Ultra Petroleum (UPL) Michael D. Watford on Q4 2015 Results - Earnings Call Transcript

| About: Ultra Petroleum (UPLMQ)

Ultra Petroleum Corp. (UPL) Q4 2015 Earnings Call February 18, 2016 11:00 AM ET

Executives

Michael D. Watford - Chairman, President & Chief Executive Officer

Garland R. Shaw - Chief Financial Officer, Senior Vice President

C. Bradley Johnson - Senior Vice President-Operations

Douglas B. Selvius - Vice President-Exploration & Land

A. Kent Rogers - Vice President-Drilling & Completions

Analysts

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Brian Michael Corales - Scotia Capital (NYSE:USA), Inc.

Ronald E. Mills - Johnson Rice & Co. LLC

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

David R. Tameron - Wells Fargo Securities LLC

Mike Kelly - Seaport Global Securities LLC

Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.

Operator

Good day, everyone. Welcome to today's Ultra Petroleum Corporation Fourth Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Please note this call is being recorded.

It is now my pleasure to turn today's program over to Mike Watford, Chairman and CEO. Please go ahead, sir.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you, operator. Good morning. Welcome to Ultra Petroleum's fourth quarter 2015 earnings call. With me today are Garland Shaw, Senior Vice President and Chief Financial Officer; Brad Johnson, Senior Vice President, Operations; Doug Selvius, Vice President, Exploration; and Kent Rogers, Vice President, Drilling and Completions.

I'd like to point out that many of the comments during this conference call are forward-looking statements that involve risks and uncertainties affecting outcomes, many of which are beyond our control and are discussed in more detail in the risk factors and forward-looking statements section of our annual and quarterly filings with the SEC. Although we believe these expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results or developments may differ materially. Also, this call may contain certain non-GAAP financial measures. Reconciliation and calculation schedules can be found on our website.

Let's talk about our results for the fourth quarter and calendar year 2015. Our production was up 17% year over year, and our cost to drill and complete wells in Pinedale was down 28%. The lower costs allowed continuation of healthy returns in our capital program that you can see in the table listed in the press release. CapEx for the year was $494 million, which is $59 million more than cash flow.

Now let me ask Garland to share our financial results.

Garland R. Shaw - Chief Financial Officer, Senior Vice President

Thank you, Mike. This morning we reported an adjusted net loss for the fourth quarter of $39 million or $0.25 per share. For the full year, adjusted net income was $46.8 million or $0.31. Cash flow from operations for the fourth quarter was $78 million or $0.51 per share and was $437 million or $2.85 per share for the full year. EBITDA was $121 million for the fourth quarter and $610 million for the full year. For all of 2015 we realized a 44% cash flow margin and a 62% EBITDA margin.

We did take a $3.1 billion non-cash ceiling test write-down during the quarter as a result of lower commodity prices and the significant reduction in our year-end reserves PV-10 value.

Our overall production for the quarter was 73.8 Bcfe and for the full year was 290.1 Bcfe, which represents 17% growth over 2014. Natural gas volumes on a full year basis of 269 Bcf were up 18% due to our Pinedale development program. 2015 oil volumes of 3.5 million barrels were 4% higher than in the prior year.

Our average realized natural gas price of $2.61 per Mcf for the quarter, including effective hedges, was $1.40 per Mcf lower than in the fourth quarter of 2014. On a full year basis, our realized natural gas price averaged $3.14 per Mcf which was $0.90 per Mcf lower than for 2014. Without hedges, our 2015 average wellhead natural gas price was $2.59 per Mcf which was $1.65 lower than in 2014.

For the year, our discount to Henry Hub dropped from $0.18 in 2014 to $0.08 in 2015 due to our higher concentration of gas production in the Rockies. Also let me add that we realized nearly $147 million in hedge gains in 2015. The average realized oil price for the fourth quarter was $35.51 which was $21.93 lower than in the same period last year. For the full year, our average oil price was $40.31 which was $36.01 lower than in 2014.

All-in costs of $3.41 for the fourth quarter came in above our guidance due to higher DD&A expense resulting from the reduction in our year-end proved reserves, which Brad will address shortly. For the year, our all-in costs were $3.28 per Mcf which is slightly higher than the $3.21 we experienced in 2014 due mainly to higher DD&A.

Cash lease operating costs of $0.99 per Mcfe for the full year were down from $1.13 last year due primarily to lower production taxes.

Lastly, in regard to the company's debt and leverage position, we ended the quarter with net debt of $3.39 billion, which was $12 million higher than a year ago. Of this amount, we had just under $2.1 billion of debt at our subsidiary operating company, Ultra Resources. We finished the fourth quarter with a debt-to-12-month-trailing-EBITDA ratio of 3.4 times at the Ultra Resources level. This debt is subject to a 3.5 times debt-to-12-month-trailing-EBITDA ratio covenant.

At the parent company, Ultra Petroleum Corp., we have $1.3 billion of outstanding debt which is subject to a greater than 2.25 times interest coverage ratio. At the end of the fourth quarter the ratio was 3.3 times.

I'll pass the call over to Brad now for an update on our operations.

C. Bradley Johnson - Senior Vice President-Operations

Wyoming net production averaged 738 million cubic feet equivalent per day this quarter, up 8% since the fourth quarter of 2014. Ultra drilled 50 wells, including 37 wells from our operated program that averaged $2.75 million per well. This marks the fifth quarter in a row with a significant cost reduction. We continue to realize service cost reductions and we continue to achieve efficiency gains. In 2015 our team reduced the cycle time of spud to TD by another 19%.

In December, we dropped a rig and ended the year with three operated rigs and three non-operated rigs in Pinedale. Since the beginning of this year, we have dropped another rig and our partner dropped two rigs. So currently, we have two operated rigs and one non-operated rig running in the field. Our 2016 budget assumes the current rig count will remain constant.

In Utah, drilling and completion operations remain suspended. Despite no additional volumes from new wells or completions, net production for the quarter averaged just over 4,000 barrels of equivalent per day. We continue to optimize our first waterflood project and have permitted two additional pilots that we are planning to implement later this summer.

In Pennsylvania, net production averaged 40 million cubic feet a day for the quarter. Production was fully restored following some minor curtailment last September and October. We did not have any drilling or completion activity in Pennsylvania in 2015, nor do we have any planned for 2016.

As of December 31, 2015, the company's proved reserves totaled just over 2.5 trillion cubic feet equivalent with a PV-10 value of $1.9 billion. Both values are down significantly from 2014 due to falling commodity prices.

The company did not book any PUDs at year-end 2015. This decision was based on our internal controls that tested and determined that we lacked the required degree of certainty of our ability to fund the five-year development plan.

In 2015, we finished the year just over 290 Bcfe of net production and a capital investment totaling $494 million. For 2016 our capital program is significantly lower at $260 million, and remains focused on our core asset in Pinedale. This budget falls well below – or just below our most recent 2016 maintenance capital of $300 million. Accordingly, our 2016 production forecast of 272.5 Bcfe represents a decrease of only 6% year-over-year even though capital is being reduced by 47%.

Mike?

Michael D. Watford - Chairman, President & Chief Executive Officer

Thanks, Brad. So now let's talk about our debt situation. We have a totally unsecured capital structure that is clearly overleveraged in today's commodity price environment. We have net debt of about $3.4 billion which have been fairly constant since year-end 2014. We had EBITDA of approximately $800 million in 2014, $600 million in 2015, and forecast $300 million in 2016, all due to downward moving commodity prices.

With the year-end ceiling test write-down, the total assets on our balance sheet is now less than $1 billion. Our year end 2015 SEC PV-10 reserve value, as Brad said, is $1.9 billion. And if calculated today at current commodity prices would be a good bit lower.

We have been working since early fourth quarter 2015 to obtain relief on debt covenants from several of our creditors, so far unsuccessfully. Now due to continued deterioration in our industry, we need to restructure our debt with our creditors providing concessions and discounts. Currently we are working on forbearance agreements with key creditors to put a pause on credit issues to allow more time for restructuring discussions.

With that, I would like to open the call for questions, operator.

Question-and-Answer Session

Operator

Certainly. We will take our first question from Noel Parks with Ladenburg Thalmann. Your line is open.

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Good morning.

Michael D. Watford - Chairman, President & Chief Executive Officer

Good morning.

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Just wanted to get a sense of maybe one more detail about your hedge thinking at this point. You know we've got a little bit of contango out there in the strip, pretty decent on a percentage basis. So, I guess first, in terms of what you prefer to do with hedges and then also kind of within the constraints of your lending agreement how does that look right now?

Michael D. Watford - Chairman, President & Chief Executive Officer

I don't see us hedging in the current commodity price environment. It just doesn't move the needle enough for us on our current issues. So it's really not even a discussion right now in terms of hedging it, sub- $2 gas or $30 oil.

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. And with the updated chart you gave with economics at $2 gas. Just to double check, is that – that's $2 benchmark or realized?

C. Bradley Johnson - Senior Vice President-Operations

Yes. This is Brad. That is a $2 realized price.

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. And just looking ahead, or using the most recent quarters, roughly what sort of the distribution of well sizes, either in terms of your most recent drilling or in terms of the certain slate you have on deck going forward?

C. Bradley Johnson - Senior Vice President-Operations

Yeah. In 2015 we averaged about 4.5 Bcfe for the wells we put on line. Expect that to continue into 2016 as well.

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. Great. And just as far as what's going on in the environment in the Uinta, I'm just wondering, has – and of course recognizing it's not necessarily an immediate priority, but in the event you saw oil strengthening and you looked at more activity out there, just kind of where would things be with service costs and economics out there?

C. Bradley Johnson - Senior Vice President-Operations

First on service costs, obviously all basins are experiencing significant reductions in service costs. We have not been active drilling and completion in Utah for about a year now. But we would expect Utah to have similar cost reductions that we've observed and realized in Wyoming. Regarding economics, down to $30 oil, not much of anything makes much of a return, and certainly Utah needs to be $50 or more to start having compelling economics.

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. And sorry if I missed this, did you give any update on sort of the waterflood pilot out there?

Douglas B. Selvius - Vice President-Exploration & Land

Yeah. This is Doug. Like you said, it's a pilot. As Brad mentioned in the call, we're continuing to optimize that and adjust to the learnings we've had. The update we can give you is that we've done some testing out there. We know where we're able to inject into reservoirs, and those are our sandstone reservoirs. Those are giving us the best response. We've also learned that there's some zones that aren't performing very well, some fractured carbonates and so forth, limestones and dolomites that are acting like seep zones, taking our water and impending our efficiency and our ability to inject where we really want to. And that's partly a function of converting our producers to injectors, where we had such a large perforated interval open. So we've learned and we're shutting those zones off now.

And I guess finally we've learned that having a central injector surrounded by producers is not optimum. We want a line drive or a line of injectors so we can form a wall of water moving through the reservoirs as opposed to a circular pattern. So those are all things that we've learned right now. And as Brad indicated, we've got some subsequent follow-up pilots that we'll be testing these things on prior to a full field development. Does that answer your question?

Noel A. Parks - Ladenburg Thalmann & Co., Inc. (Broker)

It does. Thanks. That's all for me.

Douglas B. Selvius - Vice President-Exploration & Land

Thank you.

Operator

Thank you. We'll move next to Brian Corales with Howard Weil. Your line is open.

Brian Michael Corales - Scotia Capital (USA), Inc.

Morning, guys. I just want to – I think, Mike, you talked in the past about asset sales. Is that something that's kind of on the back burner now? Or is it just talks with creditors? Can you maybe comment on there?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, Brian, the reality of the asset sale world now is that you can – and we have some, especially in Wyoming, very attractive assets that still have undeveloped value. But you can reduce absolute debt, but it doesn't help your leverage ratios, so at the end of the day, it doesn't achieve what we need to do.

Brian Michael Corales - Scotia Capital (USA), Inc.

Thanks. And finally on CapEx this year, is it just trying to maintain production? Is that kind of the thought or why not even go lower?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, I mean we've had internal conversations about higher activity and lower activity. Yeah, it's a bit of an attempt to try to maintain some kind of steady state operation and we are trying to make decisions for the good long term value of the enterprise.

Brian Michael Corales - Scotia Capital (USA), Inc.

Okay. All right, guys. Thank you.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. We'll take our next question from Ron Mills with Johnson Rice. Your line is open.

Ronald E. Mills - Johnson Rice & Co. LLC

Good morning, Mike. Just a follow-up I guess on Brian's question. The CapEx level relative to cash flow this year, it looks like if prices stay at strip, you'll once again outstrip cash flows. How does that play into your decision to draw down the rest of the revolver and how does that impact how much that CapEx level could change?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, the decision to pull down the revolver was to provide maximum liquidity in these uncertain times. And we have funds available to continue creating long term value and enterprise, so that's sort of the answer.

Ronald E. Mills - Johnson Rice & Co. LLC

Okay. And then just on the operational side, the wells that you are currently drilling, and if I looked ahead to 2016 and 2017 just from a planning standpoint, is this the kind of area or the quality of wells that you expect to drill over the next 12 months to 24 months? And if I looked at your current well costs, this slate of wells, are these more in towards the upper end, the lower end or the midpoint of the EURs you provide?

C. Bradley Johnson - Senior Vice President-Operations

Sure. Regarding EURs, we expect to continue to drill wells that are 4.5 Bcfe to 5 Bcfe in size. And that should be pretty steady as an average over the next handful of quarters. I think Kent has an opportunity to reduce costs further as we progress through this year, and we'll be setting that as a goal and hopefully we'll continue to post reduced well costs as we progress through 2016.

Ronald E. Mills - Johnson Rice & Co. LLC

And then one last one on the balance sheet, Mike, the structure of your debt is different than most companies in terms of everything, including the revolver being unsecured, but also the holders of a lot of the subsidiary debt. How does that impact options relative to what we've seen in a lot of other companies who have done exchange offers or debt for equity type opportunities? How are you positioned given the structure of your debt versus other companies?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, first as you said, we're a little unique in that all of our debt is unsecured. So that's just different than most other folks. It puts us in a different position. We have our debt in three large categories, if you want to view it that way. Two at the operating company level, two is categories, and one at the parent company level. And we've had conversations with all three of the key categories. Two of the three categories appear a little more engaged in constructive negotiations of the major components of the debt restructuring that we're trying to get done to be successful and meet all three.

We've provided, I guess early in January, the most recent proposal for restructuring, and we're waiting on some sort of constructive reply from the three different categories of folks. So we're in a unique position. It's not all that pleasant, but we need some help from the creditors to get this thing across the finish line.

Ronald E. Mills - Johnson Rice & Co. LLC

Great. Thanks and good luck on the restructuring.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you.

Operator

And we'll take our next question from Patrick Fitzgerald from Baird. Your line is open.

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

Yeah. Thanks for taking the questions. So you're still in discussions with all the opco lenders? And is that kind of on a prepackaged bankruptcy or some type of out-of-court exchange discussion?

Michael D. Watford - Chairman, President & Chief Executive Officer

Everything at this point in time is about out-of-court resolution of our credit issues.

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

Okay. And is there any solution where those opco lenders wouldn't have to take a haircut? Or are you asking everyone to take a haircut on their principal value?

Michael D. Watford - Chairman, President & Chief Executive Officer

The proposal that was made in early January didn't have the opco folks taking a haircut. But that's hard to see if that's a realistic proposal anymore.

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

Okay. And then the revolver is due this year but it has a provision where 50% can extend it. Do you think if you could get the opco noteholders onboard that you would have support from the banks to extend?

Michael D. Watford - Chairman, President & Chief Executive Officer

I think the banks have been more willing to engage in constructive conversations. So I feel confident we can get something resolved there.

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

Okay. Great. And what's kind of your view on the supply and demand dynamics in the natural gas markets you serve? Not so much the East but the West Coast?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, we haven't had any growth in supply. Well we haven't had growth and supply. We still have reasonable demand. You know we are in a soft winter right now so it's hurting everybody. But again, the increased production that you've seen over the last 2.5 years is all in the East, not in the West. The West actually is decreasing as the East is now. So we certainly don't see any increased supply as evidenced by ourselves. We are going to have declining production in 2016 as everyone else is. So that should help tighten. I think there's a number of forecasts out there right now talking about a couple of ease day of reduction and overall supply. And I have paid attention as to which basins those are in, in particular.

But we have just got to get through the – hopefully get some more winter weather and get into summer, and get on to winter of 2016, and get through this trough on the low natural gas prices.

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

All right. Thanks. And then you've obviously made a lot of progress on your drilling and completion costs last year. Do you think that that has further room for improvement or are you just assuming kind of what it was in the fourth quarter to get to your 240 number in the Pinedale for the full year.

A. Kent Rogers - Vice President-Drilling & Completions

Patrick, this is Kent. Yes. I believe we have more room. We've done some additional work with suppliers, vendors, and we've reduced costs even further we believe for Q1 this year. So we'll have those numbers out next call, and we'll talk about it. Our goal is that we'll see further reductions throughout 2016.

Patrick J. Fitzgerald - Robert W. Baird & Co., Inc. (Broker)

All right. Thanks a lot.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. We'll move now to Jay Spencer with Stifel (24:36). Your line is open.

Unknown Speaker

Good morning. Thanks for taking my call. So I had a question about the cash balance. Is the cash balance including the most recent revolver draw, is that at – is the cash balance at the opco or is it at the holdco?

Michael D. Watford - Chairman, President & Chief Executive Officer

I don't know that that's relevant to anything going on here today, but...

Garland R. Shaw - Chief Financial Officer, Senior Vice President

It's at the opco. That's where we create the cash, from operations. That's where we...

Unknown Speaker

Yeah. What I'm getting at is, are there any restrictions on moving that cash up to the holdco for interest payments, debt at that level?

Garland R. Shaw - Chief Financial Officer, Senior Vice President

No, there's not.

Unknown Speaker

Okay. Great. And then at the opco for the 3.5 times debt-to-EBITDA, I take it – is that an incurrence test or is that a maintenance test?

Garland R. Shaw - Chief Financial Officer, Senior Vice President

That's a maintenance test.

Unknown Speaker

Got it. And the next time that'll be measured will be at the end of the first quarter I presume?

Garland R. Shaw - Chief Financial Officer, Senior Vice President

That's correct.

Unknown Speaker

Got it. Okay. Is that a net leverage number? I mean is cash net against debt?

Garland R. Shaw - Chief Financial Officer, Senior Vice President

No, it's not. It's on actual debt.

Unknown Speaker

Okay. That's all I had. Thank you very much.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. We'll move now to Marshall Carver with Heikkinen Energy Advisors. Your line is open.

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

Yes. Was there a fuse on the proposal sent to the creditors in January? I'm just wondering if there's a particular date we should have in mind for a response?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, there was no fuse. We would have anticipated a response weeks ago.

Marshall Hampton Carver - Heikkinen Energy Advisors LLC

Okay. That was my question. Thank you.

Operator

Thank you. We'll move next to David Tameron with Wells Fargo. Your line is open.

David R. Tameron - Wells Fargo Securities LLC

Hi. Morning, Mike.

Michael D. Watford - Chairman, President & Chief Executive Officer

Good morning.

David R. Tameron - Wells Fargo Securities LLC

Just a couple questions. Just about last response, what's your window as far as timing? Is there a back end date you have on your calendar? How should we think about this getting resolved? I know, ultimately, you said you sent the proposal and it's just sitting there. But can you give us any more color around timeline, timeframe, or when you think you need to get something done by?

Michael D. Watford - Chairman, President & Chief Executive Officer

I'm thinking how I want to answer it, David. I'm not ignoring you.

David R. Tameron - Wells Fargo Securities LLC

Okay.

Michael D. Watford - Chairman, President & Chief Executive Officer

The – as I've said, we have some of the creditors a little more responsive on the major issues that we need to deal with. And we have some that are less responsive. So we're trying to get the less responsive ones to sort of understand where we are in the process. So I don't know that it serves me to suggest what the timing is. I mean there's lots of different agreements that have a little different trip wires that we're sort of very sensitive to.

But for us, we've been trying to get something done here for a while. We're going to keep trying to get something done. But we can't do it by ourselves. And so we're willing to negotiate. So no, I don't think I can really give you any dates.

David R. Tameron - Wells Fargo Securities LLC

Okay. Let me just follow-up on one thing you mentioned. You talked about trip wires. It looks like there's a PV-10 covenant in the credit agreement. Just on the surface it looks like with the new PV-10 number that got tripped is that – am I reading that right? I guess, just clarification there.

Garland R. Shaw - Chief Financial Officer, Senior Vice President

It's actually a PV-9 covenant that still has to be delivered by April 1.

David R. Tameron - Wells Fargo Securities LLC

Okay.

Garland R. Shaw - Chief Financial Officer, Senior Vice President

Yeah, I would say that one, with the new PV-10 number, you see that one is certainly a risk.

David R. Tameron - Wells Fargo Securities LLC

Okay. And so the – I'll just ask this question. So the decision to take down all the PUDs, was that, I mean obviously if we kept the PUDs on the PV-10 will be higher. You wouldn't trip that covenant. Was that just more a reflection of development capital and the way the reserve engineers looked at it?

Michael D. Watford - Chairman, President & Chief Executive Officer

No, that was really more of a reflection of the outside auditor who looked at it.

David R. Tameron - Wells Fargo Securities LLC

Okay. All right. All right. Appreciate you taking questions, Mike. So take care.

Michael D. Watford - Chairman, President & Chief Executive Officer

All right. Thank you, David.

Operator

Thank you. We'll go next to Mike Kelly with Seaport Global Securities. Your line is open.

Mike Kelly - Seaport Global Securities LLC

Thanks. Mike, last quarter on the call it seemed like you were pretty confident that an asset sale would get done and could address the covenant issues. And maybe it's just as simple as continued deterioration in commodities, but just want to get some color on what happened there?

Michael D. Watford - Chairman, President & Chief Executive Officer

Yeah. I think it's exactly the continued deterioration on the commodity.

Mike Kelly - Seaport Global Securities LLC

Okay.

Michael D. Watford - Chairman, President & Chief Executive Officer

We've looked back to decisions that we are looking at small equity offerings back in the spring and things like that. Even if we had done all the ones that we had contemplated or worked on, we'd still be in a bind this year based on where commodity prices are. Very few capital structures are sized to deal effectively with what we are seeing in the environment now. And unfortunate for us we just have some more current covenants and whatnot to deal with than others, so.

Mike Kelly - Seaport Global Securities LLC

Understood. When is your next interest payment due and do you guys plan on paying that? Thanks.

Michael D. Watford - Chairman, President & Chief Executive Officer

I don't think we are answering that question.

Mike Kelly - Seaport Global Securities LLC

All right. Thanks. Best of luck.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you.

Operator

We'll go now to Michael Rowe from TPH. Your line is open.

Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.

Good morning. Thanks. I just wanted to see if you could provide some rationale for the drilling program. You mentioned you want to keep running two rigs to maintain some operational momentum in the Pinedale. Could you just talk about how that outweighs the prospects of outspending your internally generated cash flow in this environment?

Michael D. Watford - Chairman, President & Chief Executive Officer

Well, I mean the primary requirement is maintain long term value and enterprise. And that's sort of the overriding issue here. With current commodity prices, it doesn't matter really what we do in terms of activity, we are going to outspend cash flow.

Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And last question is, if you do actually see some gas supply and demand tightening in the second half of 2016 and you actually see a pretty significant rise in benchmark prices, can you talk about your flexibility to and/or desire to ramp rigs from the two operated that you currently have? Thanks.

Michael D. Watford - Chairman, President & Chief Executive Officer

We are not in the mood to talk about ramping activity at this time, so we will just pass on that if it's okay.

Michael J. Rowe - Tudor, Pickering, Holt & Co. Securities, Inc.

That's fine. That's fine.

Operator

And we have no further questions at this time. I'll turn the call back to our speaker for any closing remarks today.

Michael D. Watford - Chairman, President & Chief Executive Officer

Thank you all very much for taking the time and visiting with us. And if you have any other questions, we would be glad to answer those for you. You can contact Sandi directly or Garland or I will address all questions. Thank you very much.

Operator

This does conclude today's conference. Thank you for your participation. You may disconnect at any time.

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