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SandRidge Energy (NYSE:SD)

Q1 2011 Earnings Call

May 06, 2011 9:00 am ET

Executives

James Bennett - Chief Financial Officer and Executive Vice President

Unknown Executive -

Matthew Grubb - President and Chief Operating Officer

Tom Ward - Chairman of the Board and Chief Executive Officer

Analysts

Daniel Morrison - Global Hunter Securities, LLC

Philip Dodge - Stanford Group Company

Scott Hanold - RBC Capital Markets, LLC

Unknown Speaker

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Amir Arif - Stifel, Nicolaus & Co., Inc.

David Kistler - Simmons & Company

William Butler - Stephens Inc.

Michael Breard - Hodges Capital Management

Duane Grubert - Susquehanna Financial Group, LLLP

Joseph Stewart - KeyBanc Capital Markets Inc.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Unknown Analyst -

Noel Parks - Ladenburg Thalmann & Co. Inc.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 SandRidge Energy Incorporated Earnings Conference Call. My name is Kiana, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now I'd like to turn the call over to Mr. James Bennett, Chief Financial Officer. Please proceed,

James Bennett

Thank you, Kiana. Welcome, everyone, and thank you for joining us on our first quarter 2011 earnings call. This is James Bennett, Chief Financial Officer. With us today, we have Tom Ward, Chairman and Chief Executive Officer; Matt Grubb, President and Chief Operating Officer; and Kevin White, Senior Vice President of Business Development.

Please note that today's call will contain forward-looking statements and assumptions, which are subject to inherent risks and uncertainties. The actual results may differ materially from those projected in these forward-looking statements. Additionally, we'll make reference to adjusted net income, adjusted EBITDA and other non-GAAP financial measures. A reconciliation of any non-GAAP numbers that we discuss can be found in our earnings release and on our website. Now let me turn the call over to Tom Ward.

Tom Ward

Thank you, James, and welcome to our first quarter financial and operations update. I'll lead with a few opening remarks and turn over to Matt and James.

For the last 2 years, we've had a very simple and focused strategy of acquiring and drilling for shallow conventional oil and carbonate reservoirs. We initiated our acquisition of oil by focusing on the Permian Basin because of the tremendous source rocks and production that have been developed over the last 80 years. The Permian Basin is the largest oil-producing basin in the Continental U.S. with over 29 billion barrels of oil produced. After focusing on the Permian, we decided to further focus on the Central Basin Platform as our core area of interest. The CBP has produced over 12 billion barrels of oil from only 3 million acres, defining the best oil-producing area within the best oil-producing basin.

We made 2 acquisitions with a net investment of $1.8 billion. It's now worth over $3.2 billion, showing a growth to investment of nearly $1,400,000,000 in than a year. Not only have we made tremendous value growth, we now have nearly 10 years' worth of drilling even though we drill over 800 wells per year and own over 185,000 acres of prime land. Plus, we did not have to spend capital on expensive non-EBITDA-producing acreage.

At the same time, as we are acquiring on the Central Basin Platform, we targeted another shallow carbonate oil play in the Mid-Continent. The Horizontal Mississippian play is now recognized as one of the premier shallow oil projects in the U.S. SandRidge storage [ph] worked this area in 2007 by drilling less than a dozen vertical wells. However, as we developed the idea that there were tremendous amounts of oil in place over a very large area, we stepped up and drilled horizontally nearly 30 miles away and found the same great reservoir. This gave us confidence to buy one of the industry's leading acreage positions at a very low cost. We now have 12 rigs drilling and are projecting to double our rig count in 2012.

We have said that we can only hold approximately half of our projected 1 million acres over the next 5 years if we keep our CapEx flat at its current level. Therefore, we're now reviewing 3 ways to fund the doubling of our rig count next year: we can either sell a portion of our acreage or joint venture with another entity; form additional royalty trusts; or raise CapEx within SandRidge. We've not decided which way or ways that we will fund the drilling, but we are now planning for increased Mississippian rig count in 2012. We currently are spending approximately $300 million per year drilling in the Miss in our $1.3 billion budget.

The Mississippian continues to gain traction as 9 operators are now active in the play with 24 total rigs running. SandRidge has drilled 72 horizontal wells to date, and our average 30-day IP has increased to 270 barrels a day versus the 244 barrel a day equivalent-type curve that produces 409,000 barrels equivalent of reserves.

It is also important to note that our drilling now spans across an area greater than 100 miles east to west. An industry drilling has proven up the play beyond that distance. Vertical well performance suggests the western portion of the play to be statistically better. But we don't have enough horizontal well information to verify at this time. This is important as most of our acreage is in Grant County, Oklahoma and West. We also believe reservoir thickness is good, and we have kept our acreage acquisition in the region of the play with anticipated gross thickness of 200 to 800 feet of Mississippian reservoir. Both of these areas we drill in have tremendous rates of return because we drill for oil and because the costs are low due to the shallow reservoir depths.

We continue to see very little pressure on overall costs in these plays due to the current availability of equipment in both drilling and stimulation services. We believe this is one of the distinguishing factors of our company. Even though we do not see the potential for material increases in costs today, we believe there will be competition for drilling services in the next year as we anticipate a continued ramp-up of industry activity in the Mississippian play due to robust economics and strong oil prices. Therefore, we are moving ahead aggressively to lock in rigs for our 24-rig program next year. Perhaps even more important than any slight increases in cost is that we want the assurance that we can accelerate drilling where each type curve well has a PV-10 of nearly $7 million at current oil and gas strip.

The other distinguishing factor is the development of our business units that have size and scale, along with a shallow carbonate oil and, in the case of the Central Basin Platform, no ability to duplicate the assets that we have assembled. We have successfully integrated our company into a business with high rates of return, with very little pressure of cost inflation and very little reservoir risk. We believe we are singular in our ability to make this claim. We also believe that if a company has this ability, we should hedge to lock in rates of return and drill as aggressively as possible. So you've seen us hedge nearly 25 million barrels through 2013, and we're now starting to hedge even further out and move forward with our plan to raise capital to meet the growing drilling schedule.

The focus for SandRidge during the rest of 2011 is to fully fund our 2012 drilling plans and ensure we can capitalize on their tremendous rates of return we realize in on both the Central Basin Platform and the Mississippian play. I'll now turn the call over to Matt for an operational update.

Matthew Grubb

Thanks, Tom, and good morning to everybody. I will elaborate more about our production drilling performance, CapEx and LOE.

First, I will walk through a reconciliation of our Q1 production. If we can start by going back to Q4 of 2010, we produced 28,400 barrels of oil per day and 204 million cubic feet of gas per day for a total of 62,400 barrels of oil equivalent per day in Q4. In Q1 2011, we produced 28,700 barrels of oil per day and 192 million cubic feet of gas per day for a total of 60,700 barrels of oil equivalent per day.

Q1 2011 production was slightly lower than Q4 of 2010 production due to the sale of the Wolfberry assets and the severe freezing weather that SandRidge and other operators experienced in West Texas. In the month of February, we had below-freezing temperatures for about 2 weeks and single-digit temperatures and the rolling blackouts for several days during that period. We believe these extreme conditions were 30-year, if not 50-year, weather events in the Permian Basin.

The sale of the Wolfberry assets account for about 1,600 barrels of oil equivalent per day, and the weather-related downtime amount to another 1,900 barrels of oil equivalent per day for a total impact of about 3,500 barrels of oil equivalent per day in Q1. If we add this back into our Q1 production, we would have produced 64,200 barrels of oil equivalent per day, and we'd have seen a 2.9% production gain quarter-over-quarter instead of a 2.7 production loss, 2.7% production loss. As a result, there was nearly a 6% production swing due to the sale and the weather.

In regard to oil production, we produced 28,400 barrels of oil in Q4 of 2010 and 28 -- I'm sorry, we produced 28,400 barrels of oil in Q4 of 2010 and 28,700 barrels of oil in Q1 2011. Despite the Wolfberry sale and the ice storm, we were still able to increase our oil production quarter-over-quarter. The impact on oil production due to the sale and the weather was about 2,900 barrels of oil per day. If we add this back in, we would have produced 31,600 barrels of oil per day in Q1 of 2011 for about an 11% growth in oil production quarter-over-quarter.

I would also like at this time to comment a little bit about Q2 production. As you are aware, we closed on the sale of our New Mexico assets April 1 of 2011. As you're also aware, West Texas was plagued with wildfires in early April. We estimate the net impact on Q2 production from these events to be about 1,770 barrels of oil equivalent per day, of which about 1,500 barrels of oil equivalent per day is from an asset sale. At this time, all the fires are out and production has been restored to normal on the Central Basin Platform.

I'm pleased to say that within only about a month of selling our New Mexico assets, we have already made up the 1,500 barrels of oil equivalent per day of production that's associated with that sale through our drilling success on the Central Basin Platform.

The average production for the first 4 days of May or our current production is running 63,400 barrels of oil equivalent per day, which matches our Q4 2010 production. Not only are we on track with our 2011 production plan, but we are -- but we have also already made up the 3,100 barrels of oil equivalent per day that we sold in Q1 and early Q2 of this year. With that said, at this time, despite the setbacks due to the bad weather and the fires, we are reaffirming our 2011 production guidance of 23.3 million barrels of oil equivalent, of which 12.3 million barrels of oil -- 12.3 million barrels is oil.

The strong growth in oil production is a result of our continued commitment, focus and execution on our 2 core oil plays in the Central Basin Platform in West Texas and the Mississippian horizontal play in the Mid-Continent. We drilled 199 wells on the Central Basin Platform with 16 rigs in the first quarter.

Q1 capital spending in the Permian Basin was about $173 million, of which $33 million was carried over from prior year spending. Netting out the carried over capital, we spent about $700,000 per well. This is in line with our expectations to spend $760,000 per well on the Central Basin Platform. The cost number may move from quarter-to-quarter on a per well basis as our drilling mix of wells may change from quarter-to-quarter. However, at a cost of $760,000 per well and a type curve EUR of 83,000 barrels of oil equivalent per well, the rate of return is about 100% at current commodity prices. We plan to continue with 16 rigs and project to drill 811 oil wells on the platform this year.

In the Mississippian play, we drilled 23 horizontal producers and 14 saltwater disposal wells in the first quarter of 2011. We plan to drill 138 horizontal producers and 24 saltwater disposal wells for the year. In the first quarter, we had 8 rigs running and drilling horizontal wells and 4 rigs drilling vertical wells. Currently, we have 11 rigs drilling horizontal producers and one rig drilling saltwater disposal wells. We plan to add one more rig at the end of the month to drill the horizontal wells, bringing the total to 12 rigs drilling producers. This is in line with our Mississippian drilling plan that we set forth at the beginning of this year.

Excluding land, we spent $102 million in the Mississippian play in the first quarter of 2011. Approximately $26 million was spent on saltwater disposal wells and associated facilities. As you can see, we have very much front-loaded the CapEx in this play with aggressive drilling of the saltwater disposal wells to facilitate implementation of our development plan and minimize LOE going forward.

Of the remaining $76 million, approximately $18 million can be attributed to prior year carryover and non-op capital. This leaves us spending $58 million drilling and completing 23 gross wells or 20 net wells. That's an average of $2.9 million per well.

We began the Miss program in early 2010, drilling the horizontal wells in about 30 days and was consistently spending $3 million to $3.5 million per well. We've made significant strides in 2010, bringing the average down to about 22 days and drilling a number of wells under 20 days and hit a record of 14 days on one well from spud to rig release.

During this time, our costs began trending down to about the $2.7 million range. I believe had we kept a constant rig count, we could have brought our costs even lower. However, as we started ramping up our Miss drilling program going into 2011, our well costs crept back up. We believe that in time, we can again lower the well costs in the Miss play. But today, we still have inefficiencies associated with bringing on new rigs and new crews into the play.

Today, we have not seen material increases in service costs in the Miss play. This is due to the fact that activity in the Miss is driven by smaller rigs, lower horsepower requirements for stimulation and simple fluid and prop systems in the fracs. However, due to the robust economics in the Miss play, the scale of the play and increased interest from other industry participants, we do expect increasing rig count and some cost pressure going forward but not to the extent that our industry has experienced in other horizontal plays around the country. However, in anticipation of this, we are proactively locking in rig rates, frac rates and putting a plan together to move in more company-owned rigs to hedge against potential inflation in service costs as we begin to plan for 2012.

We have shown in our presentations that a $2.7 million CapEx, which include saltwater disposal facilities, the rate of return is about 150%. Even at $3.1 million, which is $2.9 million to drill and $200,000 for saltwater disposal facilities, the rate of return is very robust, 115%. The economics here are very good, and we don't see a service cost scenario that would have us altering our business plan in the Mississippian play.

We are still using a Netherland Sewell type

Curve with an EUR of 409,000 barrels of oil equivalent and a 30-day IP of 244 barrels of oil equivalent per day. We have drilled 72 horizontal Miss wells to date, and the average 30-day IP of the last 50 wells is about 270 barrels of oil equivalent -- sorry 250,000 barrels of oil equivalent per day. That's slightly higher than 30-day IP of the type curve.

It should also be noted that we have expanded our program east into Grant County. While the data set is still limited as we only have 13 wells online, it appears that these wells are statistically as good as the ones we drilled ourselves in Woods County.

Lastly, LOE for the quarter, excluding production taxes, was $13.55 per barrel of oil equivalent. This exceeded the high range of our LOE guidance of $13.10 per barrel of oil equivalent. We discussed earlier about production downtime due to the severe cold weather in the Permian Basin. The production loss due to the winter storm was 173 -- 174,000 barrels of oil equivalent in Q1. The associated LOE to restore production was about $300,000. Notwithstanding this loss and associated onetime expenses to restore production, our LOE would have been $13.08 per BOE and within our guidance range. At this time, I will turn the call over to James for financials.

James Bennett

Thank you, Matt. I don't plan to recite every number in our release, but I'll touch on a few of the items warranting further discussion.

For the first quarter, adjusted net loss was $10.1 million or $0.02 per diluted share. Adjusted EBITDA was $146 million, and operating cash flow was $100 million. EBITDA is up 12% versus the fourth quarter of 2010 and 4% versus the comparable period in 2010 as a result of higher oil production and higher realized oil prices, somewhat offset by a decline in gas production and lower realized gas prices.

On the expense side, total lease operating expense increased approximately $24 million over the first quarter 2010 as a result of the Arena acquisition, which closed in July of last year as, as well as an increase in total production and a higher percentage contribution from oil. Oil production in the first quarter of 2010 was 47% of the total versus 28% in the first quarter of 2010.

On a per-unit basis, lease operating expense is $13.55 per barrel oil equivalent. It was approximately $2 per barrel higher than the 2010 comparable period and slightly above our guidance of $13.10. And as Matt discussed, the primary reason for this higher per-unit LOE in the first quarter was an interruption in production and an increase in onetime costs due to the severe weather and associated freeze in the Permian Basin. Excluding the weather-related impacts, LOE would be right at the high end of our guidance.

All other expense items were in line with the guidance range, and we are reaffirming our full year guidance. Our earnings release includes an updated guidance table. The only 2 changes to note in the guidance are slightly higher oil differentials due to a higher production contribution from NGLs and the impact of SandRidge Mississippian Trust I, which I will review later in the call. Matt addressed the Q1 production details, so I won't spend any more time on that, except to reiterate that we remain comfortable with our full year guidance of 23.3 million barrel oil equivalent.

Let me touch on first quarter CapEx, which totaled $420 million. When we gave our 2011 guidance, we knew that CapEx would be front-end weighted with a disproportionate amount of the spend in the first quarter. This was due to carryover CapEx from 2010, the fact that we're drilling a disproportionate number of our Mississippian saltwater disposal wells earlier in the year and our acreage leasing program in the Mississippian. In the first quarter, we had $52 million of drilling CapEx carryover from 2010, mostly in the Permian and Mid-Continent. We also had $26 million related to the drilling of 14 saltwater disposal wells. Our guidance assumes 24 saltwater disposal wells will be drilled in all of 2011. So you can see that this was heavily weighted towards Q1 as we operationally wanted to get the saltwater disposal infrastructure in place prior to redrilling a majority of the producing wells.

On leasehold, we did spend just over $100 million, which is essentially our full year guidance. 95% of this spend was in the Mississippian play where we continue to see opportunities to pick up good acreage and acreage offsetting our existing production. We've slowed the pace of our land purchases but do expect to spend some additional dollars on acreage. And we will revisit land CapEx guidance around the time of our mid-year earnings call.

We remain very active in terms of our capital raising program. Recall that our 2011 guidance called for CapEx of $1.3 billion on cash flows from operations of approximately $470 million. Our intent remains to fully fund any shortfall with non-debt sources of capital and the IPO of our first royalty trust. Our capital raising efforts are ahead of schedule as we have raised approximately $800 million year-to-date.

To review the royalty trust, in April we closed the IPO of the 62% interest in SandRidge Mississippian Trust I, which trades under the ticker SDT. The IPO was upsized 20% and priced at $21 per unit, the high end of the range, netting proceeds to SandRidge of $334 million after fees. Having almost fully funded our 2011 CapEx plan, we'll continue our capital-raising efforts and are now focused on funding our 2012 program, which we will also accomplish through additional asset monetizations.

Turning now to our liquidity and balance sheet. On March 31, we had a total of $3.2 billion of debt outstanding, consisting of $2.8 billion of senior notes, $324 million outstanding under our senior credit facility and $17 million of other debt. As I discussed earlier, in April, we raised $534 million in proceeds from asset sales and the SDT IPO. Proceeds from these transactions were used to repay revolver borrowings and have put us in an excellent liquidity position. As of May 3, we have $62 million of cash on the balance sheet and 0 outstandings under our $790 million credit facility, giving us total liquidity of $828 million. This $534 million in debt pay down in April also reduced our quarter-end leverage by 0.75 of return of EBITDA. While we still have some improvement to make in terms of our financial leverage, we are now moving in the right direction, and we'll continue to address this. As we have noted, we're [indiscernible] cash flow this year but are doing so from 100% non-debt sources and don't look to increase our debt levels in 2011.

Two other items to note in terms of our liabilities. Our senior credit facility borrowing base was reaffirmed in April at $790 million, and our next redetermination will be later this fall. Also, in March, we refinanced our $650 million 8 5/8% senior notes with a new 10-year $900 million issue of 7 1/2% senior notes. This transaction enabled us to extend our weighted average maturity of our bond to 7.5 years from 5.8 years and also reduced our weighted average cost of debt. We now have a staggered maturity schedule with only $350 in million bonds maturing in the 2014-2015 time frame.

We continue to actively hedge our out-years of oil production. To summarize our updated hedge position, which is outlined in our earnings release. Since our Q4 earnings call, we have added oil hedges in the form of swaps for 4.5 million barrels at an average price of $102 per barrel. In March and April, we also monetized approximately 42 Bcf of our 2011 and 2012 gas hedges as we entered a trough in the natural gas market. For the remaining 3 quarters of the year, we have approximately 80% of our guidance liquids production hedged at just under $87 a barrel, and 39% of our gas production guidance hedged at $4.62 for a total of 55% of our remaining total expected production hedged.

A couple of notes regarding SandRidge Mississippian Trust I. In terms of accounting for the trust, beginning in April 2011, the activities of the trust will be consolidated in SandRidge's financial statements. The public's interest in the net assets of the trust, which consists of 17.25 million units or about 62% of the total units, will be reflected in the non-controlling interest line item of the balance sheet. And the public's interest in the earnings of the trust will be reflected as net income attributable to non-controlling interest in the income statement. As outlined in our updated guidance table, we estimate net income attributable to non-controlling interest to be approximately $26 million in 2011.

There's additional disclosure regarding the accounting for the trust in the SandRidge 10-Q, which will be released on Monday, May 9. Later this month, we'll be filing our first quarter 10-Q for SandRidge Mississippian Trust. And beginning with the second quarter, we'll release earnings for SDT, and will be hosting a separate SDT quarterly conference call.

This concludes management's prepared remarks. I would like to ask the operator to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Neal Dingmann with SunTrust.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

A question, Tom. You mentioned about going to Grant, Woods, obviously, besides Alfalfa County in the Horizontal Mississippian. I'm just wondering kind of. I know it's early but how you're seeing that. Maybe if you could give a little more color as far as kind of how you're seeing that play out as far as thickness, liquidity, et cetera, on that.

Tom Ward

Sure. We target between 200 to 800 feet of total thickness in the Miss. Grant, as we've talked about, has a little bit -- vertically -- from the vertical wells, has a little bit higher oil ratio than further west. However, the estimated ultimate recoveries are somewhat better vertically to the west. So we've -- but the value between oil and gas on the vertical wells is about the same. So we've always looked at Grant, Alfalfa and Woods as -- and even clear out to Comanche in Kansas as being basically the same type of reservoir to drill for. And so far, in the wells we're drilling, statistically it looks just like the other areas we're drilling in. It is early, but we've now drilled over a dozen wells. We're producing over a dozen wells, and it appears that they're the type curve-type wells.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Oh, good to hear. And then, Tom, at one point, I think maybe at the Analyst Day, you had talked about given what's going on in Cushing about trying to divert some of your takeaway. Just wondering what it's about: sort of takeaway pipeline, et cetera. If you could comment there.

Tom Ward

Sure. The only plays that we look to divert away from Cushing is out of the Permian Basin. And that is still ongoing with discussions. And Matt, do you want to address that?

Matthew Grubb

Yes, Neal, there's -- unfortunately, there's not any short-term solutions. What's going on in Cushing right now is, as you know, there's about 50 million barrels of oil storage capacity. And just in the last 3 years, we've gone from about 17 million to about 40 million barrels inventory. The storage is filling out. How about -- by the end of this year, there are 4 companies that is adding storage. So we should see about -- that 50 million going to about 65 million of storage capacity. That'll give us some relief. However, as far as pipe coming out of Cushing, I know we in Ridge are looking at projects as well as TransCanada and some other parties. But we're publicly realistic 2 years out from build to hauling more oil out of Cushing into the Gulf Coast via pipeline. We are looking at a project, and -- that Magellan is looking at potentially reversing what they call their longhorn line from Crane County back to the Gulf Coast. And that may -- I think there's a lot of interest in that. We're certainly interested in doing that just to get a little bit of oil away from Cushing. But still, that's probably 18 months out.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Got it. Got it. And then the last question, maybe for you, Tom, is just on, or maybe for Matt, is just on service costs in general. Obviously, yours are much lower than a lot of the other regions out there. But are you doing anything to lock in long-term contracts like a lot of others who are out there? Or just on completions in general if you could comment.

Tom Ward

We are effectively hedged on the drilling side with the rigs that we own. And we look at the areas a little bit differently. In the Central Basin Platform, we use even less horsepower on our fracs than even in the Mississippian. But both of them are low-horsepower fracs. The Central Basin Platform has really very little service cost creep, except especially the very shallow vertical wells we drill. As you get into horizontal wells and move up from the 500- to 750-horsepower rigs up into the 1,000-horsepower rigs, we think there could be, as we look out into the future, some future costs creep in, in the area, and that's what we're going to try to keep away from. As you think about this, we were planning to go from 12 rigs at least 24 rigs next year. We know that other people in the play have bought very large amounts of acreage, and we assume that they will be moving up rig counts either through private equity or public companies as they start to develop the play. All of the Mississippian isn't that much different in this respect in that you only have a certain time period to get wells drilled. Now for us, fortunately, we were there early and have 3 years with 2-year options. So on very inexpensive leases. But lately, companies are having to take shorter and shorter term in order to get a hold of leases. And that will require more rigs to come in the area. So we anticipate that the Mississippian will have some kind of a pressure going forward in service costs, but not from high-pressure equipment that's being pressured around the United States in a lot of different areas. So it's different, but still we'll have some -- the Central Basin Platform, we just don't see anything other than labor and fuel as being an issue.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Got it. Okay, good answer.

Operator

And our next question is comes from Scott Hanold with RBC Capital Markets.

Scott Hanold - RBC Capital Markets, LLC

Hey, Tom, you all talked about 3 options. Obviously, the fund gets to a much higher level of activity in the city next year. When you look at those options, can you kind of just broadly give us a description of how you think of each one of those and maybe your preference at this point?

Tom Ward

Sure. The royalty trust structure, we like a lot. We continue -- if you have rates of return in excess of 100% and you have willing buyers at 10% rates of return and if you can do that in more scale, that would be our preference across the whole play. The problem is, as you know, is that they'd only -- we only had 42,000 acres in our AMI on the royalty trust that we just did. We will continue to look at that as an alternative moving forward. And along with that, we were interested in talking to potential partners for a joint venture. We don't know in what size that would be, but that's something that we'll evaluate. And the third option is that we just we keep more ourself. And so everything we're doing is with the idea that we like the play more than we did the last quarter, and we want to own more of this ourselves. So that is what we're trying to move towards.

Scott Hanold - RBC Capital Markets, LLC

When do you feel you all need to make a decision on which way you go? I mean, should we expect sometime in early second half of the year? Is that something closer to the end of the year you -- I mean, how long -- when do you think you -- when do you want to have financing taken care of?

Tom Ward

We want to have financing taken care of for 2012, before the end of 2011. So I think you'll start to see us be active throughout the rest of the year, just like we were at the beginning of this year or sort of last year. So, I mean, what I focus on the most is making sure that we fund next year's drilling program.

Scott Hanold - RBC Capital Markets, LLC

Okay, good answer. And on the -- I think you mentioned you're going to move some more company-owned rigs in the Mississippian. And would those be coming from the Permian? Because correct me if I'm wrong but you're operating all your owned rigs, am I correct?

Tom Ward

We have some that are working for other parties right now. We have 10 rigs that are working outside.

Scott Hanold - RBC Capital Markets, LLC

Okay, so you'll be able to take those back? Is that right?

Tom Ward

We can do that. Or we can also -- you have the same effective hedges if you hire somebody else and leave your rigs in the Permian. We are planning to move some rigs up.

Scott Hanold - RBC Capital Markets, LLC

Oh, okay. And one last question, if I could. When do you plan to start stepping out to the Northwest like Comanche County? When is that first well going to be drilled?

Tom Ward

Now.

Scott Hanold - RBC Capital Markets, LLC

Now? Okay.

Tom Ward

Yes, we have one well drilling in Comanche County or completing.

Scott Hanold - RBC Capital Markets, LLC

That's great.

Operator

Our next question comes from David Heikkinen with Tudor, Pickering, Holt.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Tom, just on the rig commitment and the services side. Can you talk about the duration or type of commitments you're doing as you go to 12 rigs? And then I think kind of last question was getting into the vertical integration and desire to really vertically integrate the Mississippian as well. Just kind of general thoughts.

Tom Ward

Sure, I'll take the vertical integration. When we came into the company, we already had a number of rigs. We still have 31 rigs today. It's been very efficient for us to have our own people working in the same area for long periods of time in the Permian Basin. We've brought some of those rigs up. But 6 of our 12 rigs working are Lariat rigs, which are company-owned, and we've been happy with that model of owning some of our own rigs. However, at the same time, we have other rig companies that are working for us that, as they move into the play and work for a while, are also very efficient. And I'll let Matt address how we're planning to move forward with the rig count.

Matthew Grubb

Yes. Right now, we have -- about half the rigs drilling in the Miss play we do own. So we have about 6 rigs out there that are third-party. And they're on various contracts. We have some that are 6 months contracts to a year contract, and we're continuing to renegotiate or negotiate those for 2012 already. We've also had some 24-month contracts that we're working on for the 2012 program. So they're different contracts, but I'll tell you, the rates are still very good, and they haven't materially increased very much.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

And so does it have a ladder kind of 6-, 12-, 24-month rolling contracts on the 12 rigs?

Matthew Grubb

It is but -- yes, it is a ladder. And when we're trying to source rigs today for our '12 program, those are the ones that are coming in at 24 months, because what they're going to do is take them off whatever program they're on now and commit them to us starting, say, in January -- first quarter of 2012.

Tom Ward

And then, Dave, think of this just that the -- we use a range of 750-horsepower to 1,000-horsepower rigs. So our preference is not to have to bring out rigs that are stacked and put them to work. We have done that. But our preference is to keep rigs that have been working in other places and bring them into the play so that our efficiencies are good. I don't think we'll have an issue getting rigs unless other companies are going to move up to 25 or 30 rigs, and that's where we worry. Today, there's not an issue with getting rigs. It's just that we know there is a lot of acreage being bought by several different companies, and we just assume that rig count will be going up. So if you look at the market of 750-horsepower rigs, heavy 800- to 1,000-horsepower rigs, today there's ample rig capacity. So all we're doing is looking out to 2012, making an assumption that the Mississippian grows rather than stagnates.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

And then on the water disposal side, I mean, water disposals take a lot of fluids. As you double your activity level, how much capital would you have to put into water disposal next year? Can you talk about that?

Matthew Grubb

Yes, I'll address that a little bit. It depends a lot on where we drill. Because right now, even with one or 2 wells, we're drilling disposal for it. So we minimize LOE and we'll grow into the disposal plan. I'll tell you right now we have 24 disposal wells in operation. By the end of this year, we should have around 30. And currently, or our current disposal volume is for 150,000 barrels of water per day. The disposal capacity we have is over 400,000 barrels per day. So the main reason we upfront-loaded our disposal well is so we can continue to develop these wells and not have -- not be behind in disposal wells. I think by the end of this year, we should be pretty good for 2012.

Tom Ward

And I think, too, that as we drill -- or as we drill new areas, that requires some new disposal systems. So we will continue to have some frac costs as we continue to look into new areas. So as you think about output to Grant, those are all in one disposal system, but the pipeline system can be connected in between disposal wells. So it really depends how successful we are in all the other areas. We assume we're going to have successes, so maybe I could even say it depends on how quickly we decide to step out into different areas and test new areas. Even though there's vertical well production there, we probably will move around and drill horizontal wells in different areas. So that's -- it's not set in stone as to how many disposals we'll have because it depends where the horizontal well program goes.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, so thinking about that 24-rig program, how much would be step-outs? Is it 1/3, 1/4? I'm just trying to get an idea of how should I allocate capital.

Tom Ward

Well, let's -- I think that, I mean, it's hard for me to say because at one time, the Grant County wells were considered step-outs and now they're not. So when we drilled the disposal system in Grant County, it was considered a step-out. And now it's just basically hooking into the Alfalfa County system.

Operator

And our next question comes from William Butler with Stephens.

William Butler - Stephens Inc.

I was wondering if you could provide some more detail on percentage of liquids production with NGLs?

Tom Ward

Sure. I'll let Matt take that.

Matthew Grubb

Yes. In Q1, we ran about 18% NGL. We had actually modeled a little bit lower than that, around 14% NGL. And the reason the NGL was higher was that it was not at the expense of oil production. But we did renegotiate some contracts in our favor with the processes in West Texas, which boosted our NGL netbacks. So we okayed the plans.

William Butler - Stephens Inc.

So just to clarify. The 18%, is that as a percent of total production of oil or liquids production? Sorry.

Matthew Grubb

Liquids.

William Butler - Stephens Inc.

Okay. And then on the royalty trust distributions, given sort of the ramp in the current distribution, what is that going to show up in terms of for the year? What do you think the total distributions on the trust will be on SandRidge's cash flow statement?

Matthew Grubb

Sure. And I'll point you to the S-1 for SandRidge Mississippian Trust. In there, it outlines the distribution schedule by quarter.

William Butler - Stephens Inc.

Yes.

Matthew Grubb

So that's a really a good place to start in terms of what the projected distributions are by year. So you can really pull that right out of the S-1.

William Butler - Stephens Inc.

Okay. And then 100% to the public, I guess, even backing that. On your rigs, they're running at 100% utilization now, the old rigs?

Tom Ward

Yes, that's correct.

William Butler - Stephens Inc.

And has it gotten to a point on the demand, or do you see it getting to a point where you all might actually look to use that as a source of funds? Lariat?

Tom Ward

Oh, not necessarily. The rigs are -- when everybody wants a rig, you want them yourself. And when nobody wants them, you can't get rid of them. So I guess that right now, we enjoy having our own rigs working for us.

William Butler - Stephens Inc.

Okay. And given what's going on out in West Texas with the fires and dry weather, do you see any issues for water availability for frac-ing?

Tom Ward

No, we haven't had any issues.

William Butler - Stephens Inc.

Okay. And then last question. In terms of competition for leasing in the Mississippian Lime, what is sort of the current going rate now for acreage?

Tom Ward

Well, it's higher. I think what that we have done, and you can look on our presentations, so we have a geological model that we have stayed within. And we're only are buying within the areas that we've outlined in that presentation. That doesn't mean that there isn't a Mississippian outside of that. And so you can have large amounts of Mississippian acreage being bought that might be every bit as good or better than what we have. It just doesn't necessarily fit the geological model that we've put together. So I think that just because people have bigger and bigger acreage positions, it doesn't necessarily mean that we're competing on that acreage. And for a week, what we have done is now basically slow down our acreage acquisitions into the areas that are close to our existing production or inside of that geological model we had presented. So I think we can say that acreage prices are going up but that our spending is decreasing by fairly dramatically.

William Butler - Stephens Inc.

Okay. And you still anticipate getting up to the roughly 1 million acres?

Tom Ward

Yes.

William Butler - Stephens Inc.

Okay, great. That's it for me.

Operator

And our next question comes from David Kistler with Simmons & Company.

David Kistler - Simmons & Company

Real quickly, just looking at you've drilled 72 wells in Miss. 37 of those are in the royalty trust. Of the balance between that and the 72, how many of those were dedicated to the royalty trust? And when will you have a level sufficient to thinking about doing another royalty trust?

Tom Ward

We're going to talk about those?

Unknown Executive

Hell, yes.

Unknown Executive

We're not.

Tom Ward

Oh, we're not going to talk about the trust number wells on this call. Well, I can tell you this. What's public is that we have dedicated 3 to 4 rigs to drill royalty trust wells.

David Kistler - Simmons & Company

Okay, so we can complete...

Tom Ward

I'll talk about -- when we did the royalty trust, we had 12 rigs running. And so I think that you do have to have proven reserves to put into another trust, and that's what we're building on.

David Kistler - Simmons & Company

Okay. So just thinking about it from a run rate then, if 9 rigs are allocated probably by mid-summer based on the number of wells that are being drilled, you'd probably have a sufficient number to be able to start having a reserve evaluation and potentially move forward with another trust?

Tom Ward

Well, that's fair. As long as the market's still there.

David Kistler - Simmons & Company

Yes. And then really, I'm just trying to lock down thinking about the capital side of it. And as long as we're on that...

Tom Ward

I've said publicly that I wouldn't mind looking at $1 billion from royalty trust net to SandRidge this year.

David Kistler - Simmons & Company

Perfect. Perfect. Then looking at the revolver, it came down a little bit with the issuance of senior notes, which is to be expected. But there'll be a redetermination in the fall, I imagine, you're obviously tied very closely to reserves. Too early to say, but maybe looking back at the redetermination you just had, a possibility for that to be expanded. Any color you can give us on that would be great as kind of a vehicle to think about 2012 funding.

Matthew Grubb

Sure, Dave. We did disclose our redetermination. We decided to keep it where we had the revolver at $850 million. With the upsizing of the IPO -- I'm sorry, the high-yield offering, that took it down to $790 million. We decided to leave it there at the redetermination date. I think we had ample room to push it up. But given our sources of capital this year, we really don't anticipate being in the revolver all that much. So we didn't need, say, $1 billion revolver. We'll revisit it again in the fall. But I think this level, $790 million, is ample liquidity for the near term.

David Kistler - Simmons & Company

Great, appreciate that. And then a little bit out of the bailiwick. I don't know if you guys can comment on it, but I'm guessing you've been watching it. Any kind of update you can give us on the Eagle sale and what the status is of that?

Tom Ward

Well, I actually talked to Steve Antry this week anticipating that we might get a question and asked him what he might like to say if he had a chance to sit on the call. And what he told me is that he would say is that they had decided, after their well performance and watching our performance and the performance of the royalty trust, to delay their proposed sale and leave their options open to drill more wells for the next 6 to 12 months.

David Kistler - Simmons & Company

Great. Appreciate the color. One last, just cleanup question for modeling. Natural gas production down 6%. No rigs directed towards drilling that. Is that kind of the decline we should be working in? Or when will that abate a little bit in terms of as we model things forward?

Matthew Grubb

Yes, I think we produced I think --- in this outcome, I think 76 Bs of natural gas last year. And we were -- I think we only produced about 66 Bs this year. And so our natural gas in Q1, I think it was actually a little bit ahead of what we had projected for Q1. So I think we're still right on track to do that.

Tom Ward

And that's why I would say, too, so actually yes, we think we're fine on our gas production to date.

Matthew Grubb

Okay. Great, I appreciate it, guys.

Operator

Our next question comes from Amir Arif with Stifel, Nicolaus.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Just a couple of quick questions. Just you had mentioned you've got some disposal facilities in place for at least as your volumes ramps up. But you doubled your rig count, is there the constraints in terms from the frac-ing or anything else that you see as that you had in this fall? Pipeline takeaway?

Tom Ward

Well, that's s -- everything we're working on today is preparing for that higher rig count in 2012. So we think that we'll have ample availability of services.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Okay. And then I think you had mentioned that you'll only be able to hold about half your acreage. Is that based on the current rate of 12 rigs or is that even after you double up to 24 rigs?

Tom Ward

No, that was at current rate of 12 rigs. That's why we're moving forward with a plan to capture more than that.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Okay. And the 5,300 barrels a day number that you mentioned, is that the exit rate for Q1?

Matthew Grubb

I'm sorry, what?

Tom Ward

The 5,300 barrels a day.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Barrels a day for the Mississippian.

Tom Ward

That's not exit rate for Q1. That is, the 5,300 barrels? No? No?

Matthew Grubb

No.

Tom Ward

Oh, I'm sorry. That's correct.

Amir Arif - Stifel, Nicolaus & Co., Inc.

So that's the current rate? Okay, good. And do you have -- or can give us a breakdown of how much of that was for the trust versus...

Matthew Grubb

I'm sorry, how much of that was what?

Amir Arif - Stifel, Nicolaus & Co., Inc.

Was for the trust versus for SandRidge?

Matthew Grubb

Yes. The trust -- yes ,it looks like the trust's projection -- its right around 3,300 barrels.

Tom Ward

I'm just saying let us....

Matthew Grubb

So it looks like about 60% of that was trust. Keep in mind that when we did the trust, we had 37 PDP wells, and they all went into the trust.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Yes.

Matthew Grubb

And so we just started over on the drilling.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Yes. Okay. And then as you ramp up to 130 wells for the year, do you have a rough estimate of where you think your exit rate could be for the year on the Mississippian?

Matthew Grubb

No, we just talk about exit rate company-wide. We don't want to give it out play-by-play.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Play-by-play, okay. Well, for the full year oil guidance, can you give us sense of how much of that is Mississippian? It's not the exit rate, it's just the full year guidance, right, for them.

Matthew Grubb

No. Again, we're not going to talk into details about play-by-play. We still look to produce 12.3 million barrels of liquids equivalent this year. And then the only 2 areas we're drilling is in the Permian and the Miss. So that's where your contributions are.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Okay, perfect.

Operator

Our next question comes from Joseph Stewart with KeyBanc Capital Markets.

Joseph Stewart - KeyBanc Capital Markets Inc.

Hey, Tom, just one question for me. Could you talk about some of your thoughts on timing for the potential JV given Chesapeake's announcement this week. Just considering their expertise in the JV arena? Do you think it might be better to wait for their potential deal to kind of set a floor on future bids?

Tom Ward

Well, that would assume that we're preparing to do a JV. We are just looking right now at potential partners, and we've had some conversations. But there -- right now, we don't know which may we'll go. So I think in the next few weeks, you'll be able to see which way or ways that we're looking at. So I guess that the easy answer is to say that I'm not sure that we would want to time our proposal around a JV to wait on someone else assuming that they would get theirs done at a time that fits us. Because we want to fully fund our 2012 budget this year and not sure that that's their plan. So no, I don't think we would wait.

Joseph Stewart - KeyBanc Capital Markets Inc.

Okay, great.

Operator

And our next question comes from Duane Grubert with Susquehanna Financial.

Duane Grubert - Susquehanna Financial Group, LLLP

Yes, Tom in terms of the rig count, you're already at an aggressive activity level, and you benefit from having your own rigs. Can you talk to us about how you think through whether you should actually purchase more physical rigs?

Tom Ward

Well, we haven't purchased any rigs over the last few years because of the number we had. That doesn't mean that we wouldn't look to purchase rigs in the future if they were the kind of rigs that we needed to have to sustain a play. So the only way I would look at it is to say that if for us to purchase rigs would mean that if that were the way for us to guarantee that we can move forward with our plan to drill, then that'd be something we look at. But if there's sample rigs to lease and we don't think that there's any going to be a call on those rigs, then no, we wouldn't necessarily look to that to be our favorite way to drill. So I think we would leave it open.

Duane Grubert - Susquehanna Financial Group, LLLP

Okay. And a related question. With some operators also vertically integrating all the way through frac equipment, have you thought about building out frac fleets given the multiyear run likely of a frac program in Oklahoma?

Tom Ward

No, we're still not seeing any issue with low-pressure frac-ing. And just to remember that we are different and that the backbone of the U.S. gas industry over the last 4, 5 decades has been on drilling 8,000- to 10,000-foot vertical wells using small equipment. And that equipment is still available, just not all of it in use. So we prepared a slide actually that shows how limited the rig usage is in small rigs, and that's still the way it is today. But we just assume that there's going to be activity on the rig side that might take away some of the higher end of the 1,000-horsepower rigs out of the small market. And so that's the one thing we're most concerned about, not about frac fleets.

Duane Grubert - Susquehanna Financial Group, LLLP

And then on road and type or line type infrastructure, do you have any cycle time differences from one area to the other in that? And some of your stuff is a leasehold that seems to be fairly remote.

Tom Ward

In the Mid-Continent.

Duane Grubert - Susquehanna Financial Group, LLLP

Yes. I mean, in the Mississippian specifically.

Tom Ward

No. Well, actually, not in either one, no. Our lead times for digging wells have been very quick just because there's ample systems in place throughout the play. Now we might have one well or one well stranded out that takes a few weeks. But all in all, we bring on wells within 21 days after we're through drilling.

Duane Grubert - Susquehanna Financial Group, LLLP

And finally, on the intent to double your rig count, does that require changing your personnel quite a bit? Or what's the capacity to execute relative to that plan that you have installed right now?

Tom Ward

No, we have enough people to be able to execute the play.

Duane Grubert - Susquehanna Financial Group, LLLP

Very good.

Tom Ward

That doesn't mean we don't continue to hire. But that's -- we can't do that here.

Operator

And our next question comes from Philip Dodge with Tuohy Brothers Investments.

Philip Dodge - Stanford Group Company

Could you talk about the ramp-up in the Miss rig count to 24 in terms of what it might average for 2012?

Tom Ward

That's what we believe we will average in 2012.

Philip Dodge - Stanford Group Company

Average 24 in 2012? Okay. And then what effect you see that having, Tom, on the production incline when you get to 24?

Tom Ward

Oh, we don't give guidance out that far. But that is basically doubling what our production incline is today.

Philip Dodge - Stanford Group Company

Okay. So yes, that's helpful. Appreciate the comments.

Operator

And our next question comes from Dan Morrison with KKR.

Daniel Morrison - Global Hunter Securities, LLC

It's actually Global Hunter Securities...

Tom Ward

Yes.

Daniel Morrison - Global Hunter Securities, LLC

Not KKR. How do you look at allocating capital between the Mississippian and the Permian? Is there, I mean, obviously, one source of seed capital is to dial back in the Permian again so that you can ramp up in the Mississippian.

Tom Ward

They're both about the same. If you look at our rates of return, both of the plays are extraordinary. In the Permian, it's just -- we have HBP acreage. But up until -- if you're looking out to 2012, we're more like 50-50 on allocating resources. This year, we've been more allocated towards the Permian, and I think that's -- we want to continue with both plays. And that's -- my thought is, is that our company wants to drill more and lock in very high rates of return. So that's -- we want to be able to drill and maximize as much we can. In the Permian at 16 rigs and drilling 811 wells, it's hard for us to ramp that number up logistically. We might be able to a little bit. But in the Mid-Continent, it's much easier where you have a larger area to deal with and you do have a leasehold that you have to cover.

Operator

And our next question comes from Stephen Caven, a private investor.

Unknown Speaker

I was wondering because EPS missed this quarter.

James Bennett

If you're talking about our $0.02 loss versus the Street, I would say 2 things, that I think people were projecting production probably to flatline throughout the year instead of ramping like we had. We ended the year at fourth quarter with production of 62,400 barrel of oil equivalent, and we sold about 3,000 -- over 3,000 barrel of oil equivalent a day and then we're ramping from there. So I attribute it solely to people projecting the production flat rather than ramping throughout the year.

Unknown Speaker

And so you would say that this is temporary?

James Bennett

I'm not sure what you mean by temporary. I'll say it this way. We don't -- we thought this was a good quarter. We don't really consider it a miss, the fact that people were guiding a little bit higher. We're actually right on track with our plan for this year.

Operator

And our next question comes from Noel Parks with Ladenburg Thalmann.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Just a couple of questions. And sorry if this was mentioned earlier and I happened to miss it. In the Central Basin Platform, especially thinking about the former Reno [ph] properties at Fuhrman-Mascho,, can you just talk a little bit about how down spacing has been going out there?

Matthew Grubb

Yes, down space. When we talk about down space, we're talking about 5-acre spacing. And in fact, it's going very, very well. We drill 199 wells in the first quarter in the Permian Basin, and roughly 125 wells were Fuhrman-Mascho, of which about 80 of them were 5-acre wells. And they're coming in right at our type curve projection. So the down spacing is working well, and we have plenty more of those locations to drill.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Great. And going back into last year, one of the things that had been difficult about those properties out there were some various infrastructure issues, thinking about electricity and so forth. Have those been totally resolved at this point? Or I was wondering, with the weather and wildfires out there, if there are any new challenges that had come up on those?

Matthew Grubb

Yes. I don't know if they're totally resolved. I would say they were substantially resolved. We have not had a downtime this year even with the severe freezing and the wildfires that Arena had experienced a year before just due to infrastructure. I think we've built a couple of our own substations, and that has given us the ability to restore electricity very quickly anytime we have a power outage. And we've worked with our processes very well out there. We've had very little plant downtime, compression downtimes. I think things are going very well, and the steps that we've taken operationally to improve the run time has worked out well for us.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Great. And one question on the Mississippian. You talked about the economics in general and just thinking that we now have the luxury of oil prices in or around $100 for a few weeks to months now. When you think about the tail of the production curve when you make the ROR calculation, can you just give us a sense for the reserve life, kind of, I guess, how to think of the reserve life, at sort of a more modest commodity price environment, like, say, we're back looking at the $70 range for long-term prices?

Tom Ward

Sure. We show a slide in our presentation that at, I believe it's at $60 oil, we still have a 40% rate of return in the Mississippian play. And so It's really all about costs. As you can control costs and be able to produce oil and lock in that oil at high prices, so we're locking in oil so we're between $90 and $105, there really shouldn't be any issue with the company going forward. So it's very simple strategy, is if you believe that service costs aren't going to go up, and you believe that you're finding your type curve on your production, you should hedge it and have some of the highest rates of return I've ever seen in my career.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Okay, great.

Operator

Our next question comes from Mike Breard with Hodges.

Michael Breard - Hodges Capital Management

I was given the news this morning. Just one quick question. Is Occidental putting any pressure on you at all to produce more CO2 for their tertiary recovery?

Tom Ward

Well, no. Well, there's no pressure for us. I think that Oxy and us look at this as a very long-term project, and I can't speak for them. But as of today, it doesn't make very much sense for us to drill gas wells. So we're looking forward to the time that it does for us or someone else to be able to drill in the Pinon Field.

Operator

And our next question comes from Thomas Ciccarillo [ph] with Commerce One Financial.

Unknown Analyst -

Yes, my question is for the derivatives contract. I noticed in your release that the realized impact per barrel had a negative impact of $7.50. And then in the adjusted earnings, there was a realized gain from out-of-period derivative contracts settlements. I was just wondering how that was -- how you arrived at that with the out-of-period versus the loss within the period.

Tom Ward

Sure. That was -- the out-of-period is covering some natural gas hedges on, I believe, it's 42 Bcf of gas during the period. And our belief is that $4 gas prompt that -- that, that signifies that it may be not the low, but the risk-reward past that point is negligible. And we decided to take off the gas hedges during the quarter. So that was what the out-of-contract derivative gain was.

Unknown Analyst -

Okay.

Matthew Grubb

Yes. In the period, that's simply the difference between our hedges, which were at about $87 a barrel, but they're probably closer to $100.

Operator

And there are no further questions at the time. I'll now turn it to Tom Ward, Chief Executive Officer, for closing.

Tom Ward

Thank you, and thanks, everybody, for joining us. So we look forward to seeing you or talking to you in the quarters to come. Thank you very much.

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