LinnCo's (LNCO) CEO Mark Ellis on Q2 2014 Results - Earnings Call Transcript

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 |  About: LinnCo, LLC (LNCO)
by: SA Transcripts

LinnCo, LLC (NASDAQ:LNCO)

Q2 2014 Earnings Call

August 7, 2014 11:00 am ET

Executives

Clay Jeansonne - VP, IR

Mark Ellis - Chairman, President & CEO

Kolja Rockov - EVP & CFO

Arden Walker - EVP & COO

Analysts

Brian Corales - Howard Weil

Kevin Smith - Raymond James

John Ragozzino - RBC Capital Markets

Praneeth Satish - Wells Fargo

Robert Balsamo - UBS

Eric Anderson - Hartford Financial

Amy Stepnowski - Hartford

Monroe Helm - Barrow Hanley

Gary Stromberg - Barclays

Operator

Good morning. Welcome to the LINN Energy Conference Call to discuss its Second Quarter 2014 Earnings. Today's call is being recorded.

At this time, I will turn the call over to Clay Jeansonne, LINN Energy's Vice President of Investor Relations, for some opening remarks. Please go ahead.

Clay Jeansonne

Thank you for joining our second quarter 2014 earnings conference call. In a moment, I will introduce Mark Ellis, our Chairman, President, and Chief Executive Officer.

But first, I need to provide you with disclosure regarding forward-looking statements that will be made during this call. The statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts, and assumptions are forward-looking statements.

Please note that the company's actual results may differ from those anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. Additional information concerning certain risk factors relating to our business, prospects and results is available in the company's filings with the SEC, including LINN's Form 10-Q for the quarter ended June 30, 2014, which we plan to file later this afternoon, and any other public filing and press releases. We plan to file LinnCo's Form 10-Q on Friday August 8, 2014.

Supplemental financial and operational results including the company's statement of operations, selected balance sheet data and guidance table are posted to LINN Energy's website at www.linnenergy.com in the Investor Relation Center, under Presentation.

Following management's prepared remarks, we will take your questions.

I would now like to turn the call over the Mark Ellis, LINN's Chairman, President and Chief Executive Officer.

Mark Ellis

Thanks, Clay and good morning. Joining us today from LINN are Kolja Rockov, Executive Vice President and Chief Financial Officer; and Arden Walker, Executive Vice President and Chief Operating Officer.

I would like to start by focusing on the strong operational results we generated in the second quarter. LINN reported record average daily production of more than 1.1 Bcfe per day exceeding the high end of our guidance range and resulting in growth of approximately 2.4% over first quarter volumes. This organic growth occurred across a number of our operating regions, most significantly in California and Hugoton Basin.

In California production increased 9% from last quarter to approximately 29,000 barrels of oil equivalent per day. This exceptional performance was driven primarily by growth in the Diatomite of approximately 30% to an average of approximately 9,400 barrels of oil equivalent per day for the second quarter.

In the Hugoton Basin, production increased by 5% to approximately 151 million cubic feet equivalent per day as a result of our highly efficient capital program in the area.

In addition to improving capital efficiency, we are also extremely focused on operating efficiency which was evidenced by our improved unit cost in the second quarter. During the second quarter, we exceeded guidance expectations on both lease operating and G&A expenses per Mcfe by 7% and 5% respectively. As we continue to grow the company and consolidate larger positions in certain core areas, we expect to continue to improve our operating efficiency.

2014 has been a year of tremendous transition for LINN, driven by our successful and proactive business development efforts. On the heels of $4.6 billion Berry acquisition in December of 2013, we have announced the intent to acquire or trade for approximately $4 billion to $5 billion of long-life low-decline MLP assets. In addition, we have announced our intention to trade or sell approximately $4 billion to $5 billion of higher decline more capital intensive assets in order to fund the transformation.

Completion of all the announced transactions including the intent to sell the Granite Wash and Cleveland assets and the sell or trade of the remaining Midland Basin assets in the Permian is expected to reduce our capital expenditure run rate by $300 million to $400 million and lower the company's estimated annual decline rate to approximately 15%. This transactional asset rotation is expected to result in a more stable base business and sets the stage for future growth.

Early in 2014, we laid out a clear strategy for portfolio improvement, which included maximizing the value of our Midland Basin assets in the Permian. One of the alternatives outlined in this strategy was a trade of some or all of our position in the Midland Basin for long-life material producing properties. While asset trades are typically challenging to accomplish, at the end of May, we were pleased to announce an asset trade with Exxon Mobil. Under the terms of this trade, we will receive approximately 85 million cubic feet equivalent per day of production with a low 6% base decline, 700 Bcfe approved reserves, and 500,000 net acres in the Kansas Hugoton Filed in exchange for approximately 2000 barrels of oil equivalent per day of production and 25,000 net acres in the Midland Basin. This transaction is expected to close on August 15, 2014.

On our remaining Midland Basin acreage, we continue to see strong interest in the trade or sale, with industry activity and valuations continuing to be robust. Our properties there are comprised of approximately 30,000 net acres and produced approximately 15,000 barrels of oil equivalent per day in the second quarter.

In an effort to maximize value and further delineate our position, we recently completed our first operative horizontal well which targeted the Wolfcamp B interval. This well had a 24 hour initial production rate of 1,158 barrels of oil equivalent per day, 91% of which was oil, and a 30-day rate of 1,017 barrels of oil equivalent per day, 89% of which was oil.

Now we've drilled a second operated horizontal well in the Midland Basin and are currently in the process of drilling the third. We expect to complete these two wells in the third quarter of 2014.

Following completion of our intended strategic alternatives in the Midland Basin, our Permian position will be focused on mature, low decline oil properties, primarily consisting of water floods in the Delaware and Central Basin platforms.

Acquisitions have always been a core strength of LINN and thus far 2014 has been no exception. At the end of June, we announced the acquisition of assets in five U.S. operating areas from Devon Energy for $2.3 billion. These assets currently produce approximately 275 million cubic feet equivalent per day at total proved reserves of between 1.3 and 1.5 Bcfe and are on ideal fit for an upstream MLP LLC with a modest 14% base decline rate. We believe these properties have been undercapitalized for some time and have significant upside and optimization potential.

On Monday we announced our acquisition of Pioneer's interest in the Kansas Hugoton Field for $340 million. These assets are currently producing approximately 40 million cubic feet equivalent per day with a 6% base decline rate and include proved reserves of approximately 340 Bcfe and 235,000 net acres making this another ideal upstream MLP LLC asset for LINN's portfolio.

Now we first entered the Kansas Hugoton Field with our $1.2 billion acquisition for BP in 2012, which we followed up with this year's announced Exxon Mobil trade, the Devon acquisition, and our $340 million acquisition from Pioneer. These four transactions will establish LINN as the largest operator in the Kansas Hugoton Field, and combined with our Texas Hugoton position, we will have pro forma production of approximately 275 million cubic feet equivalent per day with a low base decline rate of less than 7% and more than 1.6 million net acres. These Hugoton assets will represent approximately 28% of LINN's total proved reserves or approximately 2.2 Tcfe.

In addition to our substantial production or reserve position, we will also own significant interest in two natural gas plants in the area that have combined processing capacity of approximately 690 million cubic feet equivalent per day. Now we have assembled an outstanding operating team in the Hugoton basin and look forward to leveraging their capabilities across this expanded asset position.

In addition to trades and acquisitions, we have also announced plans for divestitures intended to finance recent acquisitions and further optimize our portfolio. In connection with the announced Devon acquisition, we announced the plan divestiture of our position in the prolific Granite Wash in Cleveland place in the Texas Panhandle and Western Oklahoma. These areas are comprised of more than 147,000 net acres, which produced an average of 225 million cubic feet equivalent per day for June of 2014 and are 97% held by production.

Our technical team has identified more than 1900 future drilling locations and over 17 different stack pay zones.

Recently we completed the horizontal well in the Lansing formation in Wheeler County, Texas that had a 30-day rate of 2,243 barrels of oil per day and 2.5 million cubic feet per day. We believe this well is indicative of the high quality of our inventory in the area.

In addition, we developed a substantial integrated network of infrastructure including over a 170 miles of gathering lines, at 30,000 barrel per day oil handling and storage facility and water handling facilities, all of which are capable of supporting a significantly expanded rig program.

Also this week we announced the sale of our rights in the stack play on 26000 undeveloped net acres in the Anadarko Basin for a purchase price of approximately $90 million. We will continue to evaluate our portfolio and believe additional value can be realized from other non-producing acreage positions within the company.

We expect these transactions to have a powerful impact on the financial strength and stability of LINN Energy and have been driven by the goals of reducing our capital intensity and overall decline rate. For 2014 budget, we reduced the combined LINN and Berry Capital by $215 million. Our efforts in 2014 are expected to further reduce our capital run rate by an additional $300 million to $400 million and lower LINN's estimated annual decline rate to approximately 15%.

Looking ahead, I am enthusiastic about further efficiency gains as we prepare our capital budget for 2015.

In closing, I want to thank our employees for their commitment and efforts in achieving these important goals. LINN's past and future success is due to their dedication and professionalism which they demonstrate every day.

Now I will turn the call over to Kolja to discuss guidance and his financial update.

Kolja Rockov

Thanks, Mark. During the second quarter, LINN's oil, natural gas, and NGL revenues were approximately $968 million. We reported a net loss of approximately $208 million or $0.64 per unit for the quarter which includes non-cash losses related to changes in fair value of unsettled commodity derivatives including the reduction of put option premium value overtime of approximately $393 million or $1.20 per unit.

For the second quarter, the company generated net cash provided by operating activities of $481 million and paid distributions to unitholders of $241 million. LINN fully covered its distribution for the quarter and reported approximately $32 million excess of net cash provided by operating activities after distributions and discretionary adjustments.

As many of you know, in early July, we received a favorable ruling by the U.S. District Court for the Southern District of New York. The court dismissed with prejudice a Securities Class Action lawsuit against the company that had been pending since last summer. We are very pleased with the court's ruling, which noted that "plaintiffs are unable to identify as single instance in which LINN's disclosures of how it calculated adjusted EBITDA, DCF, the distribution coverage ratio, or maintenance CapEx were incorrect". The court also stated that the plaintiffs acknowledge that "DCF is a measure of cash flow, yet they contend the cash outlays made in previous periods, should be deducted in a period in which the cash is not paid out", which the judge referred to you as a "demonstrably fraud argument". A PDF of the complete 50 page opinion is available on LINN's website under the Investor Center tab.

Following strong operational performance in the second quarter, driven by organic growth and efficient cost management, we anticipate a continuation of this trend for the balance of 2014. LINN expects production for the third quarter 2014 to average between 1,210 to 1,260 MMcfe per day and is increasing full year 2014 production guidance to a range of 1,217 to 1,268 MMcfe per day from its previous range of 1,075 to 1,135 MMcfe per day.

We expect to fully cover the distribution and generate excess of net cash provided by operating activities after distribution to unitholders and discretionary adjustments of approximately $63 million for the third quarter 2014 and $103 million for the full year.

Guidance for the third and fourth quarters of 2014 includes results from the Mid-Continent assets which the company plans to sell. In addition, third quarter 2014 guidance includes the partial period impact from the pending trade with ExxonMobil and acquisitions from Devon and Pioneer. This revised guidance represents a significant improvement in our results, which is the outcome of the positive steps we have taken over the last several months.

As Mark mentioned, during 2014, we have announced the intent to acquire or trade for approximately $4 billion to $5 billion of new assets, substantially all of which were intended to be funded with internal asset sales or trade. As a result of the $2.3 billion acquisition from Devon, and prior to the planned sale of the Granite Wash assets, LINN entered into a $2.3 billion of committed interim financing, which should provide adequate liquidity.

Since acquiring Berry, and including the intended transactions, we anticipate that we will have to reduce our capital expenditure run rate by approximately $550 million to $650 million and reduced our estimated annual decline rate to approximately 15%, all with little to no negative impact on operating cash flow. These accomplishments could have been in excellent position to deliver stable cash flows and a sound platform for future growth.

As evidenced by significant transaction activity during 2014, we continue to believe the rationalization of the E&P space between growth assets and mature assets is accelerating. LINN is well positioned to take advantage of this trend. LINN is a large liquid entity with excellent access to capital. LinnCo's currency enables us to make C-Corp acquisitions in a tax-efficient structure. And lastly, LINN has the scale and experience to absorb a great deal of transaction activity.

Against this backdrop and with current yields of approximately 9.5% and 10% for LINN and LinnCo respectively, we believe significant potential for yield compression exists.

I would now like to turn the call over to the operator for questions?

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from the line of Brian Corales of Howard Weil.

Brian Corales - Howard Weil

Hey guys. Good quarter. And I know there has been a lot of moving parts lately. What's all this dust settles? I mean, what do you -- what's your ideal kind of debt metrics on either a debt EBITDA or however, you think is best to look at it or how do you want the company to look on to these divestitures?

Kolja Rockov

Brian, this is Kolja. Right now our debt levels we feel pretty comfortable with where they are. But I can tell you that we're estimating that those metrics will improve as a result of all the transactional activity. But for me to give you an exact number I'd have to estimate what the actual sales proceeds and/or trade values would be and just not prepared to do that right now.

But as far as what I'm looking at and what we think it's going to be, we think the debt metrics will look a lot better as a result of the transactions that are contemplated.

Brian Corales - Howard Weil

And Kolja, may be -- let me -- I'll ask a little bit different way. Is -- when -- I mean is it the total corporation being kind of cash flow neutral, when do we see -- when could we see a distribution increase to -- is it debt dependent or is it more cash flow dependent, where does that fit?

Mark Ellis

Yes, Brian this is Mark. Let me take that one. Obviously, what you've seen us do this year is creating an awful lot of stability for the distribution going forward and building an outstanding platform of assets in which to roll upon. We still hold to the premise that distribution growth really for us comes through accretive transactions.

And looking forward with the stability that we've created this year, great platform for growth, we think the market is going to be for additional transactional activity, that's really what's going to drive distribution growth in the future for us.

Brian Corales - Howard Weil

Okay. And I'm going to ask one more and then I'll hop off. So it sounds like you just continue to bolt-on these I mean did a great job in Hugoton so other years you want to bolt-on with shallower declines. Have you -- are you all going to do similar things to earmark other divestitures or once the Granite Wash is kind of monetized? Are most of the divestures kind of been done, there won't be any more major cleanup?

Mark Ellis

Yes. Great question. I would tell you right now the organization has got a pretty whole plate as we sit. I mean, we are actively integrating assets. We obviously have just begun a sales process in the Granite Wash. We've been very active in the trade process in the Permian. So we got a pretty full plate right now.

That being said, we will obviously look at the assets going forward and make sure we have the right assets for long-term, distribution stability, and in the best platform for growth going forward. So I think we're pretty good right now in terms of the activity that we have out there.

Operator

Your next question is from the line of Kevin Smith with Raymond James.

Kevin Smith - Raymond James

Hi. Good morning gentlemen.

Mark Ellis

Good morning, Kevin.

Kevin Smith - Raymond James

Congrats on a nice quarter and really strong guidance.

Mark Ellis

Thanks.

Kevin Smith - Raymond James

Yes. I'd like to spend some time on California. Mark, Arden. You've had now two really good quarters in a row where you delivered 9% sequential production growth from an asset base that most of this aren't expected -- expecting to see those type of numbers. Would you mind commenting on why your production is doing so well? And thoughts on -- and can you keep that base up?

Mark Ellis

Yes, great question Kevin. And I couldn't be more pleased with our folks out in California. We knew they were a great technical team and had a good feel for how to develop those assets through the -- when we bought the Berry transaction. But I would tell you we've been very impressed with the results they have generated.

As far as future growth, we do have a sizable amount of acreage position in the Diatomite for further development. I can let Arden comment on it a little bit. But we would like to continue to expand that presence, because I think we've got pretty well figured out, they're performing quite well. So Arden do you want to add into that?

Arden Walker

Yes. I would just add to what Mark said. We are pleased with the growth we've seen out there. We've actually been a little positively surprised with the some of the Diatomite recently. We've rationally outperforming some of our initial type curves. I think what we will see is continuation of that over the next several years. It may be a little lumpy not given the fact that we have a group of wells come on and then it may be couple quarters before we have enough good group of wells coming on.

So I wouldn't expect it to be at that pace every single quarter, but it think over time, you will see that growth continuing up into the right.

Kevin Smith - Raymond James

Okay. I appreciate that. And then, I guess staying on that subject, Mark would you mind talking about the current operating environment in California. Is there any political discussions that you are watching that could potentially have a negative impact on the operations or development plans?

Mark Ellis

Yes, Kevin, great question. And obviously, we watch the political environment out there quite closely. And I would tell you there is a lot of talk and lot of dialogue. I know there has been a lot of discussion about steam injection. But let me assure you that we are in Kern County; we are not in some other counties in which that activity is taken hold. And there has been no discussion in Kern County that would have any adverse effect on our ability to deliver on our business model and appreciate the future development of our assets.

Kevin Smith - Raymond James

Okay. And then, just one last question or kind of a housekeeping then I'll jump-off. Kind of surprising, your realized NGL price this quarter was so strong, was expecting more of a kind of a step down. Did you may be reject more ethane in 2Q or anything you can kind of comment or attribute to that?

Arden Walker

Well, Kevin, we do. We are continuing to be in ethane rejection mode. But we've been there all years so nothing really has changed from quarter-to-quarter. I would tell you we are in different markets. And when you look at other companies you may see different areas geographical that are stronger or weaker. We have particularly strong NGL pricing contracts in place in a couple of areas, the Granite Wash in particular, as well in the Hugoton Basin area. I think that's what probably helps support our NGL prices that we realize for this quarter. I think when we look out in time there is some weakness in that marketplace and we guided appropriately when you look out for the next two quarters.

Operator

Your next question comes from the line of John Ragozzino with RBC Capital Markets.

John Ragozzino - RBC Capital Markets

Congrats on a solid quarter. Kolja, you mentioned little bit about the second half production guidance. Just want to get a little bit more color on all the moving parts and kind of what the thought process is behind, including the yet to be closed acquisitions, however, not excluding the assets that have been earmarked for sale. I mean, explain to me why that's not double dipping? And historically, in my career I've always seen people update guidance after the fact when deals are closed. So can you just walk me through the thought process there?

Kolja Rockov

Yes. I mean I think what we have with respect to pending acquisitions, we know exactly what those effective dates are going to be and that's always been our practice. When the assets that we might sell or trade those haven't been defined at this point but once those are completed we will go back and remove the impact of that. We just don't have that information to guide to it. So we've guided to what we know. And then, when the other piece becomes apparent we would guide and report to that as well.

But I would tell you also that while there are a lot of moving parts, the second quarter is an absolutely clean quarter. The fourth quarter is an absolutely clean quarter and there is a lot of strength there, absent all the moving parts that are a little bit confusing in the third quarter.

So we are happy with the base business, we're happy with the new acquisitions. And I think our methodology is very consistent. It will be applied when we know what the facts are regarding the pending trades or sales.

John Ragozzino - RBC Capital Markets

Can you may be give us a ballpark estimate of what you think the cash flow impact is? I think that Devon identified about $350 million from the assets that they let go and perhaps of what you guys expect from the Granite Wash? And how that compares when you think about the decline rate differences?

Kolja Rockov

I'm not ready to do that yet just because we don't have the final numbers on the Devon acquisition. But also -- there's just a lot of moving part, John I don't think we're prepared to give you that number at this point. But as you know the Granite Wash on a four rig program is declining so its contribution over time is less, while the Devon assets are fairly flat. So just depends on which period you want to isolate. I think the further out you go, the better that accretion looks. So there are some other variables but all of that will be crystal clear when we close these things in report.

John Ragozzino - RBC Capital Markets

Okay. That's helpful. Just a little bit of housekeeping on some of the liquidity stuff. Can you remind me how I should be thinking about the total enterprise liquidity situation? We've got $1.8 billion of availability on the LINN revolver out of a $4 billion commitment and the Berry revolver has got $1.2 billion of availability. Am I thinking -- am I double counting by saying that you've got $3 billion of availability on the total commitments or is that correct way to think about it?

Mark Ellis

No, you are, the Berry facility is $1.2 billion, which is fully drawn and what I'm not able to utilize that. So when you think about liquidity just look on the LINN side and there we have about $1.75 billion of availability into that line. And going forward, obviously, when the pieces stop moving you'll be able to see what that is. I mean it all depends on what kind of proceeds are generated from the Granite Wash sale. And then what happens with the remainder of the Permian whether that's traded or sold. But with interim financing of $2.3 billion, which matches up with the Devon acquisition, we feel like we've have got plenty of liquidity to get us through the conclusion of those processes.

John Ragozzino - RBC Capital Markets

I apologize. I read the release that's having $1 million of outstanding borrowings as opposed to borrowing capacity so that's my fault. And then as we wait for additional updates on the divestiture processes, you guys have gotten recently upside of the ATM program. Do you expect to rely on that any accelerated matter? Or can you give us an update on what you've done to data on the ATM?

Kolja Rockov

We've done nothing on it. I mean I think we had an ATM and a buyback program on LINE. But I think, we've been a bit remise in terms of just putting in place one for LinnCo as well. So we kind of took this opportunity to do some housekeeping and level set both of those programs to give us flexibility to go either way. But we have not used them and really aren't going guide to what we're going to do there. I mean we just have wait and see.

But again, I think the main message is we've just lined up both programs to be equal to give us flexibility going forward and it's just bit of housekeeping. So just stay tuned for future quarters and we'll see what happens.

John Ragozzino - RBC Capital Markets

Okay. And then going back to the revolver again, when you consider 1.4 Ts is required from Devon, 340 Bs from PXD, 700 Bs from Exxon, and if we just assume that we goes past October 31 before we see a meaningful Mid-Continent divestiture. You're talking 400 million barrels of additional reserves. What type of increase to the revolver would you expect?

Kolja Rockov

Well, I don't know. Honestly, I mean we've got put all those numbers into the process with the banks to figure out what that would be. But that's not really the way we're running the business. I mean I think we're using the $2.3 billion of interim financing to give us time to sell the Granite Wash and trade or sell the remainder of the Permian. And when all that dust settles just conservatively I would say, we'll probably end up in the same place, but there is a chance it could be better.

John Ragozzino - RBC Capital Markets

Okay. And just two more quick ones. Can you perhaps give us a rundown of any additional non-core assets either producing or undeveloped acreage that perhaps hasn't gotten much attention in the past, but may be very right for divesture similar like the STACK play?

Mark Ellis

Yes, John. I mean there is not much I want to draw your attention there. I mean there were some things that we're looking at right now, but I'm not ready to I guess release those in terms of these are the things that we have on the plate. Like I mentioned earlier, on the earlier question, I think that Brian had. We've got of lot on our plate right now with the programs we have out there both from our acquisition and sale process and I think that's enough for the marketplace right now.

John Ragozzino - RBC Capital Markets

Okay. And then just with the disruption and the infrastructure and refining complex in Permian Basin, we saw some meaningful blowouts in the Midland Basin differential for a significant portion of the quarter. Why no adjustments to the crude oil differential guidance and you also saw a slight -- I think an uptick in your NGL price realization is expected that seem like a bit of a surprise, any comment there?

Mark Ellis

Yes. Let me do the NGL one first. We had 38 almost --

John Ragozzino - RBC Capital Markets

I'm sorry, there was a downtick.

Mark Ellis

Yes. But we're being conservative there and projecting more weakness in NGL prices. So we're stepping down from around $38.50 per barrel to $35 flat.

And then, with respect to the Permian, we produce oil obviously in a lot of different region. So what you're looking at is a blend of those numbers. But I can tell you with respect to mid-cush specifically that was about $5.30 off TI in Q1. It was $9 off in Q2. So you had pretty bid degradation and blowout there. Like you said, that probably accounted for about $23 million less revenue quarter one to quarter two for us. But going forward, we're projecting $7.76 in the third quarter and $6.83 in the fourth. And I think that's pretty much flat with what the forward strip is in Q3. And then, in Q4 the strip projects only $3 off. So we're actually conservative by almost $4 a barrel in that number. So I would say with respect to mid-cush we're actually more conservative than the curve. But it's also included in the total for all of the oil producing regions we have. So it's kind of hard for you to split out. But I think I just gave you the details.

Operator

Your next question comes from the line of Praneeth Satish with Wells Fargo.

Praneeth Satish - Wells Fargo

Hey, guys. Good morning. Just a couple quick questions. I guess, first, take through to the guidance run where you think the future decline rate will shakeout. I was just wondering, if you could provide the decline rate may be on a year-by-year basis over the next few years? It's really just for the sake of comparison with some of your peers that give average decline rate?

Kolja Rockov

Praneeth, we really don't have that number. I mean, what we give you is what we see the first 12 months of the calendar year decline rate. We think that's the conservative number and the right number to be talking about. If we were to project that out obviously, it goes down time. But we really think the number that we're providing is the appropriate number.

Mark Ellis

But let me add something to that too. I think when you look at 15% what that includes is all the assets that we earmarked to either trade or sell. It does not include the impact of what assets we might purchase or trade for in that equation, so that number has the chance of going lower. And so, giving you a longer term number is little difficult because we basically have identified more assets to sell or trade than we have identified assets to buy on the back side.

So I think it's pretty conservative what we have given you, because it's a) a one-year number and not a long-term number, so it's the highest decline rate to publish. And then, the second component is, like I said, we haven't spent the proceeds or traded for the assets. And so assuming that those assets are sub 15, that we acquired or trade for that number could be lower.

Praneeth Satish - Wells Fargo

Got it. And then, I saw with the Pioneer acquisition that you are picking up some processing assets or at least interest in a plant. I guess, did you place a lot of value on those assets? Is it a big piece of the overall pie?

Mark Ellis

It was just of the overall program at Pioneer. It is a nice processing facility. That will be operated by us going forward. Now, we have got a really sizable position there in the Hugoton it's going to be interesting to see how and when we deploy our talents across the broader asset position, what all we can get from an operational efficiency standpoint out there. So very encouraged by the positions that we picked up there. Like the integration of the assets.

Praneeth Satish - Wells Fargo

Okay. And just last question for me. I was just wondering, if you could break out how much of the $300 million to $400 million decline in CapEx is growth CapEx versus maintenance CapEx?

Kolja Rockov

Yes. I can't -- no, we don’t break that at this point in time.

Mark Ellis

I mean we have to make assumptions there Praneeth. I mean, I think when you take the CapEx run rate for Permian and the Midland Basin Permian and you take the CapEx run rate for Granite Wash, we come up with a number like $470 million, $480 million. And then, we have new assets that are going to come in, right. So that's why we have netted it down because those new assets will have some capital spending on them. And so, the net we believe to be $300 million to $400 million. So it's kind of you are making some assumptions just to get to the total. And then, to further split that without having identified what assets are coming in, it's just difficult for us to do.

Operator

Your next question comes from the line of Robert Balsamo with UBS.

Robert Balsamo - UBS

How are you doing guys? Thanks for taking my call. I wanted to look at the guidance you guys put out for the full-year CapEx. Could you address the legacy production and kind of how that -- your original guidance would have changed? Obviously, there is an impact to your partial quarter through third quarter in acquisitions --?

Mark Ellis

Yes, I think your question is --

Robert Balsamo - UBS

Quarter-over-quarter?

Mark Ellis

So the question is, how are the legacy assets performing through the course of the year relative the original guidance?

Robert Balsamo - UBS

Correct.

Mark Ellis

Okay. Yes, good question. I mean, obviously, a lot of moving parts in the third quarter. We've looked at that and when we look at it our original program was to generate growth over the course of the year at around 4% and that's exactly what we are on trend to do. Kolja mentioned earlier first and second quarter were purely organic and very clean quarters. And we're actually probably a little bit ahead of our growth targets in both of those quarters. So when we carry that out through the third and fourth quarter, we are really right on track to deliver on the expectations as originally set out.

And I got to tell you, I got to give the organization a lot of credit for executing during some pretty difficult times for us or confusing times for us with all the ins and outs of assets and transactional activity going on. So they're really executing quite well on the operating plan.

Robert Balsamo - UBS

Great. And then, just a follow-up. That 15% decline rate end of the year post Granite Wash, do you get the rough number without the Granite Wash kind of where you are just the acquisitions to-date just so you may have closes in third quarter?

Mark Ellis

No, we didn’t split that out and yeah I don’t have that number up top my head.

Operator

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

Eric Anderson - Hartford Financial

Good morning, great quarter. Couple of questions as I may on the Hugoton assets that you are really seem to be building up a position in. Has there been any thoughts with regard to the second plant that you are going to be picking up from the Pioneer transaction and will be operating to link it to your Jayhawk plant either to provide for redundancy or efficiencies and processing some of the NGLs?

Mark Ellis

Yes, what I would say, I mean good question, obviously, we built a strong position there, I mentioned earlier really looking forward to really looking a development of the entire area now that we have a really large asset position in a great gathering and processing facilities there. So, I think it’s early to say what we might do with the entire facility position there, but obviously we will take everything in a consideration as we look at getting the most out that asset position.

Kolja Rockov

Eric, I would to just add there is infrastructure in place today to move physically move gas between those two facilities and there is gas that moves between those facilities during interruption period. So, it’s not like we get to go out and spend a bunch of money to make that happen. It exists today and we have benefited from that flexibility in the past as two different owners and I think, we’ll continue to benefit in the future as we pump out those facilities.

Eric Anderson - Hartford Financial

I want to add is that one thing is now think about is that I know that after formation has got a fairly decent production of helium which is quite valuable and one of the plants and did a better job in extracting helium than the other.

Mark Ellis

I don’t know about extraction efficiencies; ours is a very efficient plant and we are a major helium producer and do sell a fair amount of helium in our mix.

Eric Anderson - Hartford Financial

And then just as a follow up, if we went back in time to you know in 2012 when you bought the first asset from BP how things evolved compared to your expectations? And I do remember you talked at the time about having a fair degree of excitement about recompletions in the Chase formation. I just wonder how things have evolved over last couple of years and obviously are you happy with the basin or you would be adding to it.

Arden Walker

Eric, this is Arden Walker. What I would tell you there is we’ve had a lot of success on recompletion side, we’ve gone in and I think the numbers were closed to 500 wells. We’ve gone and worked on since 2012 we take over the original BP properties. We think we will have similar types of opportunities with both the Exxon assets, the Devon assets and now the Pioneer properties as we do believe we will have a continuation of opportunities there.

I think addition about we’ve been very successful with our drilling program. We drilled about 40 wells there in 2013. We’ve already drilled about 70 wells of our 80-well program in 2014, very predictable, repeatable type projects. We're getting good returns there. In fact, I will tell you, I'd be expecting to pick up additional rig out there in 2015 to accommodate the now larger portfolio. We see probably of thousand locations out there in inventory to drill. So both on the drilling sides as well as recompletion sides as well as just optimization types of opportunities we’ve been able to drive cost down and I think that’s where we get the leverage of being bigger in a particular area.

Eric Anderson - Hartford Financial

And that’s really not even taking out that some of the Exxon properties are being processed by different plants.

Arden Walker

Not yet

Eric Anderson - Hartford Financial

So I mean that’s potential more outside for you in terms of efficiency.

Arden Walker

That's right.

Operator

Your next question comes from the line with Amy Stepnowski with Hartford.

Amy Stepnowski - Hartford

Hi, I wondered if you could just talk a little bit more about the leverage. You had said on the call that you weren’t worried about where leverage is right now, it could potentially go lower when you close out these transactions, but just from a long-term perspective well, you are satisfied with where it is, is the goal to go lower?

Kolja Rockov

Yes, I mean I think it’s always to go to lower. I mean, I think what I’m trying to say is this where we are now are comfortable particularly because you had a pretty big rotation in the kind of assets that we have, I mean with the onboarding of Berry and then with the announced trade and sales, lowering the decline rate, lowering the capital intensity vis-à-vis the current leverage I think we are comfortable. But you haven’t seen the benefits, I guess you had of the rest of the transactions being completed which I think will bring the leverage ratios down yet again. But overall, I mean, I think our goal is always to try to get that number down to add more stability to hopefully compress both our cost of capital on the equity side and the debt side and make us more competitive going forward. So, I think the Berry transaction went a long way towards reducing our leverage metrics and the things that we are contemplating this year will go a long way again towards reducing them and then will be opportunistic going forward so.

Amy Stepnowski - Hartford

Okay, thanks. And then just one other question on the CapEx. You talked about $500 million to $600 million reduction or decline on the run rate from when you first got Berry. Can you just tell me out with what you consider the run rate to be? The numbers have moved around a bit.

Mark Ellis

Yes, I mean, it was a 1.08 billion with Berry and then we took a $1.550 during the budget process for 2014. And then what we are talking about earlier was when you take the Permian CapEx with the Granite Wash CapEx in that’s Permian Midland area, that’s around 470 million, $480 million total, and then what we said is we’re cutting another $300 million to $400 million. So we’ve made basically an assumption that new assets that we onboard would have a run rate of anywhere from $50 million to $150 million, but until those are identified, it’s very hard to be more specific. So that’s the best estimate we can give right now. But that’s still like you pointed out $500 million, $600 million is a pretty dramatic move.

And then the sort of the icing on the cake as we think we done it without much degradation in cash flow generation. So that’s kind of what the run rate is, and I can’t get any more granular in that until we identified the specific assets that are going to be bordered or traded for what’s been announced.

Operator

Your next question comes from Monroe Helm with Barrow Hanley.

Monroe Helm - Barrow Hanley

Congratulations on executing your game plan. Just two core questions, historically you’ve been able to get some production out from your acquisitions in the Ford market with Ford gas curve doesn’t look very good right now. Can you talk about how that’s impacting your goals and make acquisitions at this point in time and what you can do to offset this, anything or you just kind of let your hedge position decline over time as far as Fiasco’s not come back with certain quotient?

Mark Ellis

Yes, Munroe, great question, I think when you look at all the different moving pieces, I mean you have the Devon assets coming in which are primarily gassy and then you have the Granite Wash assets coming out which were also primarily gassy and some of the other moving pieces. We actually feel like the hedge book -- I mean, we will have to wait till our rating is completed obviously but right now the hedge book the way it is, it’s actually pretty good covering us on all the moving pieces. So we don’t feel like we need to add or subtract to it at all, but going forward the strip at $4 and change for five years, it’s kind of what we plug into incremental acquisitions. And so that’s kind of give you an answer that drives what your bids going to be. We haven’t seen that be a strategic disadvantage in any material way.

And then the other piece to think about is in California, we’re consuming quite a bit of natural gas. So what we’re trying to do post Berry is be unhedged on that piece, so you have kind of a natural hedge to your LOE input there. And so that’s I guess the recent acquisitions we've made. If you think about it, we have added a lot of gas, but we haven't intended to hedge that because that's sort of a natural hedge against the inputs for steam generation in California. So its longest winded way of saying that at the end of all this shuffling the hedge book we have now actually covers us exactly where we want to be, so no incremental needed.

Monroe Helm - Barrow Hanley

All right. I assume that would be the case with the assets swaps. Just wondering about going forward if you need to -- you found attractive asset sets to acquire and given the forward curve I mean you need to sell some other gas assets we already have hedged in place or would you like to hedge position decline over time for the right asset?

Kolja Rockov

No. No, what we would do is, I think we would incorporate what that gas strip is going forward into our bid economics and that would give you an answer. And if that's not competitive then --

Mark Ellis

We don't.

Kolja Rockov

We may not win. But I haven't seen that be an issue. I think that's little bit more of an issue on the oil side with the big degradation. I mean, the gas cure has a little bit of a U in it, but over a five year period it's kind of fairly flat.

Monroe Helm - Barrow Hanley

Right.

Mark Ellis

So I haven't seen that really be much of an issue.

Monroe Helm - Barrow Hanley

Okay. On the Granite Wash, I assume that -- are the dead rims already open? And is this asset you think more likely to be sold or swapped?

Mark Ellis

This is a cash sale is what we are looking at. The data that you are running, data is available. We've had a tremendous amount of interest it its process. So really looking forward to concluding the process as we look at over the next several months.

Monroe Helm - Barrow Hanley

Okay. So it would be a this year event, in your opinion?

Mark Ellis

We like it would be this year even absolutely.

Operator

And we have time for one more question. Your final question comes from the line of Gary Stromberg with Barclays.

Gary Stromberg - Barclays

Just a follow-up to Amy's question on CapEx. On guidance for full year 2014 CapEx should we still look at $1.55 billion or $1.6 billion?

Arden Walker

I think that's right, Gary. I mean, the assets that are coming into the company, the spending this year is very minimal, if any. So yes, I think that's a good number.

Gary Stromberg - Barclays

Okay. And then, second question. Just timing on the Permian sale or swap, is that also you think in the next couple months?

Kolja Rockov

Yes. Gary, we are still active on number of those packages. Obviously, we have got the one closing that's coming up and like we said on the 15 of August is the first tray that we have announced. Any other activity will be later this year. But we would like to conclude something this year on the remaining position of the Permian as well.

Gary Stromberg - Barclays

And would it be sold as one package or could it be multiple packages?

Kolja Rockov

It could be either.

Operator

And there are no further questions at this time. I would now like to turn the conference back over to Mark Ellis, CEO.

Mark Ellis

Okay. Well, thanks. And thanks everyone for participating this morning. That concludes our call.

Operator

Thank you. This does conclude today's conference call.

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