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Midstates Petroleum Company Inc (NYSE:MPO)

Q1 2014 Earnings Conference Call

May 7, 2014 10:00 AM ET

Executives

Danielle Burkhart – Vice President-Investor Relations

Peter J. Hill – President, Chief Executive Officer and Director

Nelson M. Haight – Senior Vice President, Chief Financial and Accounting Officer

Analysts

Neal D. Dingmann – SunTrust Robinson Humphrey

Ronald E. Mills – Johnson Rice & Co. LLC

Ron Mills – Johnson Rice & Co.

Chad L. Mabry – MLV & Co. LLC

Sean M. Sneeden – Oppenheimer & Co. Inc.

Kyle Rhodes – RBC Capital Markets

Pearce W. Hammond – Simmons & Co. International

Michael Rowe – Tudor Pickering Holt & Co. Securities

David Heikkinen – Heikkinen Energy Advisors

Gregg Brody – JPMorgan Securities Inc.

Operator

Good morning. My name is Holly and I will be your conference operator today. At this time, we would like to welcome everyone to the Midstates First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn today’s conference over to Danielle Burkhart, Vice President of Investor Relations. Please go ahead ma’am.

Danielle Burkhart

Thank you, Holly. Good morning, everyone, and welcome to Midstates Petroleum’s first quarter 2014 earnings conference call. Please note that today we have posted on our website supplemental, financial and operational information to complement our discussion this morning. Joining me as speakers are Dr. Peter Hill, Interim President and Chief Executive Officer; and Nelson Haight, Senior Vice President and Chief Financial Officer. Before we begin, let’s clear one housekeeping matter.

As a reminder this conference call contains certain projections and other forward-looking information and statements within the meaning of the Federal Securities Laws. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings, including our earnings release which was filed on Form 8-K, yesterday, our annual report on Form 10-K, and the first quarter 2014 Form 10-Q that will be filed shortly.

Midstates assumes no obligation to update any forward-looking statements or information which speak as of their respective date.

I will now turn the call over to Peter for his comments.

Peter J. Hill

Good morning everyone and thanks very much for joining us today. Few words from me and then I will pass it over to Nelson for a few further words on the financials, and then we will turn it over to you guys for questions. Since starting this interim role in early April, the first thing we did was to layout a reenergized Midstates strategic agenda. That in short was that we were now going to be very keenly focused on delivering financial stability and applying very rigorous capital efficiency.

Financial stability is concentrated on preserving sufficient liquidity, managing our revolver, while we continue to grow EBITDA and cash flow by delivering our production guidance. Capital efficiency is about improving the value of that production by spending wisely, maximizing our margins, lowering our costs, and paying full attention to the risk profile with regard to well locations and rig counts.

This is an ongoing process and we will continue to look at ways to improve our operations and our financial performance. All that said I’m very pleased with our progress on both of these fronts this past quarter. At the same time we will also evaluate all strategic options and that are going to be available to us to unlock and deliver the value that we know exists within our asset base.

We have completed the sale of Pine Prairie for $170 million and are continuing to examine other non-core sales and joint ventures. We will look at all alternatives and at the time and ability to be both thoughtful and consider and how we proceed. So our strategy and agenda is totally driven by improving shareholder value and with a longer-term or being cash flow positive by early 2016.

So turning to the first quarter, and our first quarter 2014 we generated an adjusted EBITDA of $111 million with a production average of 29,004 barrels of equivalent a day. The decrease in production from the fourth quarter was in large measure due to weather. This past winter we have had widespread snow and ice storms. We’ve had public power supply outages, compressor and generator freeze-ups, oil trucking and frac crew delays, road closures it just went on and on.

It was bloody miserable and bloody cold. And none of us were spared. We anticipated for example 20 new completions in the Miss Lime, but we only achieved 11. We estimate that for the quarter we lost about 2,300 barrels of oil equivalent a day due to tough weather. But because of our continuous and sustainable reductions in operating costs a higher oil percentage of total production, we call these strong price realizations that allowed us to maintain a robust EBITDA number that was only marginally lower than our record fourth quarter EBITDA of a $118 million.

And with operating cost improving and in line with guidance and our drilling program focused on our strongest geological locations, we are forecasting strong EBITDA growth in 2014. Our intention is to have capital spend equal EBITDA and both will fall within the range of $500 million to $550 million. This is an intentional shift and I would like you to note this change in emphasis to our guidance and our performance. This reflects, to me, capital efficiency and minimizes the drain of our borrowing base, it protects our liquidity position, and overall brings more stability to our balance sheet. It also gives us time to bring forward solutions and alternatives to reduce our debt burden and repay our stretched balance sheet. The first-class results in our operating metrics in the Miss Lime were driven by continued savings and efficiencies from the cost initiatives that we began last summer and that we will continue to read the benefits of as we pass through the rest of this year. We have implemented similar initiatives in the Anadarko to help reduce overall operating costs, improve margins, and are confident that we can repeat and obtain similar results.

So overall through 1Q, we had 10 active rigs, we spudded 34 wells, we brought 25 wells online and fracture stimulated 17 Miss Lime wells. And those are the wells that were drilled initially as open-hole completions. During our first quarter, our production averaged 29,004 as I said, with the Miss Lime properties delivering 16,381 barrels per day, the Anadarko contributing 8,376 barrels of equivalent a day, and our Gulf Coast area adding 4,247 Boe’s per day.

Recently, we have been catching up on the completion delays we experienced in Q1, and our production in April averaged 32,500 Boe equivalent. It shows we can play catch-up and repair the damage the year, the winter left us with. So we believe that demonstrates that we are well on our way to achieving our full year production guidance of 32,000 to 35,000 post-Pine Prairie. That delivers 37% year-on-year average production increase, if you normalize the Pine Prairie and the Panther acquisition.

And I think, to me, that shows a very strong growth story. So we are constantly evaluating ways to enhance our capital efficiency, and with this in mind we are shifting the rig from the Anadarko to the Miss Lime, and this will improve our returns while allowing us to better understand the encouraging results we’ve experienced to date in the Anadarko, and build those learnings into our future program. The latest wells in the Miss Lime performed exceptionally well, and in the first quarter, we’ve taken all 146 wells. We are averaging a peak 30-day IP of 565 Boe per day. There have also been some strong promising results in the Anadarko. The top quartile of those wells, that we bought online in the Anadarko, since the acquisition of an average 30-day IP of 670 Boe’s a day.

And the first quarter results in the Anadarko excluding those wells that where we had difficulties and problems, gave us an average return of 50% with a few wells hedging over 90%, such as the recent Tonkawa well with the 30-day IP of 850 Boe a day. We believe that these results validate the potential that lies within our acreage, and we fully expect to duplicate and even improve on these results. We are going to work to high-grade our inventory and avoid some of the early problems we encountered on a few of our first wells. And we believe, through improved asset understanding and drilling efficiency, the Anadarko rates of return will complete with those of the Miss Lime. And it’s kind of a nice problem to have when you are really addressing capital allocation.

We continue to closely monitor industry activity around our entire acreage portfolio to better allow us to apply best practices, improve economic viability and develop new production horizons. While we believe that our Miss Lime acreage is among the best in the play, and our continued results demonstrate that point, there’s always room for improvement to increase our margins and grow our revenues.

We have over 400 gross Upper Miss potential locations identified and believe that the other horizons offer significant upsides in location count and value that is currently not reflected in our map. Similarly, in the Anadarko we have over 700 gross locations identified across the Cleveland, Marmaton and other play types. We have started a rigorous internal review on high grading and valuing our entire contingent resource base and already see a significant increase in gross well locations in both the Miss and the Anadarko acreage.

We’re going to host an Analyst Day in the fall to fully demonstrate that potential value growth that we see, but we will also keep you advised of our progress as we go through the balance of the year.

So in summary I am pleased with our first quarter results and proud of the job the guys have done under some very difficult circumstances. We’ve got some very solid growth ahead of us in our core areas, our focus is operational execution and that will allow us to grow our EBITDA production and importantly our value in a very fiscally responsible manner. We believe this will allow us to meaningfully repair the balance sheet and provide us with a firm platform going forward.

With that, I hope that investors will develop more confidence and belief in the story that we lay out. And with that as a segue, I now turn the call over to Nelson, the CFO to give you some financial detail on the first quarter performance. Nelson?

Nelson M. Haight

Thanks, Peter. As previously disclosed the sale of the Pine Prairie went smoothly as we closed exactly as we have expected. We used a $131 million of the net proceeds of approximately a $160 million to reduce the outstanding balance on our revolver and retain the balance as working capital. Post the pay down on May 1, our liquidity totaled approximately $200 million comprised of about $164 million of undrawn capacity on our revolver and roughly $36 million in cash.

Our borrowing base is now $475 million and we terminated the arrangements for the $125 million bridge facility that we put in place in case the transaction was delayed. The next regular redetermination date for revolver is October 2014. Our first quarter adjusted EBITDA of $111 million was inline with our expectations and down marginally from $118 million in the fourth quarter of 2013 despite the lower production volumes due to the winter weather. As you saw, our liquids volumes were not impacted as much as natural gas volumes which were reduced due to gas transportation and processing problems encountered with third parties. That resulted in relatively higher oil revenues. We also benefited from stronger NGL realizations in natural gas pricing during the period.

For instance compared with the fourth quarter of 2013, we experienced the 29% increase in propane pricing in the Mid-Continent areas, which represents about 30% of our NGL stream. Additionally, our absolute cash operating costs were below the fourth quarter and well within our expectation although they were up slightly on a per unit basis due to the lower volumes discussed earlier.

In sum, this means that we are still on track with our estimated 2014 adjusted EBITDA range between $500 million and $550 million. As Peter discussed going forward we planned to balance our capital program with our expected EBITDA and we’ll adjust that capital spend if our EBITDA expectations to change. Our growing cash flow along with the availability under our existing credit facility give us confidence that we have the financial resources we need to execute our planned capital budgets and service our debts to at least the end of 2015.

We continue to believe that we are not required to execute any further transactions or raise additional debt or equity in the foreseeable future. Nevertheless, we continue to look at other options that we can add cushion to our balance sheet and enhance liquidity. Adjusted net income for the first quarter was $8.3 million or $0.13 per share compared with $1.4 million in the same period year ago and $5 million in the fourth quarter of 2013. This excludes the impact of unrealized gains and losses on derivatives, acquisition and transaction costs in a non-cash oil and gas property impairment charge along with the related tax impact. Our reported first quarter 2014 GAAP net loss of $83.6 million before preferred dividends compares with the net loss of $7.9 million in the same period in 2013 and $315.8 million in the fourth quarter of 2013.

Production in the first quarter totaled 29,004 Boe per day after accounting for the weather impacted about 23,000 Boe per day. We continue to experience significant downtime and well completion delays through March, which caused a greater impact from weather than our original estimate of 1,000 Boe per day. Our current production is more than rebounded from those weather disruptions and grown to roughly 32,500 Boe per day for the month of April. 56% of the first quarter volumes came from Mississippian Lime properties, 29% from our Anadarko Basin assets, and 15% from the Gulf Coast area. The product breakdown was weighted more towards liquids during the quarter as we made specials efforts to keep the oil flowing when we experienced third party issues with our gas production.

Effective May 1, we no longer have production from Pine Prairie in Louisiana which averaged about 1,900 Boe per day in the first quarter. We still have production from our Dequincy assets in the western part of the state. For the second quarter with Pine Prairie out of our estimates we expect our production to be in the range of 32,000 to 33,000 Boe per day. Our full year 2014 guidance is 32,000 to 35,000 Boe per day, which, despite the weather impact of the first quarter is the same as what we guided for in 2014 on our last call after adjusting for the impact of Pine Prairie being removed as of May 1.

Turning to the Mid-Continent, we’ve recently executed a new crude oil purchase contract by portion of our Mississippian Lime production that will improve realizations in that area. Beginning with the second quarter, we expect the differential from WTI on that production will average about $5 per barrel compared with $6.50 per barrel in the past.

That contract revealed as much is $6 million in additional annual revenue for us. The regional break-downs as well as the revised realization differentials including transportation are all reflected in the first quarter of 2014 supplemental information packet posted on our website.

During the first quarter, we did not add any new hedges as the forward curve did not appear favorable. A summary of our current hedge positions was included in the release and is posted on our website along with all the guidance I’m providing today. Our hedging strategy remains to be as aggressive as possible to protect our operating cash flow in order to fund our development programs going forward. I will now review our first quarter expenses and provide guidance for the second quarter and full year 2014 updated for the sale of Pine Prairie.

First quarter cash operating expenses, which includes LOE production and cash G&A, but excludes acquisition and transaction costs, totaled $40.9 million compared with $42 million in the fourth quarter of 2013. Absolute costs fell but on a Boe basis, rose to $15.67 per Boe due to the weather impacted lower production volumes.

Our cost efficiencies remain well in place during the quarter. Our lease operating and work over expenses totaled $20.1 million down slightly from $20.2 million in the fourth quarter. First quarter LOE of $ 7.71 per Boe was within our guidance range despite the lower production volumes. For the second quarter, we expect LOE and work over expenses to be in the range of $7.00 to $7.50 per Boe, which reflects the exclusion of Pine Prairie volumes which had higher average lifting and work over costs on our Mid-Continent assets.

LOE for our Miss Lime properties alone average $5.55 per Boe during the first quarter. For the full year 2014, we anticipate LOE and work over expense to be in the range of $7.00 to $7.50 per Boe. Gathering and transportation expenses associated with our gas processing arrangement in the Mississippian Lime totaled $2.8 million, essentially flat with our fourth quarter cost of $2.9 million.

For the second quarter and full-year 2014, we expect those costs to continue to range between $2.5 million to $3 million per quarter. Severance and ad valorem taxes were about 5% of sales revenue before derivatives, and within our guidance range. For the second quarter and full year 2014, we are maintaining the same guidance of 5% to 6% of revenue.

First quarter general and administrative expense was a $11.7 million down $1.3 million from the fourth quarter and within our guidance range. Non-cash G&A totaled $1.5 million during the first quarter and we expect G&A in the second quarter of 2014 to be in the range of $10 million to $12 million with about $1 million to $2 million being non-cash. For the full year 2014, we anticipate G&A range from $44 million to $50 million with about $6 million to $8 million non-cash. Our DD&A rate in the quarter of $25.63 per Boe was within our guidance of $25 to $27 per Boe.

For the second quarter and full year of 2014, we expect a range of 25 to 27 per Boe. During the quarter we recognized a non-cash before tax full-cost ceiling impairment and oil and gas properties of $86.5 million. This charge resulted partly from the strategic decision to focus the Q1 drilling program on converting proved undeveloped locations to proved producing in order to enhance our near-term cash flow. Additionally, during the first quarter we continue to rationalize our unproved leasehold acreage, and that involves targeting our land capital expenditure on preserving those undeveloped leases which present the best near-term development potential and that are subject to competition from other operators.

Going forward we will continue to allow undeveloped leasehold acreage that currently does not meet our revised hurdle rate to expire with the plans of cost-effectively adding back that acreage if and when circumstances warrant. Total interest expense incurred in the first quarter was $38.5 million of which we capitalized $4.6 million. We expect to capitalize about $4 million to $6 million per quarter in 2014.

The tax rate utilized for the quarter was a benefit of about 3%, which was substantially lower than our combined historical rate between 35% and 40%. During the first quarter we generated a net operating loss carry forward for tax purposes, but due to the company’s short history as a taxable entity we were unable to record that benefit in the income statement.

We currently have about $75 million of net operating loss carry forwards that have not been recorded in the income statement, but that are available to offset future taxable income. To the extent we generate financial taxable income in future quarters; we will recognize a portion of these net operating loss carry forwards to offset the related expense. As a result for the foreseeable future our tax rate will be between 2% and 5% with all being non cash.

During the first quarter excluding capitalized interest, we invested approximately $135 million in capital expenditures with $86 million in our Mississippian Lime properties, $46 million in Anadarko Basin properties, and the balance of $3 million in the Gulf Coast. For the second quarter of 2014, we expect to invest $130 million to $140 million with $80 million to $85 million in Miss Lime, $40 million to $45 million in Anadarko Basin, and the balance in the Gulf Coast.

These figures reflect the moment of one rig from the Anadarko to the Miss Lime during the second quarter. The capital plan for Louisiana is primarily for acreage retention. For the full year 2014, we have not changed our initial capital budget of $500 million to $550 million. Additional details available in our supplemental information packet posted to our website.

In summary, we believe that Q1 results particularly on the expense side those type of progress we have made in improving capital and operating efficiency while maintaining a growth profile. Additionally, the closing of the Pine Prairie sale and restructuring of our revolver represent significant steps and our goal to deliver improved financial stability and liquidity through 2015.

With that I will now turn the call back over to the moderator. So we can take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is going to come from the line of Neal Dingmann with SunTrust.

Neal D. Dingmann – SunTrust Robinson Humphrey

Good morning Peter, Nelson. Say, Peter, your thoughts with this 565 Boe the kind of peak rate average IP on this Miss that you're putting out there, what's your thoughts on that? I mean going forward, is that something that you'll be able to improve on in the near term? Is that just going to be kind of a grind out and push that higher? So I guess what I'm wondering is, when I model this out, what these wells are doing now. Are you assuming significant improvement quickly, or just as a ramp?

Peter J. Hill

Good morning. Good question I think it was about five or six question in there. The Miss Lime is starting to lend itself to some understanding. If I take you through it, then you perhaps – then I’ll get to your answer. We’ve now got a 3D cube over the key area that we are looking at and focused on. That allows us to not only see the areas of increased and enhanced rock storage and porosity and allows us then to target those wells.

That means we can be much more efficient, we can much more organized, we can start pad drilling and it means we can start to really target those intervals and focus on the completion to deliver the best well as we can. We are starting to see those rates and the diagrams you can see on our little hand out in the website there on page five. Show that level of improvement.

And I think we can continue along those lines. We’ve learnt a lot of lessons from those open-hole completions and we are learning a lot of lessons, as we go through those wells. So yes, I think we can get better through both the cost side of the equation and through the well performance side of the equation. How high I don’t know, but you can see I think if you look at our peers and others, we are way up there at the top in terms of our performance along with some of the – I think Sandridge are doing. And I think we can continue that. So where does the ultimate limit lie I don’t know. All I know is it gets better. We can see other identifiable intervals that carry these same porosity and rock storage, and we see other ways in which storage and porosity is enhanced. So, we are gaining understanding, we are developing better wells, and I think we will grow that production and grow that efficiency.

Neal D. Dingmann – SunTrust Robinson Humphrey

All right, great answer. And just last follow-up if I could. Just on over in the Anadarko Basin, now if you move a rig out of there, will you just focus on sort of one prominent area or will you still continue to look at the majority of your property? I’m just wondering how you’re going to tackle that kind of the remainder of the year and going forward. Thank you.

Peter J. Hill

Yes, sure. What I'd like to do is sort of slay a few dragons here if we can, is that where we are in the Miss Lime in Woods County and Alfalfa is we can see in that whole area an awful lot of potential. We talked in the past about this core of the core. I don’t see it that way at all. I see it that now that we got this 3D; we can start to see lots of potential in lots of different places around that whole area and indeed across our whole Miss Lime position. And on that basis, we will sequentially go out there and try some of these things and test some of these things. But primarily the thrust of the drilling effort will be all about picking these target areas, making these things work and look a lot better, and improve that position considerably.

That said, what we also do in terms of bringing that rig into the Miss Lime is it's back to this concept of capital allocation. And the best – or one of the best bits of paper I’ve got since I started this job is coming from the operations guys with input from everyone else that takes every single location we contemplate drilling both in the Miss Lime and the Anadarko, looks at the cost, looks at the EUR, looks at the 30-day rate, looks at the return on capital and high-grades to that program. And when you do that, you get to the point of been able to say that, hey, the majority of these wells that we are looking at sit in the Miss Lime and on that basis by putting another rig to it you get far more benefit from the capital you employ and the dollar you spend.

It doesn't mean that the Anadarko is any poorer, it doesn’t mean that the Anadarko is any less, quite the opposite. We quite like it; we very much like it. But what we've got to do is a lot of work to high-grade that acreage to bring it to the same level of benefit and profitability as the Miss Lime. So, it's a combination of looking at where our scarce dollars are going to be spent and how they can be spent the best advantage. And that's why we look at it in that light. I've got nothing against the Anadarko, quite the opposite. I really like it, and there's plenty of opportunity there, we just got a high-grade it and bring it forward. Does that answer your question?

Operator

And that caller has withdrawn. And your next question will come from the line of Ron Mills with Johnson Rice.

Ronald E. Mills – Johnson Rice & Co. LLC

Good morning, Peter.

Peter J. Hill

Hi, Ron.

Ronald E. Mills – Johnson Rice & Co. LLC

I’ll try not to get disconnected. A couple of questions. You talked, in the Miss Lime, you talked about 400-plus I think Upper Miss Lime locations, but you also followed up with commentary about the 3-D seismic and showing rock storage/porosity. How does that filter into your expectations about multiple zones, whether they be shallower in the Chester or just different benches of the Miss Lime, and what’s your thought process in that testing process?

Peter J. Hill

I just think it’s a matter of time before we get there, before we get down there and test some of these intervals, before others start doing the same thing. We know talking to other people that they see this potential, and as time goes by, you will see those intervals tested and I'm sure be successful. The days of blanket bombing the Miss Lime are over. Too much money has been spent, too much failure has been drawn up, and too many conclusions of incredible variability have been drawn from it. And people are now becoming much more focused on where to attack this lime. It’s a very thick system. It’s 400, 600 feet thick, and it contains many different intervals of potential which through time we will confirm and develop. A bit like anything else, a bit like what you can see in the Bakken with the Three Forks, a bit like you can see elsewhere in other plays in the Permian and the like. These resource plays lend themselves to that understanding and development. And I have no doubt in my mind that the Miss Lime will fall into similar position.

Ronald E. Mills – Johnson Rice & Co. LLC

So I guess I should read into that you're really going to remain focused on the Upper Miss with this five to six rig program.

Peter J. Hill

Well, primarily, yes, but we will spend some time and some wells looking at other opportunities and develop and see what these things bring. I mean it does – it further allows you then to down-space and you can use pad drilling and allow your cost and improve your margin that way. So that allows all of those things to take place.

Ronald E. Mills – Johnson Rice & Co. LLC

And it looks like, from your new present or supplemental slides, that the well performance there, your average 30-day peak went up 20 barrels a day, which, considering that's off of a base of 146 wells, that's pretty good performance. But a lot of that seems to be really in the wells that have come on between 500 and 1,000 BOEs per day, which now represent 36% of your wells versus 31% in your prior presentation.

Peter J. Hill

Yes.

Ronald E. Mills – Johnson Rice & Co. LLC

What's driving that kind of…

Peter J. Hill

When that green ships to the right and you can start to see that benefit and those are the ones that really give you very strong and very handsome rates of return. I mean bearing on what went on here is that some of these wells, you recall we drilled 17 wells that we open whole completed initially and that we’ve gone back and completed those wells. Some of the benefits you see from that are demonstrably at the top end, we had wells that flow tremendously, that we’ve not have to bother with any recompletion and those wells call them home runs that are now being converted into grand slams.

At the bottom end, we saw a number of wells that fail to deliver, fail to perform well and we save money by not having to separately complete them. Those in the middle, we recompleted and we found they gave a significant benefit and if you take those wells and add them to the additional wells that we drilled that’s where you start to see this shift to the right. So the lessons we’ve learnt from that open whole program is that, yes, there are some great wells that we don’t need to touch, there are some bad wells that we can ignore, there is some wells in the middle there, a goodly number, that we've kind of completed but we will now complete from day one because it’s a bit cheaper and it brings you real benefit and that gives you those wells that froze you into that higher end of profitability and takes you into those greater than 500 barrels a day after 30 days.

Ron Mills – Johnson Rice & Co.

And then lastly, the guidance – the numbers that are out there, obviously to maintain that full-year guidance, that suggest a stronger ramp in the second half than it had been initially provided: a) am I reading that correctly and b) similar question on the EBITDA guidance. I think you, on your last call, talked about $500 million in recent presentations, $500 million to $550 million. I just want to make sure, are those apples-to-apples in terms of having already netted out the Pine Prairie sale?

Unidentified Company Representative

The Pine Prairie sale allows our cost base to fall our improvement in margins to continue. So that’s what that provides. Yes, we will get better wells because we got lot of locations that we feel very comfortable with and a lot of those locations we think can deliver very good numbers. We got just opposed wells very nearby. There's no reason to suspect that, if we operate properly and execute properly that we won’t deliver very good wells. I think the way look at it and the way we take it forward, it’s not linear but it does allow us to grow into those numbers to give you both improved margin and make sure we hit the target between 32,000 and 35,000 barrels a day.

Ron Mills – Johnson Rice & Co.

I guess on the EBITDA question I didn't ask it very clearly. Did your prior numbers – maybe this is for Nelson of $500 million to $550 million, was that already net of the Pine Prairie sale?

Nelson M. Haight

Yes. Yes, Ron, it was.

Ron Mills – Johnson Rice & Co.

Okay, great. Thank you. Let me – let someone else jump in.

Operator

And our next question will come from the line of Chad Mabry with MLV.

Chad L. Mabry – MLV & Co. LLC

Thank you. I had a question on the cost side, curious what you're budgeting going forward on your well costs in the Miss and specifically if you help us reconcile Q1 CapEx in the play coming in kind of at the high end of your range versus the fewer completions that you had planned.

Unidentified Company Representative

I'll let Nelson have a go at that and I'll come back.

Nelson M. Haight

Hi, Chad. We are on the Miss Lime we are targeting that we have planned to spend on the D&C about $3.4 million per well it was a little bit higher in Q1 because of the weather. Q1 also included the cost of the recompletion of the stimulation of the 17 open holes that Peter referenced earlier. Those branded – those probably added another $17 million to $18 million to spending in the quarter.

I think if you back that out I think we are $138 with the hard dollar number before cap interest that we took the $17 million our, you were at $120-ish million

Unidentified Company Representative

And as a back that’s the numbers as a backdrop for that what were going to doing an increasingly is be looking at – I’m not is going to adds a benefit on its kind of low yield cost. You’ve been nearby so you want have such logistical issues you get some savings on the fact that we are going to be doing some completions that allow us to save money because we do the completion instantly. And we got the mobilization issues of have been close and close around and you comeback practice things and lot of savings there.

So we are hoping that we can drop the numbers that never some talked to that. We’ve now embraced but not included, but we see that’s going to benefit in doing that from that that saving style if you like. I’m would definitely very key on that plushy to additional benefit we look at what our competitors are doing we look at what we do over on D&C and we know this areas where we can do things better and slicker. And we are always constantly drive into get back to that price down and that benefit margin up.

Chad L. Mabry – MLV & Co. LLC

Okay. Very helpful, I appreciate it. And I guess just as a follow-up, as far as your EUR range, you guys have had that 300 to 460 MBOE out there for a while. Given that you've drilled 146 wells now in the play, any reason you can -- we can see that tightening here in the near term?

Unidentified Company Representative

Just terms of what get what EUR is you know it’s a mathematical regression and we are doing is best fitting dots. What we're trying to do signs are more science to this, not that there's nothing wrong with the regression is a mathematical solution. But what we're looking at and what I am very focused on with guys, as we look at the first 30, 60, 90, 120 days and we try and benefit as much as we can from that accelerated production without doing vast damage to the pressure of the regime and the ultimate recovery. And so we are focused very much on that. And whilst EURs are useful to us, the way we look at them is we are the families of the EURs, we actually look at the 9 and 10 wells round about, and we take the best fit that we can and what we think we're going to achieve and what is going to occur. We have seen increases. We've seen better numbers, we will show you all of that when we get to our analyst day, but we've run, we've had wells that we anticipate have got 400 EURs. We've got wells that I think have got 500,000 EURs and who knows what we’re going to see when we get into the future and into our program that will be continuous improvement I can tell you that now.

Chad L. Mabry – MLV & Co. LLC

Understood. Keep up the good work.

Peter J. Hill

We’re going to try.

Operator

And your next question will come from the line of Sean Sneeden with Oppenheimer.

Sean M. Sneeden – Oppenheimer & Co. Inc.

Hi, thank you for taking the question.

Nelson M. Haight

Sure.

Sean M. Sneeden – Oppenheimer & Co. Inc.

Nelson, just for you on the liquidity front, I know you guys have previously talked about exiting this year with $100 million or so of liquidity. I guess, number one, is that still the plan for the year? And then maybe more to the point, number two, can you talk about funding for next year? For instance, you’ve got a similar plan on CapEx, maybe kind of walk us through how you feel you’re comfortably funded through 2015?

Nelson M. Haight

Sure, thanks Sean. The plan is still to exit the year between $100 million and $120 million of liquidity. That's the target. I think in that supplemental information pack we had a recap on one of the pages, I think it was page eight that kind of gets us to where we are today. And if you kind of work through the numbers like we have in the past, just taking out the interest expense and adding in the adjusted EBITDA we should exit the year with between $100 million and $120 million without any increase in the revolver.

Heading into 2015, we still feel like we’ll be able – we’ll have a same rough capital expenditures. We think we’ll have some EBITDA growth on top of what we have projected for this year which will help bridge part of the shortfall that we are experiencing in 2014 we’re not planning to have any borrowing base growth in 2015. That’s not underpinning our statement that we are comfortably funded, but we would expect the production growth to impact that revolver in April of next year. So I think we can – our projections are showing us exiting the year around $60 million to $80 million in 2015 and that does not consider any aggressive revolver growth.

Sean Sneeden – Oppenheimer & Co.

Sorry, $60 million to $80 million of liquidity?

Unidentified Company Representative

Yeah, I think in 2015.

Sean Sneeden – Oppenheimer & Co.

Okay.

Unidentified Company Representative

Yeah, I am sorry. This year it’s still $120 million is the target.

Sean Sneeden – Oppenheimer & Co.

Gotcha.

Unidentified Company Representative

And we should be pulling closer together and 2015 EBITDA and CapEx should start to be very close to the line as we exit next year.

Sean Sneeden – Oppenheimer & Co.

Okay. And just to be sure, when you guys are talking about EBITDA and CapEx, you're not necessarily talking about like operating cash flow of CapEx, so there would still be an outspend for interest expense and working capital, right?

Unidentified Company Representative

There is outspent for interest expense, yes.

Sean Sneeden – Oppenheimer & Co.

Okay. The $60 million to $80 million for 2015, that doesn't include anything on the asset sale front, right?

Unidentified Company Representative

No, anything that we do beyond what we’ve done with Pine Prairie would all be incremental to that.

Sean Sneeden – Oppenheimer & Co.

Okay, great.

Unidentified Company Representative

And there will be some.

Sean Sneeden – Oppenheimer & Co.

All right, great. That's helpful. Thank you very much.

Operator

And your next question comes from line of Kyle Rhodes with RBC.

Kyle Rhodes – RBC Capital Markets

Yeah, just kind of following up there, in terms of your discussions around your JVs or asset monetization, can you provide us an idea of which these discussions lets forget the furthest?

Unidentified Company Representative

No, I mean we’re in discussions with a number of parties and I think it wouldn’t be prudent for us to say who is front, who is behind, who is doing what and what expectations we’ve got, we’re going to do the best we can for our shareholders and get the best possible price for the assets we have in mind.

Kyle Rhodes – RBC Capital Markets

Sure, that's fair.

Unidentified Company Representative

(indiscernible) working down hard to do it.

Kyle Rhodes – RBC Capital Markets

And then I guess you guys mentioned a rationalization of unproved leases earlier. Can you give the ballpark of what the expiry potential is for 2014 and then what it would cost to release that acreage?

Unidentified Company Representative

We have no idea.

Unidentified Company Representative

Just let me tell you what we would kind of do here. Leases as you know saw – they cut off at a primary term and they comfortably renewed, they can be top leased as a whole host of other things you can do if you can get the agreement of the owners. What we are doing, because we are so fixated now on capital allocation, I say to the guys, okay, tell me the benefit of these acres, what they were and if they don’t meet a certain hurdle if we don’t think that got potential from the guys down to look at them, we start to put them into pile and say okay we’ll let those laps and if we can get them at a lower price a little later or a different price or we can put them into a different package then we would contemplate taking them back. Its good practice, its good management, its good management you get portfolio and it’s a good process to follow. We got plenty of acres and we look at them from the point of view of strategic benefits, holding by production et cetera, et cetera and we go to that whole exercise.

So, it's not a tactical exercise of get into some renew and every acre we’ve got. We looked at very fast. There are areas where it’s very little competition where we think we can pick these leases back up for a much lower price and that's in our best interest. And that's what we do.

How we then treat that from an accounting principle is something that we are working through with Nelson and the auditors and the guys, because it says, if you just drop a lease, then in essence is an impairment, is a write-down. If you then go and pick it up it just comes out of the capital allocation.

How you then treat that on your balance sheet and the rest of it is stuff we are still working through, but there will be every quarter 5,000 maybe 10,000 acres that we look at that come under that sort of regime that we're going to look at and review and come to a decision on. Is that right?

Nelson M. Haight

Yes, I think the – and the key point there I think the focus is on the cash spend going forward, not what we had in these acres in the past. So the accounting, but the key is optimize that capital that we have available for lease.

Kyle Rhodes – RBC Capital Markets

Sure, that makes sense. And then just one quick last one from me. I think you guys have mentioned in the past some infill pilots in the Miss Lime. When should we expect those this year?

Peter J. Hill

You’ve seen them already. We’ve done them. We’ve got all sorts of things going on. We got a couple of bilaterals. We've got one trilateral where we are looking at three wellbores open hole right now, that there is some 40 to 50 feet apart, and we’re just seeing what they do vertically? What they do and how they perform. And we've got other things where we down-space to the fourth well in a section, and we've got other areas where we contemplate doing the same thing. And we will see what those results bring.

We can look at interference; we can look at performance, look at the whole range of items that they look at what would then be a practice in terms of what we would follow going forward. Plenty of locations, plenty.

Kyle Rhodes – RBC Capital Markets

Thanks Peter.

Operator

And I apologize for the delay, and your next question is going to come from the line of Pearce Hammond of Simmons & Co.

Pearce W. Hammond – Simmons & Co. International

Good morning.

Peter J. Hill

Good morning.

Pearce W. Hammond – Simmons & Co. International

Just following up on some of the earlier questions on portfolio optimization as you are redirecting the rig from the Anadarko Basin to the Miss Lime. What would be the minimum number of rigs that you think you would need to run in the Anadarko Basin to achieve your objectives there, either to better understand the geology and what you have or to hold acreage, et cetera, while maximizing as much you can in your Miss Lime acreage?

Peter J. Hill

Sure. That’s a hell of a good question. You are always looking at it. It’s dynamic it doesn’t stand still, because as you get understanding and you get the tractions and you get prizes that you think you see, the overarching number I think is four. That’s sort of a gut feel. We've talked about it a bit, but I think four is the number that makes good sense to us.

In any organization, in any program, over the years and years I've been doing this, organizations can cope with a certain rig count. And you get to a certain level and you can't cope with it and then you become inefficient you’re running around being responsive to rigs and rig locations, and you make some terrible decisions. I think our number for where we are today and what we are about in the Tulsa office and out in the field there, I think four is a good number. That said, there is plenty of potential here and plenty of opportunity.

And you've got to put it in a high order and you've then got to be reflective and thoughtful about how your balance sheet, how your flow of cash and how it plays out into your company structure. You can have hundreds of wells, and we do have, and you can have years and years of inventory which we have. At what pace do you attack that really is reflected on what your capacity to both pay benefit and see your balance sheet there not to be stretched, struggle, and you bring value to your shareholder base. So long story short, I think the answer is four.

Good example of how that might work is this Tonkawa well has given us a huge amount of encouragement. It's an order of magnitude – not magnitude, it is significantly better than what we've seen in the Cleveland today, and it offers a goodly number of locations that would allow us to start thinking that we can repeat what we've done on this Misko well that I told you about earlier that gives you a best part of the 1000 barrels a day of IP and 800,000 of 30 day IP, a tremendous well which we can repeat.

And if we found the same thing in the Marmaton, the Cottage Grove and maybe even the Cleveland itself, that would start to attract attention, it would start to bring rigs back in the focus and we would start to look at capital allocation. But back to your story, I think the number is four.

Pearce Hammond – Simmons & Co. International

Thank you for the detailed answer there. And then for the remainder of this year, the drilling in the Anadarko Basin, can you provide a breakout on the composition of the horizons or locations that you will be drilling for the remainder of the year? Is it primarily concentrated in the Cleveland?

Unidentified Company Representative

I don’t have any idea right now, and we will be very thorough on this allocation. Back to my nice piece of paper that I was given where you can go down that list and where you draw your line on your per capita, you've got what wells sit above it and what wells sit below it, and that's always changing. Cleveland is a very solid, steady performer. It gives you good rates of returns as long as you keep your well costs down and you deliver the EUR in the 30 day IP and there is hundreds of locations to us. Marmaton is a bit of a wildcard right now. We are learning about it. We've seen some results. Tonkawa I've just talked about, gives us some spectacular results, and so we go on. How you then put that into an onward program is dynamic and I would now – right now I couldn’t give you an answer. I’ll get back to you and tell you what my best thoughts are, but right now, I can’t tell you.

Pearce Hammond – Simmons & Co. International

Okay, thank you. And then one last quick housekeeping one for me. Do you have the exit rate production for the Miss and for the Anadarko basins at the end of the first quarters on March 31, what they were producing?

Unidentified Company Representative

The exit rate from the 31st of March, we’ll get back to you – I don’t want give you a bad number, I’ve got so many numbers in front of me here, I wouldn't know where to start.

Pearce Hammond – Simmons & Co. International

Okay, thank you very much.

Unidentified Company Representative

It’s not a bad number, I can tell you.

Pearce Hammond – Simmons & Co. International

Thank you.

Operator

And your next question is going to come from the line of Michael Rowe with Tudor Pickering Holt.

Michael Rowe – Tudor Pickering Holt & Co. Securities

Hi, good morning. Thanks for taking my question.

Unidentified Company Representative

Good morning.

Michael Rowe – Tudor Pickering Holt & Co. Securities

At the beginning of the call, you mentioned sort of you had some; I guess specific well problems in the Anadarko with some new wells you brought online recently. What was that related to specifically? Was that just weather related or was that something else that happened?

Unidentified Company Representative

It's the usual stuff. You differentially stick, you twist off your bottom hole assembly, you can’t dig a pipe down to the depths that you drilled it to. It goes on and you get into those things. You come out of the – you try and drill along a particular curve and a particular target and you come out of zone. so you come back and sidetrack. Those take days and add days, I mean we’ve got fairly tight tolerances to try and drill these wells in the 20 to 25 drilling range. and if you get deviation from that, it encroaches on your valuation and your IRR. So it’s a combination of those things fine-tuning your methods and fine-tuning your program, no real major train wrecks, but just ongoing operations. It’s why it's called operations. This stuff happens.

Michael Rowe – Tudor Pickering Holt & Co. Securities

Okay, great. And then…

Unidentified Company Representative

But there's no common theme, I would say. Sometimes you get individual problems that would keep repeating themselves. We seem to run the gamut and catch a few other things.

Michael Rowe – Tudor Pickering Holt & Co. Securities

Understood.

Unidentified Company Representative

So we’re still getting our learning -- our program down pat and getting our consistency in place.

Michael Rowe – Tudor Pickering Holt & Co. Securities

Do you think I guess with that Anadarko consistency is one thing that you all are going to be trying to focus on more going forward to see whether or not this play ultimately competes I guess with the Mississippian Lime. I guess what I'm going with that, I'm just trying to get a sense for how the variability by zone you're seeing compares to your initial expectations and whether that has something to do with you all deciding to shift a rig from the Anadarko to the Mississippian Lime? Thank you.

Unidentified Company Representative

Yes, sure. Hey, we started operating in anger in the Anadarko from December. And here we are now in early May, so it's not been that long.

The Anadarko has been around for gosh 100 years down there in terms of oil production, in terms of history. There's a large number of producing horizons and we’re just systematically working our way through it. I don’t write the Anadarko any less than I do the Miss, I am further on in the Miss because we got better understanding and the guys have done a terrific job in unlocking the potential and cracking the code. I am very confident we’ll do the same in the Anadarko. It’s just going to take a bit of time and in the interim we are going to be very, very careful and ruthless in where we allocate our capital.

I’d say to you guys I wouldn't worry about where we produce our barrel from as only just a valuable barrel. And at the end of the day if we’re producing 33,000, 34,000, 35,000 barrels a day and we got a run way as long as you around from nine or ten years, you shouldn't worry where we get it from just trust us that were going to do it from the best possible target to get the best possible profit and give the highest possible margin for the dollar invested. Should I do any different?

Michael Rowe – Tudor Pickering Holt & Co. Securities

That’s helpful. Thanks.

Operator

And your next question is going to come from the line of David Heikkinen with Heikkinen Energy.

David Heikkinen – Heikkinen Energy Advisors

Hi, Peter. Along those lines, as you think about the assets that Midstates own, something and you’ve looked at a lot of other assets, whether or not they would be the Williston or other areas. How did the Miss Lime and the Anadarko stack up for the most profitable barrels?

Peter J. Hill

Yeah, that’s a good question, David. Just one personal thing, one of the reasons I joined the board of Midstates was I wanted to understand the Anadarko and the Miss Lime. I was fascinated by particularly the Miss Lime being a carbonate I was really interested on how that would perform and how that looks. Resource plays a complex, they are not just simple (indiscernible) as you well know. And you've got to learn about them and understand as they go on. What surprised me about the Miss Lime is that it is such an inefficient carrier of a source system from the Woodford and then distribute around the basin, towards the basin margins. But it’s incredibly difficult to work out what is the track in mechanism, what is the release mechanism and how do these rocks behave and work.

And again one I found very interesting is talking to the guys out there in Tulsa and with the guys around here – if I where are growing the about our (indiscernible) resource play Lime instance work, they are very different statistics. I’m very surprised and very surprised how good the Miss line is turning out particularly where we are and where we developing and understanding on the basis that through the sizing. The Anadarko is a bit more (indiscernible) bit more cloudy in my head, because it has been there so long and it's more of a classic old oilfield. But we are learning, and certainly some of the other horizons of these delta top sands are really interest me and starting to show that if you can understand the rock storage and what’s holding the oil in place, you can start to get at it a lot better and a lot more efficiently with your wellbore interface. Long-winded way of saying that the Miss Lime to us is terrific and we are getting better at it, and I think the Anadarko will follow, but it will take a bit of time.

David Heikkinen – Heikkinen Energy Advisors

And then obviously you are working within all limitations of your balance sheet and stock price, but as you think about assets, are these the assets that you want Midstates to own assuming you get a joint venture done on asset sales or would you go into other basins?

Peter J. Hill

Hey, if we had on druthers, we would like to be in the Permian Basin, wouldn't we, and wouldn’t a lot of other things, and the Bakken is not at all bad, I can tell you. But that said I think the Mid-Continent offers a lot of potential. I think it's slightly different. Your cost bases are a lot different and it's a lot easier to get at them, and they are a lot shallower. There's a lot less pressure and there's a lot more margin if you can get at it.

So I'm kind of interested in the Mid-Continent in a different way, because I think the industry can do great things here. And one of the places of being able to live over here is that, it's only in the U.S. onshore that you see the stuff. There's nowhere else in the world that's doing this. And the guys you meet and talk to in the field, whether they would be Midstates' guys, whether they be competitors or peers, it's a pleasure, it’s a no, no, and these guys are really working at the age of doing great things. No doubt about it in my mind.

David Heikkinen – Heikkinen Energy Advisors

Okay. I should have been more specific around Oklahoma. You want to stay focused on that area obviously, but thinking about any extensions of where you are already looking at, whether or not that be the Merrimack section or any of the hunting that's going on and around you just those type of thoughts.

Peter J. Hill

Yes, I think some of the work Greg and Curtis have been doing with the guys up in Tulsa, has opened up a lot of other intervals. Oil is really fine, as you know? And there's lots of things going on in the Woodford, the Viola, some of the shallower horizons and not just the Miss Lime, I think are potentially quite attractive. And I think, as time goes by, we will pick those up and we will find ways of making valuable.

David Heikkinen – Heikkinen Energy Advisors

Yes, look forward to talking to you more. Thanks.

Peter J. Hill

Yes, me too.

Operator

And your next question will come from the line of Gregg Brody with JPMorgan.

Gregg Brody – JPMorgan Securities Inc.

Good morning, guys. Just two questions for you. The first one, the liquidity bridge you gave, could you remind us of what your commodity price assumptions are for 2014 and 2015? And then the second question is just for Peter. I don't know if I missed it. Obviously, you gave us your view on how the business is going to be run differently. It wasn’t clear to me that you were a permanent CEOs,, so I was curious if that is the case, and is there process ongoing to put someone permanent in place?

Peter J. Hill

Hey, Gregg. On the forecast prices for liquidity bridge we talked about we used a WTI of about $98 a barrel, Henry Hub gas of $4.70 with a NGL price of around $44 per barrel.

Gregg Brody – JPMorgan Securities Inc.

And that's 2014. What about for 2015?

Nelson M. Haight

We use the strip for 2015.

Gregg Brody – JPMorgan Securities Inc.

Perfect.

Nelson M. Haight

The first strip, yes.

Peter J. Hill

The other question you asked, I serve at the best of the board, which I am a member. I certainly call very true and very principled in terms of what my responsibilities are in terms of a board member, which is a duty of care and duty of loyalty. When John step down and I was asked step in, we have started process of looking for new CEO is on going. One of the issues around that is where is this company going and what is it going to do, until there is some more clarity on that, and that’s what we’re working on. Then I will continue to hold this job how long is that one month, two months, three months don’t know. It means interim because I am not going to do it forever.

At 67 I've got a lot of fishing to do and the lot of things to catch up. But I am very committed to this. There's a great group of guys here, and one of the jobs is to enable this team to be able to come forward and show what they can do in terms of taking Midstates forward. There is an organic way out of this and I have indicated already that I think we can be cash flow neutral by 2016, well cash flow positive by 2016. That. is one way of getting there is that the best the more secure the most risk free or other ways that been able to deliver the value to the shareholders. And until we’ve laid those options out clearly in our mind, then I will stay running this thing and trying to help out as best I can.

Gregg Brody – JPMorgan Securities Inc.

And just one follow-up, on the 2015 commodity price assumptions - by the way, thank you very much. That was very helpful. Just one follow-up. The strip for 2015, what's the NGL realization you're assuming?

Nelson M. Haight

We are using 45% of the strip price.

Gregg Brody – JPMorgan Securities Inc.

Okay. Can you just remind us what it was for this quarter?

Nelson M. Haight

This quarter, it was about 47%.

Gregg Brody – JPMorgan Securities Inc.

Perfect. So do you think the propane advantages that you achieve this quarter will likely carry through?

Nelson M. Haight

It’s hard to say they were hopeful. There is bunch of activity around exporting some of these NGLs but they are held up for the prices as well.

Peter J. Hill

Its still hanging in there.

Gregg Brody – JPMorgan Securities Inc.

Yes, it's been very strong.

Peter J. Hill

And you got a crystal ball, can you tell us?

Gregg Brody – JPMorgan Securities Inc.

I don't. I often ask around to see if somebody does.

Peter J. Hill

It's as muddy as our crystal ball then.

Gregg Brody – JPMorgan Securities Inc.

I appreciate that. Thank you guys

Unidentified Company Representative

Thank you.

Operator

And we have time for one final question. Your final question will come from the line of Ron Mills from Johnson Rice.

Ron Mills – Johnson Rice & Co.

Nelson, just a couple maybe modeling ones. The 0% TO 5% tax rate you talk about for the foreseeable future is that something through 2014, or how long do you think that tax regime lasts? And then Peter, the 2016 commentary about cash flows exceeding CapEx, are you still at that point talking about EBITDA or are you talking about discretionary cash flow?

Unidentified Company Representative

I’ll take the first question on the tax rate, I think that’s that 0% to5% range is appropriate to the rest of this year certainly so I would just continue to use that one.

Ron Mills – Johnson Rice & Co.

And in 2015, do you think it reverts back to a statutory rate, or is even that too soon?

Unidentified Company Representative

It just depends on work whatever tax and book losses book gain come as for the rest of year I would that say that probably holds through the middle part of 2015 but all this keep updating that guidance every quarter.

Ron Mills – Johnson Rice & Co.

Okay

Unidentified Company Representative

That’s EBITDA and we were staring the interest.

Ron Mills – Johnson Rice & Co.

All right. Everything else has been asked. Thank you so much, guys.

Unidentified Company Representative

That’s in our best interest.

Ron Mills – Johnson Rice & Co.

Good night.

Operator

And that now like to turn today’s conference back over to management.

Peter J. Hill

Just thanks everyone for the listening and asking whatever question. Have a good day and we are talking again soon. Thanks very much.

Operator

Once again we’d like to thank you for your participation in today’s Midstates first quarter earnings conference call. You may now disconnect.

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Source: Midstates Petroleum's (MPO) CEO Peter Hill on Q1 2014 Results - Earnings Call Transcript
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