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Energy XXI (Bermuda) Limited (NASDAQ:EXXI)

Q3 2012 Earnings Call

May 03, 2012 10:00 am ET

Executives

Stewart Lawrence - Vice President of Investor Relations and Communications

John Daniel Schiller - Chairman and Chief Executive Officer

David West Griffin - Chief Financial Officer

Ben Marchive - Executive Vice President of Exploration and Development

Analysts

Joseph Bachmann - Howard Weil Incorporated, Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Andrew Coleman - Raymond James & Associates, Inc., Research Division

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Robert Ferer - KeyBanc Capital Markets Inc., Research Division

Operator

Ladies and gentlemen, good day. At this time, I'd like to welcome everyone to the Energy XXI Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. And now I would like to turn the call over to Stewart Lawrence, Vice President of Investor Relations. Please go ahead, sir.

Stewart Lawrence

Thank you, Allie. Welcome to the call, everyone. Presenting today, John Schiller, Chairman and CEO; and West Griffin, CFO; and a few others in the room to help answer questions when we're done.

Before we get started, I need to remind everyone that our remarks today, including answers to your questions, include statements that we believe to be forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those risks include, among others, matters that we've described in our earnings release issued last night and in our public filings. We disclaim any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, competition, technology and environmental regulatory compliance. Our drilling schedules, capital plans and other factors may cause our results to differ materially. I urge you to read our 10-K and the latest 10-Q to become better familiar with these risks and our company.

Now I'll turn the call over to John.

John Daniel Schiller

Thanks, Stewart. Welcome, everyone. Our third quarter financials were released yesterday at the close of the market. And we have record production of 45,300 barrels equivalent oil per day for the quarter, producing nearly 70% oil. Our net realized crude price for the quarter was about $1 -- $109 per barrel, representing more than 94% of our pre-hedged revenues for the quarter. Bottom line is that oil drives our financial success.

We hit our stride this quarter and are currently running 5 operated rigs and 4 non-operated rigs. This program resulted in a substantial increase in our CapEx for the quarter and yet we still generated a free cash flow during the quarter. Even better next quarter, we'll start reaping the benefits from the increased activity in terms of record production from those assets.

The only downside for the quarter was that as good as our oil production was, we suffered shut ins due to pipeline repairs and rig moves that cost us about 2,000 barrels of oil today, with the majority of that coming from the pipeline.

Oil has led our historical production growth. In 2 years we've increased oil production over 80%. Current oil production indicates that growth trend is continuing with a capacity that's running 10% above our current quoted rate. We have 6 more wells coming online this quarter with net uplift expected to top another 10,000 barrels of oil equivalent per day. I'll talk more about those wells and other operations in a few minutes, but first let's turn the call over to West to discuss our financial performance.

David West Griffin

Thanks, John. Let's take a look at a few highlights from the quarter. We realized $118.76 on crude versus $52.67 on NGLs for an average realized price of $110.54 for the quarter. That's up slightly versus $108.80 in the December quarter.

We realized natural gas prices of $2.52 this quarter versus $3.23 in the December quarter. Even though natural gas prices fell 34% quarter on quarter, our average realized price per barrel equivalent fell less than 3%. Gas prices have a minimal impact on our financial performance.

Our LOE remained essentially flat against the December quarter at $19.61 per barrel. And our EBITDA was a healthy $52.16 per barrel, our second consecutive quarter above $50 per barrel, even with natural gas prices declining by over 1/3 during that period.

G&A was higher quarter on quarter, primarily due to noncash mark-to-market adjustments on stock-based compensation and profit sharing paid during the quarter. Our EBITDA for the past 2 quarters combined is $440 million. On an annualized basis, that's almost $900 million. As we continue to ramp crude oil production, we should see a significant increase in EBITDA and free cash flow.

During the fiscal third quarter, the drilling program was at its peak and we spent approximately $155 million in CapEx. And even at that rate, we were cash flow positive. As we bring production tied to this CapEx online in the June and September quarters, you will see accelerated cash flow and increased liquidity. And to help assure that we remain cash flow positive, although we believe that the fundamentals for crude oil remain very constructive, we continue to look for prudent ways to enhance our existing hedge portfolio. We recently bought 15,000 barrels per day of the 75-85 WTI put spread, paying approximately $0.70 per barrel for this through May through the December period. We are also looking at incremental hedges for calendar 2013 and 2014 periods, which give us additional downside protection while allowing us to participate in the upside.

I'd like to turn it back to John to update everyone on our operations.

John Daniel Schiller

Thanks, West. I want to start by reviewing our success in our Main Pass Bill, which is a legacy bill we had prior to the acquisition of the ExxonMobil assets. And I'll also spend some time covering some new wells that are either just coming online or will be coming online in a few days to give you a sense of where we plan to get the uplift to deliver the record production again in our fiscal fourth quarter.

At Main Pass, which we acquired from POGO in 2007 and then further interest in the 2009 Met [ph] Energy Deal, we continue to see upside around our Onyx well that we drilled last year. The well came online last January at about 2,000 barrels a day, then after almost 8 months and 400,000 barrels of production, and not seeing any production decline, we opened the choke and production rose to 3,400 barrels a day based on some pressure trends and analysis work we had performed.

We identified 2 additional shut in wells that have penetrated this sand and that could be re-completed into the LP-1G Sand. We've since re-completed those wells in the past few weeks and they're online today, producing about 3,800 barrels a day. The C-12 re-completion, which was in the same reservoir as the Onyx well, is producing 3,200 barrels per day by itself and we're preparing to rig up a coil tubing unit to remove an obstruction in the tubing of the C-2 well in order to bring the rate up on that well from 600 barrels a day to approximately 2,000. True to our mission that good wells make great wells, we changed out the tubing on the Onyx well and increased that production from 3,400 to over 5,200 barrels of oil per day. This should give you a sense of opportunity we have in the way our teams work to exploit these large, mature oilfields.

Now let's take a look at what's coming this current quarter to give you a sense of the uplift. Camshaft has just been placed online as producing about 3,000 barrels equivalent a day. It's located on our South Tim 54 and went out to Sand to up the current production. The well found 180 net feet of oil pay and was duly completed above the G-9 and G-8 Sands. It should be noted that none of the reserves associated with that well which will be in excess of 1.5 million barrels, were on our books at the time.

Over Grand Isle 16, the Costello well targeted 2 separate sands updip to wells that we have produced almost 9 million barrels of oil from. We encountered 279 net feet of oil pay and we should have this well online at more than 3,000 barrels of oil equivalent in the next week. At West Delta 73, Miller is our second development well in the field and that well was placed online a week ago at 1,250 barrels a day. It was duly completed and we have 2 additionals on that have been gravel packed for future production.

The Camshaft and Miller wells along with the Costello well coming online this week provide an uplift of over 7,000 barrels a day in just 2 weeks, adding to the 5,000 barrels equivalent a day at the Onyx wells 3 weeks ago. That's 12,000 barrels a day. And most of that was oil. As we said in the news release, there's still another 10,000 barrels of oil of uplift to come from wells we expect to place on production by June 30, our fiscal year end.

I believe you can sense why we're so upbeat about the future of Energy XXI. We sit on top of mature oil fields that have produced in excess of 1.7 billion barrels of oil. Average recovery has been 40% or less and we have the technology and the commodity pricing today to continue to increase that recovery from known produced reservoirs. This 5% increase in the ultimate recovery comes close to replacing our existing reserves.

Now I'll touch briefly on what's going on in our other part of our business, with the ultra-deep. At Davy Jones #1, we have finished removing the tube and we're preparing to pick up our work stream and going there and clean out the bottom and then we'll begin the process of perforating all of the zones through electric line with a casing gun. And over at BlackBoard West #2, we had penetrated the salt well, saw about 150 foot of salt. We're currently cleaning out the hole there to run a liner before drilling out into the events associated with the Cupola, as Jim likes to call it.

And with that, that's a quick summary of everything we've got going on. Why don't we go ahead and open it up for some Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeb Bachmann of Howard Weil.

Joseph Bachmann - Howard Weil Incorporated, Research Division

A few questions mainly surrounding production. I guess it sounds like Bullfrog and Golden Bear are the 2 wells that are slightly delayed, I guess Golden Bear with the waiting on the DJ rig. Is that right?

John Daniel Schiller

Yes, Golden Bear is waiting on the Davy Jones rig, so it's got 0 chance of impacting us this year now. Bullfrog, we're still drilling ahead. We've got a line to run. We have a chance of getting that to TD this year. I don't know that we'll have any first production before June 30 out of that well, either, which is kind of consistent with what we've been telling you, Jeb. I mean, our long wells are just hammering it. They're all coming in better than anticipated. Any volume variance you see going forward is probably going to be associated with some of the high rate gas wells.

Joseph Bachmann - Howard Weil Incorporated, Research Division

Okay. So I guess, looking towards the exit rating, June 30, the end of your fiscal year, be accurate to say you guys are looking at something north of 60,000 barrels a day at this point?

John Daniel Schiller

Yes. I mean, as I kind of mentioned in there, we're running capacity right now in sort of 56,000 57,000 range. So we're bringing on additional production and we feel pretty good that come June 30, we're going to have a high-50,000s sort of rate.

Joseph Bachmann - Howard Weil Incorporated, Research Division

Okay. And then I look at the CapEx, it went up a little bit. Is that all just increased costs with the completion at Davy Jones, that what's driving that increase?

John Daniel Schiller

Yes, I missed part of your question, but I think you said about CapEx going up. Most of that is just the amount of activity we're running now. Now we picked up the fifth rig and went out there and did the Main Pass re-completion work. That was about $8 million or $9 million worth of work incremental before we started drilling the wells that were planned in the budget. You've got some cost overrun obviously with Bullfrog and then some with Davy Jones. But the Davy Jones piece, just because of our 15% interest, is not near the impact as just our operating 100% work is.

Joseph Bachmann - Howard Weil Incorporated, Research Division

Last one for me. Remind us what, I guess, the cutoff date from the SEC in terms of when you're allowed to consider reserves part of the prior fiscal year and kind of that's going to Davy Jones and assuming that can be tested late June or early July. If it's successful, do you think you're going to book some incremental reserves on that for your 2011 report?

John Daniel Schiller

I will be 100% honest with you, they don't all do it the same way but I will tell you with regards to us, you have to have the Sand penetrated by June 30. Whether you can take data that comes in July 5 to help improve that penetration is somewhere where the subject of debate comes up. But for sure, you have to have a reservoir penetrated by June 30 to be able to book it. Then you can just kind of argue about when you learned more data. So on the Davy Jones case for us, obviously the slam dunk is get a production test before the June 30. It will have an impact on us. If for some reason, it's later than that, and I don't know why it would be, but if it is, then we'll have a little debate with auditors about whether that was official reserve increase or not.

Operator

Our next question comes from Duane Grubert of Susquehanna Financial.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Another question about reserves. And this one ex the McMoRan program, when you go to do those reserves in a few weeks, your oil prices are going to be materially higher this year than last year. Everything works at last year's prices. Everything works at this year's prices. But do you think there's a material tranche of reserve adds that might come from extending the tail on those curves because of the higher prices on your production?

John Daniel Schiller

Yes. I mean, Duane, it's a good question. Obviously, there will be some impact. I don't think I would call it material. And that's just a function of the tight decline rates we have. And while they're nowhere near 35%, when you start talking about a tail in production, it's not something that's a 10% sort of number, okay? But I will tell you in general, we're very comfortable with where the reserves are going to be. You're going to see year-on-year growth. You're going to see more than production replaced and things like that.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Yes, that sounds logical. Separately, you've reinstated your dividend. Can you walk us through how you guys came to conclude to do that?

John Daniel Schiller

Yes. I mean, I think we've done a good job, West has, of fixing the balance sheet, continue to pay down debt. You look at the free cash flow we're generating and what your options are. One's go buy debt back, well, that doesn't make a lot of sense to anybody in the room, that's not callable until the end of 2014. Second, we looked at things like how much more can we put to work and you're going to see us continue to look for ways to put more capital to work. But even when we look at sort of our upside capital expenditures and downside oil price scenarios, we're still generating pretty substantial free cash flow. So we wanted to do something for our shareholder and we thought the best way to start that was to reinstate our dividend and do it at a rate that at least would get your attention and is going to come close to 1% and we'll keep working on getting more back to you as we keep growing the cash flow.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Okay, very good. And then you had mentioned in the past, I know you have a really thoughtful approach to how much work you guys do. You try to not to overdo it and let the wheels fall off the wagon by trying to take more than you could chew. But you've also talked about putting together a team that does more regional work. Has that happened and what are they working on it if it has?

John Daniel Schiller

Yes. We're actually working on that as we speak and what you're referring to is we're trying to take some of our high impact exploration opportunities that don't even show up in any of our inventories, and start moving that forward. And I think we are making some headway there. We may show a little bit of it at Investor Day. But most of it's going to be 6 more months down the road.

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

All right. And then finally, if you could just comment a little bit on the acquisitions environment in the Gulf. I've heard you publicly made comments about there are probably private guys who would be for sale. Can you explain why that would be the case? What would motivate these guys to want to sell?

John Daniel Schiller

Yes. I think there's a lot of different scenarios going on over there. But rigs are getting tight again. So if you go back to our history at ocean, when rigs got tight was when we were typically able to do deals with private companies who have some undrilled locations to develop but they weren't really going to get rigs. So it creates a nice situation where -- just to give an example, $200 million of PV with $50 million or $60 million coming from a PUD, or PUDs in general, there's a price in there where you can make a good deal that's a little bit more than they're going to get. It's a less price than what you're going to realize and then you put the public company multiple on and it's a pretty nice acquisition. So you combine that with, frankly, if you think about some of the private guys that are out there in the Gulf, that they've started drilling oil wells and some of them have had success and now they have to realize they're going to operate an oil well. Operating oil is a totally different one than operating gas with a nice little separator and dehyde [ph]. Now you have to handle a lot of fluid. You've got to process it. You got to heat treat it a lot of times. You got to use chemicals and you got to put water overboard. And frankly, if you think about being a private guy in that scenario, with this administration, a little oil spill can wipe you out. So I think you're going to see those opportunities start popping up and we intend to be in a position to take advantage of it.

Operator

Our next question comes from Michael Blake [ph] of Johnson Rice.

Unknown Analyst

Just a quick question on the production mix. You're running 70% oil. How should we look at that going forward over the next couple of quarters? I mean, it seems like some of the gas projects have been pushed out a little bit and the oil projects are outperforming. Is that fair?

John Daniel Schiller

That's correct. I think, Michael, that's what we were discussing before we went on about ways and I think we've started doing monthly updates for you to give you some sense. That's probably the best way to get there. But I would say that we look out of things at least for the next couple of quarters, we're still sort of in that 68%, 72% sort of window. For us, it's something -- we brought on some wells right now that are oil wells, up dip, but they're making some decent amount of gas. And we don't think that gas stays with us long and becomes oil, just based on how we know these reservoirs produce. So I think you're going to continue to see some things like that happen. Obviously, the high rate, big gas wells will have some impact. But those are the type of wells that hopefully will be a little bit more predictable once we have them online too.

Unknown Analyst

And then shifting to the acquisition market, do you guys see any opportunity in kind of deeper water kind of in the mid-water depths? I mean, is there really a significant difference philosophically for a property like Dynamic did with Bullwinkle, or Stone did with Pompano and kind of what you look at on the shelf?

John Daniel Schiller

Yes. No, I think that's a great question. We've talked about that and we kind of agree with what you said. We don't really think there's that much difference as long as we're operating on a platform that sits on the bottom, with dry trees between what we already do. But there aren't really any assets out there right now that get us very excited.

Operator

Our next question comes from Andrew Coleman of Raymond James.

Andrew Coleman - Raymond James & Associates, Inc., Research Division

I just had a question on -- I guess, 2 questions. One was on the NGL kind of outlook here. It seems most of the onshore guys have seen NGL prices that have fallen as far as $35, $33 a barrel. You guys are still at $50, $51. I guess as we look ahead in the next quarter or 2, I mean, how do you see that NGL forecast kind of I guess holding up or tapering off or...

John Daniel Schiller

Yes. Well, I think what we believe right now is production will be less. This was a big quarter for us. And I don't think you'll see as much NGLs going forward. Second, we talked about pricing and it's kind of like everything else. When you're located offshore Louisiana, you are the indexes for the most part. So we just don't suffer a lot on transportation. So we don't see any indication -- matter of fact, we were caught off a little guard with some – off guard a little bit with some of the reporting yesterday in terms of 30% and 35% of WTI. That's not current with what we're getting or anything else. And it all goes back to where you are relative to the points of sale.

Andrew Coleman - Raymond James & Associates, Inc., Research Division

Okay, great. And I guess, one other question on minutiae then. Looking at the -- you guys had a, I guess a lower tax rate, looks like around 10% here for the quarter, so maybe this question is for West. But I know you guys had monetized some hedges a little over a year ago and that kind of impacts your taxes as we see them in the financials. But will we see that continue going forward into fiscal 2013, or is that going to end here with your -- with this next quarterly release?

David West Griffin

Yes. We had a very slight change in the effective tax rate from just over 11% down to 10.5%. And that's really driven by the fact that we just filed our fiscal year '11 cash tax return in March, and then we did a little true up of some items between the accounting and the tax and led to a slight -- very slight reduction in the effective tax rate. Looking at it going forward, we're not a cash taxpayer right now. We do anticipate this next year to start potentially paying a little bit of AMT tax from a cash tax perspective. Now on our effective tax rate, from an accounting standpoint, that's going to creep up a little bit as we get into fiscal year '13, as we finish chewing through our valuation allowance. That is a residual of the ceiling test write downs we took in '08 and '09.

Operator

[Operator Instructions] Our next question comes from David Deckelbaum of KeyBanc Capital Markets.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Hate to belabor the questions about product mix. But just curious on -- you did say mostly oil on the 10,000 barrel a day uplift. Is that more in line with that 70% cut? I know that Bullfrog's included in there and certainly a high gas rate well. But I guess should we be thinking about that preponderance of the mix barrel equivalents coming on as being in that 70% range?

John Daniel Schiller

Yes. I think you're going to find -- we're doing fine with that. We'd still be in that 7% range. Most of what we're bringing on is solid oil. The Onyx well, when we bring it on, the C-12, when we get that obstruction out, that's going to be all oil. So we're real good with 70%, it could be close to 75% at the end of the day.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Okay. And I'm curious just to hear what the plans are for Onyx, I guess, over the next 12 months and when some additional offsets might be drilled.

John Daniel Schiller

Yes. I'm chuckling because I've got 2 board members in here with us, one of which is my audit chair. He asked Netherland Sewell that same question 2 days ago and they kind of raised their hands and said, "We don't have a freaking clue." So that's not quite our answer. Our answer I will tell you is here's the game plan. We're going to drill Carinos that we're currently drilling. That well is going to TD here probably in 10 days. Then we're going to Don Tomas. We're going to complete it, then we're going to drill Don Tomas, complete it. That probably gives us about 3 months of production from this reservoir, and 3 months and 10,000 barrels a day would be a decent increase in the amount of knowledge we have. We'll be doing some more buildup work in there, David, to see what kind of size we think we're seeing, and that hopefully, we can put ourselves in a position where we can take that rig back over there, get over the platform and drill a sidetrack or 2. So that's kind of the rough game plan that we're on. Obviously, the performance is going to be a key to that.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Sure. And I guess digging into the weeds, I noticed that the cake project showed up on the slide deck. Can you just give us like a brief overview of what that project looks like and where it is?

John Daniel Schiller

Which project showed up? I'm sorry.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Cake.

John Daniel Schiller

Yes, cake. Ben, tell him about cake.

Ben Marchive

Well, we had to have cake because we had pie in there, too.

John Daniel Schiller

You've probably noticed we're on desserts for that. Hold on a minute. Yes, cake is just -- that's one we just looked at this week for the first time. But it's another up dip well, looks really good. As I kind of mentioned casually in there, I think, David, the thing that got more of us taken by surprise is that we're finding all these up dip wells. We're finding north of 1.5 million up to 2 million barrels with a couple of these wells. And from a Netherland Sewell look, they had only seen the 1 or 2 reservoirs and they argued that they weren't economical enough for a justified well. So nothing got drilled. And so we're starting to go back through and find all that. And that's what cake is. It's just another up dip opportunity. Yes, it's a little bit shallower -- its objectives that are a little bit shallower than the pie well.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

And what block is that in?

John Daniel Schiller

It's on Grand Isle 22.

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Great. And then I just had one more, just at a high level. With the dividends now, you talked about I guess different ways to put capital to work and perhaps a potential if privates need to have you operate their well or bring your rig over in partnerships. I guess I'm just wondering, with the dividend out there now, does that change anything in how you're looking at your business, or scheduling the type of wells that you're drilling? I wouldn't imagine that does, given the free cash situation, but just curious if the mentality has changed a bit.

John Daniel Schiller

No, not at all. We wouldn't be doing a dividend if we didn't feel very comfortable that we've got some great cash flows coming. We've protected it with smart, intelligent hedging. And we looked at our drill program and as I've told you guys, we're 6 out of 6 on Exxon, we expect to be 9 out of 9 before we drill anything that's remotely risky, which would be Golden Bear and at the current rate of getting that rig back, we could be 11 out of 11 before we get the Golden Bear. But we feel very solid. I don't think you're going to see a change in anything we do. At the numbers we're talking about, you're talking $25 million, $30 million a year. It's a nice number, it's a good number to get back. What we want to do is keep getting ourselves in a position where we grow that every year.

Operator

Our next question comes from Mike Kelly of Global Hunter Securities.

Michael Kelly - Global Hunter Securities, LLC, Research Division

John, I was hoping you could expand upon your comments earlier that you potentially look to bring forward some of these higher impact exploration projects. I'm just wondering how much capital is actually allocated here and what types of impacts could you actually see in terms of reserves and production growth if these are successful.

John Daniel Schiller

Yes. I think if you go back, we've routinely -- as we went into ultra-deep but even before that, Mike, when we went into Laphroaig with Jim Bob, we kind of always said we were targeting 10% to 15% of our cash flow to those type wells. I think we'll be staying within that number. So you put it all together with exploration, with the ultra-deep and all that, I still think we're sort of talking $100 million sort of number exposed for these type opportunities. And some of these wells will be -- that's one of the things we'll be looking at going forward. Some of them are $15 million, $18 million dry holes that I think we'll do 100%, no question asked. Some of them are $40 million sort of dry hole numbers and we will need to make a decision as we get closer to where we are partner or where have we grown cash flow to and how comfortable are we taking a bite of that size by ourselves.

Michael Kelly - Global Hunter Securities, LLC, Research Division

Do you have any of those actually listed out? I know you give all your prospects here, what would be some of those higher impact, maybe like the $40 million type opportunities?

John Daniel Schiller

Yes, we're not really showing on most of those. I will tell you that, without a doubt, Crete is one of those. But there's some things going on there, including some new seismic that's getting shot that we'd like to see. There's some long offset seismic that we signed up for the other day in that area, and that's going to give us some even additional data on that prospect. So we're going through things like that, making sure we've got all the latest current data, in some cases going back to Exxon and getting more data that -- or trying to find more data. So it's a slow process, but I think you'll see wells starting early next calendar year. Yes, we're going to try and show you some of that in New York hopefully.

Operator

Our next question comes from Paul Gregle [ph] of Macquarie.

Unknown Analyst

One quick question on the 10,000 net barrels. Is that inclusive of Miller and Costello or is that additive on top of those that have either already come online or about to come online?

John Daniel Schiller

Miller is, Costello's not.

Robert Ferer - KeyBanc Capital Markets Inc., Research Division

Okay. So the 10,000 is entirely incremental from this point forward into the rest of the quarter?

John Daniel Schiller

Correct.

Unknown Analyst

Okay. And in terms of the timing of those wells that are expected to come on. Are those more in late May and June or are those equally spread out?

John Daniel Schiller

Yes, I mean, you look at the production uplift, you can pretty much get the guidance. I mean, Costello is coming on soon, Flaundry [ph] will TD and bring on later in the quarter. Carinos is going to TD but we've got to complete it so it's going to catch on sometime late June, so we're just -- we're moving stuff through.

Unknown Analyst

Okay, great. And then in terms of Davy Jones and the expectations there with the flow test, determine some of difficulties that have occurred, is there any change to expectations that Jim Bob had laid out previously from your guys' perspective?

John Daniel Schiller

Yes. The only thing I'll tell you at Davy Jones is it's very slow, you're dealing with some big iron, the government's making them test the BOPs every 7 days. There's 24 components to test in the BOPs. So I would tell you that out of a 14-day work week, we're going to do good to work 9 or 10 days. And so as we move through this, he's making good time. I mean, we're not -- we've got no trouble time, it's just not a quick process. We only get to work 5 days out of 7. But the tubing's out of the hole, like I said, we're picking up the water stream, we'll go in there and wash the bottom and we should start to perforate and get everything perforated and then start running tubing.

Unknown Analyst

And in terms of rate, is there any kind of change in view, given the difficulties that occurred?

John Daniel Schiller

Yes. I mean, what I'll continue to talk about there is, to me, 15 to 20 million a day is plenty good rate. I'm not looking to justify commerciality off the rate from a 5 inch completion. What I want to see is what the permeability is in the reservoir. I can tell you right now, no matter what we try and do with this well, and whether we put acid on it or not, short of having natural fractures which, if we have natural fractures, everything I'm about to say you can forget about. But in a normal reservoir with these type permeabilities, perforating in a casing gun with mud, is going to cause a lot of damage. Damage is typically very hard to get out. And so I don't think you're going to have huge flow rates. I think it has absolutely nothing to do with what the real commerciality is though and it's how Ben and I and guys of our era, that's how we started making our names. We came out in an era where the late '70s, all the high-pressure wells in Louisiana had been completed in mud. They made 5 million a day. We came around started perforating in a clear fluid balance and making 20 million a day from the same reservoirs. And so that's my point here is we have smaller casing. We're not going to do a lot of penetration either way even though it's better than what we're going to get through tubing and we're perforating over balance with mud. So I just think that if you just look at the flow rate, you're going to see a lower number. All that really matters to us is what's the permeability in the reservoir because then I can turn around and tell you in Davy Jones #2 with 7 inch, exactly how much rate we're going to make and it'll be a significantly higher number.

Operator

I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. John Schiller for any closing remarks.

John Daniel Schiller

Thank you, Allie. Thanks everybody for joining us again this morning. I think you're going to continue to see record growth. We've got a lot of great things on the platter and we'll update you as we need between now and the end of the year. Thanks.

Operator

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

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