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Athlon Energy Inc. (NYSE:ATHL)

Q1 2014 Results Earnings Conference Call

May 7, 2014 11:00 AM ET

Executives

Bob Reeves - Chairman, President and CEO

Jennifer Palko - Vice President, Business Development and Engineering

Bud Holmes - Vice President, Engineering and Operations

Analysts

Will Green - Stephens

Brad Carpenter - Wells Fargo

Stephen Shepherd - Simmons

Jeb Bachmann - Howard Weil

Mike Kelly - Global Hunter Securities

Gabriele Sorbara - Topeka Capital Markets

Jason Smith - Bank of America Merrill Lynch

John Nelson - Citigroup

Adam Michael - Miller Tabak

Operator

Good morning, ladies and gentlemen. And welcome to the First Quarter 2014 Athlon Energy Earnings Conference Call. My name is Tony, and I’ll be the operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session. (Operator Instructions)

As a reminder, today's conference call contains projections and other forward-looking statements within the meaning of the federal securities law. These statements are subject to risk and uncertainties that may cause actual results to differ from those expressed or implied in these statements and Athlon's filings with the Securities and Exchange Commission.

The discussion on this conference call may include disclosure regarding non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to the most directly comparable GAAP measure are provided in yesterday’s news release that is posted to our website at www.athlonenergy.com.

I’ll now turn the call over to Mr. Bob Reeves, Athlon's Chairman, President and Chief Executive Officer. Please proceed.

Bob Reeves

Thanks, Tony. I would just like to point out that last week we put a new IR presentation on our website, that was after our -- we raised capital in the markets and the debt and equity markets. So there is a new IR deck out there.

Certainly, 2014 we started off -- we had a very fast pace out of the gate as far as our first quarter operation, then also the announced acquisitions. As you know, we’ve added $970 million of acquisitions this year. It is a very high-quality acquisitions. Have very low drilling commitments associated with them, in a very good area of the Northern Midland Basin. So we are happy to get those acquisitions and how its, 30,000 net acres, 5,500 barrels of production and 34 million barrels of proved reserves.

It added a substantial number of locations both on the horizontal side and the vertical, with almost 500 horizontal locations and over a 1,000 vertical locations. And it’s in areas where we have been operating and drilling for quite some time. So we are real happy to get those in-house.

You really don't see the full effect of those acquisitions and so you really look at the third quarter this year, because these acquisitions closed, a couple of them closed by now, by the first of May, then a couple more close at the 1st of June.

So you don't see the full quarter effect on your production and cash flows until the third quarter. But by the third quarter you really starting to see, they were really gaining size and scale as a company.

And then you look into 2015 and you see where we are headed with our new capital program with the additional horizontal rigs, well, it’s getting to be a nice size company but still maintaining a very, very nice growth profile. So we are excited for 2014 and we are really looking forward to 2015.

As I mentioned earlier, we did have a couple of nice offerings the week before Easter. We had an equity offering that we went out with 11 million shares. We upsized that deal to 12.9 million shares because of demand. And then Green Shoe was fully exercised the next day bringing the total offering size up to 14.8 million shares. We issued those at $40. So net of underwriter discounts we were at $570.5 million of net proceeds.

We also did a concurrent high-yield offering that we started out $500 million, we upsize it to $650 million. Those notes priced at 6% and we were very happy with those two financings. In the process Moody’s recognized our size and our scale was becoming larger and they upgraded us. So we are very happy with that as well.

So, overall, we had a great week out of the market. It was great to talk to our new bondholders and our new equity holders. We have got some great accounts in the book. We are happy to have all those people on Board.

So we have a strong balance sheet right now before closing, but we have a strong balance sheet after closing these acquisitions in June. So we will have $1.1 billion of liquidity in June after these deals which is an exciting position to be in.

I think we will continue to look at smaller type bolt-on acquisitions. I don't think we'll be looking at acquisitions in the $1 billion range for this year. But I think we will continue to consolidate smaller type acquisitions like we typically done and try to get these acquisitions integrated along with the new drilling program that we would laid out as far as adding horizontal rigs.

So, again, to date, we closed about $200 million of the acquisitions. So we closed one just this week. So we are excited to get those closed and let Bud take over on the operation side and rest of the field and then we’ll close the rest of them, like I said in about 30 days.

The first quarter, we talked about the first quarter in a release and then we did our offerings. But we had a fantastic first quarter. We came in about 200 barrels a day above the high-end of our guidance range.

Again, we continue to grow a kind of the 70% plus cliff and that’s all the while doing these five separate negotiated transactions and getting those in-house. So the same staff that implements the operations program is also looking at these acquisitions, as far as the analysis and deciding on which acquisitions to pursue and negotiating and then ultimately executing on them. So it’s a great team.

And those -- that production that we have in the first quarter translated very nice into cash flows. We kept our operating cost lower and they continue to trend lower. This is all ahead of the estimate that we have out there.

And I think that the team is really started to capitalize on this competitive advantage that we feel like we have out here that we started off in the vertical program and now its seem to be translating very nicely to our horizontal program. And we are seeing to have very excellent results in each one of the counties that we drill in from a horizontal standpoint.

The vertical program though continues to do very well and continues to be the backbone of the company. For the first quarter, again, we drilled very few horizontal wells, just one rig that we have running. So the solid results from a vertical program continue to drive the company forward.

On the horizontal side, though, I know everyone is excited to hear more about the horizontal program and we've done really well. I have announced some previous results for our horizontal program on our first five wells and again, those first five wells added $90 oil deck, which is kind of where we run the company has a greater than 85% rate of return on those five wells.

And again, we did some extra work on those wells as far as some science on those wells. We also took some extra precautions to make sure that we drill those wells properly and completed them properly that we took the proper steps to drill the plugs out in a safe manner where we didn’t run into any problems out there. And so all those additional costs are included in that and yet, you come out with greater than 85% rate of return at 90%. So we are very proud of that.

I think one of the interesting things that we did as we start looking at all these results across the basin, whether it’s the left side of the Northern Midland Basin or the east side of the Northern Midland Basin.

And we normalize all those to a 1,000 feet and our 30-day IPs on those first five wells came at -- came in at 195 barrels a day. It looks like that's well above the industry average of 134 barrels a day. So we're very proud of the horizontal program and we are excited to step like I said nicely and from the vertical program into the horizontal.

So the last two wells that we released were the Lawson well and it had a 24-hour rate in Glasscock County a 1,069 barrels equivalent per day and a 30-day rate of 983. And then the Able well in Howard County, it had a 24-hour rate of 1,364 barrels a day and a 1,063 on a 30 day side.

We -- as I stated before and I talked about it a couple weeks ago the second Howard County well, the Williams was successfully drilled, those placed on production and we don't have 30 days on that well yet.

But I will say that which is typical in the industry as you drill more and more wells in a given area the team learns from those previous wells. So it looks like that second well is definitely going to be at or better than that first Howard County wells.

So we are really encouraged by the results by it. We will be happy to put out the 30-day rigs on it once we have the full 30 days. But it looks like -- looks to be a very good well similar to the first well.

Then the third Howard County well, we plan to complete that these week and we’ll have an on production in the next couple week. So we’re encouraged by it as well. Although, we don't have any production data on it, but it seem to drill very nice.

As part of the horizontal type curves, we’ve -- in the IR deck out there, we have increased our Pegasus, which is our Midland County and Northern Upton County EURs to 880 MBOE for 7,500 foot lateral that was up from previously 730 MBOE type curve.

In Martin County, we have continued to use the 730 MBOE that we previously had on the Midland area. We haven’t drill any well ourselves up in Martin County. So we are not at a point where we would increase the type curves.

One of things that we do see in the Midland area versus the Martin area is that Martin is oilier. So we are using the 77% production stream for the EUR as opposed to 68% in Pegasus. We saw the same thing in Howard County versus Glasscock County.

So when you look at the type curves for Howard and Glasscock County, we split those type curves out now, where we had 625 MBOE on both of those type curves. The thing that we changed in the necessity to break them out was we are seeing a much oilier content in Howard County similar to Martin County. So its 77% oil and Glasscock County is 67% oil, which is very similar to Midland County.

So you just see the oilier content in the two northern counties as opposed to the two southern counties. So that translates nicely in the higher rates of return given the same size EUR. So that’s very encouraging.

As far as the rig fleet goes, the first rig that we picked up is currently drilling down in Glasscock County and we talked about it. The second rig has already arrived. It’s drilling in Midland County right now. It’s drilling the vertical section of the first well, we are at about, I don’t know, 7,000 feet deep, something like that.

And then the third rig, it comes as we close the last two acquisitions in June and than we have contracted for the fourth rig, which is scheduled to come in the fourth quarter of 2014 and it’s headed to Upton County.

And then we have two pretty good leads on our fifth and sixth rigs already and those aren’t scheduled to come till the first of 2015 and then like the second quarter of 2015. But we've got some pretty good leads on those two rigs already. So we don't foresee any problems as far as rigging -- moving to sixth rigs. So it’s something that we’re very excited about.

On the vertical side, again, like I said, we still focus on the verticals, still very important to us. We are running the eight vertical rigs. We actually completed 52 gross wells in the first quarter of ‘14 versus 46 in the fourth quarter of ’13. So we continue to keep the efficiency going.

One other things that we added in our vertical slide program is, we put, I don’t know, three or four more wells into our hall of fame type sheet that we’ve put in on the vertical wells. We had some very good vertical wells out there in really all of our areas.

I’ve talked about the last conference call, we updated our vertical type curves year end, I won’t go through that again that’s all out there on that IR deck as well. So with that being said, we put our 2014 guidance out there once again in this release just for ease. We are maintaining this eight rig vertical program through 2014, which results in about 205 wells being drilled.

We -- I have talked about before that we are taking one of those rigs over to the newly acquired acreage to fulfill the drilling commitments on that acreage and we plan to ramp up to four horizontal rigs by the end of this year, which results in 30 horizontal wells being drilled by the company in 2014 and then we will move six rigs by the middle of 2015 on the horizontal side.

So that equates to about $700 million of total capital for drilling and completions. We have another $25 million in there for leasing and capital workover, et cetera. Again, our HBP requirements for 2014 are right about $300 million level. It takes about six vertical rigs a year to HBP our acreage.

One other things that we have been doing as we have been ramping up is we continue to hire some really fantastic employees, and we’ve had a very good luck hiring people out of the Midland offices as well as in the Fort Worth office really in all the departments. So we’ve really added some really high quality people. We will continue to add additional people as we -- as the company gets larger. So we’re always still actively looking for good people out there. And so, it’s one of the things that we’re focusing on but really not having any trouble with.

Again, the second quarter production, you are not going to see the full effect of all these acquisitions in it. We really just have one month contributing from the acquisitions, which is only about 1600 barrels a day or so. So again, we did put out second quarter guidance on the production, because until we really get in there and find out where these operations are going, we didn’t want to base our guidance on the current operators out there. All the current operators are very good operators, so we don’t foresee any problems. It’s just harder to track it until you really get it in-house. But, anyway, the second quarter is still looking very good.

On the hedging front, we currently have about 65% of our production hedged in 2014 at around $92.50. We have updated that since the 10-K filing and we’ve layered in some additional hedges for 2015 and in the first half of 2015, we have about 10,000 barrels a day hedged. In the second half of ’15, we are right around 4500 barrels a day hedged. We do have a nice balance sheet now, a plenty of liquidity and plenty of proved reserves. So we will try to layer in some additional hedges for the second half of ’15. I don’t think we need to be quite as aggressive as we have been historically on getting those in place. As we get the rig contracts in place, we will look to actively put those hedges in place but with the current backward dated like it is. We are just not being real aggressive right now until the current moves up some. And with the strong balance sheet and really a low risk drilling program, you can afford to be a slightly more liberal with that hedging.

But again, we’re really having good luck with the horizontal program. Everything is really looking good on the horizontal side and the vertical side. We feel like 2014 is really in the bag right now and we are really focusing on 2015. And the plan is pretty much in place for 2015 other than deciding on kind of where that 6th horizontal rig goes.

So with that, I’ll turn it back over to the operator and we will open it up for some questions if there is some questions out there.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is going to come from the line of Mr. Will Green of Stephens. Please proceed.

Will Green - Stephens

I wonder if we could maybe start in the Pegasus area. Obviously great news on the recent type curve revision you guys had there. Following this recent acquisition, what amount of net acreage, total net acreage would you guys consider being in that Pegasus area, where you guys up the type curve?

Bob Reeves

I want to say that it’s in the -- it’s about half-and-half as far as how much we have in Midland and how much we have in Martin. I don’t have the exact numbers in front of me, but about half of it resides in that northern part of the Midland and Martin area and the half in the southern part.

Will Green - Stephens

And then, what’s the total acreage breakdown of that though, the total net acreage breakdown of that?

Bob Reeves

Well we have -- I think now we have about 60,000 acres that we have in the Midland and Martin area, so about -- it’s just about half-and-half.

Will Green - Stephens

About half is in the Pegasus?

Bob Reeves

Yes.

Will Green - Stephens

Got you. Thanks. And then, I realize you guys have been asked this before, but given the success you guys have had horizontally and what seems like a pretty big wealth of opportunity in all these different zones. When is the right time to start shifting capital away from the eight vertical rigs you guys are currently operating in and more to the horizontals?

Bob Reeves

Yes, I think that -- I think you asked that a lot and I don’t mind answering it, because it’s a legitimate question. But I don’t foresee a shifting capital per se away from the eight vertical rigs. But as our cash flow continues to increase, that incremental cash flow goes into the horizontal play. So we are not actually putting any additional capital into the eight vertical rigs, but we are putting all the incremental capital into the horizontal rig.

So in effect, you are shifting capital as a percentage of your budget to the horizontals, but again I like those eight vertical rigs. We spent a tremendous amount of time getting and running very well. They have great crews and they are great rigs. And it givers us the opportunity when we need to go in an HBP some leases on an acquisition that we have rigs ready to go. So I think you will see the budget as it gets bigger. The percentage goes more towards the horizontals, but I certainly don’t think we will be dropping any of the eight rigs on the vertical side.

Will Green - Stephens

Got you. Thanks for the color there.

Bob Reeves

Thanks, Will.

Operator

Your next question comes from the line of Mr. David Templin of Wells Fargo. Please proceed.

Brad Carpenter - Wells Fargo

Hi, everyone. This is actually Brad Carpenter. As everyone knows, it's a pretty busy morning. You kind of caught us between calls here. But, Bob, first off, I appreciate your commentary to start off the call. In your relatively short history as a public company, you guys have proven the ability to add acreage and locations at competitive rates. I am just curious if you could provide us with some more color on some of the thoughts in the M&A market as we move through 2014?

Bob Reeves

Yes. So I think that general theme that we saw emerging in 2013 going into 2014 and beyond is that as a play or that this particular part of basin moves into more of a horizontal development that you really need to scale and you really need access to services out here to properly develop all of your acreage position out here. And I think what we’ve seen is that some of the smaller operators continue to look at attractive valuations on the horizontal side and as opposed to just going in and developing these zones themselves, they go ahead and monetize it.

So I think we are going to continue to see that trend of probably smaller acreage blocks being divested. It’s still attractive prices for the buyers and I think its attractive prices for the sellers. So I think what you’re seeing is when you have those two things going on, you see the M&A market start to clear itself which it’s been doing. I think they will continue to see these size deals into 2014 and further into 2015, that’s just my gut.

Brad Carpenter - Wells Fargo

Okay, great. I appreciate that. And in that light, I know Bob touched on the potential for smaller bolt-on acquisitions for the remainder of 2014, but looking at your availability on your revolver after these five acquisitions close June, that’s pretty substantial amount of dry power. And I was curious if you could provide us with -- I don’t know if you had any internal discussions on first, second, third and so on the best uses for that capital?

Bob Reeves

Well, I certainly think that we do have a lot of dry power out there, but we also are significantly increasing our capital program. So where we have $700 capital program this year, I mean, it’s obviously going to increase next year. And although our cash flow increases substantially, we still have kind of that $200 million to $300 million outspend that we kind of see in 2015. And I think as you -- my point is as your budget gets larger, I think you need more liquidity available as a larger company. It’s just a more prudent way to run your business. So I like having the liquidity out there. You are correct though it does afford us the ability to go out and do additional deals because typically the deals that we do and really probably the only type of deals we are going to see out here in Northern Midland Basin are deals that come with production associated with them.

So with that production, you are able to use some additional leverage, whether it’s in the first lane capacity or in the high-yield market, so it expands your liquidity alongside these acquisitions.

So, I think we are in a very good position. We’re going to six rigs in 2015 and we’ve really only gotten through the middle of the year looking at that. So we've got opportunities, we’ve got plenty of inventory on the drilling side. And like I said earlier, I think we’ve got plenty of opportunities on the M&A side. So there will be some combination of that that puts some of that to you is I would say.

Brad Carpenter - Wells Fargo

All right. Great. I appreciate the commentary and once again, congrats on the acquisitions and nice quarter.

Bob Reeves

Thanks Brad.

Operator

Your next question comes from the line of Mr. Stephen Shepherd of Simmons. Please proceed.

Stephen Shepherd - Simmons

Hey. Good morning, guys.

Bob Reeves

What’s up, Steve?

Stephen Shepherd - Simmons

Hey. And I may have just missed this, but I was wondering if you could tell me how many completions you all had in 1Q. And then if you could remind on both the vertical and horizontal side, what’s your full year wells completed guidance for ’14?

Bob Reeves

Yeah. So for the first quarter, we actually completed 52 gross vertical wells and we typically, we had done 46 in the fourth quarter. We picked up a couple extra wells from just drilling a little faster, but then we also picked up some wells from the first acquisition that just needed to be completed. But I think for the year, we are scheduled to drill and complete 205 vertical wells this year.

Stephen Shepherd - Simmons

Okay. And on the horizontal side?

Bob Reeves

On the horizontal side, we’ve only completed five or we’ve completed six horizontal wells to date and we plan to do 30 by year end. So that’s kind of how the horizontal side is shaking out.

Stephen Shepherd - Simmons

Perfect. My next question, can you kind of walk me through the mechanics of how you all price your oil that you are selling out of the basin? Is it -- I'm presuming it’s WTI and Midland-Cushing spread and then some kind of a fixed hit on top of that or I’d be curios if there are any other pieces I’m missing there?

Bob Reeves

That’s pretty straightforward. I’ll let Jennifer who kind of handles all that. So, I’ll let her kind of walk you through that.

Jennifer Palko

Hi. Yeah, you are very close. The WTI, there is Class B closing there and then the Mid-Cushing dip and then a transportation charge.

Stephen Shepherd - Simmons

And what is that transport charge?

Jennifer Palko

It varies from contract-to-contract. But our average of all our blended contracts seems to come out around a $1.70.

Stephen Shepherd - Simmons

Perfect. And then one more, just kind of housekeeping question. Do you guys have exit rate production at 331 that you could give me?

Bob Reeves

I don’t know what that is, but it’s not that. I think what we put in the -- we put in our new IR desk kind of pro forma for the acquisition in first quarter and it’s like 218. So, I mean that’s -- I don’t know, we don’t really track exit rates each quarter. We are just growing at such a fast pace that which is not something we focus on. But probably a 22,000 barrel company, when you look at it in the first quarter.

Stephen Shepherd - Simmons

Great. Thanks a lot.

Bob Reeves

Thank you.

Operator

Your next question comes from the line of Mr. Jeb Bachmann of Howard Weil. Please proceed.

Jeb Bachmann - Howard Weil

Morning, guys. Just a quick one for me, Bob, looking at the program going forward, at what point do you guys think you'll get into, what they call science wells, downspacing or stack lateral type wells on your acreage?

Bob Reeves

At what point will we get into that?

Jeb Bachmann - Howard Weil

Yeah.

Bob Reeves

I think that when you look at 2015 and having six horizontal rigs running out there, that gives you a lot more diversity as far as your results as opposed to like, what we are doing now is which is just well watching one well to the next, which is stressful for everybody and tedious. I think next year, when you have six horizontal rigs running, it really gives you the opportunity to go in and drill some additional zones and focus on things like that. I think we wouldn’t get into that until probably the back half of the year because we continue to focus on what's low risk and what a bird in a hand.

But the industry and ourselves are quickly derisking a lot of these zones and a lot of these areas. So, we are feeling more and more comfortable with these additional zones and as far as the downspacing goes, we haven’t really focused on trying to add additional locations for downspacing yet. But those are all things that you can look at, when you get to a larger budget and more diverse fleet resulting in additional wells drilled.

Jeb Bachmann - Howard Weil

Great. Thanks a lot.

Bob Reeves

Thank you.

Operator

Your next question comes from the line of Mr. Mike Kelly of Global Hunter Securities. Please proceed.

Mike Kelly - Global Hunter Securities

Hi, guys. Good morning.

Bob Reeves

Good morning, Mike.

Mike Kelly - Global Hunter Securities

I think it was really encouraging to hear you say in your prepared remarks that the second well in Howard County is looking as good as the first one, if not better. And I was just hoping to get a little bit more color on the acreage out there. You stated in your slide deck that Howard is very similar rock quality and thickness versus Midland and Martin. Yet, there's a decent delta there in terms of what you are expecting for the ultimate EUR between the two areas there. And I just wanted to hear an explanation for that and if that's something really is kind of geologically based in your opinion or is it just a lack of history out there. Thanks.

Bob Reeves

No, it is different and I think that we told folks all along that the Midland and the Martin and the Upton is a different decent, the Glasscock and the Howard. And that’s mainly because of the depth. The depths over on the west side of the play -- you are just going to get better recoveries because of the pressure associated with it. You have to drill deeper, so you have additional costs.

But on the East side and by saving that additional costs, your EURs -- we've already said that we think they are going to be smaller than the west side. But the rates of return are competitive with the west side. And I think that’s what we are seeing. And then as I said earlier, I think we are seeing in the northern counties, it’s definitely oilier, which helps our rate of return. We are not really focused on a specific EUR, as much as we are focused on a specific rate of return to be competitive across all the acreage.

Mike Kelly - Global Hunter Securities

Great. That's helpful. Thanks for the color. And maybe just asking on that first well in Howard, we've got a 30-day rate that you gave to us a few weeks ago. Maybe you could just comment on how the well is holding up now as it moves into month or two? Thanks.

Bob Reeves

Yeah. It’s holding up just fine. I mean, it’s holding up along the type curve than you would typically put on a well. Now that well had a much higher 24-hour rate than our type curve than it had a much higher 30-day rate in our type curve. But the general slope associated with the well seems to be in line with what you would expect from horizontals in the Wolfcamp out here. So that seems to be tracking just fine.

Mike Kelly - Global Hunter Securities

All right. Thanks.

Bob Reeves

Thank you.

Operator

Your next question comes from the line of Gabriele Sorbara of Topeka Capital Markets. Please proceed.

Gabriele Sorbara - Topeka Capital Markets

Thank you. Good morning, Bob. Just thinking about the Sprayberry this morning. Just if you can give us your thoughts on the Sprayberry, obviously you guys have identified some locations in Midland Martin County. But just wanted to get your thoughts there and when you expect to spud or at least test the Sprayberry? And then as it relates to Howard County, as well since Element I think is going to be spudding their first well this quarter.

Bob Reeves

Well, I think we feel much more comfortable with the Sprayberry in Martin and Midland and Upton and then parts of Glasscock County. And we plan to be drilling Sprayberry well this year in Martin County. So there will be -- we really like the Sprayberry a lot and we think it’s going to be a very productive zone. Now as far getting over our in the Howard and Glasscock and certain parts of Glasscock, we think it’d be a while on the Spraberry before we start drilling those wells. I was not familiar with Element drilling over there. So we wish them the best of luck. And obviously as the industry continues to delineate that, we will be watching it closely, just like you will be.

Gabriele Sorbara - Topeka Capital Markets

So it sounds like we should expect results later this year in the Sprayberry?

Bob Reeves

For us in Martin County, I think you will for sure.

Gabriele Sorbara - Topeka Capital Markets

Okay. And then just one more quick one, thinking about 2015 and your vertical rig count, I guess what's required, kind of the minimum rig count to maintain leases there?

Bob Reeves

Yeah. It’s still the six-rig pace, so it’s about $300 million a year to HBP our leases in ’15 just like it is in ’14.

Gabriele Sorbara - Topeka Capital Markets

Got it. Thank you very much, Bob.

Bob Reeves

Sure. Thank you.

Operator

Your next question comes from the line Mr. Jason Smith of Bank of America Merrill Lynch. Please proceed.

Jason Smith - Bank of America Merrill Lynch

Hey, good morning guys. Bob, just again going back to your prepared remarks on Howard County, you mentioned you learned from your initial well. Can you just maybe expand on that? What have you guys done the same, what you have different in your second and third horizontal wells up in Howard?

Bob Reeves

Well, I think, we just get better at picking where you want to be in the zone. I think you get better at steering the wells. Once you’ve drilled one lateral out there, you get a better idea of how the rocks going to drill horizontally and I think that helps a lot. And then I think just as far as the first well I think had about 31 stages that we completed on it, the second well was real similar.

I think as you just treat all those stages and understand the different pressures and what you're putting in the wells, it just translates to better wells. I think they just do it more efficiently and they get the right rates. So, I think it’s just, is part of the natural process to get better and better as you do more wells. I think you see that probably with every operator out there, whether it’s vertical or horizontal and it’s in -- each formation just seems to get better over time.

Jason Smith - Bank of America Merrill Lynch

Okay. Thanks. And then just coming back to the basis -- I think in the past you've been against basis hedges. With the widening of spreads in the Midland in the last few months, have your views on that changed at all?

Bob Reeves

Well, I wasn’t against basis hedges. We actually did basis hedges in 2013. But you’re correct, I didn’t do any in 2014. It really wasn’t for any particular reason other than we felt good about what we were perceiving for 2014. Now, 2014 right now is now turned out to be as good as we were hoping it to be but we think it’s going to straighten itself out. But we will continue to look at hedging some of that basis out there. And I wouldn’t be surprise if we put some along for 2015 for sure.

Jason Smith - Bank of America Merrill Lynch

And you think this recent widening just due to refinery downtime, or is there anything else driving it?

Bob Reeves

Well, I think that’s most of it. It’s a combination of several different factors but obviously, we have a large acreage position out here across all these counties. And we’re very familiar with all the different projects that are going on the Midstream side and we are probably been involved in some of those. And so we see the straightening out of it and the eventual -- all of the transportation needed to evacuate the product out of the basin looks like its coming along nicely. So we’re not concerned about long-term. One of the things that I did was like 2014, was not yet as aggressive on hedging NYMEX, so that I could absorb some of that basis different. So, I think that’s worked out very well for us. So net-net, I think we’re going to end up just fine.

Jason Smith - Bank of America Merrill Lynch

I appreciate the color, Bob. Thanks.

Operator

Your next question comes from the line of Mr. John Nelson of Citigroup. Please proceed.

John Nelson - Citigroup

Good morning and congratulations, I guess, on all of your activity over the last quarter.

Bob Reeves

Thanks, John.

John Nelson - Citigroup

Just curious, as we've started thinking about these horizontal rigs ramping up and being more in a development mode in their individual areas, how should we think about spud to sales with regards to just kind of what an average pad size might be and overall average lateral length kind of the 2015 program?

Bob Reeves

Yeah. For the ’15 program, obviously we don’t have that second rig identified what zone and what county it’s going to be in yet. But I think spud to sales is 60 days and we’ve been doing pretty good on that so far. So the average lateral length, I think we’ve been running kind of 75-100ish days but we’ve got to drill some short laterals just like everybody else because of the way the acreage lines up.

In some areas, we’re going to drill some 8,300 foot laterals and we’ve also got a couple on docket for 10,000 feet. So, I don’t know what’s the overall average is but I think overall for the company, it is 7,300 or something like that. So, I wouldn’t expect it to be much different in that on aggregate basis from year-to-year.

John Nelson - Citigroup

That's helpful. And then I appreciate the comments and breaking out the type curves, about the differing oil mix in the northern counties. Just curious if you would care to make any comments on how that has also trended for maybe some of the incremental zones that maybe you haven't drilled up as much? So if you thought that was similar or what the band might be around oil mix for those?

Bob Reeves

I think it’s going to be real similar because we saw it on the vertical side. So, I mean, our vertical type curves are oilier in the northern counties and they are in the southern counties as well, it’s just gassier. And Dave can take to your whole lesson on why it’s gassier there and I’ll spare you my technical expertise on that. But we've seen it on the vertical side and it’s translated to the first six horizontal well that we drilled in the industry. You're seeing the same thing, I think it’s just a product of -- that’s just how the rock plays out.

John Nelson - Citigroup

Okay. And then just last one for me. I can appreciate why we don't have 2Q guidance, should we expect that 3Q guidance will be back next quarter?

Bob Reeves

Sure. For sure, I almost gave 3Q guidance now, we feel so good about it.

John Nelson - Citigroup

All right. Congrats. Thanks, guys.

Bob Reeves

Thank you.

Operator

Your next question comes from the line of Mr. Adam Michael of Miller Tabak. Please proceed.

Adam Michael - Miller Tabak

Hi, guys. I think a lot of my questions have been asked, but if I could just follow up on there's a slide in there about the recent top performing vertical wells. I'm just curious, there seems to be a pretty good sweet spot north of Big Spring, and I know that's where we drilled the first two horizontal wells in Howard County. Are you able to tell if there's a certain zone that's giving up a lot of the oil? And then, I guess, the second part would be -- and I think you commented on this in the last question, but what does the oil cut look like after 30 days or 180 days on the vertical wells in Howard County?

Bob Reeves

On the vertical wells?

Adam Michael - Miller Tabak

Yes.

Bob Reeves

Yes. I’m not sure on the vertical wells, but I think what you see on that map as far as where the wells are, again, the western side of our acreage is really one large lease that we don't have to drill very much to hold it. And then, our leases in Howard County were taken from the far western point and then going east. So our leases expire from West to East. So thus we drill from West to East excluding that western block because we want to drill very many well. So I think you see a lot of wells kind of in that central area because that’s where we're drilling the HBPR leases. As we go our further to the east over into 2015 and 2016, I would expect to put more circles on the map and more stars. So that’s really the product to kind of where they’re located right now. And I'll have Bud look into the vertical percentage oil thing and we can just get back with you on that.

Adam Michael - Miller Tabak

Okay. That's helpful. So it sounds like it's not really a sweet spot. It's just more of holding leases is the reason you are drilling where you are in Howard County?

Bob Reeves

We find really good wells throughout all of our acreage where we are drilling. So, on the vertical wells, you just really got to drill them all. You are going to get a handful of really exceptional wells and you get a lot of type curve wells and then from time to time you get some poorer wells. So it’s just part of the statistical nature of these unconventional plays.

Adam Michael - Miller Tabak

Okay. Thanks, guys.

Bob Reeves

Thank you.

Operator

There are no further questions in the queue. Ladies and gentlemen, thank you for your participation in the Q&A session. I would now like to turn the conference back over to Mr. Bob Reeves for closing remarks.

Bob Reeves

Yes. I would just like to thank everyone for getting on the call today and asking some really good questions. And I think we've got a lot of very good data out there right now. So things are going well. We will just continue to execute like we've been doing and we will give you more color on the horizontals as they come out and we get the full 30 days. And we're looking forward to integrating these acquisitions, getting them close and then moving forward. So with that, we’ll conclude the call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference call. You may now disconnect and have a great day.

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