Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Noble Energy, Inc. (NYSE:NBL)

Q2 2007 Earnings Call

August 01, 2007, 10:00 AM ET

Executives

Chris Tong - Sr. VP and CFO

Charles D. Davidson - Chairman, President and CEO

David L. Stover - EVP and COO

Alan R. Bullington - Sr. VP, International

Analysts

Ellen Hannan - Bear Stearns

Robert Morris - Banc of America Securities

Irene Haas - Canaccord Adams

John Herrlin - Merrill Lynch

Brian Kuzma - JP Morgan

TRANSCRIPT SPONSOR
Wall Street Breakfast

Operator

Good morning. And welcome to the Noble Energy's Second Quarter Earnings Call. As a reminder this call is being recorded.

I would now like to turn the call over to Mr. Chris Tong, Chief Financial Officer for Noble Energy. Please go ahead, sir.

Chris Tong - Senior Vice President and Chief Financial Officer

Thank you, Jamie. Good morning, ladies and gentlemen. Welcome to Noble Energy's second quarter 2007 earnings conference call.

With me this morning is Chuck Davidson, our Chairman and Chief Executive Officer, Dave Stover, our Chief Operating Officer, and Alan Bullington, Senior Vice President, International. Today we'll be going over Noble Energy's second quarter 2007 results. Chuck will be making some opening comments, I'll review our financial results and then Dave will discuss our operating results and programs for the remainder of the year.

Please note that we will be making some forward-looking statements and we may be discussing some non-GAAP measures. So I’d like to refer you to the final paragraph of our press release in which we note that any such projections or statements reflect our current views about future events and financial performance. No assurances can be given that such events or performance will occur as projected, and actual results may differ materially from those projected. In addition, when we refer to measures that are not generally accepted accounting principles, such as discretionary cash flow it's because we believe they are good tools for internal use, and for the investment community in evaluating the company's overall performance.

And now I'd like to turn the call over to Chuck.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Thanks, Chris, and good morning, everyone. In summary, we certainly believe it's been another excellent quarter for Noble Energy. Our programs are moving forward as planned, and we certainly find ourselves in good position as we now move through the third quarter.

Once again, it was a quarter where we fully offset the earnings and production that we lost when we sold the Gulf of Mexico Shelf asset last year. On a per share basis, for this quarter, we reported earnings of $1.22 per basic share, which is certainly comparable with the second quarter 2006 adjusted earnings of $1.24 per basic share. And that’s of course, when we still owned the Gulf of Mexico Shelf assets.

We experienced pro forma production growth of nearly 12% in the second quarter, versus the second quarter of 2006. And that’s after adjusting for the sale of the shelf properties. And as compared with the first quarter this year, production was up 5% quarter-to-quarter. Clearly, we are pleased with the progress that we are making on all of our programs. This is an environment, where having a diversified portfolio is really paying us dividends. With nearly 45% of our production being liquid, we've been able to recognize incremental value from the recent strength in the oil markets.

Our exploration program has delivered two significant discoveries recently. One, in the deepwater Gulf of Mexico and one in Equatorial Guinea. We closed on an acquisition in the Rockies that doubled our Piceance position, as well we have been continuing to build our acreage positions in Niobrara as well as the New Albany plays.

The past quarter also saw significant gas sales to the new LNG plant, now operating in Equatorial Guinea. Capital spending accelerated in the second quarter to $481 million. That was up 69% from the first quarter's capital spending level.

I would say, as exciting as the second quarter has been, we're certainly looking forward to the rest of the year. We now have two rigs running in West Africa, testing prospects both in Equatorial Guinea as well as in Cameroon. And we should have the results on the well in Equatorial Guinea in just perhaps a few weeks. We also have a rig headed towards our Raton deepwater gas development in the Gulf of Mexico as well as a partner operated rig will be starting drilling at the Robusto deepwater prospect, also in the Gulf of Mexico in just a few weeks.

We have also secured another deepwater rig that will allow us to accelerate the development drilling of our Swordfish field in the Gulf of Mexico, and again, that rig should be on location in a week or two.

These projects are providing a steady flow of results over the few quarters. And I think more importantly, they're really going to put us in an excellent position as we move into 2008.

In North America, we have continued to increase our level of activity in the Rockies primarily focusing on our Wattenberg, Piceance and Niobrara operations. We've been very active in the second quarter. As I mentioned before, we've added additional strategic acreage positions. We doubled our acreage in the Piceance from just over 8,000 acres to nearly 19,000 net acres. We've grown our position in the Niobrara to 380,000 net acres by adding another 160,000 net acres in the second quarter, and we've increased our acreage in the potential emerging play, the New Albany Shale play from 60,000 net acres to nearly 170,000 net acres. That play for us is in the Southern Indiana.

We're very excited about our exploration success at Isabela, that’s at Mississippi Canyon Block 562 in the deepwater Gulf. And we're now working with our partner there on the development plans. Our interest in Isabela is a third, 33.33%. We also had announced, at the time we announced the discovery that we had acquired interest in acreage adjacent to Isabela which contained some additional exploration potential. So Isabela, in our portfolio looks to be a very high quality discovery with certainly some potential upside coming with the adjacent acreage that we've acquired.

Our international portfolio of assets really performed extremely well in the second quarter with production growth in Israel, the North Sea and the Equatorial Guinea over the comparable period last year. Of specific note during the second quarter, was the ramp-up of natural gas sales from the Alba field in Equatorial Guinea to the new LNG plant there. And during the quarter, those sales averaged about 9,700 barrels a day equivalent net to our interest.

Also in Equatorial Guinea, we now have two Miocene exploration discoveries at Belinda and Benita. Our original discovery dates back to 2005, that was Belinda on Block O. And then our second discovery, Benita, which we announced earlier in the second quarter, and that represents at Benita, the first exploration well ever drilled on Block I which is located south of Block O. That makes two discoveries out of the first three prospects we've tested so far, with both discoveries testing very encouraging flows of gas and condensate.

The Songa Saturn drill ship has now moved back to Block O where it's drilling a Belinda appraisal well, about 4.5 miles from our original discovery there. After that appraisal well, we still have three additional firm slots that we've committed to on the Songa Saturn.

You may recall from our annual management review that was held in New York in May that we announced we picked up an additional rig to drill our first exploration well in Cameroon. That rig, which is the Transocean Sedco 700 is now on location, and drilling has commenced on the Yoyo Polar [ph] prospect. This is a combination prospect. The well will be testing a Miocene objective which is called Yoyo, and that of course is the same age as what our EG discoveries are in the Miocene. And then also we'll be testing a deeper Paleogene target called Polar that sits underneath Yoyo. The deeper horizon has a potential of being oil bearing, but it’s significantly riskier than the Miocene plays that we've been pursuing.

Our West Africa exploration program really remains extremely exciting for the company. Our primary objectives for 2007 remain unchanged. The first, of course is to understand the potential Miocene resources in the area. The second, which we're doing now, is to appraise Belinda. And then finally, third, to test some of the deeper zones in the area which we will hope to do with the Polar prospect in Cameroon. Once we understand the potential resources, we can begin the process of identifying development scenarios and the potential commercial possibilities for the resources that we've found. Overall, a very exciting program with a lot of information still to be gained over the course of the rest of the year.

You'll recall that we set our original 2007 capital budget at $1.42 billion. We have slightly increased that to $1.6 billion, with the increases primarily related to the acquisition and development of property that we acquired in Piceance, which I mentioned earlier, the acquisition of the additional acreage in Niobrara and New Albany Shale, and then also some increases in the deepwater Gulf of Mexico and West Africa. In the deepwater Gulf of Mexico, the increase there is driven by the discovery at Isabela. And some of the resulting acreage that we've added there as well as some funding for getting started on the development work there.

The capital additions in West Africa is due primarily to the addition of the second rig, which I just mentioned, which is now operating in Cameroon. Even with the increased capital program it looks like we will be continuing to generate excess free cash flow for the year. So, you can tell it's been a very active second quarter and year so far for Noble Energy. And of course the year is not over. There is much more that we look forward to reporting to you especially the results of our exploration programs as well as our expanded North America onshore program.

Now, with that opening I would like to turn the call over to Chris, where he will cover our financial results.

Chris Tong - Senior Vice President and Chief Financial Officer

Thank you, Chuck. As we mentioned, we reported strong operating and financial results in the second quarter. Net income was $209 million, or $1.22 per basic share and discretionary cash flow was $473 million, or $2.77 per basic share. This compares to the first quarter earnings of $212 million, or $1.24 per basic share and discretionary cash flow of $448 million, or $2.62 per basic share.

Robust crude oil and natural gas liquid prices coupled with the 5% increase in production over the last quarter, helped drive revenues and earnings. Realized crude prices strengthened during the quarter which helped contribute to an $89 million, or 27% increase in our oil revenues. Gas prices during the quarter on the other hand declined by approximately 18% which resulted in a $29 million decrease in gas revenues.

Natural gas prices historically decline during the spring and this year was no different. In fact, basis differentials in the Rocky Mountain region widen significantly during the second quarter. For example, CIG basis differentials averaged nearly $3.80 per Mcf during the quarter. Fortunately for us, we have a significant amount of our Rocky Mountains gas production hedged, leaving only about 50 million cubic per day exposed to basis differentials.

Our North American operations also benefited from the value of natural gas liquids, which we included in our realized natural gas price. During the second quarter, NGLs added approximately $1.20 per Mcf. Our natural gas price for the quarter also included the benefit of approximately $40 million that was attributable to previously recognized losses for hedged contracts. These contracts were re-designated concurrent with the 2006 Gulf of Mexico Shelf asset sale. This compares to a benefit of $51 million for the first quarter.

The expenses during the second quarter, increased by approximately $62 million over the first quarter. This increase is largely attributable to an increase in our estimate for hurricane related salvage and clean up cost associated with Hurricanes Ivan and Katrina, which resulted in a pretax charge of $38.3 million. I am pleased to say that salvage and clean up operations for these two hurricanes is now complete. So, these expenses should now be behind us. We also recorded a $3 million pretax deferred compensation expense during the quarter. This charge is due to the increase in Noble Energy stock price over the last quarter which resulted in the expense for this benefit program.

Exploration expense was up quarter-on-quarter, primarily as a result of approximately $7.5 million of a seismic acquisition incurred on the North Sea related to the Norway licenses we recently acquired, as well as an increase in deepwater seismic and support of the October federal lease sale.

LOE transportation, production taxes and G&A were each up slightly from the first quarter with an aggregate increase of $15 million. The largest component of these cash costs in LOE, which we define as oil and gas operating cost and work over and repair expense. Looking at LOE on a unit of production basis as compared to the first quarter, our costs actually declined $0.07 per barrel oil equivalent. Managing our cost remains a very important part of our business model.

Our DD&A decreased slightly on a unit sale basis to $9.98 per barrel for the second quarter compared to $10 for the first quarter. Our effective tax rate in the second quarter was approximately 29%, down slightly from 30% in the first quarter. Higher international earnings, including earnings from unconsolidated subsidiaries coupled with increased domestic drilling activities are responsible for this reduction. The split between current deferred taxes for the quarter was 20% and 80% respectively. Increased domestic drilling and greater intangible drilling costs led to this change for the quarter. We still expect that our deferred portion of taxes for the year will be between 50% and 60%.

Looking at the segment reporting schedule by country, North America reported pretax operating income of $160 million, compared to $218 million last quarter. Operating income for the quarter decreased largely due to the hurricane related expenses mentioned earlier. In addition, DD&A was up for the quarter as a result of higher volumes and production based changes. Production was nearly 114,700 barrels of oil equivalent per day in the second quarter, up from 113,600 for the previous quarter. Liquid prices for the quarter were stronger sequentially. The average realized liquid price for North America was $51.34 per barrel compared to $46.42 per barrel during the first quarter. Crude oil hedges lowered our realized crude revenues by $40 million, or $9.74 per barrel. Realized natural gas prices for the quarter averaged $7.25 per thousand cubic feet. A decline of approximately $0.99 from the $8.24 per Mcf reported in the first quarter. As mentioned earlier North American natural gas prices included a second quarter benefit of approximately $40 million that was attributable to previously recognized losses for hedged contracts. For comparison purposes, the benefit to the first quarter of ’07 was 451 million. These contracts were re-designated concurrent with the 2006 Gulf of Mexico Shelf asset sale.

Actual hedged settlements during the second quarter of ’07 decreased gas revenues by $10.3 million. The net hedging impact of these two items was an addition to the natural gas price of $0.77 for the quarter.

As I mentioned earlier, we certainly saw widening natural gas differentials in the Rockies during the second quarter particularly in the case of CIG basis. With our basis hedges in high liquid hydrocarbon content of certain of our North American natural gas fields such as the Wattenberg Field, we were able to mitigate much of this price weakness. In the second quarter ’07, NGL sales added $45.7 million into to our gas revenues, mostly in the Wattenberg and deepwater areas. On the Mcf basis, again, NGL has added $1.20 to our realized North American natural gas price.

Switching to international. Total sales volumes for the quarter were approximately 84,819 barrels of oil equivalent per day versus 68,513 barrels of oil equivalent per day for the prior quarter. Primary contributor to the increase was West Africa, where natural gas volumes increased from approximately 55 million cubic feet per day in the first quarter to just under 116 million cubic feet per day in the second quarter. Most related to increased sales to the LNG plant. In addition, Alba condensate sales volumes increased from 12,236 barrel per day in the first quarter to 18,799 barrels in the second quarter, due to a greater number of condensate lifting period-over-period.

Intentional operating income increased 31% to $202 million compared to $154 million in the first quarter. In AG operating income was $142 million, up from $83 million in the prior quarter. Accompanying the increase in condensate sales volumes was an increase in the realized liquid prices from $56.25 per barrel in the first quarter to $69.23 in the second quarter. The Alba plant reported $38 million of income from LPG and condensate sales net to Noble's interest compared to $20.8 million for the first quarter of ’07. The increase in operating income from Alba plant LLC reflects increased plant sales as well as higher realized prices. Sales volumes increased to 9,096 barrels per day, up from 7,014 barrels per day. And realized prices increased from $44.51 per barrel to $50.60 in the second quarter.

Income from methanol operations totaled $11 million net to our interest. Due to the timing of liftings menthol sales volumes declined to 33.6 million gallons compared to 39.7 million gallons last quarter. Realized methanol prices averaged $0.87 a gallon during the quarter, up from a record $1.22 per gallon in the first quarter.

In the North Sea, in spite of Dumbarton continuing to ramp up, operating income decreased modestly from $32 million and $27 million, primarily due to the increase in seismic expenditures incurred in Norway. Second quarter operating income from Israel was down slightly to $17.5 million from $19.7 million. Natural gas production averaged 97.5 million cubic feet for the second quarter compared to $103.1 million for the first quarter. Decline was expected and is seasonal in nature. Unit costs remained at variable levels with LOE at $0.24 per thousand cubic feet and DD&A at $0.46 per thousand cubic feet.

In China, sales remained constant at nearly 4,200 barrels per day and operating income grew to $13 million. Operating income in Argentina was nearly $3.5 million and in Ecuador, Machala gas power project showed operating income about $1.7 million.

Our total debt increased approximately $113 million at quarter end, to just over $2 billion. Debt increased, in part due to several property acquisitions which totaled $85 million and the payment of the income tax as an AG of $86 million, which were dued and paid annually. Cash also increased during the period by approximately $53 million.

So while our total debt to booked capitalization at the end of the quarter increased slightly to just under 32%, our net debt to booked capitalization at the end of the quarter stayed constant at 28%.

And now with that I would like to turn the call over to Dave.

David L. Stover - Executive Vice President and Chief Operating Officer

Thank you, Chris and good morning everybody. As Chuck and Chris mentioned earlier, second quarter was very active for both our North American and international operations. Total production was strong at 197,217 barrels of oil equivalent per day compared to the 187,588 barrels of oil equivalent per day in the first quarter, an increase of 5%. As Chuck has mentioned, adjusting for 2006 Gulf of Mexico Shelf sale production growth was 12%, second quarter 2007 over second quarter 2006.

Now I would like to go through a few of the second quarter highlights for each of our operating areas, as well as discuss our key programs for the remainder of 2007.

North America, I’ll start with Northern region. As a reminder our Northern region includes the Rocky Mountains and Western mid-continent operation. During the second quarter of 2007, production in the Northern region was 394 million cubic feet equivalent per day, an 80% of which came from the Rocky Mountains. Total capital expenditures in this region are estimated to be approximately $840 million in 2007, up from earlier around $730 million mainly due to the increase for acquisition and development costs in the Piceance and Niobrara plays. About 51% is targeted for Wattenberg development, 15% for the Western mid-continent properties primarily the Buffalo Wallow and Billy Rose fields and the remaining 34% is allocated to our other Rockies projects including Piceance, Niobrara, Bedouin [ph] and Iron Horse fields.

Wattenberg, our largest field in the Northern region had production during the second quarter of approximately 246 million cubic feet equivalent per day. That’s compared to 217 million cubic feet equivalent per day in the first quarter. We recovered the 36 million cubic feet equivalent per day impact in the first quarter due to the severe winter storms. However we were affected by temporary third party processing plant shutdown which curtailed our production by nearly 6 million cubic feet per day this quarter. The curtailed production is now flowing, again volumes are back to around 250 million cubic feet equivalent per day.

During the second quarter 2007 we drilled 133 wells in addition to 125 refrac, trifrac, deepening and recompletion projects in the Wattenberg field. We are currently running eight drilling rigs in the field including the addition of one new rig in April. We have initiated coiled tubing drilling with one of the rigs. We are currently using this rig to drill a number of wells to see if we are able to cost effectively reduce our drilling times in the field. Still early in the process, but we are encouraged with what we have seen so far.

During the second half of the year, we will also begin to test some of the up-hole potential that has not been a focus area in this field in the past. In the Piceance basin, we are currently producing close to 26 million cubic feet equivalent per day net. Additional compression will be added during the third quarter to continue unlocking our production capacity. We have moved a new rig into the area, increased the number drilling reached during second quarter to three and have initiated drilling on the new acreage we recently acquired. As mentioned earlier we increased our net acreage from 8,200 net acres to just under 19,000 net acres. We have increased our number of wells to be drilled in the Piceance basin by 10 as a result of this acquisition and now expect to drill over 80 wells total in the basin this year.

We’ve contracted for two fit-for-purpose rigs to come into the Piceance area sometime in the first quarter 2008 and anticipate a three to four rig program in this basin when the new rigs are operational.

In the Niobrara trend, we’ve increased our acreage position to over 380,000 net acres and are currently producing 23 million cubic feet per day. Production from the Niobrara Teton area commenced in March this year and are currently 20 wells online producing around 1 million cubic per day. Success has been over 88% in this new play area as we continue to ramp up development based on our seismic review. Overall, we expect to drill more than a 150 Niobrara wells between the Teton acreage and our legacy position in 2007.

In the Iron Horse field, we expect to drill three to five wells in the second half of the year to further test the Fort Union formation on this 29,000 acre area.

In the Western mid-continent area, we operate three drilling rigs, two in Buffalo Wallow and one in Billy Rose. Current production from this area is around 81 million cubic feet equivalent per day.

Turning to the Southern region, we expect to invest approximately $380 million in 2007. Our Southern region includes the Gulf of Mexico, onshore Gulf coast and Eastern mid-continent operations. We remain extremely active in our Deepwater Gulf of Mexico business with the combination of exploration and development projects. Earlier in the quarter, we announced a Deepwater Gulf of Mexico exploration discovery on Mississippi Canyon Block 562 named Isabela. Development planning is underway from all the well's subsea tieback and existing production facility in the area. As Chuck mentioned, Noble has a 33% working interest in the Isabela discovery. We also announced that we had acquired interest in the acreage adjacent to Isabela which contains additional exploration potential. Currently working with our partners to plan the first well on the new acreage was finally dependent on rig availability.

Our next exploration well on the drilling schedule is the Mississippi Canyon Block 568 on the Robusto project, with a 20% working interest and expect the well to pressure [ph] in the third quarter. Robusto has a geologic chance of success of approximately 56% with the resource size ranging from 40 million to 80 million barrels of oil equivalent.

Deepwater production was around 27,700 barrels of oil equivalent per day in the second quarter, down approximately 2400 barrels of oil equivalent per day from the first quarter. We expect continued decline through the remainder of the year which will still result in the full year average relatively flat to 2006.

Looking towards the future Deepwater production growth, in the third quarter, we will accelerate our sidetracked operation at Swordfish, we'll be drilling the third well at Ticonderoga. We expect both of these development operations to add significant production by early next year.

Also, we remain on track to bring the new Raton gas development project online in the part of 2008. Overall, we'll have very active Deepwater program in the second half of 2007 with participation in two to four rigs at any one time.

As both Chuck and Chris have mentioned, we have completed the salvage and clean up operation regarding damage from Hurricanes Ivan and Katrina and all associated equipment has been released. This project is one of the largest of its kind ever conducted; we are especially pleased that it was completed without a serious environmental or safety incident despite over 2,400 dive operations and 1,800 remote operated vehicle operations.

Also in the southern region, we continue to expand our efforts on the New Albany Shale in the Southwestern portion of Indiana. We’ve grown our position to approximately 170,000 net acres and year-to-date we have drilled seven vertical pilot holes in this acreage and four horizontal laterals. We plan to drill around ten additional horizontal wells in 2007. And as we install our own gathering and treating facilities in late third quarter or early fourth quarter, we'll start to begin to see some production results from this year’s program.

In East Texas, we are excited to kick off a six well development program during the third quarter in the Oliver Creek field in Shelby County. Noble’s an operator in the field with an average working interest of 67%. Wells will primarily target the low risk Travis Peaks sand and with success, additional drilling will commence in early 2008 with as many as 30 locations already identified.

Looking at international, it was an extremely active and exciting quarter. To date, capital expenditures for the year stand at a $125 million. We intend to spend approximately $208 million on international operations in the remainder of 2007. Our production growth internationally benefited from the increase of natural gas volumes delivered to the LNG plant in Equatorial Guinea which averaged 58.4 million cubic feet of natural gas per day in the second quarter first. We anticipate volumes will continued increase in the second half of the year as the LNG plant continues to ramp up.

We remain active with our exploration program in West Africa as we have been drilling the Belinda appraisal well, following our exploration success with Benita on Block I announced in the second quarter. With Benita, we now have an exploration discovery in both of our operated offshore Equatorial Guinea blocks. As a reminder, we are the technical operator of both Block O and Block I with 45% and 40% working interest respectively. Similar to Belinda, additional appraisal work will be conducted to verify the area and extent of the Benita discovery. As Chuck mentioned earlier, we still have three firm well commitments with the Songa Saturn after the Belinda appraisal well. Well possibilities include another Belinda delineation well, a Benita appraisal well and/or Block I exploration tests. We have been very pleased with the continued efficiency improvements of this drilling program, both in terms of the potential to reduce time and to reduce costs.

We also picked up an additional rig to accelerate the drilling of a prospect on Block PH77 in Cameroon. As a reminder, we have a 50% working interest in operating this block. We spud the Yoyo Polar prospect in July and expect results nearly end of the third quarter. Yoyo is a Miocene interval with gross resource potential of 80 million to 180 million barrels oil equivalent and Polar is deeper Paleogene, a higher risk prospect, potentially larger in size and possibly oil bearing, if successful.

We’ve had a great start with two out of three successes and we’re very excited about the remainder of our West Africa exploration and appraisal program. As Chuck mentioned, our goal was to further identify potential resources within the area to evaluate Felton [ph] scenarios and needless to say, our West Africa team will stay very busy.

Turning to Israel, second quarter production was very strong at a little over 97 million cubic feet per day. The second quarter is typically the lowest due to seasonal demand related to weather. Subsequently, the third quarter is typically the strongest quarter for the year; in fact recently we have seen daily sales as high 140 million cubic feet per day net to Noble.

In country pipeline construction continues and that will allow the ISP power plants together in McGee [ph], as well as the independent power plant at Ascon [ph] to begin consuming natural gas later this year, early next year.

As a reminder, we did secure rig commitment to drill large exploration prospect offshore Israel tomorrow [ph] in 5,400 feet of water. Noble will be the operator with 33% working interest, and we expect this well to spud in the first half of 2008.

In the North Sea, Dumbarton continues to ramp up and it contributed 7,200 barrels of oil equivalent per day in the second quarter, an increase of 1,400 barrels of oil equivalent per day from the first quarter. We continue to see volume ramp up from Dumbarton and based on recent performance, we still expect production for the full year to average 9,000 barrels per day net to Noble.

Also in the North Sea, we’ve purchased seismic for license acquired in Norway and we anticipate drilling our first exploration prospect called Bream in the first half of 2008. Our Bream working interest is 20% with a 75% chance of success and a resource range from 30 million to 56 million barrels oil equivalent.

In China, we are continuing with the supplemental development program for our operated field with plans to commence drilling by first quarter of 2008. Early estimates are that we will see first oil by late 2008 or early 2009 with potential to double our current production by late 2009 or early 2010.

And in Surinam, we’re moving forward with the Western Pier prospect with intentions of spudding that well in the first half of 2008 as well. As a reminder we have a 30% in block 30 offshore of Surinam.

I guess at this time Jamie, we would like to go ahead and open the call to questions.

Question and Answer

Operator

Certainly. [Operator Instructions].

And we’ll take our first question from Ellen Hannan with Bear Stearns.

Ellen Hannan – Bear Stearns

Good morning.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Good morning.

Ellen Hannan – Bear Stearns

There’s just a couple of questions for you. In terms of the price realizations on your U.S. gas and you mentioned that the liquids had such a positive impact for the quarter. Is there a way that we can think about that going forward… in terms of maybe some generalized guidance on basis differentials or… not too specific in terms of what the results for NGLs are for the quarter?

Chris Tong – Senior Vice President and Chief Financial Officer

You can look we had $46 million or so in the quarter you know in value from NGLs. I think you obviously have to look at crude prices and try to get some sort of factor off of that. What makes it more complicated, is as you know you have other moving parts with basis. But we do have a lot of basis hedges that we outline in our Qs and Ks, quite a bit in fact for CIG, for the remainder of this year. So… but in the case of NGLs I guess, we try to… have tried to look at some sort of rule of thumb between that and our crude oil prices to try to get a factor from that.

Charles D. Davidson - Chairman, President and Chief Executive Officer

I think, looking at that was $1.20.

Chris Tong – Senior Vice President and Chief Financial Officer

It was $1.20.

Charles D. Davidson - Chairman, President and Chief Executive Officer

And really without major changes in our… either our Wattenberg gas volumes or Deepwater gas volumes that’s where the NGL revenue comes from, those two. As Chris suggests, if you look at that $1.20 and probably index it based on North American liquid prices such as propane and butane is the best way to look at that, Ellen.

Ellen Hannan – Bear Stearns

Okay, great. Another question on the volume side in the U.K. you mentioned that you think Dumbarton is at an average 9,000 barrels per day net to you, is what I believe is you said. Can you talk about your total U.K. volume outlook for the year for oil?

Charles D. Davidson - Chairman, President and Chief Executive Officer

The… when we look at the other pieces in the U.K., I think realistically we don’t see much else in the way of development or things coming on or falling off. Most of the movement is going to be in Dumbarton. Dave, do you want to add anything more to that?

David L. Stover – Executive Vice President and Chief Operating Officer

Right, no, I think Ellen, when you look at the U.K. volumes probably Dumbarton is 80% of the volume or more.

Ellen Hannan – Bear Stearns

Okay. Another question, and then that’s enough from me. But just… is it too early to ask you about your outlook for your capital program for next year?

Charles D. Davidson - Chairman, President and Chief Executive Officer

Well, we haven’t really put that in place yet. Now I would take you back to what we talked in New York, and that was that based on an organic program, we were looking at somewhere around $1.6 billion as an average over the next five years. And that’s our basic thinking in terms of our five year plan.

Ellen Hannan – Bear Stearns

That’s it for me. Thank you very much.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Thank you.

Operator

Next, we’ll hear from Robert Morris with Banc of America.

Robert Morris – Banc of America Securities

Good morning.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Good morning.

Robert Morris – Banc of America Securities

On the New Albany Shale, we know that you’ve drilled seven verticals, four horizontals, but you’d planned to have some of these begin production late Q3 or early Q4. Can you give us any more sense of how the results are coming in? Does it appear to be commercial or are you anticipating that, sort of what sort of reserves per well are you looking at and targeting there? Just a little bit more color. It just seems that you’re encouraged at least by some of the success or drilling you have done so far.

David L. Stover – Executive Vice President and Chief Operating Officer

Yes Robert, this is Dave. I think I can fairly say we haven’t seen anything discouraging at this point. I think we’ve looked at this both from obviously production reserve side and the costs side and we’ve talked about getting our costs down to $1 million or under. I think this last well we actually saw our costs actually a little bit under $1 million. So, very encouraged from that spud.

I think from what we’re seeing from logs and so forth, no surprises on the wells we've drilled. So, we’re just anxious to get some of this on production later in the year.

Robert Morris – Banc of America Securities

So what are you targeting as far as per well reserves at $1 million cost?

David L. Stover – Executive Vice President and Chief Operating Officer

We’re still looking at around a BCF.

Robert Morris – Banc of America Securities

Okay. All right, that’s it for now, thanks.

David L. Stover – Executive Vice President and Chief Operating Officer

Thanks, Bob.

Operator

We’re going to take our next question from Irene Haas with Canaccord.

Irene Haas – Canaccord Adams

Hi, everybody. My question has to do with West Africa, my most favorite place. And by now you have drilled two successful wells and one dry hole and Miocene seems to be really attractive and you go to Cameroon to drill another well that has a double target. And my question for you is, at this point, when would you pull back and kind of be able to pretty much tell what you have in the entire three blocks? Is it three more wells exploration, on the exploration side or do you need to drill more? I mean, do you have a pretty good concept by now and actually after the Cameroon’s well is drilled, what you actually have under your leases.

Charles D. Davidson - Chairman, President and Chief Executive Officer

I think Irene on that for the Miocene is perhaps going to be a little bit easier after we drill our remaining prospect. Now the Miocene prospect in Cameroon is sizeable, as Dave mentioned. And there is another Miocene prospect in Block I that we could test. But again, we believe that probably by the end of this year and certainly by utilizing those remaining firm slots on the Songa Saturn, as well as the Transocean rig that we now have in Cameroon, we should have a good sense for the Miocene resource.

As you know, this is an amplitude driven play. We’ve been able to do quite a bit of calibration work on that with the wells we’ve drilled. So, and certainly the Belinda appraisal will help us also. So, that really put us in fairly good shape by… I would say by the end of this year of understanding the Miocene resource.

The wildcard would be… is if there was something that would be deeper say in the Paleogene. And again, we note that the riskier play is also not an amplitude driven play. And so, it would probably take quite a bit of drilling to evaluate any discovery. That would be again, a great problem to have. But our target right now is to see if we can get this Miocene nailed down by the end of the year, because as you know we have to look at an overall development plan of marketing, of the associated gas as well as how we would be recovering the condensate.

So we have two nice discoveries and there are certainly going to be some synergies in the development plans of these and that’s why it’s so important to really understand the breadth of resources.

Irene Haas – Canaccord Adams

Now, if you were to go ahead with just gas and condensate, what would be the lead time to first production? That’s all I have.

Charles D. Davidson - Chairman, President and Chief Executive Officer

I think, Irene, we are looking at some 2011-2012 type timeframe, is kind of our best guess right now, as we work through it.

Irene Haas – Canaccord Adams

Okay. Thanks.

Chris Tong - Senior Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions].

Next we will go to John Herrlin with Merrill Lynch.

John Herrlin - Merrill Lynch

Hi. Regarding DJ, the plays still seem kind of retrograde to me. What kind of size threshold do you need, Chuck, for commerciality?

Charles D. Davidson - Chairman, President and Chief Executive Officer

Well, it is… and the key, John, as you know, is the richness of the gas. We certainly at Belinda, it was the richer discovery of the two. When we look at, not only the condensate, but also the liquids that are recovered through processing because the natural gas is rich as well, we do see something that is comparable to the Alba field in terms of liquid quality. And so as a result, I would say right now that pending the market discussion, we could make it go even with just Belinda. So, we are above the size threshold for something that we think is a commercial development. But again, we don’t know what that development looks like without understanding the other resources. Dave, would you like to?

David L. Stover - Executive Vice President and Chief Operating Officer

I agree with Chuck. I think, pending any negative surprises we think that Belinda itself would be economic after some obvious additional commercial discussions, but going back what we said before, we are pleased with what we seen if the sizes hold up for these individual prospects as the potential ranges, then we think we will have something definitely economic to develop.

John Herrlin - Merrill Lynch

And that would be at today’s higher cost development projects.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Yes, it would be. It's and but it would be… again pending discussions, we won't know what the final gas price is, but it would also be at what we think is the, as a reasonable market net back price for natural gas in that area. We have certainly been encouraged by the discussions of expanding the LNG capacity in the area. It looks like it's going to be a good area. What is so nice, is our production is concentrated in a fairly reasonably small area close to the island, close to all this infrastructure. So, we still got more wells to drill. But I think we do believe and we thought almost from the beginning that Belinda was of a size that we could move forward. Benita is certainly a nice add-on. Benita is not quite as rich in terms of condensate, but it also has liquefiable hydrocarbons in the gas base as well. So, as we go through all the processing scenarios and development scenarios, we will be able to get better feel.

John Herrlin - Merrill Lynch

Okay. Next one from me. You are not producing shelf gas, I understand the nature of the settlements but why don’t you treat it as extraordinary rather than throwing it into your gas price realizations in the U.S. because I think Chris said it added $0.77 an Mcf because that way you will get a sense of what you are going to get at the well head.

Chris Tong - Senior Vice President and Chief Financial Officer

Well, unfortunately the way accounting is when we took the flush, we had to take that to the P&L and we have to add back that $400 million over the life of those contracts. So, it goes in there. We do have the schedule drawn on every press release. I think it is Schedule A where we show by quarter exactly what's its going to be, because once it was frozen and there was a mark-to-market value it was known and that doesn’t fluctuate. So, that is something in your model or whatever you could just identify as a separate line item. Now, the actual cash settlements of the hedges that we have in place is going to be dependant on where the prices are, as compared to the hedges that we have that we list in our Qs and Ks. And that could be up or down depending on what prices are but unfortunately, we just kind of have to add it back that way but we do try to schedule it out for you.

John Herrlin - Merrill Lynch

I realize that. Thanks. Last one from me. Rockies gas sales, you gave equivalent production or Chuck did, could you give what the gas percentage was?

Charles D. Davidson - Chairman, President and Chief Executive Officer

The breakdown on that. I think Dave did.

John Herrlin - Merrill Lynch

Or Dave did. I am sorry.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Yes, and he talked about, for instance they are up to 250.

David L. Stover - Executive Vice President and Chief Operating Officer

Yes, I think majority of it comes from Wattenberg… from the 250 is Wattenberg and that is probably closer to 70% gas and 30% liquid. The majority of the rest of the volume in the Rockies in mainly gas.

John Herrlin - Merrill Lynch

Thank you.

David L. Stover - Executive Vice President and Chief Operating Officer

Thanks, John.

Operator

[Operator Instructions].

Next we will hear from Brian Kuzma with JP Morgan.

Brian Kuzma - JP Morgan

Good morning, guys.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Good morning.

Brian Kuzma - JP Morgan

Could you guys review for me again what the appraisal well at Belinda is going to tell us in terms of the structure there and the potential size of the discovery and composition of the gas versus the condensate?

Charles D. Davidson - Chairman, President and Chief Executive Officer

Right. Well, as I mentioned, it's about 4.5 miles away, it's down structured. Part of it is, we think we have calibrated the amplitude. But the key thing will be, as we drill, how does the net pay come out. Reservoir quality can vary over that distance. So what we're understanding is the variability. We're going to be gathering a lot of data on that appraisal, with plans to collect a whole core through the productive interval.

So it's really to allow us to continue to map out the entire field. We have gone back and forth on plans to drill that appraisal well and then also a sidetrack into another area. I think our thinking is now that we may actually drill one more well in the Belinda structure just to make sure. What we don’t want to do is make an assumption here on a very expensive development and find out that we cut ourselves short. So, we are gathering a lot of data. I would tell you, we don’t view it as a high risk well at all. I think we… as we laid out the program and we talked about the Belinda appraisal well as being about 80% to 85% chance of success. What is really important is telling us how reservoir quality varies and how reservoir content varies in terms of liquid yields.

Brian Kuzma - JP Morgan

Okay. And remind me again, on the original Belinda well, was that… are there several pay sands we are talking about here, or is it--?

Charles D. Davidson - Chairman, President and Chief Executive Officer

It’s a single Miocene pay. And that's of course what we saw at Benita as well, a single Miocene pay. There could be some smaller targets here, but they're not meaningful in terms of the overall resource potential. We're basically mapping most of the resource potential in Belinda as a single zone, which really simplifies the development as well.

Brian Kuzma - JP Morgan

And then on an unrelated question. With you guys' CapEx, what percentage of your CapEx are you guys going to spend on acreage acquisition this year?

Charles D. Davidson - Chairman, President and Chief Executive Officer

I think as far as the total acreage, when you include the Piceance, the Niobrara…

Chris Tong - Senior Vice President and Chief Financial Officer

… We spent $85 million…

Charles D. Davidson - Chairman, President and Chief Executive Officer

… New Albany, we're close to about $85 million, $90 million. And there will be some other expenditures. There's a deepwater Gulf of Mexico sale coming up, but we don’t disclose what we have planned for that.

Brian Kuzma - JP Morgan

Okay. And are you guys still acquiring more acreage in the New Albany Shale or are you comfortable with what you got right now?

Charles D. Davidson - Chairman, President and Chief Executive Officer

Right now we continue to look for places to fill in the blanks so to speak, the acreage around some of those areas that we've picked up. So we'll continue to look at some offstets and some additions here and there.

Brian Kuzma - JP Morgan

Okay. Even before you guys get production there going on [ph]?

Charles D. Davidson - Chairman, President and Chief Executive Officer

Well, yes we've had some production on already. And so what we've seen from that has been encouraging along with the other pieces. Again I think relatively, there will be some small additions but, our main objective right now is to get the facilities in and start to see some additional production here later in the year.

Brian Kuzma - JP Morgan

Got it. Thanks, guys.

Charles D. Davidson - Chairman, President and Chief Executive Officer

Thank you.

Operator

And at this time we have no further questions coming in. Mr. Tong, I will hand the conference back to you for any final or closing comments.

Chris Tong - Senior Vice President and Chief Financial Officer

Okay. Well thank you very much. We appreciate your interest and attendance. And if you have any questions please feel free to give us a call at the office.

Operator

And that does conclude our conference. Again thank you all for your participation, we do hope you enjoy the rest of your day. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Noble Energy Q2 2007 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts