SandRidge Energy Q3 2007 Earnings Call Transcript

Dec. 4.07 | About: SandRidge Energy, (SD)

SandRidge Energy Inc. (NYSE:SD)

Q3 2007 Earnings Call

December 4, 2007 9:00 am ET

Executives

Tom L. Ward - Chairman of the Board, President, ChiefExecutive Officer

Dirk M. Van Doren - Chief Financial Officer, Executive VicePresident

Matthew K. Grubb - Chief Operating Officer, Executive VicePresident

Analysts

Joseph Allman - J.P. Morgan

Brian Singer - Goldman Sachs

Scott Hanold - RBC Capital Markets

Jeff Robinson - Lehman Brothers

David Heikkinen - Tudo Pickering & Co.

Operator

Good day, ladies and gentlemen, and welcome to the thirdquarter 2007 SandRidge Energy earnings conference call. (Operator Instructions)I would now like to turn the call over to your host for today, Mr. Dirk M. VanDoren, Chief Financial Officer of SandRidge Energy. Please proceed, sir.

Dirk M. Van Doren

Thank you. I have a few housekeeping items, including theforward-looking statement to read, then Tom and I will discuss the highlightsof the quarter and finally we will have a question-and-answer session. We willtake all the questions with no time limit and I will be available to take callslater in the day and throughout the week at your convenience. My direct numberis on the press release.

If you have not received a press release, please go to ourwebsite. www.sandridgeenergy.com under the investor relations tab. There is away also to sign up for our filings automatically. We also filed our 10-Q lastnight as well.

Turning to the forward-looking statement, this conferencecall could include forward-looking statements within the meaning of variousprovisions of the Securities Act of 1933 as amended and the Securities Act of1934 as amended. These statements express a belief, expectation or intentionand are generally accompanied by words that convey the uncertainty of futureevents or outcomes. The forward-looking statements include projections andestimates concerning the timing and success of specific projects and our futureproduction revenues, income and capital spending. We have based theseforward-looking statements on our current expectations and assumptions andanalyses made by us in light of our experience and our perception of historicaltrends, current conditions, and expected future developments, as well as otherfactors we believe appropriate under the circumstances. However, whether actualresults and developments will conform with our expectations and predictions issubject to a number of risks and uncertainties, including the volatility ofnatural gas, our success in discovering, estimating, developing and replacingnatural gas and crude oil reserves, the availability in terms of capital andthe amount and timing of future development costs and other factors, many of whichare beyond our control.

We refer you to the discussion of risks in our prospectusdated November 5, 2007 and filed with the Securities and Exchange Commission onNovember 6, 2007.

All of the forward-looking statements made on thisconference call are qualified by these cautionary statements and there can beno assurance that the actual results or developments anticipated will berealized. Such statements are not guarantees of future performance and actualresults or developments may differ materially from those projected in theforward-looking statements.

We also undertake no obligation to update or revise anyforward-looking statements.

Now let me turn the call over to our Chairman and CEO, TomWard.

Tom L. Ward

Thank you, Dirk and thank you for joining our third quarter2007 earnings conference call. You’ve just heard from Dirk, our Chief FinancialOfficer, and we also have in our office Matt Grubb, our Chief OperatingOfficer. We’ve posted our third quarter numbers on our website and Dirk willdiscuss those with you momentarily.

I do have several items to discuss with regard to ouroperations today. SandRidge currently has 40 rigs operating. These rigs aredistributed as follows; 30 in West Texas Overthrust; six in East Texas drillingour Cotton Valley trend; two in Oklahoma; one in [Ektar] County, Texas,drilling for Permian oil and one in our Galveston Bay area.

We have also finalized our third quarter reserve numbers andhave added 99 bcfe during the quarter. This brings our total reserves to 1.27tcf gas equivalent. Year-to-date through September 30th, we have added over 270bcfe of reserves. Our PUD count has moved down to 59% from 68% at the beginningof the year and 62% at the end of the second quarter. As we continue to drillthe West Texas Overthrust, we expect this PUD count to stay fairly constant.Our year-to-date PUD drilling in the West Texas Overthrust is approximately 65%and during the third quarter, our PUD drilling was 71%.

During the third quarter, SandRidge drilled and completed 48operated wells in the western division and 21 operated wells in the easterndivision. Our drilling finding costs came in over budget at $2.27 per mcfe forthe quarter; however, our finding costs for the first nine months of 2007 was$1.77 per mcfe. This increase in finding costs was a direct result of theaggressive ramp-up of our drilling program. We were challenged on the cost sideof our business during the first half of 2007 as we ramped up from drillingseven rigs to 30 rigs in the West Texas Overthrust.

Many of the wells completed and reported in the thirdquarter were drilled during this ramp-up period. We reached our ramp-up targetof 30 rigs in the WTO at the end of the second quarter. As we have kept our rigcounts constant now for several months, our drilling costs have decreased tolevels achieved prior to the ramp-up. We believe we will be back at or belowour nine month average finding costs at year-end. We currently model $1.75 permcfe and continue to feel comfortable with that guidance.

Our all-in finding costs for the quarter were $2.86 per mcfeand $2.24 per mcfe for the year-to-date. We are focused on moving that numberdown to $2 per mcfe and as we have substantially completed our -- or as wesubstantially complete our leasing program in the West Texas Overthrust.

We produced 16.1 bcfe for the quarter for an average of 175million cubic feet of gas equivalent, which is in line with our projections. Wealso continue to ramp up our drilling production and averaged just over 220million cubic feet in November. We do continue to expand our compression anddeliverability from the Piñon Field through our wholly-owned subsidiary, NEGOil and Gas. During the early part of the year, we were capacity constrained.However, we have budgeted approximately $100 million per year to be spent onour midstream business to maximize existing production and ensure that we’ll beable to deliver gas as we drill.

On November 1st, we began delivery of gas into EnergyTransfer’s newly constructed 20-inch pipeline. This pipeline provides SandRidgewith an incremental 285 million cubic feet of gas, of sweet gas capacity out inthe field and access to firm transportation to the KD hub. With this new EPCline, SandRidge now has takeaway capacity of over 400 million cubic feet of gasa day from our Piñon Field and therefore also from the greater West Texas Overthrustregion.

We continue to be constrained in the production of our highCO2 gas from the Piñon field. One of our top priorities is to expand ourtreating capacity for high CO2 gas. Just this last week we acquired the GreyRanch Plant from Enterprise. SandRidge currently treats 50 million cubic feetof gas a day at Grey Ranch and we will add approximately 80 million cubic feetof high CO2 gas treating capacity with the start-up of our second train by theend of the second quarter 2008.

We continue to explore different alternatives to acceleratethe growth of our methane cells from high CO2 gas. We are in discussions withseveral engineering firms to expedite the construction of the new treatingfacilities to enable us to ramp up our high CO2 gas development program. We arealso moving forward with the construction of additional processing facilitiesat Piñon and anticipate having the first of our four 100 million a day trainsat our future Century plant constructed by the third quarter 2009.

Our high CO2 gas treating capacity is currently 170 millioncubic feet a day. We anticipate growing that to 700 million cubic feet of gas aday by the end of 2010. We model the mixture of gas to 70% CO2 and 30% methane.Therefore, we anticipate that we’ll produce approximately 200 million of sweetgas a day and 500 million of CO2 gas through our Century plant by the end of2010.

Lastly, we are in discussions with several companiesregarding the potential transportation and sales of our future CO2 production.We believe we’ll have more to discuss about this project by the time we haveour year-end call in March 2008.

As you know, we have had a tremendous ramp-up in drilling inWest Texas Overthrust in the last year. We’ve moved from drilling with sevenrigs in the third quarter of 2006 to 30 rigs by the third quarter of this year.We now believe our ramp-up is nearing completion and only anticipate moving to 40rigs in the West Texas Overthrust by the end of 2008 as we develop new areasthat are being shot by 3D seismic.

We have now shot 300 square miles of 3D and we haveprocessed nearly 150 miles out of our 1,300 square mile shoot. Our next 70square miles are due to be processed by December 17th. Therefore, we’ll have220 square miles shot and processed by year-end out of 360 miles that will beshot.

We currently believe that this is the largest contiguousproprietary on-shore 3D shoot in U.S. history. As this data comes in, we’re inthe process of moving rigs out of Piñon and we’ll start testing some ideasduring the next quarter. As I mentioned, we currently have 30 rigs running inthe West Texas Overthrust and 29 continue to work in the Piñon field. Weanticipate using as many as five rigs to test new ideas outside of Piñon by theend of the second quarter 2008.

We are seeing very good quality data from our 3D shoot andare able to image several deep structures. We now anticipate with the newprocessing that will come to us by 2010 that we’ll be able to explore for thesedeep structures.

Within 10 miles of the north edge of the West Texas Overthrustare some of the very best Ellenburger fields in West Texas. These fieldsproduce high quantities of methane gas and also approximately 30% CO2. We haveseveral wells in the Overthrust that were drilled off-structure that didproduct substantial amounts of gas but also had very high CO2 rates.

It is our goal during 2008 to test at least one of thesestructures that we see on our 3D seismic. It is our belief that there will beconsiderable gas. However, we don’t know the quantities of the CO2 present.This all coincides with our inclination that we’ll have several takeawayoptions with our CO2 gas within the next few years.

Lastly, we’ll also be moving two rigs to explore for the CaballosCherts in the Big Canyon area in South Sabino. These areas are the first tohave the 3D shot and we’re ready to explore for gas in the thrusted part of theCaballos. We’re looking for structures, rich and thrust faults to determine ourlocations. Our location in the Big Canyon area will be drilled to approximately16,500 feet and we’ll test zones from the [inaudible] testing sands through theDevonian Cherts. Our location in theSouth Sabino area will be targeting the Devonian Cherts at 8,000 feet. We planto spud both wells in the first quarter of 2008.

Our third rig working outside of the Piñon field willcontinue to drill off of sub-surface control in the Thistle Field within theSouth Sabino area. We recently recompleted a Caballos Chert well which tested2.2 million cubic feet of gas a day and is consistent with our tight curve forlower Caballos wells within the Piñon field. The second well drilled within theThistle Field is currently waiting on completion.

We are confident that we can find gas outside of the Piñonfield within the West Texas Overthrust. We are not sure of the quality orquantity of the gas that we’ll find; however, we have a great land position puttogether and our processing capability -- we have processing capabilities withany reservoir that presents itself to us.

We’re very excited about the opportunities at [cross rakers]position in the Overthrust and with the 3D seismic program. We remain confidentabout our drilling program within the Piñon field area.

Our Piñon fields step-out wells continue to deliver goodresults and we are comfortable with the production forecast that we have givenas we continue to drill and search for the limits of the Piñon field.

I’ll now turn over the call to Dirk to go through thefinancial presentation.

Dirk M. Van Doren

Thanks, Tom. I’d like to highlight a few financial items forthe quarter and then start the Q&A portion of the conference call. We filedour 10-Q last night and in combination with the press release, saw theimportant numbers for the quarter are covered in these two documents so I won’tgo through them.

Our main focus is adjusted EBITDA, a non-GAAP measurement,which was $102.6 million for the quarter and ahead of our internal model. Forthe nine months of 2007, the result was $259.7 million.

Another result that might be of interest is our net incomeper share excluding unrealized hedging. For the third quarter of ’07, thenumber was negative $0.01 per share compared to $0.15 per share for the thirdquarter of ’06.

The number I’d like to discuss is our shares outstandingafter the IPO. Before the IPO, we had 109.3 million shares outstanding. We sold32.4 million shares in November, so the total is 141.9. To calculate fullydiluted, you must add 22.3 million of the preferred stock conversion, thus thetotal fully diluted shares outstanding pro forma for the IPO is 164.1 millionshares.

Today we plan on filing the registration statement forcommon stock issued in December 2005, November 2006, and March 2007, as well asthe common stock issuable upon the conversion of the preferred stock issued inNovember 2006.

We will also file an 8-K tomorrow that has all of our secondquarter financials broken out since that was not available in our prospectus.This should help anyone building a model.

November was a busy month for financing. First, wesuccessfully completed the initial public offering in early November and raised$795 million net to SandRidge. We used the proceeds to repay debt on therevolver of $515 million and $49 million for an acquisition note. We alsoclosed on a $20 million mortgage on our new corporate headquarters and parkinggarage in downtown Oklahoma City. And late in November, we closed on a $32million acquisition in the WTO and a $10 million acquisition of the Gray Ranchplant, thus pro forma for all these transactions, we had approximately $210million of cash on hand and total debt was $1.072 billion.

Because the road show was a month ago, we do not have newguidance and hence did not include that in our third quarter press release. Weplan on having 2008 guidance on our year-end call or sooner. Right now, we areplanning on having that call in early March and a half-day analyst meeting afew days later. We’ll have details of the time and location shortly.

Finally, our conference call schedule for January andFebruary is as follows: we’ll be attending the Goldman Sachs conference inmid-January in Las Vegas and we’ll be at the Credit Suisse conference in earlyFebruary in Vail, Colorado.

That ends my formal remarks. We’re now ready to open thequestion-and-answer period.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from theline of Joe Allman with J.P. Morgan. Please proceed.

Joseph Allman - J.P.Morgan

Tom, the three acquisitions that you’ve made so far in thefourth quarter, could you talk about any proved reserves or production andacreage associated with those acquisitions?

Tom L. Ward

You mean third quarter? Or do you mean -- are you talkingabout the West Texas --

Joseph Allman - J.P.Morgan

No, it seems in your press release, you mentioned -- I mean,it looks like you didn’t make -- you made hardly any acquisitions year-to-date,but you made I think $116 million worth of acquisitions in the fourth quarterso far. There were two separate properties. One was $74 million --

Matthew K. Grubb

Yeah, we got it. We did do a fairly significant acquisition.It’s a $75 million acquisition of West Tex, which is additional interest in thePiñon field and that was approximately 34 bcfs of reserves and we did a[smaller deal] with [Hayfield], which I think is another 10 bcfs or so.

Dirk M. Van Doren

And then we’ve got the $32 million one.

Matthew K. Grubb

Yeah, we did about $32 million from Malone Mitchell ofadditional acreage in the Piñon field area, and also his participation in thewells and associated reserves.

Joseph Allman - J.P.Morgan

Okay, so you got 34 bcf added of proved, plus 10 so it’s a44 -- how about part of the 32?

Tom L. Ward

We should have it before we get off the call here. We canbreak out the $32 million on how much was proved.

Joseph Allman - J.P.Morgan

And if you could also, additional acreage net to you guys,that would be helpful too. And then in terms of your rig activities, you sayyou’ve got 30 in the WTO, one outside of Piñon, and you went through some ofthe stuff fairly quickly and I didn’t catch it. What’s that one rig doing rightnow?

Tom L. Ward

The one rig is drilling in the Thistle Field, which isreally also -- it isn’t shot yet with 3D seismic, so it’s a lot like the waywe’ve drilled Piñon to date, is off of sub-surface control, so there was someexisting wells we’re drilling within the limits of the older fields, which isjust about 15 miles east of Piñon. And we have one well that’s been tested tomake 2.2 million a day that’s not -- that’s currently waiting on -- actually Ithink we have a line just getting to that and then we have a well that’s downand waiting on completion. And we continue to have one rig working in what wecall the Thistle Field. It’s in the South Sabino area.

Joseph Allman - J.P.Morgan

Okay, that’s helpful. And so you’ll continue working thatrig and then the seismic data, could you talk about how much has come in so forand specifically where is that? Is that right over the Piñon field or is itoutside the Piñon field? And I guess you are going to drill first wells outsideof the Piñon field based on the -- besides where you’re drilling with that onerig based on the seismic as it comes in?

Tom L. Ward

That is correct. The seismic that we have shot is not overPiñon field. We’ve shot 300 square miles and currently have 150 miles of itprocessed. And that is with two crews, so it’s two different shoots. One isapproximately 30 miles east of Piñon and the other is about 15 miles southeastof Piñon. So these shoots are a considerable distance away from the Piñonfield.

We plan to shoot the Piñon field in the first quarter of2008 and we do have some prospects that we are going to drill in the firstquarter off of these two shoots. One is a deep project, about 16,500 feet deepand the other is about 8,000 feet and both of those will be just testing theDevonian Cherts.

Joseph Allman - J.P.Morgan

Okay, very helpful. Thank you.

Operator

Your next question comes from the line of Brian Singer withGoldman Sachs. Please proceed.

Brian Singer -Goldman Sachs

Thank you very much. Good morning. How close are you orcould you give us update on signing contracts for CO2? And as you’ve delvedinto the petro source and the CO2 EOR opportunities, any thoughts regardingthat potential?

Tom L. Ward

We are not close yet to signing contracts on the CO2. Infact, we’re just really in the initial stages of evaluating the economics ofdelivering CO2 to the Permian. We have a lot of interest, I would say that, andjust right now we don’t know which alternative that we’ll go to or whetherwe’ll partner with someone else -- partner with a producer, partner with apipeline company. There’s a potential we could be a merchant seller ourselves.It’s just there are a lot of options right now with the delivery of CO2 intothe Permian.

Brian Singer -Goldman Sachs

And then going back to the Thistle area, you had I thinkinitial success on a reentry a few months back. Can you be a little bit morespecific on what this rig will be doing and the timing of results from thedrilling that you are doing without the three?

Tom L. Ward

Sure. That rig, it will continue to drill in this area andwe have now one rig or one well that’s ready to produce that had an initialtest of 2.2 million and then the second well will be fracked I believe thisweek and then we have the rig that’s currently working there, so by the nextquarter, that rig will continue to drill wells every 45 days. We should havesome I think a decent amount of production news by the end of the quarter.

Brian Singer -Goldman Sachs

Great. Thank you.

Operator

Your next question comes from the line of Scott Hanold withRBC Capital Markets. Please proceed.

Scott Hanold - RBCCapital Markets

Thank you. Good morning. Tom, could you give us a little bitof color -- I guess you got some of your seismic in and process. Can you justtell us what you’ve seen and what you’re specifically targeting here in thefirst quarter?

Tom L. Ward

The seismic data that we have in is very good quality, soeven better quality than we though it might be when we first came out to shoot.In order to get this type of quality, you have to have very long offsets andtherefore it requires us to have a very large shoot in order to get data andthat’s what we’re doing now, is we’re shooting a very large area.

And so what we see is that it’s our belief that you have tohave structure really to make this chertfractured enough to produce and so we look for deep-seeded structures and thenthrusting along in the Devonian, which is the target zone of interest.

So as we look for a thrust fault, wrench faults and then thestructure itself. So basically looking for very conventional type traps.

Scott Hanold - RBCCapital Markets

Okay, and is it pretty consistent with the stuff you’veprocessed? Have you seen similar stuff? Can you kind of give us a little bit ofcolor on I guess what the expectations are here?

Tom L. Ward

Well, it’s our expectation that the Piñon field is also on astructure or several structures and we don’t have that shot yet but justthrough sub-surface control and logs, we know that it’s a very complicated areaand so I think that after 2008, we’ll have a lot better picture than we dotoday. However, we feel comfortable with the data we have to date to go aheadand move forward with drilling wells there.

I think we know we have some penetrations that we can get upstructure to and feel like the deep-seeded structures we’re drilling on willcause the fracturing.

Scott Hanold - RBCCapital Markets

Okay. And I think you said -- was it November production wasrunning at 220 a day, is that correct?

Tom L. Ward

That was our average for November.

Scott Hanold - RBCCapital Markets

Average for November -- what was it in the WTO? And couldyou give us what the sweet versus high CO2 breakout was?

Tom L. Ward

Matt I think has that.

Matthew K. Grubb

Yeah, for -- of that 220 in November, the WTO was about 120of that in November and then the methane developed from the high CO2 reservoirwas approximately 40 a day.

Scott Hanold - RBCCapital Markets

Okay, because I think you said that you are constrained alittle bit currently on the high CO2. Is that correct?

Matthew K. Grubb

That is correct. We are maxed out on our plant capacity andwe’ll be continuing to ramp that up over the next year.

Scott Hanold - RBC CapitalMarkets

Okay, so if you look forward in the next say six months withboth I guess sweet and high CO2, are there any constraints that we need to bethinking about in terms of modeling out production growth?

Matthew K. Grubb

No, I think we’re in very good shape on the sweet side withthe new ETT line and the compression work and the infrastructure work that weare doing. We do have 29 rigs running and drilling for sweet gas, so we’re ingood shape there. Today our capacity for treating high CO2 gas is approximately170 million a day and we should be at about 260 million a day by the end ofsecond quarter 2008, so we’ll move that along also.

The big thing for high CO2 is just getting additional plantsbuilt and that will be in ’09 and ’10 to really take that up to 700 million aday.

Scott Hanold - RBCCapital Markets

Okay, thank you and one last question, I guess for Dirk; canyou talk a little bit about the DD&A number in the third quarter? I guessit came up a little bit from where you guys were on the second quarter. Can yougive a little color on that?

Dirk M. Van Doren

Well, I think it’s really related to a little bit higherfinding costs that we had in the third versus the second versus the first.

Scott Hanold - RBCCapital Markets

Okay. Can you --

Dirk M. Van Doren

And we’ve also got all of our rigs now in as well, so thenon is up a little as well.

Scott Hanold - RBCCapital Markets

Okay, got it. And actually I lied -- I do have one quickquestion here. You mentioned that there was some severance costs in thatG&A number. Could you give us what that amount was in the third quarter?

Dirk M. Van Doren

I think it was -- the total amount I think is about $1million and that was due to a few people from Riata that left the company in thethird quarter of ’06, and we felt it was the right thing to do to give themtheir stock.

Scott Hanold - RBCCapital Markets

Okay, so the $1 million pretax?

Dirk M. Van Doren

Yes.

Scott Hanold - RBCCapital Markets

Okay. Appreciate your time, thanks.

Operator

Your next question comes from the line of Jeff Robinson withLehman Brothers. Please proceed.

Jeff Robinson -Lehman Brothers

Thanks. Tom, you mentioned Ellenburger tests in yourcomments around the exploration program. Are those prospects that are beingshot out with the seismic and maybe incorporated into the drilling program nextyear?

Tom L. Ward

Yes, Jeff. After we saw the seismic, we believe there is --well, there’s a pop-up structure in the Ellenburger and we see some of these structuresand we now understand what we thought was probably happening is that you had tohave a deep-seeded structured in order to make the Devonian Cherts fracture,and so what we see is pop-up structures like the diagram that we show. They doexist and so we are going to probably test one of those.

I think it will be -- I think there will be prolific gasthere. My question will be is it 30% CO2 or is it 85% CO2?

Jeff Robinson -Lehman Brothers

Okay, and then at South Sabino, are there any penetrationsclose by that tell you anything about the quality of the Caballos Cherts there?

Tom L. Ward

Not close by. This will be a fairly big step out. However,we did drill a couple of wells without 3D last year in the South Sabino area.This will be several miles from those but we do believe that we will be able tofind sweet gas there based off of the Thistle field area and the wells that wedrilled.

Jeff Robinson -Lehman Brothers

Okay, and one last question on the CO2 takeaway issues, ispart of the discussion that you all are having, does it include using otherpeople’s capital to build the plants in a related processing capacity?

Tom L. Ward

We do not model having any costs for plants or pipe in ourmodel.

Jeff Robinson -Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from the line of David Heikkinenwith Tudo Pickering.

David Heikkinen -Tudo Pickering & Co.

Good morning. Just in your November average production,Matt, can you give the rest of the breakouts beyond WTO, the remaining 100million a day?

Matthew K. Grubb

Yes, I can. Actually, the average exact number was 222.6. Wehad in the Gulf Coast was 42.9; East Texas, 29.5; Gulf of Mexico, 17.9; and theMidcontinent, 11.7.

David Heikkinen -Tudo Pickering & Co.

Thanks. And then, looking at the Thistle field, any limitsas far as takeaway capacity? Or what is the takeaway capacity out of that areawith the rig running there next year?

Matthew K. Grubb

The Thistle field, we’re actually -- we have a right of wayalready acquired and we are right now just trying to understand what size linewe need. We do have a fairly short connection to our main line. We have twolines. They are called Sabino lines. We have a 12-inch line and a 10-inch line.One is for high CO2 and one is for sweet gas and we can take the 10-inch line,which is currently sweet gas, take it back to Piñon and flow gas back out theETC interconnect. So I don’t foresee any capacity constraints in that areaanytime soon.

David Heikkinen -Tudo Pickering & Co.

Okay. Thanks a lot, guys.

Tom L. Ward

And we should have the line in for the --

Matthew K. Grubb

Well, we -- as Tom mentioned earlier, we did re-complete awell in Thistle and tested for 2.2 million. Today, we’re flowing about amillion a day through a compressor and we have a 3.5-inch temporary line. Andthen going forward, we’re just trying to understand our potential out there insize. We’re looking at 8-inch to 10-inch line that we’ll be putting in.

David Heikkinen -Tudo Pickering & Co.

Okay.

Operator

(Operator Instructions) You have a follow-up question from theline of Joe Allman with J.P. Morgan.

Joseph Allman - J.P.Morgan

In terms of your proved reserve adds, could you break outhow much came from performance related revisions and how much came fromextensions in discoveries?

Tom L. Ward

I think we’ve got that.

Matthew K. Grubb

Yeah, revisions, performance related revisions is 89.7 bcfe;extension discoveries is 15.6; acquisitions, 4.5; pricing revisions, 5.2; andwe produce 16.1. That would be a negative to the total.

Joseph Allman - J.P.Morgan

Okay. And what would you attribute the performance relatedrevisions to?

Matthew K. Grubb

It’s mainly operations. It had to do a lot with ourmidstream results of lowering line pressures, adding in more pipe compression,flatten out declines, et cetera.

Joseph Allman - J.P.Morgan

Okay.

Tom L. Ward

We inherited a system that really had to have some overhaulto it to be able to produce these rates. It was really not designed to have thePiñon field grow like it has, so that’s something we continue to work on.

Joseph Allman - J.P.Morgan

Very helpful. Thanks, guys.

Operator

You have a follow-up question from the line of Scott Hanoldwith RBC Capital Markets.

Scott Hanold - RBCCapital Markets

Tom, could you give us your view on the gas market? I knowyou guys have your fingers on the pulse. Can you just give us your perspectivehere?

Tom L. Ward

I guess my thought is that we need some weather. If we gothrough the year without any winter, we’ll be in -- have lower prices comingout next year. If we can’t have some winter weather, then I think that it’sfairly priced where we are. We continue to look for a way to hedge out ourfourth quarter ’08 production and hopefully we’ll get a chance to do thatthrough the winter period this year.

What we try to do is just look one year out and hedge ourgas into that one year period. So no crystal ball here -- just believe that weneed to have some winter weather.

Scott Hanold - RBCCapital Markets

Okay, and in terms of -- do you have any perspective onexpectations for where production is going on the North American side of thingsand how that plays into your growth outlook?

Tom L. Ward

Well, I am constantly amazed at how much gas can be foundout of the Shell plays. Those guys are doing a fantastic job of growingproduction in these different areas. Of course, that’s always the supply side,there’s always a concern as we grow production. It is a little comforting thatwe have less rigs running in Canada and that our rig count, even though we’restill going up this year, has increased at a more moderate rate and I thinkdepletion at the end of the day does still overcome a lot of the new wells thatwe bring on.

I think ultimately that my belief is that we don’t have thatmuch incremental coal generation and that we will come up with some demand fromthe natural gas side as the business moves forward.

Scott Hanold - RBCCapital Markets

Thank you again.

Operator

(Operator Instructions)

Matthew K. Grubb

Joe, this is Matt Grubb again. Your first question, Iapologize. We were going to talk more in detail about those in the Q4 but asfar as the [Hayfield], West Texas, Malone Mitchell acquisition, that totaled$119.5 million and proved reserves of 71.3 bcfs.

Tom L. Ward

We’ll get you the acreage position. Hopefully if Joe didn’tcatch that, somebody can call him.

Operator

You have a follow-up question from the line of Joe Allman.

Joseph Allman - J.P.Morgan

I got it, thanks. So you said 71.3 bcfe -- do you happen tohave the production numbers, any production associated with that?

Matthew K. Grubb

I don’t remember the exact number off the top of my head butit’s in the 6 million to 7 million a day type range.

Joseph Allman - J.P.Morgan

Okay, and you’ll come back with the acreage?

Tom L. Ward

Come back with the acreage and the acquisitions, theseacquisitions were really made for tying up the last bits of acreage around thePiñon field.

Joseph Allman - J.P.Morgan

Okay, so you wouldn’t expect anymore similar types ofacquisitions, or very few?

Tom L. Ward

I don’t think there are anymore to be had. We’re up to about93% to 95%, most of our wells that are drilling now in the Piñon.

Joseph Allman - J.P.Morgan

All right. Very helpful, guys. Thank you.

Operator

At this time, there are no further questions. I would nowlike to turn the call back over to management for closing remarks.

Tom L. Ward

We do thank you. It’s our inaugural call and hopefully asthe quarters go by, we’ll be a little bit better prepared and ready to answerall the questions. Thank you so much.

Operator

This concludes the presentation. You may now disconnect andhave a good day.

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