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Bill Barrett Corp. (NYSE:BBG)

Q4 FY07 Earnings Call

February 26, 2008, 12:00 PM ET

Executives

Jennifer Martin - Director of IR

Fredrick J. Barrett - Chairman and CEO

Robert W. Howard - CFO and Treasurer

Joseph N. Jaggers - President and COO

Lynn Boone Henry - VP, Reservoir Engineering

Analysts

Robert Lynd - Simmons & Company International

Eric Hagen - Merrill Lynch

Larry Busnardo - Tri Stone Capital Inc.

Raymond Deacon - BMO Capital Markets

Operator

Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Bill Barrett Corporation Fourth Quarter and Full Year 2007 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Ms. Martin, you may begin your conference.

Jennifer Martin - Director of Investor Relations

Thank you Julianne. Good morning everyone and welcome to Bill Barrett Corporation's fourth quarter and full year 2007 conference call. Today we will review fourth quarter and full year operating and financial results.

Presenting today are Fred Barrett, Chairman and Chief Executive Officer, who will open our discussion with an overview followed by Bob Howard, Chief Financial Officer, who will review financial results; and finally Joe Jaggers, President and Chief Operating Officer will review operations and provide an update on our development, delineation and installation programs.

We have prepared a user-controlled slideshow that accompanies our discussions. It is available with the webcast or it can be printed from the homepage of the website at billbarrettcorp.com. Look along the left of the page, under "Current Events" and click on Fourth Quarter Results and Full Year 2007 Results, "Earnings Call Slides" to print those out. Just to let you know we expect to file our Form 10-K with the SEC, later this afternoon.

Before we begin, let me draw your attention to the forward-looking statements and cautionary statements disclosures on slide two of the presentation, which were also included in our press release today. Also please note that during our discussion, we will make reference to discretionary cash flow, which is a non-GAAP measure. Reconciliation to the appropriate GAAP measure was also provided in the press release today.

With that, I will turn it over to Fred Barrett to get started.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Good morning, and thank you for joining us today. Over the past five years, Bill Barrett Corporation has proven reserves and production at a compound rate of 29% and 23% respectively as you can see on the first slide. But as I focus on 2007 specifically, we believe this was our best year-to-date for a number of reasons and it's for these same reasons our shareholders enjoyed a 54% increase in share price, during 2007.

I'd like to start with comments highlighting these performance factors both development and exploration, pass the discussion on to Bob Howard and Joe Jaggers for a more detail color on our financial and operational activities, respectively. And then I'd like to close our discussion with some comments on our 2008 program, the program which was designed for more of the same type of performance we saw in 2007.

One of the primary points you should takeaway from this conference call, 2007 was a year where we really began to see the true capability of our development programs. And looking at slide number two, we accomplished what we set out to do on the basic drivers behind our share growth. We increased reserves 44% as adjusted quarter sales of Williston and a few other small properties. We replaced production by over 380%. We increased production 17% despite shutting in N3 Bcfe. By producing these volumes later in the year, we exposed our investors to much better pricing and returns, a reflection of our disciplined management. And we also had record cash flow on an absolute basis, despite about $1.55 per Mcfe decline in pre-hedged natural gas prices.

I won't repeat all of the metrics that have been laid out in our earnings release, but I do want to emphasize several points. First, not only was this a record year for growth but we also continue to see efficiency improvements in drilling costs, completion, optimization and significant improvement in LOE during the year, as a direct result of our continued commitment toward utilization of the right technologies and our diligent management practice to maximize cost efficiencies. When combining our capital discipline, our operational efficiencies and reserve growth, the net result has led to a record year in terms of F&D, discernibly below the $2 per Mcf level. As part of that discipline, we came in under the top end of our CapEx guidance at around $440 million.

In 2007, we allocated approximately 80% of that CapEx to our low-risk development programs. I will let Joe provide more detail on these programs, but let me emphasize several key points. During 2007, one of our core objectives was achieved in determining the viability of increased density, as a true future growth catalyst at our two largest development programs; West Tavaputs and the Piceance. Comprehensive geologic and engineering analysis in the utilization of technology clearly shows the need for optimal increased density; 10 acres in the Piceance and 40 acres in West Tavaputs. The analysis is also pointing towards the potential for 20-acre locations in West Tavaputs.

In the Powder River Basin program, we've seen very encouraging signs that the Big George is dewatering earlier than expected, which means potential acceleration and realizing reserves in production over the next 12 to 18 months in this area.

For those of you who follow this company, you know we also had a very busy year on the exploration front. In 2007, we allocated approximately 20% of our CapEx to our delineation and exploration programs and frankly, the results in 2007 exceeded our expectations in terms of providing initial data, which continues to support the potential for several large scale resource plays. At Yellow Jacket we've demonstrated the presence of producible gas over a large area, where our core data also suggests the potential for a shale gas resource play. Likewise, we're equally intrigued with the initial test rates from the first two wells in Circus; both of which are capable of dry gas production from a shale gas interval called the Cody Shale.

Early test results from those shales have made us all stop and reconsider where the true potential lies in this area. Lastly, as we indicated on our press release, the initial flow rates for several Blacktail Ridge wells in the Uintah are clearly very encouraging. Given the 2007 results of our development programs and the continued encouragement with our delineation and exploration programs, the company is poised for another great year in 2008. But before I say more about the 08 program, let me pass it over to Bob to review our 2007 financial performance.

Robert W. Howard - Chief Financial Officer and Treasurer

Thank you Fred. Page five of the slide presentation includes a summary of key financial and operating highlights.

Operating results for the fourth quarter were generally in line with our expectations, with full production resuming in November, following our voluntary curtailments of approximately 1.5 Bcfe of gas production in October due to low sales prices. We were able to meet our revised production goals with production of 17.2 Bcf for the quarter, which is 21% higher than the fourth quarter of 2006. This increased production combined with our hedge position and improving gas sales prices generates $70.1 million of discretionary cash flow for the quarter, which is a 28% increase from the third quarter. Our cash flow of a $1.56 per share is slightly ahead of first call estimates.

Net income also increased during the fourth quarter to $2.5 million, which was impacted by $13.6 million of dry hole costs recognized in the quarter, which is equal to $0.19 per share after-tax. As a result of the dry hole costs, earnings per share came in lower than first call estimates.

Our natural gas hedges provided a significant benefit in the fourth quarter by increasing the sales prices of our natural gas production by a $1.81 per Mcf, $29.8 million to an average realized sales price of $5.97 per Mcf. 62% of our natural gas in all sales volumes were hedged for the quarter.

On the expense side, our production expenses consisting of lease operating expenses, gathering and transportation expenses and production taxes, came in at $1.42 per Mcfe versus $1.29 per Mcfe in the third quarter, as lower LOE was offset by increasing, gathering and transportation expenses and a one-time assessment food production taxes. LOE averaged $0.51 per Mcfe for the quarter, which is $0.16 per Mcfe lower than third quarter. This reduction includes benefits from new facilities in our operating practices throughout our operating areas.

Our 2008 LOE guidance is $0.64 to $0.70 per Mcfe, just comparable to full year 2007 LOE of $0.68 per Mcfe. Gathering and transportation charges averaged $0.46 per Mcfe in the fourth quarter, up from earlier quarters due to a higher gas processing charges.

During the year, we entered into new gas processing arrangements for gas production from the Piceance and Uinta Basins. Our guidance for 2008 of $0.54 to $0.59 per Mcfe reflects a further increase in gathering and transportation expenses to our firm transportation commitment on the Rockies Express System and continued higher processing charges. These additional transportation charges on Rockies Express will allow us to sell a portion of our gas of the Rockies Express pipeline to historically higher price pipelines in the Midwest.

Production taxes for the fourth quarter were up compared to the 2006 fourth quarter and the 2007 third quarter, due to a one-time of assessment for Colorado production taxes that averaged $0.20 per Mcfe. For future modeling purposes, it would be appropriate to back out this assessment just to make an affective production tax rate to then apply to pre-hedged production revenue.

Depreciation, depletion and amortization costs for the fourth quarter were $2.73 per Mcfe, a reduction of $0.19 per Mcfe from the third quarter, reflecting the reserve additions recorded at year end. DD&A for 2008 will be based on the fourth quarter rate as adjusted throughout the year for capital expenditures compared to reserve additions.

Regarding full year 2007, most of the key points have been addressed in our discussion of quarterly results and in the press release. In addition, I would like to emphasize a couple of points. As you all are aware, throughout 2007, we are challenged by low regional gas prices. The index price for gas deliveries to CIG averaged $2.97 per MMBtu for the year versus $5.63 per MMBtu for 2006. We frequently mentioned our philosophy to hedge 50% to 70% of our forward 12 month production to provide a more stable and predictable cash flow stream. In 2007 the strategy proved to be extremely valuable, as our hedge positions added $87 million to sales revenue, clearly contributing to our ability to support exploration and development activities.

During 2007, our cash flow from operations, net borrowings of $86 million from our line of credit and $96 million from our proceeds from property sales including the sales of our Williston Basin properties, combined to fund our $444 million capital expenditure program. We are very pleased with the funding and development cost of $1.83 per Mcfe which demonstrates a strong rate of return from our development and capital investments and is reflected in reduced DD&A rates for the fourth quarter. The last page of our earnings press release includes a comprehensive analysis of capital costs and reserve data.

I've just a few comments to discuss our expectations for the 2008 and we've disclosed our guidance that was issued last month. Our production guidance of 70 to 77 Bcfe is an increase 14% to 26% compared to 2007 and includes only those activities that are planned for our development programs. We have not considered the upside potential that may be generated from our delineations and exploration activities. This guidance range considers normal operating challenges that we encountered throughout the year.

We intend to continue our on going program of hedging up to 70% of our anticipated production. Our Form 10-K includes a comprehensive schedule of our hedge positions. For 2008, we have entered into fixed price gas swaps for 37.6 Bcf with a weighted average sales price $6.80 per MMBtu. With the recent strength in gas prices, we will able to participate in the upside swings in gas prices for the balance of our production, including 11.1 Bcf of production that is subject to CIG callers with a gap $10 per MMBtu.

Our capital expenditure budget for 2008 is $550 million to $600 million of which we expect to spend 80% on development activities, 10% to evaluate, to find or delineate our recent discoveries and 10% on our exploratory projects. Based on the increased improved reserves at year end in our hedge positions, we've requested that the borrowing base under our credit facility be increased to $510 million compared to a borrowing base of $385 million based on the midyear 2007 reserves.

Currently the outstanding balance under our credit facility is $276 million. The interest rate on our bank debt is LIBOR plus a margin of 1% to 1.75% based on the ratio of outstanding borrowings to our borrowing base. Current LIBOR is approximately 3.1% and our current interest margin is 1.25%.

To wrap up, we are extremely pleased with our 2007 results. We've begun 2008 financially well positioned to support our continued growth. I'll now turn the call over to Joe for an update on our operating activities and additional insights into our expectations for 2008.

Joseph N. Jaggers - President and Chief Operating Officer

Thank you Bob. I'll begin speaking from slide number six and address the first point which is the current Rockies gas price situation. On this slide the first two month's CIG is represented by green bars. Daily gas from next day delivery is the red line and our realized prices with hedges are the horizontal green lines.

As you know we've seen dramatic improvement in first two month prices, and through fourth quarter and continuing into 2008. Preliminary indications for March are that will settle tomorrow near $8 per MMBtu. In addition, the high volatility and daily cash prices we were seeing early in the quarter has disappeared. Since December, we've seen daily pricing consistently in the range of $6 to $8 per MMBtu CIG. We attribute much of this to regional weather and associated demand, but also attribute to the impact of the Rockies express pipeline which began service of the mid-continent on January 12th.

While we are all very pleased with the short-term improvement in prices, it's the longer term fundamentals that have us the most excited. Two primary factors contribute to our optimism. The first is a likely prospect for additional timely infrastructure beyond Rockies Express, and there are several additional pipelines proposed and it is of course, these pipelines that tie the Rockies to national markets. The second factor is the likelihood of strong increases in regional demand as several proposed coal burning power plants intended to address growing regional power demand that have encountered permitting difficulties. In short, the pricing environment in the Rockies has improved considerably over the fourth quarter and early 2008.

Turning now to slide number seven, I will provide a quick reconciliation of our year-end reserves. As Fred has said, we achieved tremendous reserve growth, total reserve additions were 233 Bcfe. Our total year-end 2007 reserves of 558 Bs represent an increase of 30% without adjusting for divestment and a reserve replacement ratio of 382%. Beginning on the left from our year end 2006 reserves of 428 Bs, the significant components contributing to our reserves were first, 2007 production of 61 Bcfe, and property sales and purchases, the net of which was sales of 39 Bs. The largest part of these property transactions was the sale of our Williston Basin assets.

Price improvements at year-end compared to a year earlier added 19 Bs as year-end CIG prices increased to $6.04 per MMBtu from 446 at year-end 2006. Revisions due to well performance improvements, totaled 35 days. The Uintah and Piceance basins were the primary contributors to this increase. Finally and most importantly, our drilling additions totaled 176 Bs. All three of our development areas contributed to the result. Increased density development at Piceance and West Tavaputs were important to our drilling adds. However, we have taken a conservative approach to these bookings.

In West Tavaputs, our increased density adds were only done in the inner-well areas of field and in the Piceance, our increased density bookings were only done in the areas where we conducted increased development... increased density development during 2007. Of our year-end 3P figure of two trillion cubic feet, over 80% of our probable and possible resources associated with this lower risk increased density development, a point that I believe bodes very well for our future reserved bookings.

Turning now to slide number eight, I will provide an update of our development activities. Getting at West Tavaputs and the Uintah Basin, we continue to operate two rigs; one in a deep program and one in the shallow. We expect to add a rig in June at the conclusion of the big game steps and to maintain three rigs for the balance of the year. We planned 50 shallow and five deep wells in 2008. As the final West Tavaput bullet point indicates, we now expect that EIS record a decision to be received during the second half of the year. While this does represent somewhat of a delay, we're pleased that we've reached a major milestone with the posting of the draft EIS for public comment on February 1st.

Our review of the preferred alternative within the draft indicates no major issues surrounding our objective of full year full development of the field. We are prepared with contingent plans for 2008 in the event that recorded decision is received late in the year. Relying once again on categorical exclusions, we're able to construct a plan that will provide virtually the same number of wells and result in production is the current plan. Said another way, we don't expect the EIS timing to present risk to 2008 production and activity. We are currently producing 80 million cubic feet equivalent net in the field and expect to be at this level until increased processing becomes available during May.

Our 40-acre density pilots conducted in 2007 were successful and at least in parts of the field, the pilots suggest that optimal density may be less than 40s. We are piloting 20-acre density in these parts of the field during 2008.

As our release stated, we did record a dry hole charge for one of our deep West Tavaputs wells. This well, the Peter's Point 15-6D followed six successful deep wells. And while we did encounter the Navajo sandstone, our most common target at a position structurally higher than other production in the field. It was unfortunately tight. We're currently conducting an evaluation to better understand the factors that contributed to this low permeability and porosity. We do plan a completion in this well of the Mancos Shale, which will be our first Mancos test in the field. The Mancos is a Shale that regularly yields large gas shale as we drill fluid to deeper targets and is being pursued by other operators regionally.

We are currently drilling the 7-1D ultra-deep well, a test of the waver level and should reach intermediate casing point through the Navajo this week. Although we are disappointed with the 15-6 well, we continue to be very excited about Tavaputs in general, the shallow to deep and the potential for the ultra-deep levels in the field.

In the Piceance Basin, at our Gibson Gulch property, we're operating four rigs and plan 110 wells during the year. Our production is 83 million cubic feet per day and we have additional compression capacity being installed for July operation. Our 10-acre density pilots were successful during 2007 and we've begun reserve bookings and future development on this basis. Our development in 2008 will be largely on 10-acre density.

In the Powder River Basin, we plan 275 wells for the year, nearly all targeting the Big George coal. We are currently producing 17 million a day and still hampered some infrastructure constraints. This is particularly the case in Cat Creek, where we expect to have new capacity available after March. Two other areas where we have drilled and seen encouraging early results, Willow Creek and Pumpkin Creek are both waiting on infrastructure planned for installation during the second half of the year. All and all, we're extremely pleased with our development projects. We're producing over 200 million cubic feet equivalent per day net and are confident in execution of our 2008 plans.

I'll conclude with slide nine, which is an update of our delineation and exploration projects. The first area that I'll discuss is the Lake Canyon/Blacktail Ridge project in Uintah Basin. We've now drilled six wells in the program that we began during the second half of 2007 and four of these wells have been completed. The Blacktail Ridge 7-7 and 12-36 wells, two of which... two wells which we provided initial results announcements, continue to produce in the range of 150 to 200 barrels of oil per day, each.

AURs for these wells are estimated to be in the range of 200,000 to 400,000 barrels of oil and this large range results from early production data as well as difficult weather conditions affecting operations throughout the winter in the Uintah Basin. The third well, the DLB 728 is producing on the order of 100 barrels per day and the fourth, the DLB 721 is currently having artificial lift installed. We continue to be very excited about the project and now plan a continuous one-rig program throughout 2008.

In the Paradox Basin, we are planning our first horizontal well, which we hope to begin soon. As the release included, we did recognize an exploratory dry hole at our Federal Rabbit Creek well in the Paradox. This well was a large step out from the quarry of the play, drilled some 18 miles from the Johnson well, and as such does not change our thinking about the prospectivity of the core area, where the Koskie and Johnson wells both produce gas.

We have a second Paradox Basin Shale project we plan to drill this year. This project called Green Jacket targets the Hovenweep Shale to the west of our Yellow Jacket project area. We have a partner for the project, and we are not in a position at this time to disclose. But that brings considerable shale gas experience to our combined efforts in Green Jacket.

In the Montana Overthrust Circus project, we've completed testing the Draco and Leviathan wells. And although I just pointed that our deeper objectives were not productive, we did test gas from the cretaceous Cody Shale and it plans for additional drilling and coring in this shale during 2008. The Cody potentially represents a regional resource plan in a very thick shale interval.

At the Cave Gulch, we've sidetracked the 14-18 well, a previous Muddy and Lakota producer. We've completed the well in the frontier and are currently producing at a rate of 13.5 million cubic feet per day at some 8000 pounds. We have a 63% net revenue interest in the well.

On a broader note, we've completed our sell down efforts at Cave Gulch and are pleased to have true oil and gas [ph] a very experienced E&P companies as partners in the project. As a result of this sell down, we are now drilling the Cave Gulch 31-32 well, plan a continuous 2 - 3 well program during 2008, which will carry us to year-end.

At the Hook project, we've completed our sell down and are pleased to have ConocoPhillips as our partner. We've planned one to two wells in the project during the project during 2008, targeting the Manning Canyon shales. And finally in the Bighorn Basin, we've completed acquisition of our 3D survey over the Red Point area and planned two wells following completion of processing this data and interpretation.

As you can see, 2008 is a very active year for our delineation and exploration projects. We are excited about the results to-date and optimistic about our new areas. At year-end, based on results to-date, we expect we will one or more of these to the development category.

Now, turning over to Fred for concluding remarks.

Fredrick J. Barrett - Chairman and Chief Executive Officer

All right. Thank you, Joe. We entered 2008 with a balanced plan which continues and enhances the tempo that we saw in 2007. As we've mentioned earlier, we've increased our capital budget by roughly 25% to 30% to $550 million to $600 million, planning to invest approximately 80% into our key development programs and 20% into our current and new exploration and delineation plays.

The production growth in 2008 is forecasted at about 25% near the top end of our guidance, before adjusting for sales in 2007. A few closing comments to reemphasize some key points concerning our development delineation and some of the new exploration in 2008.

We increased... with increased density a reality in West Tavaputs and Piceance, and the early signs of gas production in some of our developing Powder River basin, Big George blocks, we are in a position to drive substantial low risk growth with these development programs on a standalone basis over the coming years. We're encouraged with the continued progress with our EIS at West Tavaputs and as Joe pointed out, a key takeaway from this discussion, we expect to execute a program that reflects our original drilling budget in 2008 at West Tavaputs, regardless of EIS timing.

Remember, we've yet hit full stride in our development capabilities at West Tavaputs and combined with Piceance and Powder River Basin, the company has visibility on what I believe is one of the strongest natural gas development portfolios in the Rockies. And in addition to the development, we provide a unique balance and exposure to significant value optionality with a number of other large scale ongoing potential resource plays.

As we mentioned, we're out to a great start in terms of drilling execution and some early results in 2008 with our delineation programs. As we move through the first half of 08, let me recap some of the activity Joe mentioned earlier. We recently established high volume producer at Cave Gulch in the Uintah River basin and expect the TDR, first deep well in that program by the early second quarter. We should be TD'd at our first ultra-deep well in West Tavaputs. By early second quarter, it will begin drilling the untested west structure in the third quarter.

We're making final preparations to drill our first horizontal well at Yellow Jacket, with hopes of establishing this as a game changer technology to expose the company to significant shale gas resource play in this area. We continue with the one-rig program in the Blacktail Ridge/Lake Canyon area to define the in-field and extension potential relative to the prolific Ultima Bluebell [Ph] field. And lastly expect us to drill some follow-up wells in Cody Shale resource play at Circus.

Exposure to the immense resource base herein the Rockies is a key part of our strategy and as such in addition to our delineation programs, we do plan to drill several new exploration programs in '08, as Joe pointed out. I won't get in to the details but we do look forward to updating you on these plays as we move through the year, including our shale gas play in the Hook area in the Uinta Basin, the 3D salt-linked play in the Paradox in the basin-centered tight gas sand play in the Bighorn Basin.

We also see 2008 having a favorable pricing environment and we are finally seeing the initial positive results on the Rockies bases differentials associated with new service capacity on Rex west [ph]. We're also benefiting from cold snaps this winter that have driven larger storage withdrawals as well as less than projected LNG imports as a results for demand in Asia and Europe and declining Canadian exports. Longer term, we are bullish on the macroeconomics for natural gas. Specifically, for increased power generation demand as planned construction for coal-fired plants continues to run into environmental roadblocks.

Natural gas is a clean, abundant energy source and the preferred bridge fuel into the future. With one of the stronger natural gas portfolios in the Rockies, a region considered the largest natural gas resources supply in the U.S we're poised strategically to drive substantial growth. Finally, as we enter 2008, we are well poised financially as Bob pointed out with a conservative balance sheet to take advantage of the many opportunities in our portfolio to continue to grow our business at a double-digit pace. Thank you for your attention. We are going to be more excited about where this company is headed, and look forward to answering your questions.

Back to Jennifer.

Jennifer Martin - Director of Investor Relations

Julianne, we'd like to open it up for the questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question is from the line of Robert Lynd with Simmons and Company.

Robert Lynd - Simmons & Company International

Good morning.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Good morning.

Robert Lynd - Simmons & Company International

In your production guidance, can you tell me how much you are assuming from the PRB?

Joseph N. Jaggers - President and Chief Operating Officer

Robert this is Joe Jaggers. We will quickly look back at that detail, but it's going to increase throughout the year, Lynn do you have that number?

Lynn Boone Henry - Vice President, Reservoir Engineering

7.8 Bs.

Joseph N. Jaggers - President and Chief Operating Officer

7.8 Bs, little over 10%.

Robert Lynd - Simmons & Company International

Okay. And then on the PRB, Joe you were talking... on the presentation I think the previous presentation, showed LOE at about $2.50 and can you break that down into the gathering and transportation portion and is this a good long-term assumption, is there any room to drive that down lower?

Joseph N. Jaggers - President and Chief Operating Officer

Well, yes I think on a units basis there is good reason to think it will be lower going forward, the gathering in compression side of that runs about a $1.25. You remember that 5 pound service and requires a quite a bit of horsepower for compression. The other thing we are citing currently is the fact that in several of these areas, Cat Creek, Willow Creek, Pumpkin Creek, we're not able to produce at max rates or at all. So we got a number of wells dewatering, we are adding to that LOE side that hopefully by midyear, we'll have all those areas in production and producing gas.

Robert Lynd - Simmons & Company International

So with the water issues... as these wells dewater do we see LOE fall?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, on a dollar per Mcf basis we should see it fall.

Robert Lynd - Simmons & Company International

Okay and then just one final question on how fast [ph] you're going to run one rig continuously at Blacktail Ridge. Is that one net rig and how much of Blacktail Ridge is going into your guidance?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Right, its one gross rig and our nets vary out there. We are going to have just the one rig running we had like any other deal with Barry and in Blacktail Ridge we have the deal with the Tribe, so they can opt on different wells to participate or not participate. So our nets swing around quite a bit in the area and there is, there is almost no production from that area included in the guidance. We'd add a couple earlier wells that were in the PDP category that of course in, but none of this drilling that we're currently doing is included.

Robert Lynd - Simmons & Company International

Great thanks. I will hop-off.

Operator

Your next question is from the line Eric Hagen with Merrill Lynch.

Eric Hagen - Merrill Lynch

Yes hi good morning, just a follow-up on the production guidance. What's... what is driving the very ability between the 14% and 26%. Is that the dewatering of the Big George wells is that timing of infrastructure?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Joe you want to take that and I can prompt some.

Joseph N. Jaggers - President and Chief Operating Officer

Sure, its a combination of things. Early on there was some uncertainty around EIS timing and the impact it might have on 2008 production. We have since developed a plan that we believe we can execute on that preserves all the production and activity in West Tavaputs for the year. The other factor that you mentioned that contributes to some of that uncertainty is timing around these infrastructure projects in the Powder River when we'll effectively be able to increase that production. As you know from the last couple of calls, we have seen a series of delays on those infrastructure projects but feel more confident now that we've knocked out a couple of them that and there with the same operator there that the others will follow in short order.

Eric Hagen - Merrill Lynch

Great. Then on the Powder River basin, what sort of dewatering times are you are seeing and how does that compare to your additional expectations?

Joseph N. Jaggers - President and Chief Operating Officer

I recently see a range of dewatering times. Generally speaking, our development in the Big George areas is contiguous with, are near some of the big projects that Anadarko and Williams operate. So we're seeing faster response times than we initially expected. Unfortunately, because we're seeing such fast response times, now we've gotten ourselves in a position, we've got gas, we've got pressure. We don't have any infrastructure to move it. It's a good problem to have. Rather that one in a long dewatering time.

Eric Hagen - Merrill Lynch

Is that like nine to twelve months or is it a bit longer than that or...?

Joseph N. Jaggers - President and Chief Operating Officer

On average, I say its six months and in some of those areas it's almost immediately we drill, we try to pump in a well at Willow Creek here recently and we having to kill the things before we'd even started the dewatering process, it was trying to flow on us.

Eric Hagen - Merrill Lynch

Great. Thanks for the color. Just one last one then I will jump off. On the Cody Shale, is a plan there to... it take some core samples or do you plan on drilling a horizontal well? I mean how do you plan to test that?

Joseph N. Jaggers - President and Chief Operating Officer

Yes. We have plans anywhere from two to three wells this year, have in and around the Circus proper area. You want to take your core data and determine the various characteristics of the Cody Shale. We believe that is thoroughly matured shale, but we want to understand exactly how the full impact of those attributes to the overall play. And, in most of these shale gas plays here aware, seems like the game changing technology is to go horizontal and I would say there is a strong likelihood that we'll try and get to that point. Whether or not we get to a horizontal well this year, it remains to be determined.

Eric Hagen - Merrill Lynch

Okay, great. Thanks, nice job and a pretty challenging year price-wise.

Joseph N. Jaggers - President and Chief Operating Officer

Yes, thanks.

Operator

Your next question is from the line of Larry Busnardo with Tri Stone Capital.

Larry Busnardo - Tri Stone Capital Inc.

Good morning. Hey, just in the Cave Gulch field, how many additional recompletion opportunities do you have there? And I think you mentioned two to three. I assume those are two to three new wells?

Joseph N. Jaggers - President and Chief Operating Officer

Fredrick you want to go ahead.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Sure. Larry, yes that's right. That's two to three drilling wells, 31-32 that we're on now and two more. And, given what results we've just experiencing with 14-18, we are looking at recompletion opportunities and we have at least one or two in the same fault block with 14-18.

Larry Busnardo - Tri Stone Capital Inc.

And the new wells, what formation are they targeting?

Fredrick J. Barrett - Chairman and Chief Executive Officer

It's the complete smorgasbord of Lakota, Muddy, and Frontier that we normally target in these deep wells.

Larry Busnardo - Tri Stone Capital Inc.

What dictates, what formation is it? Is it due to... primarily just a area where you are out there?

Joseph N. Jaggers - President and Chief Operating Officer

Go ahead, Fred.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Well, as you may recall Larry, the deep overpressured zones has three primary intervals that Joe pointed out. And we see those intervals everywhere, pretty widespread except for the Muddy formation. Most of the locations that we are drilling right now are geared towards not only encountering the frontier but trying to pinpoint where the Muddy formation is. If you can get a good Muddy well in that area, boy, you can make some big-big wells and so that's what we are focused on here in the upfront portion of this program.

Larry Busnardo - Tri Stone Capital Inc.

Okay. What is the current production rate out of out of the Cave Gulch field?

Joseph N. Jaggers - President and Chief Operating Officer

On a gross basis Larry, it's about $34 million a day.

Larry Busnardo - Tri Stone Capital Inc.

And you've got what, 77% of that or so? Well I guess there is a [indiscernible] right?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, I think on average about...

Joseph N. Jaggers - President and Chief Operating Officer

Fred, net revenue of interest, yeah.

Larry Busnardo - Tri Stone Capital Inc.

All right. Switching over to West Tavaputs, the 2-7 well came on that. I guess, the initial average was around $3 million a day. That's lower than some of the other wells that were completed in the Navajo. Is there anything that contributed to that or anything you can pinpoint that led to that rate?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Well, again I think, somewhat similar to the 15-6, the Navajo was a little bit tighter in that well.

Larry Busnardo - Tri Stone Capital Inc.

Were they near each other? Is there any...

Fredrick J. Barrett - Chairman and Chief Executive Officer

No. Yes, they were. Correct me Joe... but just kind of looking at my mental map here, that well kind of sits between the... in manner of speaking, between the 15-6 and 6-7 further to the south.

Joseph N. Jaggers - President and Chief Operating Officer

Larry, I think, Fred's exactly right on the position of that. But I would add that we are dealing with this aeolian sequence in the Jurassic in the Navajo here so. There is going to be some variability and we've seen it, but we still continue based on the average that we've seen to expect wells in the across EUR range of 4 to 5 Bs and have a number of excellent locations still to go to even with the results of 15-6 in 2007.

Larry Busnardo - Tri Stone Capital Inc.

All right. And then just lastly Green Jacket is that a new play or is that the Salt Plain play?

Fredrick J. Barrett - Chairman and Chief Executive Officer

No, that is not Salt Plain play.

Larry Busnardo - Tri Stone Capital Inc.

Then that's a new play?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes well our Green Jacket, one way to look at Green Jacket it's a sister shale gas play to the Yellow Jacket area and we are also, we are still dealing with the Gothic but we also pickup another shale interval above that of the Jowen Wheat and basically doing the same thing there. We're just in earlier stage there we are going to drill our first science well in that area during 2008.

Joseph N. Jaggers - President and Chief Operating Officer

And on the Salt Plain Larry purposes of these conference calls we only choose the update the ones where we've had some activity completed to sell down or have firm plants to drill in the case of Salt Plain we're still in the sell down phase. We get that done only this year we hope to drill this year, but those plans are still being developed.

Larry Busnardo - Tri Stone Capital Inc.

Okay and then just one last one. In terms of the acreage position, do you look at it as being part of the whole Yellow Jacket complex, Green Jacket and the Yellow Jacket being similar?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes. We have in that play in the Yellow Jacket play we have is looking up like acreage positions here, we've got about 248,000 gross, 114,000 net in Yellow Jacket and just immediately west of Yellow Jacket pan is our Green Jacket area where we picked up about a 122,000 gross and about 89,000 net acres. But regionally when as you look at this play concept its one contiguous area that represents a shale gas concept.

Larry Busnardo - Tri Stone Capital Inc.

Okay. Great, thanks for the update.

Operator

Your next question is from the line of John Ragasino [ph] with Wachovia.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Hi, guys.

Unidentified Company Representative

Hi.

Unidentified Analyst

Can you talk a little bit about financing going forward. I know in the past you'd talked about possibly doing debt, any change in the plan as far as that spot on that strategy?

Robert W. Howard - Chief Financial Officer and Treasurer

John it's Bob Howard. As you can tell it from our comments, we have a very good position with their bank line of credit and supports our drilling activities and we continue to look at the capital markets and want to diversify our capital structure over time. We look at throughout, then we see that the markets can provide for us but right now we are very confident with the bank line of credit. We expect that to increase throughout the year through borrowing base increases, we had proved reserves.

Unidentified Analyst

Does that reset every six months or so?

Robert W. Howard - Chief Financial Officer and Treasurer

It does and we also the option twice during the year. We said if we think we've added quite a bit of proved reserves but it is scheduled to be six months and we have submitted our year-end reserves. We had great reserves at the end of the year and submitted that to the banks and then, and believe we should be able to get about $500 million our borrowing base under that line of credit.

Unidentified Analyst

Okay. Thanks, and then on the dry hole expense, you mentioned some of the recent dry hole in the Uinta. What location was that because I have missed it but I didn't catch it?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, that was, that was work of the West Tavaputs 15-6 Deep and it was a kind of a well on the Northern parameter of the West Tavaputs Deep program.

Unidentified Analyst

And what correlation was it?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, we encountered the primary; one of the primary targets standards that Navajo encountered a tight Navajo section in that well.

Unidentified Analyst

And that change of any future drilling plans out there as a result?

Unidentified Company Representative

Well, the two comments there in context of the Deep and then in context of the West Tavaputs program in general. This well, it is, that there is a number productive wells that are at or below the structural elevation of the 15-6. So a little bit of a head scratcher there. The Navajo is the regional dune complex as Joe pointed out earlier, and so it maybe that we drilled into a localized tight spot within that dune complex. When you look East to West across the core Peters Point structure here, we still see 13 to 14 deep locations but actually we did hid a tight spot in there, could become another tight spot, another position, absolutely. But I would just frame a couple of things, one VVX drilled the structurally highest positions in West Tavaputs, I think there is a strong likelihood, a very strong potential that your are going to see some very, very stout wells upon top of the structure and we began to drill those once we get the CIS out of the way.

Secondly in context to the overall West Tavaputs area for those of you that aren't very familiar with this program, the work force, the company maker at this point, it is the shallow horizons stand about 8000 feet. We expect to see some pretty explosive growth out of that program over the coming years and that one well at 15-6 dry hole in no way has any baring on that kind of program. As you move down the section as I mentioned we look forward to drilling a number of locations more on top of the structure, we have yet to drilled the west deep structure, and West Tavaputs, we are currently drilling our first ultra deep in there, so there is a potential for a significant ultra deep play in there and then we see potential in the Mancos and it is likely that we will move out in that 15-6 and test the Mancos. So all in all when you look at the 15-6 in the total West Tavaputs area, from a geologic standpoint it's an immaterial well.

Unidentified Analyst

Okay, well thanks very much that's all I have.

Operator

Your next question is form the line of Ray Deacon with BMO Capital Markets.

Raymond Deacon - BMO Capital Markets

Yes, hey Fred. I was wondering with the ultra-deep well? Did you say that's on the western structure and how many of the 5 deep wells this year, will test the western structure?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Okay, yes the ultra-deep is not on the western structure, it's on the eastern structure. It is currently drilling, we will drill, one well on the west structure this year kind of mid-year, Joe is that?

Joseph N. Jaggers - President and Chief Operating Officer

That's current plan.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Trends.

Raymond Deacon - BMO Capital Markets

Got it. Okay and what's your basic feel for Blacktail Ridge at this point. I mean is this a year when you could make a significant add to your 2P, 3P numbers. The results continue to be, continue to be what you have seen in the first 2 wells?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, the results continued to... continued see well that perform similar to those first two wells. But bear in mind that we are drilling over fairly large area. Part of the program about 10 other wells will be up in Blacktail Ridge area and we are trying to do two things there. One is in-field program to determine the viability of increased density and enhancing the recovery factors in that play and then secondly how far to the Southwest can you extend this sweet spot in the Ultima Bluebell [ph] area the first Blacktail Ridge well that we drilled was two mile step out to the Southwest. It was some what of developed cat, if you will.

And a very encouraged with that well, I think you are estimating the potential UR on that well and this is subject to change we are estimating the anywhere as Joe mentioned, from 200,000 to 400,000 barrels on that well. How far out to the south west can you go there, that what we are trying to determine on that extension program. And we didn't have kind of the third phase in here, where we are really stepping out in to the Lake Canyon which sits immediately to the south. And drilling a number of wells again to try and determine exactly where this trend may go down across the southern blocks here to the south into the west.

So you may see some variable results but put to this point we are very encouraged with wells in Blacktail Ridge, we will continue do to some additional exploration Lake Canyon, but yes this is one of the project that we hoped to bring in to more of the development phase by the end of this year.

Raymond Deacon - BMO Capital Markets

Okay got it. And just can I ask about the first quarter what would you call the exploration dollars. I guess that you are exposing that could show up in the dry hole cost number?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Are you talking about the 2008?

Raymond Deacon - BMO Capital Markets

Yes, I was just thinking about that.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Well in the first quarter?

Raymond Deacon - BMO Capital Markets

Right

Fredrick J. Barrett - Chairman and Chief Executive Officer

Well first off, we're not forecasting out what expense, you may or may not have. I think you're going to end up in a bit of a guessing game there. But for the full year, I would... bear this in mind. One is that, our exploration capital budget which represents about 20% of the total, that exploration budget call it close to $100 million, 76% of that budget, 76% of the exploration budget is associated with these lower risks delineation programs and a little over 24% is associated with the new exploration programs.

But as it relates then specifically to the first quarter, you got... your drilling in Blacktail, in Lake Canyon Blacktail Ridge, your drilling your first well in Cave Gulch. You expect Cave Gulch to be successful and those are the two main and your drilling the West Tavaputs ultra deep. So you may Bob... has corrected, that you may potentially have expenses associated with those three wells in the first quarter.

Raymond Deacon - BMO Capital Markets

Well, we would but timing on current completions and then all of our evaluation, the dollars may be spent but many of these wells have the potential to timing, dollars may be spent but timing will really depend on when we are through with our revolver ...

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, and if it pans out later? Yes, so we need to... that's a bit of a loaded question, we need to see what the results are on those wells before we give any guidance on any sort of the expense in first quarter.

Raymond Deacon - BMO Capital Markets

Okay. Got it. And also, just, can you remind me the deep Cave Gulch wells; I thought you were going to take a partner. Was that already done and this is... is any of the activity this quarter the success on the re-completion, I guess, has that changed your mind about capital allocation there at all?

Fredrick J. Barrett - Chairman and Chief Executive Officer

No. When we went through the Cave Gulch play, we did find a partner there, two partners as a matter of fact. So the wells that we will drill deep, the new wells this year, the first two were on a promoted basis. After those two wells are complete we'll be a 50% heads up partner with those two bass and through for the third well. The 14-18 is because of a side track of previous well. There was no sell down involved with that effort.

Raymond Deacon - BMO Capital Markets

Got it. Thanks Joe.

Operator

Your have a follow-up question from the line of Robert Lynd with Simmons & Company.

Robert Lynd - Simmons & Company International

Sorry if I missed this but at Circus did the two wells flow naturally out of the Cody? You didn't track that, correct?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Robert, the barrels we tested were fracture stimulated.

Joseph N. Jaggers - President and Chief Operating Officer

But yes, they were for... you're exactly right but a very small job relative to what you see Pumpkin most Shales and they were of course both vertical wells with limited completion in terms of the net that we took on relative to the gross interval there.

Robert Lynd - Simmons & Company International

And have you got any results back from the core analysis, do you have an idea what silica content, what silica content is?

Joseph N. Jaggers - President and Chief Operating Officer

Now this year that's the effort is to determine regionally how well it may work and then together that core material and do those tests.

Robert Lynd - Simmons & Company International

Okay. And then what do you think like a crash roots Cody horizontal well would cost to drilling complete?

Joseph N. Jaggers - President and Chief Operating Officer

Probably $2.5 million and in that range, just been on how long the lateral that we took and how many stages of fraction we put into the thing.

Robert Lynd - Simmons & Company International

Got you. Okay, that's all I have. Thanks.

Operator

[Operator Instructions] There are no further question at this time.

Jennifer Martin - Director of Investor Relations

You aren't interested to wrap up. Thank you very much for joining us and please give us a call if you have any further questions.

Operator

Thank you for joining today's conference call. You may now disconnect.

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Source: Bill Barrett Corp. Q4 2007 Earnings Call Transcript

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