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Rex Energy Corporation (NASDAQ:REXX)

Q3 2010 Earnings Call

November 2, 2010 10:00 am ET

Executives

Lance Shaner - Chairman, Interim President and CEO

Tom Stabley - Executive Vice President, Chief Financial Officer

Patrick McKinney - Executive Vice President, Chief Operating Officer

Analysts

Ron Mills - Johnson Rice

Jeff Hayden - Rodman & Renshaw

Derrick Whitfield - Canaccord Genuity

Leo Mariani - RBC Capital Markets

Mike Scialla - Stifel Nicolaus

Marshall Carver - Capital One Southcoast

Jack Aydin - KeyBanc Capital Markets

Brian Lively - Tudor, Pickering, Holt & Co

Jason Wangler - Wunderlich Securities

Operator

Good day, ladies and gentlemen, and welcome to your Rex Energy third quarter 2010 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this is being recorded. I would now like to introduce Mr. Lance P. Shaner, Rex Energy Chairman and Interim President and CEO. Mr. Shaner, you may begin.

Lance Shaner

Thank you, Moderator. Good morning and thank for joining us on our call to discuss financial and operational results from the third quarter 2010. As a reminder, we issued our earnings press release last evening and posted the conference call slides on rexenergy.com.

I'll start the call this morning on slide 3, with some key takeaways from the quarter. First, our production in the third quarter was in line with our guidance and represented an increase of 26% over the third quarter of 2009. Our production during the first nine months of 2010 was also up 23% over the same period in 2009. This is predominantly a result of our team's successful Marcellus Shale drilling operations and is a trend we fully intend on continuing.

Taking a look at our oil and gas revenue, we were up 22% in the third quarter over the same period in 2009 and up 24% in the first nine months 2010 over the nine months of 2009. At the same time, our lease operating expenses were up only 14% and 13% respectively, which demonstrates our continued commitment to improving our per-unit operating expenses as we continue to grow our production and revenue.

As a result, our EBITDAX in the third quarter grew 10% over the same period in 2009 and 35% over the first nine months of 2009. Operational highlights to report include the commissioning of the Sarsen Plant in Butler County, Pennsylvania. The Slavek trust number 3HIP rate of 3.1 of gross million cubic feet per day in Westmoreland County and in Butler County the Shannon number 1H initial flow rate of 2 million gross cubic feet equivalent per day was only 5% of load recovered.

Lastly, I'm extremely pleased to welcome Daniel J Churay into his new role at the company as President and CEO. Dan has served as a director of Rex Energy since 2007 and has 20 years of experience dealing with the oil and gas industry. In addition to his capital markets knowledge Dan has held leadership positions with Fortune 500 companies and for the past eight years has served as executive vice president, general council and secretary of WRC Worldwide Incorporated.

He will spend the next 30 days transitioning out of his current role at WRC and meeting with Rex Energy employees, investors and stakeholders. Dan will begin his full-time service as President and CEO of Rex Energy on December 1, 2010. I'll now turn the call over to Tom Stabley, Executive Vice President and Chief Financial Officer, to review a few of the financial results.

Tom Stabley

Thank you, Lance. I'll begin on slide 4 which provides more detail on our changes in production mix and realized prices for the quarter and year-to-date. Our average daily production during the third quarter 2010 increased for all three of our production mix components. The company's overall third quarter average daily production increased 8% from the second quarter of 2010 to 20.3 million cubic feet equivalent per day, which was in line with our previously issued guidance.

Due to the effect of cash settled derivatives, the company's effective realized price of oil and natural gas decreased 1% in the third quarter compared to the second quarter.

Continuing on slide 5, the total operating revenue, including the effects of cash settled oil and gas derivatives in the third quarter 2010 increased 8% from the second quarter 2010. Looking at our expenses, there are a few items to review.

Cash G&A expenses were $4.8 million in the quarter, which was slightly higher than our guidance. The increase is primarily due to legal expenses relating to the Sumitomo joint venture. Our gain on sale of assets net of impairment was $14.1 million and also attributed to the gain recognized on the Sumitomo joint venture transaction.

Lastly, we recognized exploration income rather than expense in the third quarter due to reimbursements we received from Sumitomo at the closing for seismic expenses incurred to date in the joint venture areas.

Earnings comparable to analyst estimates were approximately $400,000 or $0.01 per share. Our EBITDAX, a non-GAAP measure decreased 1.7% over the second quarter of 2010 to $5.7 million but on a per share basis remained $0.13 per share.

As you can see on slide 6, we have continued to aggressively hedge our production to protect our future cash flow. In the second quarter we took advantage of a particularly low dip in natural gas prices and bought back the price ceilings on most of our 2010 and 2011 natural gas derivative contracts at a minimal cost. We have since layered in several fixed price swap contracts to increase the volume under contract.

Based on September 2010 average daily production, we have floor price protection on 108% of our natural gas production in the fourth quarter 2010 and full-year 2011 will have only 41% and 63% respectively subject to ceiling prices during those periods.

On slide 7 we have presented a condensed balance sheet. Since we closed the Sumitomo deal at the very end of the quarter, our September 30 cash is $64.8 million and long-term debt is $75 million. We subsequently reduced our long-term debt to $10 million drawn with $115 million still available under a senior credit facility.

Also at the closing, we placed approximately $30.6 million of additional cash in a restricted account for a 1031 lifetime exchange, which, on the balance sheet, is under net other assets. If no qualified properties are identified during the 45-day exchange period the money will be reclassified as cash and move back to the balance sheet n the fourth quarter 2010.

The balance on Williams Field earned carry in our joint venture project areas was $2.8 million at the end of the third quarter of 2010. We would forecast Williams will expend the remainder of the carry balance in 2010 by year-end.

The Sumitomo carry balance at the end of the third quarter was approximately $48.7 million which we would forecast to be used by mid-year 2011. On Friday I will wrap up the financial portion of today's calls with fourth quarter and full-year 2010 guidance.

We anticipate production in the fourth quarter 2010 to be between 22 million and 24 million cubic feet equivalent per day, which puts the company's full year production within our previous guidance for the year, albeit at the low end of the range.

Due to the completion delays in the Marcellus, which we highlighted in the earnings release yesterday, we have revised our December 2010 production guidance to 23 million to 26 million cubic feet equivalent per day. We are also reaffirming our 2010 year-end lease operating expense guidance and net capital budget. Due to the increased third quarter 2010 G&A, we have revised our full-year 2010 cash G&A guidance to approximately $17 million.

Patrick McKinney, our Executive Vice President and Chief Operating Officer, will now give a brief update on our operations.

Patrick McKinney

Thanks, Tom. I'll start on slide 9 with our Butler County Marcellus Shale project. As Lance mentioned, we are now commissioning the Sarsen Plant which is a jointly owned cryogenic processing plant of which we own a 28% interest.

We expect to be producing approximately 10 million cubic foot per day by mid-November 2010 at which time the Sarsen Plant will have initial compression in place to process up to 20 million cubic feet per day.

Additional inlet compression to increase plant throughput capacity of 30 million cubic foot per day is scheduled to be installed in mid-January 2011. Compression for the full plant capacity of 40 million cubic foot per day is scheduled to be added by the end of the first quarter 2011.

In early October 2010, we fracture stimulated the Shannon 1H well with 10 stages over the 2870 foot of lateral extension in the well. We were extremely encouraged by the treating pressure profile and fracture extent on the micro-seismic data from the well. The Shannon 1H is currently being flow tested with approximately 5% of the low water returning to surface. To date, the well is cleaning up with an initial rate of 2.2 million cubic foot per day equivalent gross on task.

Concurrent with the fracture stimulation of the Shannon 1H, we began to fracture stimulate the Shannon 2H but ceased operations in second stage when a casing integrity issue was detected. A similar casing integrity issue was observed on the Voll 1H and, therefore, the fracture stimulation of the five wells awaiting completion has been delayed until later in 2010 to perform the necessary remedial well work.

Our drilling rig has just completed the drilling of second of five wells on our [Grucial] unit pad. On slide 10 we highlight our Westmoreland County, Pennsylvania project area where Williams serves as the operator.

After the closing of the Sumitomo joint venture transaction we now have a 40% working interest in this project area. During the quarter, Williams completed the Slavek trust 2H which was announced in September 2010 and put into production at a peak 24-hour rate of 4.3 million cubic foot per day gross.

Recently, Williams completed and put the Slavek trust 3H in line at a peak 24-hour rate of 3.5 million cubic foot per day gross. However, our Marcellus production out of this area is currently limited to 12 million cubic foot per day gross due to pipeline capacity constraints.

Williams is currently constructing a gathering line to the Equitrans pipeline, which will alleviate production constraints. We anticipate the line will be completed in May 2011. Currently, Williams is working on the Uschak 2 unit, which has spud the fourth well on a five-well pad.

Moving to the Central Pennsylvania project area on slide 11, Williams completed the gathering system for the Alder Run wells to the Columbia Pipeline during the third quarter 2010. The Alder Run 1H and 3H, both drilled in 2009, were put into production at a combined 24-hour peak rate of 6.9 million cubic foot per day gross.

Williams added a second joint venture rig during the third quarter 2010 and drilled the Alder Run 2H which we anticipate will be completed by year-end 2010. Williams is currently drilling the Alder Run 5H and will then move the rig to Westmoreland County.

A quick update on our ASP project in the Illinois basin on slide 12 -- during the third quarter of 2010 we began chemical injection in our Middagh unit which is a 15-acre ASP unit targeting the Bridgeport Sandstone. To date, we have reached injection of approximately 12% of the core volume and expect initial response in the latter part of the first quarter 2011 to early second quarter 2011.

Moving to the DJ Basin on slide 13, during the third quarter we drilled and began completion of the Silo State 41-22H or our Niobrara Shale well. This well is located in the southern part of the Silo field offsetting a previously completed 4000 foot unstimulated Niobrara lateral well drilled in 1993 and that well produced just over 20,000 of oil before abandonment.

Although we noticed indications of partial depletion of the reservoir during drilling, the fracture stimulation increased volatile pressure indicating that areas of virgin reservoir were contacted by the fracture stimulation.

During the initial flow back of the well, the tubing work string parted and had to be repaired, which caused a 10-day delay in our completion. To date, we have recovered approximately 20% of the fracture, increasing oil [costs].

We will put the Silo State well on artificial lift and expect to get initial production rate within the next few weeks. We recently reached total depth on the Herrington Farms 1H, our second Niobrara shale well with an approximate 4300 lateral extension. The well is located 12 miles east of the Silo State 41-22 and outside of any previously developed Niobrara production.

We plan to begin completion operations on the Herrington well in November of this year. As previously announced, we commenced oil sales from the Herrington Farms 1H during drilling operations. We have four additional Niobrara shale well drilling permits in hand and plan to spud the BJB number 1H well by year-end 2010.

With that, I'll now turn the call back over to Lance.

Lance Shaner

Thank you, Pat. There are several upcoming conferences we will be presenting at, which I would like to mention before we get into the Q&A.

In November, we will be at Pritchard Capital's Appalachia Forum in Boston, Stifel Nicolaus' Midwest One-on-One Conference in Chicago and Canaccord Genuity's Global Energy Conference in Miami.

In December we will be at Capital One's Southcoast 5th Annual Energy Conference in New Orleans and we'll kick off 2011 in San Francisco at Pritchard Capital's 8th Annual Energize Conference.

Operator, at this time I would like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Ron Mills - Johnson Rice.

Ron Mills - Johnson Rice

One question just the casing integrity, Pat. The issue -- what type of remedial work? Is it just setting a liner and then getting back the frac crew and lining up all five of those completions? Is that the concept?

Patrick McKinney

Yes, Ron. We noticed a little pressure on the back side when we're trying to treat the Shannon well, so we shut down the operations and decided it was best to take a look and see what we had going on. We also noticed a similar issue on the Voll well, so, yes, it does involve just running a 3.5 inch liner back and going in and conducting the fracture as we normally would and we have the crews lined up to come back here the end of November and finish those five wells off.

Ron Mills - Johnson Rice

Then in terms of the production from the area, you have -- it sounds like you can get up to 10 million a day just with the existing wells and once you get these other five wells drilled, is that something that allows you whether late this year or early next year to get to that 20 million a day range that the plant has the capacity? Or is that going to be impacted by the size of the liner in those remediated wells?

Lance Shaner

Yes, no, the liner in there will basically just produce those wells without tubing, Ron, so it shouldn't affect the rate at all and that's our plan is to get those wells up as quick as we can and fill that plant up.

Ron Mills - Johnson Rice

My third question is in the Niobrara, you talked about pressure depletion in that well may not be as big of an issue given potentially virgin pressures. Can you remind us on the Herrington well, the drilling -- I think you drilled it under balance, so you experienced oil flows during the drilling. How about when that well comes online, infrastructure and the ability to get the goods processed?

Patrick McKinney

Yes, we have oil takeaway out there, Ron. That shouldn't be an issue. We have a number of different outlets for the oil. Then on the gas takeaway we're currently negotiating and getting bids from a number of different parties on gas sales and infrastructure issues. So we really don't think we're going to have a problem out there because there was an existing plant in the Silo field and we're negotiating with the folks out there to be able to take all the gas that we can bring on.

Operator

Your next question comes from the line of Jeff Hayden - Rodman & Renshaw.

Jeff Hayden - Rodman & Renshaw

Just a couple questions kind of on the Butler development ramp up. I guess kind of looking forward into next year, what are you thinking about the rig count as far as sticking with one rig and possibly adding a second? What are kind of the current expectations on when you need to put in a second Butler plant?

Tom Stabley

Yes, Jeff, it's Tom Stabley. We're working on the 2011 budget right now. Pat and I and Lance have discussed it. It looks like we're going to have a second rig secured that we can bring in around the middle to late second quarter of next year in the Butler. It would allow us to run a two-rig program there for at least the second half of next year and then Williams, to our expectations, is still continuing the two-rig program that they've outlined in Westmoreland and Clearfield.

Then as far as the new plan goes, our midstream partners there are continuing to look for the location of which we can set that second plant site and hope to begin work on permitting that later this year, early first quarter of next year.

Jeff Hayden - Rodman & Renshaw

Just kind of thinking timeline, should we assume about 12 months from kind of when you start permitting to when we could expect the plant to be operational?

Tom Stabley

Yes, yes, that's correct. That last plant we got, I believe, it was at about nine months. But I think for planning purposes I would probably utilize 12.

Jeff Hayden - Rodman & Renshaw

Then just kind of looking at Butler and building on Ron's question, in addition to the five wells that you guys have that you to expect to kind of frac sort of starting end of November, where do you stand as far as kind of other wells in various stages of drilling right now?

Patrick McKinney

This is Pat, Jeff. We just TDed the second well on our [Grucial] pad as a five-well pad and we've got the top holes drilled on those, so the horizontal rig can come in and just knock those out. We should be done with that pad sometime early in the first quarter and then we're really taking a look at, as part of our budget process, where we get the biggest bang for our buck.

We've got a number of permits in hand and a number of different options and different pad sites we can go to. Obviously our goal is to get as many wells on as quickly as we can, so we're in the process of trying to optimize our drilling schedule but we've got plenty of running room with where to take the first rig. As Tom mentioned, as the second rig comes in we think we'll have a lot of opportunities out there to go and get those wells on as quickly as possible.

Jeff Hayden - Rodman & Renshaw

On that pad you guys are currently working on, you and Sumitomo together have about 60%, 65% of those wells?

Tom Stabley

No, the [Grucial] pad -- Jeff, it's Tom. The [Grucial] pad is 100% owned Rex and Sumitomo pad, so it's 70, 30.

Operator

Your next question comes from the line of Derrick Whitfield - Canaccord Genuity.

Derrick Whitfield - Canaccord Genuity

Thinking about the Niobrara, you guys have drilled two wells to date. While early and you're still flowing back your first well, what are your predrill expectations for these wells?

Patrick McKinney

Well, obviously we would love to have the whole area shot with seismic so we could answer that better. We're in the process of getting that achieved but there some 2D we've looked at out there, Derrick, and really you're looking for areas that have a lot of fractures. The primary other driver that the industries use is looking at resistivity maps, so we're using all of that to try to high-grade our areas out there and so far in the two wells we think we're drilling in the right spots.

Derrick Whitfield - Canaccord Genuity

On page 13, you guys noted that the Niobrara offers a strong matrix contribution. Is that based on your experience in the basin offset wells or some combination of both?

Patrick McKinney

I think it's a combination of both, Derrick. Since I was with UPRC when we discovered that field and started developing it and what we saw just drilling single stage frac wells, unstimulated laterals, you got to see from the decline curves a lot of just simple fracture contribution to the production profile and then you can see some of the matrix in there.

So that's why we really feel going in and fracking these wells you're going to get a one, two punch. You're going to get contribution for the fractures and we like what we've seen on the logs that we've run so far to show that there are some matrix contributions out there available as well.

Derrick Whitfield - Canaccord Genuity

Then thinking about your testing program in the Niobrara for 2011, you guys have four additional wells permitted right now. How many more wells might you guys drill in 2011?

Patrick McKinney

Well, I'll speak for Tom here. I think it's just going to depend on the well results and if we need to get more science and really how they do. But we've got this current rig available. If we want to continue to keep it working we will. I think it's going to depend on the results and what we see and what other operators see out there.

Derrick Whitfield - Canaccord Genuity

But you currently have four wells permitted, so you certainly have the ability to move into those wells.

Patrick McKinney

Absolutely, yes.

Operator

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

Leo Mariani - RBC Capital Markets

I guess on your first Niobrara well, it sounds like you have 20% of the frac load of that already. Obviously, there was a mechanical problem. Do you guys think that the well is going to be damaged? It sounds like it's reflowing now and frac fluid is coming out. Do you guys think that's going to be a commercial well, there?

Patrick McKinney

So far we do, Leo. I mean, we haven't seen anything back this early and getting a load back that would make us think otherwise.

Leo Mariani - RBC Capital Markets

Do you guys plan to come out with some results of that well? I know in your press release, in your prepared comments you talked about having a better look at it in a couple weeks. Do you plan to put out an announcement once you have it assessed?

Lance Shaner

Yes, I mean, I'd like to -- personally, I'd like to wait and see the results of the Herrington as well, too, and put that out. I think that would give us a lot more color on really what we feel is a base part of the program.

Leo Mariani - RBC Capital Markets

So you think that's likely maybe a December event then? Sounds like you're fracking the Herrington later this month.

Lance Shaner

Yes, it could be but we don't know now. I mean, when we get the IP results on it we'll share it with the market when we get it.

Leo Mariani - RBC Capital Markets

I guess you guys said you had $30 million something of cash that you had on the balance sheet and other assets that was reserved for acquisitions. Is that targeted for anything at this point? Are you guys looking to picking up more acres in Niobrara? Can you give us more color on that?

Tom Stabley

Sure, Leo, it's Tom. Yes, we just -- that money was placed into the restricted account in the possibility of an acquisition or an opportunity came along. At the present time we have utilized it for several small additional blocks we've picked up in the Niobrara, approximately about $5 million. But I would expect the rest of it, pending no major acquisitions, I think it's about 10 days or less on that it would be moved back into the regular balance sheet cash account.

Leo Mariani - RBC Capital Markets

It sounds like you guys are having some potential delays on ramping up your production here in Westmoreland County as well. Are you guys at the limit of your capacity in terms of what you can produce there on a gross basis currently?

Tom Stabley

Yes, Leo. That 12 million that we mentioned in the call is the amount that we're currently curtailed at in Westmoreland County.

Leo Mariani - RBC Capital Markets

I guess you've got a May date to alleviate that. What do you guys think your capacity is going to be come May?

Tom Stabley

I believe the Equitrans -- I'd have to follow up on that. I believe the Equitrans tap that Williams is putting in is -- I want to say it's 40 million but I'd have to follow up on that.

Operator

Your next question comes from the line of Mike Scialla - Stifel Nicolaus.

Mike Scialla - Stifel Nicolaus

Just so I understand on the integrity issues with the casing again, is this a problem with just the cement job really or could you give just a little more detail on the exact problem there?

Patrick McKinney

Mike, it's really not on the cement job, per se. We just had a pipe integrity issue, so we had a pin-and-box deal on the case and that's really all it was.

Mike Scialla - Stifel Nicolaus

So it's not a steel problem? It's just the way the casing was placed in the hole?

Patrick McKinney

We're going through all of our due diligence to see exactly what all the issues were but we don't think it's a huge problem. Obviously the same pipe was run on two wells, so we saw the same issue on two wells.

Mike Scialla - Stifel Nicolaus

Then in your Herrington Farms well, did you have any drilling issues there? I thought originally you were hoping to get about 5000 feet and then it looks like you went 4300 feet.

Patrick McKinney

Yes, I mean, as we take these wells out our intent was to try to get out to 5000 but based on the hole conditions we decided just to cut it short, so I guess you can say we're learning as we're going here and we decided to cut that one short.

Mike Scialla - Stifel Nicolaus

Can you say anything on what kind of rates that was producing during drilling?

Patrick McKinney

Well, our first criteria is to have a safe and secure well site, so we really controlled the flow on that. So I can't tell you really what it was capable of flowing while drilling but we saw enough indication while drilling to know that it was capable of flowing, so we maintained well control and recovered what we recovered and didn't want to get too crazy with it. We didn't think there was any reason to do that.

Mike Scialla - Stifel Nicolaus

One last one for me maybe for Lance -- I guess, in terms of the decision to put Daniel in as CEO, was the performance of YRC figured into that decision at all?

Lance Shaner

Well, YRC obviously has been a company that's been in the workout mode the last several years with their pension liabilities and union contracts. I think Dan Churay is senior council on that matter. He did an excellent job of renegotiating certain contracts that they had at the company, very complicated transactions.

So YRC would be the latest part of Dan's career. Obviously as a 20-year career, starting at Fulbright & Jaworkski and going on up through with other positions, senior positions with Fortune 500 companies and Dan is a very seasoned professional executive that's demonstrated his ability to develop business plans, hit goals, work with other people, excellent communication skills and so on, so the board had the utmost confidence in bringing Dan onboard so he could hit the ground running.

He has three years experience with the company and obviously knows a lot of detail. So the board was very pleased that we could reach agreement with Dan and we think that he'll do an excellent job.

Operator

(Operator Instructions). Your next question comes from the line of Marshall Carver - Capital One Southcoast.

Marshall Carver - Capital One Southcoast

Just a couple questions, on the Sarsen Plant, I know you're talking about putting an additional plant on in a couple years. When do you think you will actually max out this first plant at the 40 million?

Patrick McKinney

Marshall, this is Pat. Our current plan, we're trying to layer in our drilling schedule and production schedule to fill the plant up and then obviously be prepared to have a second plant come in to match our drilling schedule.

So, as we discussed earlier on the call, we think it's going to take about a year to get the second plant up and going. So we're working really hard right now with our midstream partners to go and identify a plant site. We'll close on that and then get the permitting started, so we'll have that plant available when we need it.

Marshall Carver - Capital One Southcoast

So it would probably be some time in 2012?

Patrick McKinney

Well, yes. As we said, it's about a year permitting time, so hopefully we'll be able to announce a new plant site here shortly and then you can add 12 months to it. So it'll either be late '11 or early 2012.

Marshall Carver - Capital One Southcoast

I know you're working on your 2011 plan. When do you expect to announce details on that? Could you give us hints at this point? I know you've got the Sumitomo JV, which will help carry some of your spending. Do you have a feel for the -- will the net budget be higher or lower than this year? Or what can you say and when will you have the final numbers?

Tom Stabley

Yes, Marshall, it's Tom. The expectations now internally is we would move to historically approve the CapEx budget for 2011, usually the middle of December at that board meeting. So I would expect we would have a number out to the market sometime early in January. I think as we talked earlier, kind of the expectation for us next year is a two-rig scenario in Butler County for probably late in the second quarter through the remainder of the year.

The two-rig scenario in certainly Westmoreland and Clearfield and then, as Pat alluded to, our hopes are to have a one-rig program in the Niobrara pending the results. So I think based on those types of numbers and the carry, you'd be looking at a capital budget obviously a little bit north of what the number is this year.

Operator

Your next question comes from the line of Jack Aydin - KeyBanc Capital Markets.

Jack Aydin - KeyBanc Capital Markets

Do you need air quality permit for the completion later this year and next year?

Patrick McKinney

Jack, this is Pat. For our current plant it is fully permitted, so we're not waiting for any additional permits whatsoever to take that capacity up.

Jack Aydin - KeyBanc Capital Markets

Tom, in the cash G&A you show $4.8 million, some of which was for legal. How much was for legal?

Tom Stabley

Related to Sumitomo, Jack, that was about $300,000.

Jack Aydin - KeyBanc Capital Markets

My third question, will there be any additional G&A in the fourth quarter for settlement with them?

Tom Stabley

No, there will not be any additional costs relating to the separation agreement.

Operator

Your next question comes from the line of Brian Lively - Tudor, Pickering, Holt & Co.

Brian Lively - Tudor, Pickering, Holt & Co

Thinking about your comments on the selection process for Dan, just thinking strategically, is there any shifts that you see for the Company going forward? Are you going to be more acquisition focused or is it still pretty much an execution story? Some color on that would be helpful.

Lance Shaner

The board and the company and our senior executives are really totally focused on executing our development programs in the Niobrara and the ASP and the Marcellus. We have had a lot of transactions that have occurred at the company the last few years and we've developed we think some compelling opportunities but we're really looking to exploit our reserves and really focus on increasing production and execution on our various capital management and investment programs.

As a public company that's not to say that the public companies are public companies and you have to always look at opportunities. We are not pursuing, at this time, an acquisition program. We feel that reinvesting our capital into our prospects is the highest return on capital for the shareholders and we're focused on that.

Brian Lively - Tudor, Pickering, Holt & Co

Looking at the quarter, looking at the NGR realizations, can you just give us some guidance where you see realizations going as you bring up production on the cryogenic plant?

Patrick McKinney

Well, this is Pat. I'll just speak from the operational end and Tom can talk about what we're currently seeing. The current refrigeration plant really is not a high-efficiency plant. When we get the cryo plant up our yields should improve from what we're currently seeing from the refrigeration plant.

Brian Lively - Tudor, Pickering, Holt & Co

Do you have any guidance on -- I think you were about 30%, 35% of NYMEX this quarter. Going forward, what's a general run rate?

Tom Stabley

Yes, I think the number will get slightly better from that based on the fact that we'll be into the cryogenic plant and with the ethane rate being reduced, so I think we're probably about a 25% to 30% rate going forward.

Brian Lively - Tudor, Pickering, Holt & Co

Does that assume ethane rejection?

Tom Stabley

Yes, we have an ethane rejection unit in the plant.

Brian Lively - Tudor, Pickering, Holt & Co

Lastly, over in the Niobrara, just trying to get a sense of the level of depletion you saw when you were drilling off the lateral. What mud weight were you using to drill where you saw depletion?

Patrick McKinney

We were at I believe around 8.4 pounds per gallon.

Operator

Your next question comes from the line of Jason Wangler - Wunderlich Securities.

Jason Wangler - Wunderlich Securities

Just a couple quick ones, it looks like on the guidance that the LOE is going to jump up quite a bit. I know the production is supposed to as well, but even on a per-unit basis, it looks like it might get a little higher. Is there any color you could add to that?

Tom Stabley

Yes, that's going to be early on as relates to the ramp-up in the plant. So once the plant would get the maximum capacity some of the fixed costs would be spread out over the remainder of the units.

Jason Wangler - Wunderlich Securities

Then just one other, I saw the accounts payable kind of jumped up a little bit. Is that just kind of the timing of when the quarter ended and that should kind of come back down to a normal run rate going forward? Or is that something we should expect to see continue?

Tom Stabley

That's a good question. That's going to be as relates to the Sumitomo joint venture. So with them being 30% of the wells obviously we're funding some of those costs upfront. So I think -- I don't totally know. That'll depend a lot on whether you're fracking wells or just drilling wells or where the timing is on the wells. But I think you will see a significant increase in the AP going forward for some time.

Operator

(Operator Instructions). Your next question comes from the line of Mike Scialla - Stifel Nicolaus.

Mike Scialla - Stifel Nicolaus

Yes, just wondered, on your Shannon well -- just trying to get a fix on how good a well that could be with 5% of the load recovered. Do you have a sense for how it compares to the better wells in Butler County?

Patrick McKinney

Well, we've seen getting kind of a full clean up and a max rate of about 15% of load recovery, Mike. So we're really optimistic this well is going to be a good well given where we're at in the process.

Mike Scialla - Stifel Nicolaus

Just one other follow-up, tax consequences if you don't get an exchange done for the divestitures?

Tom Stabley

Yes, we think in 2010 there could be a very small portion of AMT tax that might be due but the majority of the transaction should not have any major tax consequence.

Mike Scialla - Stifel Nicolaus

So you're talking just a couple million dollars, something on the order of that?

Tom Stabley

Yes, yes, south of that even.

Operator

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

Leo Mariani - RBC Capital Markets

Just a couple quick follow-ups for you here -- what was your CapEx in the third quarter and is there any change to your 2010 CapEx budget?

Tom Stabley

Well, the 2010 CapEx we reiterated the existing budget that we put out post Sumitomo. The total for the year was $130.7 million.

Leo Mariani - RBC Capital Markets

So no change to that at all? Obviously, service costs have risen. It's been an issue for a lot of companies in the sector. So you guys feel pretty good about that right now?

Lance Shaner

Yes, we still feel pretty good right now.

Leo Mariani - RBC Capital Markets

Is there any change to your 2011 production guidance? I know in the past, you guys have shown a three or four-year ramp up in some of your slides, been a while since I've seen that, but do you guys foresee any potential changes in that as a result of -- it sounds like some infrastructure issues here and a little delay ramping up in Butler county?

Tom Stabley

Yes, we'll go back and take a look at that based on the Sumitomo transaction and some of the delays and hopefully have that out with the revised CapEx budget for 2011 in January. Last note, I did get some clarification. The Equitrans tap is 25 million to start with the ability to expand it.

Operator

Thank you. (Operator Instructions). Your next question comes from the line of Jeff Hayden - Rodman & Renshaw.

Jeff Hayden - Rodman & Renshaw

Just one quick follow-up, I believe it was to Marshall's question. The 40 million a day kind of plant capacity in Butler, based on the inventory of wells, et cetera, that you've got timing, when do you think you'd be maxed out on that plant capacity?

Tom Stabley

Yes, Jeff, I mean, at the present time we haven't given any guidance for 2011. Again, we would expect to hope to have something out on that early in January.

Operator

(Operator Instructions). I am not showing any other questions in queue. I will now like to turn it back to the speakers for any closing remarks.

Lance Shaner

Yes, I'd like to thank everyone for participating in this call. We really appreciate your questions and I want to reiterate the commitment of the board and management to continue executing our business plan. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.

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