreage. We will continue to watch the performance from this well and those of offsetting operators, but it's extremely nice to have three streams of revenue, natural gas, natural gas liquids and condensate.

If this area continues to perform well, as we expect it should, I would look for us to be very active in this area during 2010.

As you can see from both the Springer Ranch and Gates Ranch updates, we've not only had good well results, but we have been active in adding to our lease positions. As of this morning, we now have more than 47,000 net acres in the play, under lease or committed. The Springer Ranch and Gates Ranch areas make up roughly 66% of our total lease position in the play, so you can see why we are extremely excited about our two initial discoveries in those areas.

Those two areas alone offer us nearly 200 net drilling locations using 160 acre well spacing assumptions. Looking forward, our plans are to initiate independent development programs in these two areas, as well as test our acreage outside of these areas through the drilling of additional exploratory wells.

I cannot say yet, whether or not we will have one, two or three rigs actively drilling in the Eagle Ford next year, but I can say that we are very pleased with where we've positioned ourselves. We look forward to announcing our 2010 Eagle Ford program within the next few weeks.

Next, I'd like to update you on the progress with our Alberta Basin Bakken program. This program is less mature than our Eagle Ford. However, we've crossed several important milestones this quarter. We've successfully drilled our first exploratory well in the play, the Tribal Gunsight number 31-16H. This well was drilled to test the Lodgepole, Bakken and Three Forks formations. The well was drilled vertically, cored and logged.

Based on the data that we collected and analyzed, we made the decision to take the well horizontal. The well was successfully drilled horizontal to a measured depth of 9,206 feet, at a true vertical depth of roughly 4,800 feet. It has a lateral length of more than 4,100 feet and we are currently in the process of completing the well.

We are pleased with what we've seen so far from a depositional and resource maturity perspective, and the data from the completion operations will give us additional insight into the reservoir mechanics and possible fluid flow from the rock. Without giving out all of the technical merits of what we saw in our logging and coring program that encouraged us to go horizontal, I will say that our original Williston Basin analog model continues to hold together.

In addition to the Gunsight well, we have spud our second exploratory well in the play, the Tribal Riverbend 12-13H. This well is located roughly 30 miles northwest of the Gunsight well, so you can see that our goal is to continue to delineate our understanding of this play and properly assess its full resource potential

This well is being drilled vertically, with plans to characterize the rock through coring and logging operations. We will then make a determination as to whether or not it will be set up to drill horizontal.

As you can see from our actions in the play, we are encouraged thus far with what we are seeing, but as with all resource plays, we are cautious to not get ahead of ourselves. The completion results of our Gunsight well and the well data collected from our Riverbend well are the next hurdles we will cross on our way to the further understanding the full potential of the play.

That wraps up my update on the Eagle Ford and Bakken programs, and I look forward to updating you again next quarter.

Before I turn the call over to Randy, I would like to make one last comment. Our technical and operations teams have done an outstanding job of identifying, capturing and executing on both of these programs. It's a pleasure to work with such a highly technical, opportunistic and creative group of people. Jim and I could not be any prouder.

With that, I will turn the call back to Randy for closing comments.

Randy Limbacher

Thanks, John. We are a dramatically different company than we were just a year ago. The current environment is very challenging, but I believe we have some unique attributes, especially for a company our size, that should distinguish us in these challenging times.

We executed a very prudent operating plan in 2009 and we retained our flexibility to respond to both organic and inorganic opportunities as they arose. We do not believe there are many small cap companies sitting in our position today, with the potential impact plays that Rosetta has in hand.

Our team remains highly committed to growing and building this company. We believe we have an opportunity to advance our strategy, and we are confident about the path we are pursuing. We look forward to updating you when our plans are in place for 2010.

With that, I'll turn the call back to Christine and we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We will go first to Jeff Hayden with Rodman & Renshaw Investment Bank.

John Hayden - Rodman & Renshaw Investment Bank

Just a couple of questions on 2010. I mean I don't want to pin you guys down on anything, but if we jump to Bakken, kind of given what you've seen, could you maybe give us a little bit of color on what type of program you could be running up there in terms of activity level number of rigs et cetera? Then maybe with the first well down, possibly any color on what might be a good number for us to think about in terms of well costs for the horizontal?

Randy Limbacher

Yes, Jeff, I mean it is a little premature to talk about that. I mean we can talk about kind of maybe our minimum plans and then go from there, but John, you want to…

John Clayton

Yes, Jeff, let me put it into context of how we look at these resource plays. The first thing we try to do is work this from a subsurface regional perspective, which we've obviously worked the area. Then we try to capture acreage and we put together nearly 0.25 million acres up there. Then we try to understand what Mother Nature gave us, how much resource is in place. We can do that several ways. The way we do it in our plays, Eagle Ford is no different, we drill vertical wells. We look at the rock through cores. We look at it through logging equipment and we try to quantify how much resource is in play, whether or not we can take it to the next step to make it horizontal. Then we drill horizontal to see if we can get commercial production out of the wells, and then we try to work on our cost and bring it into a full scale development.

So before I wanted to tell you maybe what our plans are for '10, kind of put into context of where we are on that cycle. So we have one well that you can come to the conclusion that we think there is a resource in play or we wouldn't have taken a horizontal, and we have another well that's testing another area 30 miles from that, but based on continued encouragement, our contract that we have up there has to drill a minimum of two wells per year. So we will address that first. So, we will drill at least two wells in 2010 to further delineate the play. But if we are continually seeing encouragement from up there, I would see us drilling maybe five or six wells, maybe on a minimum case, to further understand the play. Now that doesn't mean they'll all be drilled in January and we will have production rates that we will be selling oil on, but for us to delineate such a large resource, I'd look for us to drill maybe five to six wells.

Randy Limbacher

Hey, Jeff, I mean I would just add, I think that you have to think about this as a much less mature play than, for example, the Eagle Ford. We are still in exploratory mode, however, if we do see success in the test then we would look to do it, to do development work, but I still think of this as being an exploratory mode with some encouragement by what we've seen early.

John Hayden - Rodman & Renshaw Investment Bank

Then just jumping to the Eagle Ford real fast? With the stuff you guys have in kind of the (inaudible) Gates area, about 30,000 net acres, Assume you're still not going to give us much color on where the additional 10,000 is, but most of the stuff you guys have, is it more in the kind of gas condensate part of the play, or do you have any stuff or any acreage that's maybe up in the oilier part of the play?

John Clayton

Okay. I will take that one as well. We've got 47,000 net acres under lease or committed right now. If you look at our operations update on our release last week, it stated 42 and then late last week we entered into an agreement with another 5000 acres. So now we are looking at 47,000 acres. That's where Rosetta sits in the entire play. Now, we will drill down a little bit further. The area we call our Gates Ranch area is in the oil condensate window of the play. That's where our Gates well is located. In that area, we have 17,000 net acres in the play. All 17,000 is contiguous. We operate all of it, and we've gotten by far, if not 100%, we have by far probably on average maybe 80% working interest throughout that entire block. Huge position for us and it's located right in the heart of the oil window.

Our next largest position is in our Springer Ranch area. The Springer Ranch, as we released, is a dry gas well. Our net acreage position around the Springer Ranch is 14,000 net acres. The majority of that block, it's all operated by Rosetta. The majority is 100% working interest. That block is about 30 miles east of our Springer, but it is in the dry gas window where we located the Springer Ranch well. So if you add those two up together, that gets to 31,000 net acres and some change. I think Randy rounded it to 30. So, we've got another 15,000 net acres that we've not disclosed where it is or the timing of when we will develop that. Does that help you out a little bit, Jeff?

Operator

We will take our next question from Joe Magner with MacQuarie.

Joe Magner - MacQuarie

Hey. How are you? Good quarter. You made some comments about 2010 matching some of your long-term performance goals. Not to pin you down, understand the process is underway, but can you give us some ranges or some expectations on what those long-term goals might be?

Mike Rosinski

I think it's a little bit premature to do that, but one of the things that we've talked about is to build that project inventory up to the point where, if we choose to do so, that we could, and we've talked in the past, fund it at a level that would drive double-digit growth and production, and certainly significant growth in reserves. So I think the biggest step that you've seen this year is, we've got a significant inventory we've put together and our update that at yearend, but I think you'll be pleased with the growth that you see on that. On the other side of it, we still have the liquidity between our bank line and cash on hand of $225 million. It will allow us to go out and execute the program. So look for significant increases in capital next year, as well as guidance that we will give in December that shows production and reserve expected for 2010.

Joe Magner - MacQuarie

One of the reasons you're being a little bit cautious in some of your comments (inaudible) new areas you are actually leasing, you've mentioned you've picked up some acreage in the Eagle Ford. Does that apply to all of these new areas, the Eagle Ford, the Alberta Basin as well as the Sacramento Basin or is it heavily weighted towards the Eagle Ford and not so much to the other two?

John Clayton

I will address the three you mentioned, Joe. I will start with the Sac basin. Where we do our workovers is in an area called the Rio Vista gas unit. It is about 30,000 acres in size and it is held by production. So our acreage position there is intact. You don't have as many competitors poking around the sides of that unit as you do in some of the resource areas that get depressed these days. So that kind of Sacramento Basin is not as competitive as these other areas.

Then I will move you to the Eagle Ford. It's extremely competitive. It's driven costs up throughout our industry. We were fortunate to get into play very early on. We've got about 47,000 and some change net acres now. A year ago at this time, we had about 25,000 net acres. So we've continually to add to our position. I think every quarter since the play has been announced publicly we've grown our position. So it's extremely competitive and there's tens and tens of companies out there that are competing with each other.

The Bakken play, because of the success in the Williston Basin and that's the analogue in the northern Rockies that people play off, it's also very competitive and we are not the only company out there that's chasing this play. That's kind of where I will leave it today.

Joe Magner - MacQuarie

Okay. If the Bakken play were to pick up, how does the permitting process look right now?

John Clayton

The permitting is very, very easy. This is on the Blackfeet Indian reservation, so the surface is owned by the Blackfeet Indians, that's the entity that we entered into our exploratory agreement with. It's also, if you look at a macro geographic map, it may appear to be in the northern Rockies or the northern U.S. side of the Rockies, and it's quite the reverse. It's actually on the eastern side of the Rockies in rolling hills and terrain. So as far as wildlife and so forth, we don't have some of that that maybe you have as you move east into the federal surface lands of the Rocky Mountains. So I believe currently we have, without getting into too much specifics, we've done on sites, which is where you typically run into regulatory problems, but we've done those on, let's say, more than a dozen locations and we've got an inventory of drilling locations out ahead of us if we were to be successful.

Joe Magner - MacQuarie

Then maybe just one last question, Mike, perhaps for you or any of you, I guess. You talked about the interest in bolt-on acquisitions as a way to further I guess add to the inventory. Where do those sit right now on your list of priorities?

Mike Rosinski

Well, I would say, first of all, the focus of the call has been on Eagle Ford and Bakken, so obviously, that's where the priority for our efforts are. Right now, we continue to keep an eye on the opportunities that are out there, but for the most part have not seen what we would consider highly attractive opportunities, and so I would rank it down just a little bit lower, but again, we are always keeping an eye out for what's going on out there.

Operator

We will take our next question from Rehan Rashid with FBR Capital Markets.

Rehan Rashid - FBR Capital Markets

Good morning. Just a quick maintenance CapEx question. First, what kind of maintenance CapEx level would you need to kind of keep your production, let's just say, at the 130 million a day? Kind of how many areas could you do that and let's exclude the Eagle Ford and the Bakken from that, please?

Jim Craddock

Hey, Rehan. It's Jim Craddock. I think, in the past, we've said maintenance capital, the key volume is flat, was around $170 million, something in that range. Recently, with the reduction in costs, though, I think it's lower. So it's probably in the $150 million range, something like that. So when we spent 125 this year, obviously we fell below that maintenance capital level, but we're picking that pace back up. I'm sorry, the second part of your question regarding the...

Rehan Rashid - FBR Capital Markets

How long can you keep this, let's just say at 150 flat? Do you have a couple of years' worth of running room in the inventory, I presume?

Jim Craddock

Yes, like we said, we will talk more about inventory at the end of the year, but we have significantly more than a couple of years, so we are pretty excited about the growth in inventory, not just in the new emerging plays, which is very significant, but even in the core areas we are seeing significant uptick in the number of projects that we can choose from.

Randy Limbacher

I would add to that, that as we look out toward next year, the expectation would be for something well above maintenance capital levels. I mean, just looking at expected cash flow and cash on hand, we would expect to see growth in our volumes next year.

Rehan Rashid - FBR Capital Markets

Okay. On the Bakken, this Tribal Riverbend number 12-13H, what are the kind of parameters of this exploratory well? How is it going to be different than the first well that got drilled?

John Clayton

This is John. I will kind of go back to what maybe I explained to Jeff on what we look for in these plays, all the way from the idea ,through making it commercial, full-scale development. What we are trying to attempt to accomplish on the Riverbend well, which is 30 miles from our original, is to quantify the resource within the interval itself. Then once we quantify that, if it's large enough, then we work on getting it out of the ground and making it commercial. We do that through then taking the well horizontal, which is what we've done on the Gunsight well. So our primary goal on the first one will be to look at what does the rock look like and how much oil and gas would be in place in the rock.

Operator

We will take our next question from Mark Lear with Sidoti & Co.

Mark Lear - Sidoti & Co

Looking at the Gates Ranch area, just curious about the takeaway and processing capacity in that area. Is that something you guys would do internally or look to a third-party to take care of?

Mike Rosinski

Mark, we would plan on using a third-party to move the gas away, and in fact, we are very comfortable right now with where we are in infrastructure. In fact, are in discussions with potential transporters or gatherers about our long-term plans. So the answer to your question is, we are most likely we'll contract this to third parties. We are already doing that and discussions are underway for how we'll handle that on a long-term basis.

Mark Lear - Sidoti & Co

Mike, while I have got you, just gas realized prices looked to tick up despite the I guess benchmark gas kind of ticking a little bit lower in the quarter. I was just curious what the reason for that was?

Mike Rosinski

One of the things that's happened is, how closely you've been following the indices, but PG&E has been very strong for the last several months, and in fact, PG&E has been running above Ship Channel, it's been above Henry Hub. I would say that's probably been one of the biggest factors in helping our realizations here recently.

Mark Lear - Sidoti & Co

Your thoughts on 2010 hedging? You guys look a little bit light. I was just curious if you would be looking to add more on at these levels or just kind of wait and ride things out a little bit?

Mike Rosinski

No, the answer is that we are keeping a close eye on the market, looking for opportunities to add hedges that we think are attractive. If you look at what happened in the third quarter we added hedges for both 2010 and 2011, and the prices you see in the Q are the kind of prices we're looking at. Just as a reminder, we did collars with a floor of 5.75 and a ceiling of 7.65. So from a collar standpoint, that's the kind of pricing we are looking for.

Mark Lear - Sidoti & Co

You guys haven't really talked about Pinedale too much. Just kind of curious when that starts to get a little bit more attention from you guys?

John Clayton

Yes, Mark, we've done a lot of resource assessment work at Pinedale. We are looking at activity on the Anticline. We are seeing a number of operators begin to get active again, down dip on the Anticline, which is interesting to us. Our team is on it. So it's one of the options in our portfolio of investment projects that we will be looking at, potentially resourcing next year or thereafter.

Randy Limbacher

One of the decisions we get to make around Pinedale-Sac Basin is that we have the luxury of that virtually all of that acreage is held by production. So we'll probably look at the whole portfolio, but we will probably put a little more emphasis on those areas that are not held by production as far as converting those leaseholders to that status.

Mark Lear - Sidoti & Co

With these recent Eagle Ford additions, can you talk at all about acreage costs?

John Clayton

We're going to stay away from acreage costs on this call. I think, in the past, we have updated it, updated you guys on what we've got all into it, but there has been so many announcements recently and we have found it detrimental.

Operator

We will take our next question from Irene Haas with Canaccord Adams.

Irene Haas - Canaccord Adams

You guys are in pretty good shape. Right now; you've got plenty of liquidity. Really my question is, is Mike going to loosen up his purse string and let people spend some money? Notionally, you have Eagle Ford going well. It's not just you guys, but bunch of industry players. Just according to our preliminary analysis, you easily can afford a one to two rig program. I mean and probably roughly cost $15 million a pop. Would that be the right way of looking at it? Then really finally, do you have any sort of foreseeable transportation or processing bottleneck related to the liquids and potential oil?

Randy Limbacher

I'm going to let Mike answer that, but we've really been encouraging him to loosen his grip a little bit and I think he's coming around, so...

Mike Rosinski

Irene, in fact, the reason why I have been tight with the purse strings is waiting for the right opportunities. So again, the reminder is, we have very strong cash position; we have our liquidity; and again, it has been because we are waiting for the right moment, and this very well would be the right moment. But go back to the party line. We are going to get into specifics once we get our capital program approved for next year.

On your other question about the bottleneck. No, we don't see any issues at all near-term in being able to move gas or liquids, as the case may be, out of Eagle Ford. As I said, we've had in fact a number of potential transporters approach us about negotiations. Part of their strategy is they just don't want to be left out. They want to have the right arrangements with the right producers should we see significant volume growth. So we just don't see that as an issue anytime soon.

Operator

(Operator Instructions)

We'll go next to Welles Fitzpatrick with Johnson Rice.

Welles Fitzpatrick - Johnson Rice

On that first Springer Ranch well, you noted that it continues to meet expectations. I was wondering if you could elaborate a little bit on what your expectations there are. I mean are they within the sort of four to seven Bcf EUR window that other operators have given for the dry gas portion of the play?

John Clayton

We've yet to go public. We believe there's a lot of talking out there for us on what these EURs are. All I'll tell you on the Springer Ranch and the Gates early on is we've got commercial models not only with costs, and expenses, but well performance, and then we've got our hurdle rates. Both that well and the Gates well are significantly exceeding the commercial performance.

I'll let everybody else speak to how much of, let's say, 160 Bcf of gas in place per section will get recovered out of a well and how much it will drain, and I'll let them do that with 60 days worth of data before we will. But there will be a point in time kind of like we've done with our other programs that we will go public with what our tight curves for different areas of the Eagle Ford. Right now, we just don't think it's prudent on our part to do it and it's probably not prudent on your part to accept it and run your models with it. So, I hate to say we're not going to do the homework for the outside world, but right now it's something we've stayed away from and I'd look for us to stay away from it until we release our tight curves.

Randy Limbacher

Yeah. We can say that we're encouraged enough about what we see to build a drilling program around both of those areas for next year and to want to go test the other areas that we haven't talked about yet. So, I would say, we're kind of acting with our pocketbook. Mike Rosinski, his parsimonious ways aside, we are going to put some more money to the drillbit in those areas and I think in a pretty substantial way.

John Clayton

I will give you some tangible stuff though because it is a good question. The difference between the dry gas window and the oil window in our Gates well, like I said on my script, was best I can tell in this area it's the highest condensate yield that we've got. But the question you have in answering what the recoveries are is the drainage area. In the dry gas area, technical data would tell you a dry gas reservoir, given everything else same in the rock, is going to drain a larger area than maybe more liquid prone reservoir. So, that's what we need more data on as an industry, I believe, to start forecasting out what EURs are. So I think the drainage, when it's all said and done, in the dry gas window may be 160s and in the higher yield areas may be down to 80s, but time will only tell.

Welles Fitzpatrick - Johnson Rice

On the Santa Cruz, you guys obviously increased in the frac density, can we assume that will be sort of the same 4,000 or 5,000 foot lateral for around, give or take, 15 stages? Is that about right?

Jim Craddock

That's right, Welles. This is Jim. We are watching the industry compress along those ways as are we. We are doing a lot of diagnostic work on our first two wells. We've gone public with the fact that we'll probably increase density a it, but expect us to approach that incrementally. We will learn with each well and move forward very carefully.

Welles Fitzpatrick - Johnson Rice

Okay, great. The Alberta Bakken, obviously, leasing seems to have gotten a bit more competitive from what you all are saying. Can you frame that a little bit more? I mean, obviously, new fields in the area, have you seen other people enter the play or are you just seeing sort of existing players build their positions or just if you have any more detail on that?

John Clayton

I'm not going to give you a lot of specific detail on it, but I would encourage you to look at kind of what's happened in the Williston Basin central area. There are numerous operators that have expanded it out beyond east to the Nesson, west of the Nesson in Elm Coulee. It's a huge play up in Saskatchewan now. There's been some test over further in Montana. So it's not only just us, and you mentioned another competitor out there, it's not only just us that's trying to find another sweet spot of the Bakken as a whole, it's everybody that you can list in the Williston Basin is trying to expand beyond the commercial limits of that play. So I'd say, no, it's not just two companies looking for the next field to be an analog to the Williston.

Operator

We will take our next question from Richard Rossi with Wunderlich Securities.

Richard Rossi - Wunderlich Securities

Good morning, everybody. Well, you've answered most of the questions I had, but just a couple of things. I may have missed this, but could you remind me what the Gates well cost?

John Clayton

Yeah. The Gates was just a little bit over $5 million. I guess kind of stepping through that, like a lot of companies, we've been on a learning curve there. Our first well was around $7 million for the Springer. That well, not only did we add the diagnostic work, but we actually moved off the vertical pilot hole and back on. Gates was five to drill, complete and equip, and we expect those costs to continue to come down or development wells as we move forward.

Richard Rossi - Wunderlich Securities

Are you seeing service costs in the Eagle Ford firm up a little because of that activity? One thing I am seeing or heard that fracing scheduling is getting stretched out a bit generally.

John Clayton

I guess what we'd say is that we've seen it flat is probably the way I would say it. Still a lot of spare equipment out there, but you are right. Fracing is one of the places where you see some scheduling issues come up. But overall, we haven't seen an uptick in costs and we're watching that pretty carefully. So I think we're at a bottom but we will see how it goes.

Richard Rossi - Wunderlich Securities

Then just finally, looking at the Sacramento Basin, is it likely in 2010 we'll see you just continue to move with recompletions rather than move anywhere else?

Jim Craddock

I think that's a fair statement. Kind of like Randy said, we'll go forward with our 2010 plans, but it's a held by production area. The recomplete program is probably the most lucrative in our entire spending right now. So we'll fund it as much as we can. But to substitute drilling in an area that's held by production with, let's say, an Eagle Ford area that we're continuing to build inventory and will be booking reserves on at a future date is probably something we wouldn't do. So we'd hold back the drilling out there and focus on the recomplete program.

Richard Rossi - Wunderlich Securities

Again, those recompletions, what's the rough cost?

Jim Craddock

What we've run into recently is we have not had to fracture stimulate these last set of wells. So, it's anywhere between 50,000 and $100,000 a pop. So it's pretty remarkable when you look at the uplift we've had out there. We've actually increased production in the last 12 months and had essentially no drilling capital out there. So pretty phenomenal.

Randy Limbacher

I think we're at the top of the hour, but we can take one more question.

Operator

We do have a follow-up from Joe Magner with Macquarie.

Joseph Magner - MacQuarie

Yeah. Just one follow-up there on the Sac basin recompletion program, what are your current thoughts in terms of expected rate and reserves for those recompletions, and how many do you think you have remaining in inventory at this point?

Jim Craddock

Again, we'll probably update on inventory in a little more detail later on, but let's just say a significant inventory, those types of projects. If you look at the program overall this year, as we said, we offset decline. We actually grew it. So you kind of back into a number. I think the overall program delivered over 10 million a day of uplift during the year. So, as John said, pretty phenomenal results during some very low-cost workovers. In terms of reserves, that's a little bit of a mixed bag. Some of those wells were already booked behind pipe, some we will add reserves at the end of the year, but we're still doing our work on the reserve piece right now. So kind of tough to say how it's going to come out.

Randy Limbacher

What we can say, Joe, though is we talked about having roughly 150-plus idle wellbores and we've probably only gone through about 25 of those so far. So we've got a lot of wellbores left to do that in. We're not going to go around the reserve review process, but it sure looks like its way below $1 an Mcf that we're are adding these reserves for right now we're developing them for. So they're a pretty attractive program.

Well, we really appreciate your questions and interest. We are obviously very excited about where the company stands today. We are looking forward to updating you in December once we get our final plans in place, But again, think about this in terms of we see exit volume strengthening considerably from what you saw this quarter, so we'll exit the quarter between 130 and 135. Look for us to have a significantly higher capital program next year and one that's going to deliver volume and reserve growth. We look forward to laying that out for you.

I think there's going to be a few folks around here today to take your questions later on. So feel free to give Ellen and Mike a call if you have other things. But we'll turn it back to Christine, and again, we appreciate your time.

Operator

Thank you. This will conclude today's conference. We thank you for your participation.

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Source: Rosetta Resources Inc. Q3 2009 Earnings Call Transcript
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