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Energy Partners Ltd. (NYSE:EPL)

Q4 2007 Earnings Call

February 28, 2008 9:30 am ET

Executives

Richard Bachmann – Chairman, CEO

John Peper – Exec. VP

Joseph Leary - CFO

T.J. Thom – IR

Dina Brochi - Controller

Tom Debrock – Sr. VP of Exploration

Steve Longon – Sr. VP of Drilling, Engineering and Production

Keith Vincent – Sr. VP of Land, Sr. VP of Acquisition

Analysts

Neal Dingmann –Dahlman Rose & Co.

Tom Nowak – Merrill Lynch

Eric Kalamaras – Wachovia Capital Markets

Stephen Berman – Pritchard Capital Partners, LLC

Ronald Mills – Johnson Rice & Company

Marianna Kushner - Nomura Management

Terran Miller – UBS

Chris Gulf (ph) – Lehman Brothers

Kelly Krenger - Banc of America Securities

Evan Templeton - Jefferies

Operator

(Operator Instructions)

At this time I would like to welcome everyone to the Energy Partners Fourth Quarter 2007 Earnings Conference Call.

(Operator Instructions)

Thank you, Miss T.J. Thom you may begin your conference.

T.J. Thom

Good morning everyone and welcome to Energy Partners’ Fourth Quarter and Full Year 2007 Earnings Conference Call. Joining me today from EPL are Rick Backmann, Chairman and Chief Executive Officer. Joe Leary our Executive Vice President and Chief Financial Officer, and John Peper, Executive Vice President, General Council and Corporate Secretary; Dina Brochi, Controller, Tom Debrock, Senior Vice President of Exploration, Steve Longon, Senior Vice President of Drilling, Engineering and Production, and Keith Vincent, Senior Vice President of Land, who has just been named Senior Vice President of Acquisition, are also on the call and will be available to answer questions.

Rick will begin today’s call with the fourth quarter and full year 2007 result, as well as the review of some of the operational details and a preview of our activities in the upcoming quarter. Together with the overall strategy of the company going forward in 2008.

Joe will go into detail on our financial results for the fourth quarter and full year of 2007 and I will provide first quarter and full year of 2008 guidance. Rick will then wrap up with some closing comments.

Before we begin, first we need to get the administrative details all the way, with our Safe Harbor Statement. This conference call may contain forward-looking information and statements regarding EPL. Any statements included in this conference call that address activities, events or developments that EPL expects, believes, or anticipates will or may occur in the future are forward-looking statements. These include statements regarding reserve and production estimates, oil and natural gas prices, the impact of derivative decisions, production expense estimates, cash flow estimates, future financial performance, planned capital expenditures and other matters that are discussed in EPL's filings with the Securities and Exchange Commission. These statements are based on current expectations and projections about future events and involve known and unknown risks, uncertainties, and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Please refer to EPL's filings with the SEC, including Form 10-K for the years ended December 31, 2006 and Form 10-Q for the quarter ending September 30, 2007 and Form 10-K for the year ended December 31, 2007 to be filed for discussion of these risks. I will now turn the call over to Rick for his comments.

Rick Bachmann

Thank you T.J. and good morning. Let me start with the fourth quarter net loss to common shareholders of $2.31 per share reported earlier this morning. Majority of the net loss for the fourth quarter of 2007 was attributable to $100.4 million of pre tax non-cash cost associated with property impairments. As Jill will touch on later these charges totaled $64.2 million on an after tax basis, reducing net income per share by $2.02.

In addition, the net loss for the fourth quarter also included $9 million of after tax non-cash unrealized losses on derivative instruments. The vast majority of the impairments were associated with properties within our Western offshore asset based and where the result of mechanical and performance issues.

Five properties located in the Western area experienced mechanical difficulties requiring significant capital to restore production and accounted for over 60% of the impairments. The majority of this capital would have been needed to be spent in 2008 due to pending lease explorations and given our decreased capital budget for 2008, we made the decision that this capital would be better deployed to projects with more potential and a better risk profile. The remaining impairment cost in the Western offshore area were mainly due to six fields that depleted earlier than anticipated or experienced production under performance and were partially impaired.

Our Western area performance is totally unacceptable and we have taken decisive steps to correct this issue. These steps included reducing our capital spending going forward in the Western property base. It is important to note that these impairments incurred in areas outside of our core focus areas of the central and Eastern offshore areas where we have experienced tremendous success particularly in the South Timbalier area.

Our 2008 spending plans will be focused primarily on core areas in South Timbalier and East Bay where we have enjoyed a good return on our capital employed and on initiating production from our deepwater Raton discovery. On a positive note, revenue for the fourth quarter of 2007 was strong at $114.1 million, up from fourth quarter 2006 revenues of $111.6 million and revenue for the year, reached a new record of $454.6 million.

Production for 2007 was within our guidance range at 24,130 BOEs per day. We will go into more detail on this and other income statements components of debt later. Approved the reserves at yearend 2007 stood at 45.3 million BOEs with 62% oil and 38% natural gas. And 84% of the reserves were classified as proved developed. Out lack of exploratory drilling success in 2007 was clearly a reason for a low reserve replacement from the drill bit where we added a total of 2.5 million BOEs against annual production of 8.8 million BOEs.

A further disappointment, we recorded 5.3 million BOEs of negative revisions to our proved reserves in 2007 comprised of 4.1 million BOEs of negative revisions for fields mainly on the Western offshore area that were impaired during 2007.

The other components of our reserve changes include net asset sales and acquisitions. In 2007 we sold 2.1 million BOEs of reserves, the vast majority of which was from the sale of substantially all of our onshore South Louisiana asset base in June of 2007. Also in 2007, we acquired 700,000 BOEs of reserves mainly from the purchase of additional interest in our deep water Mississippi Canyon Blocks 248, 204, and 292.

We are clearly disappointed with our reserve replacement numbers this past year. In that regard we are undertaking a comprehensive risk assessment study and we have hired Rose & Associates, a leading consulting firm on risk assessment to lead this effort with our technical staff. In this study we will look at our past performance and more importantly we will take a critical look at our current exploratory inventory that expands the shelf in the deepwater Gulf of Mexico and decide how to best execute deploying.

The outcome of that study will not only shape our prospect risk in going forward but also help us to determine the future direction of capital spending in these areas. Nevertheless, this company has a mask, a sizable reserve base to date with our current improved reserve base calculated at $1.5 billion in present value compared to the prior yearend value. At yearend our reserve base now has a higher concentration of oil reserves than we have had in the past five years. And we are attempting to increase our oil activities in this year through our announced programs in East Bay Marchand and select projects in South Timbalier 26.

We believe that the best near term plant for the company is to focus on exploitation and exploration within our core areas of South Timbalier and East Bay and we have positioned our technical staff accordingly. These are areas where we have enjoyed a tremendous amount of success in the past and clearly we believe a lot of future potential.

We currently have two moderate risks, moderate potential explored to our wells underway, including South Timbalier 46 number 5 with an A-3 well located on the gulf of Mexico Shelf and the South Timpbalier 23 CC!4 side track located in Bay Merchand.

We will also have a rig in East Bay within a few weeks to initiate a program of at least four wells including 2 pilot horizontal wells designed to enhance oil production in this field. Our technical staff is focused on monitoring our current prospect inventory covering undeveloped blocks in our South Timbalier area. Additionally, our staff is prospecting recently from Ship Shoal to Grand Isle surrounding our South Timbalier area in further East to the West Delta blocks near our East Bay field in an effort to generate new opportunities within our focus area.

Last but not the least in our deepwater Gulf of Mexico program, our Raton gas discovery in Mississippi Canyon 248 where we have a 33% working interest is set to come online in early April. This well marks our first production from deepwater. The projects I have outlined in addition to a few more exploitation projects will comprise our capital spending for the first half of the year. The stewardship of our $200 million budget for the full year of 2008 will be on a quarter-to-quarter basis with emphasis on first half operating performance to determine our spending level for the second half of the year.

Based on our narrowed focus within our core areas of Central and Eastern offshore areas, we are in the process of rightsizing our company to match the approved asset base that is concentrated in those areas. This rightsizing is intended to reduce our cash cost. We are targeting a 20% reduction in our cost, mainly to reductions in general in administrative cost and lease operating expenses. This process is underway and the major reductions in our G&A are expected to be implemented in the first half of this year with LOE reductions to occur throughout the year.

Rightsizing our cost is necessary given not only our current proved asset based but also our production profile for 2008. We estimate that for the full year 2008, our production will average between 17,500 to 19,500 barrel of all equipments per day, the first quarter this year will range between 15,500 to 17,000 BOEs per day.

First quarter is down in the fourth quarter of last year due to no new production scheduled to come on line until late in the quarter and several of our wells in the South Timbalier area declining from their higher production rates within the South Timbalier area while we have numerous uphold zones left to complete and produce in many wells high commodity prizes and an MMS mandate are forcing us to stay in each completion zone longer.

These even low production rates are economic. This is good news for our maximum reserve recovery but it does create lumpiness in our production profile as we wait for these zones to fully complete before we re-complete for the next zone. Additionally, our first quarter rate is also lower than the fourth quarter because we must re-inject a large portion of our produced gas at our South Timbalier 26 field. While we are ramping up our oil production in that field, we have to re-inject a large portion of produced gas back into one of our main reservoir’s gas cap to conserve reservoir energy. Meaning to re-inject this gas as a condition, we did not have last year.

Overall this effort will maximize our oil recovery in South Timbalier 26 to record all the prices and we will produce the gas at a later date. We anticipate that the first quarter average production will be at the lowest for the year as new projects that I have already mentioned in deepwater and on the shelf are set to come online starting in the second quarter. With our current annual production profile and our reductions in cash cost. We project that current commodity to prices, our discretion or cash flow will enable us to execute our program and give us excess cash flow to pay down debt.

In addition to reserving a portion of our excess cash flow this year to pay down debt, we will continue to look at proper sales as part of our longer term strategy to further pay down debt. With likely sales candidates to come from outside our core focus areas in the Central and Eastern areas. We are pleased to announce that we have entered into a definitive agreement to sell two assets located in our Western offshore area for $16.2 million. The sale represents less than 1% of our proved reserves at year end and less than 2% of fourth quarter average production.

The properties include one non-operated asset and one property where we had a small override. We saw limited outside potential on either property. The transaction is expected to close in late March or early April and subject to customary closing conditions and adjustments. We will continue to pursue additional property sales with transactions that are likely to be similar to the one we just announced. We are focused on growth through exploring and acquiring additional anchorage and reserves within our Core, Central, and Eastern offshore areas. With a clear preference to find opportunities that fall within these core areas and lead to expansion of our reserved base.

We are also considering other basins or investment opportunities that could lengthen our reserved life and provide a more predictable production base to support our shelf in deepwater pursuits. The actions we have detailed today provide us with a clear path to move forward that is intended to lead to future growth.

I will now turn the call over to Joe to give you more detail on our financials.

Joe Leary

The net loss of $73.4 million for the fourth quarter of 2007 or $2.31 cents per diluted share compares to a net loss of $52.5 million for the fourth quarter of 2006 or

$1.35 per diluted share, as mentioned earlier a large part of the loss attributed to a $100.4 million pre tax non-cash charge associated with property impairment. The loss of the fourth quarter of 2006 was primarily attributed to $85 million of property impairments on our onshore South Louisiana assets and merger and acquisition related expenses.

We had a net loss of $80 million for all of 2007 or $2.32 per diluted share, compared to a net loss of $50.4 million or $1.32 per diluted share for 2006. The increase loss was largely due to higher lease operating expenses, exploration expenses including dry hole cost and as mentioned earlier, impairments, also a loss on derivative instruments and financing costs. Its increase net loss is partially offset by general and administrative expenses that were lower than 2006, which included a one-time expense cost of $54.5 million of merger related cost and a $6.5 million gain recorded in 2007 on the sales substantially all of our onshore South Louisiana assets. On a better note, discretionary cash flow, which is cash flow from operations and forward changes in working capital and the floor exploration expense totaled $70,000.7 million for the fourth quarter, $2.23 per share, up 9% from last years $65 million or $1.67 per share.

Discretionary cash flow for the quarter was ahead of consensus estimates of $2.10 per share. For the full year, discretionary cash flow totaled $278.9 million or $8.08 cents per share just down slightly from last year’s $279.1 million or $7.29 per share. Discretionary cash flow for the year was slightly below consensus estimates of $8.13 per share. Revenue for the fourth quarter of 2007 was $114.1 million, up slightly from the same period in 2006 at $111.6 million.

Revenue for the full year increased to $454.6 million from $449.6 million in 2006. Although production decreased primarily due to the sale of substantially all of our South Louisiana assets in June 2007, combined with natural reservoir decline, we got a slight increase in oil production during the year as well as increase in both oil and natural gas prices.

Fourth quarter production averaged 2,806 barrels of oil equivalent per day. That was made up of 8,489 barrels of oil and 73.9 million cubic feet of natural gas per day. Oil represented 41% and gas 59% of total production.

As Rick mentioned earlier, our 2007 production average is 24,130 barrels of oil equivalent per day. Now, it is made up of 8,769 barrels of oil and 92.2 million cubic feet of natural gas per day. Although it represented 36% the natural gas 64% of total production.

Price realizations were strong for the fourth quarter averaging $84.44 per barrel of oil and $7.07 for Mcf for natural gas. These prices represent an increase of 57% for oil and 6% for gas over fourth quarter 2006 prices of $53.54 per barrel and $6.64 per Mcfe respectively. Price realizations were also strong for the year. Averaging $56.78 per barrel and $0.78 per barrel and $7.15 per Mcfe for gas, these prices represent an increase of 12% for oil and 2% for gas over 2006 prices and $59.78 per barrel and $6.98 per Mcfe respectively.

Turning to expenses, lease operating expenses for the quarter was $16.7 million excluding transportation charges or $8.72 per barrel of oil equivalent. LOE for the quarter was above the high end of our guidance range of $8.50 per BOE primarily due to production being approximately 200 BOE per day below our guidance range.

For the full year, LOE totaled $59.9 million or $7.94 per BOE. LOE increased $11.1 million primarily as a result of an increase in maintenance and a pipeline repair cost increased in well coming on stream in new field and workovers. These increases were primarily offset by the sale of our onshore Louisiana assets. Contributing to the increase in the per BOE basis where production declined from existing wells with – loss, workovers and maintenance and pipeline repair costs mentioned above, exploration expense including impairments with $131.3 million for the quarter driven primarily by $100.4 million impairment charges as previously detailed. Drive hole and seismic and delay rental expenses for the quarter totaled $28.9 million and $2.2 million respectively.

Dry hole cost and delay rentals increased $46.5 million to $98.2 million for the full year of 2007. the increase is primarily due to our decreased excess rate and increased average dollar spent on exploratory well. The expense in 2007 is comprised of $87.1 million of cost for 11 exploratory wells or portions thereof, which profound to be not commercially productive and $11.1 million of seismic expenditures in delay rentals.

Depreciation, Depletion and Amortization DD&A excluding accretion of our abandonment liability was $36.4 million for the quarter or $19.01 per BOE within our guidance range of $18 to $21 per BOE. For the full year, DD&A decreased $28.1 million to $107.1 million or $19.31 per BOE. This decrease was primarily due to the sale of our onshore Louisiana asset in June 2007 or $55.1 million, partially offset by increased DD&A from our Greater Bay Marchand area primarily South Timbalier due to increased production and capital expenditures of $31.8 million in 2007.

Generally and Administrative, G&A expenses for the fourth quarter was $13.4 million in line with our guidance range of $12 million to $14 million. G&A expenses decreased $58.4 million to $61.7 million in 2007; a decrease was primarily attributed to the one-time cost of $54.5 million incurred during the merger activity as well as legal and advisory cost of $15 million in 2006.

In 2007 we spent approximately $9.4 million of financial and legal advisory fees related to the review of strategic alternatives. In addition, included in G&A is stock based compensation of $9.4 million and $10.7 million for 2007 and 2006 respectively.

Net interest expense for the fourth quarter was$12.1 million, which is an increase from $7.7 million for he same period of 2006 but on the low end of our guidance range of $12 million to $14 million. Net interest expense increased $21.5 million to $44.6 million in 2007. This increase is primarily attributed to the net increase in both the average borrowings and interest rates on the $450 million of Senior Secured Notes issued in April of 2007, offset by the repurchase of $145.5 million of the company’s $150 million Senior Notes as well as borrowings under our bank credit facilities.

Income taxes for the fourth quarter was a benefit or $41.2 million with all of these being deferred. We had a 30% tax rate for both the fourth quarter and full year 2007. Turning to the balance sheet at the end of the year, we had current assets of $66.5 million, current liabilities of $128 million and negative working capital of $61.5 million. At the end of the year, we had $8.9 million in cash, $450 million of new senior unsecured debt, $4.5 million remaining in our old Senior Notes and $30 million drawn on our bank facilities.

We $102 million or shareholder’s equity and currently we have $35 million drawn under our borrowing based bank facility with $165 million of unused capacity.

T.J. Thom

I will be taking you through our first quarter and full year 2008 guidance, starting with production volume for full year 2008, we expect to average $17,500.00 to $19,500.00 BOE per day. For the first quarter, we expect to average between $15,500.17 BOE per day, with the percentage of oil in both cases falling between 30% and 40%. The first quarter is expected to experience little offset to natural decline and routine downtime and is impacted re-injecting gas in our South Timbalier 26 filled area.

Next quarter is expected to increase substantially from new rate coming online from at least three projects including two on the shelf and one from our Raton discovery in Mississippi canyon 248 in the deep water. In addition, we could also see production initiated in the second quarter from Success and either the two shelf exploratory wells currently drilling in our central offshore area and from Success in the program commencing in East Bay which includes the pilot program to enhance oil production to the drilling of two in-fills for its NOL. In regard to pricing, going forward, we expect our price realization to continue to be on par with Henry Hub for natural gas and $1.50 per barrel lower than WTI for oil.

Now, turning to expenses. For LOE, we expect our upload LOE will be significantly down from the $15.7 million expense in the fourth quarter of last year to a forecasted range of $14 million to $16 million in the first quarter of 2008. For the full year, we expect it to range from between $59 million to $67 million for the full year. For G&A expenses, we expenses, we expect this line on them to range between $12 million and $14 million for the first quarter and to total between $40 million and $50 million for the full year. Taxes other than on earnings should be within 2% to 3% of our revenue for the first quarter and full year 2008. For exploration expense, we expect these costs to range between $10 million to $20 million for the first quarter and for full year 2008; we expect exploration expense in the total range of $20 million to $40 million.

Turning to DD&A, the guidance for our DD&A rate for the first quarter is $17.50 to $19.50 per BOE and for full year, we expect the DD&A rate to between $20.00 and $24.00 per BOE. For interest expense, we would expect interest expense for the first quarter to range between $11.5 million to $12.5 million and for full year to range between $43 million and $47 million. Finally, our income tax rate should range between 34% and 37% for the first quarter and full year of 2008. As a reminder, we will post the first quarter and full year 2008 guidance we gave you on this conference call to our website later today. With that, I will turn the call back over to Rick for a few more comments and we will be happy to answer your questions, any questions you may have in a moment.

Rick Bachmann

We hope that this call has been instructional in regards to our 2007 year, but more importantly, what we would hope is that you look at the path going forward. We fully recognize that this year is a critical year for us to reverse the poor performance we have experienced and return to the levels of growth and profitability we once enjoyed. I am convinced that focusing on rightsizing the company, directing our exploration-exploitation efforts mainly to our core focus areas in South Timbalier and East Bay, paying down debt through excess cash flow and seeking to divest the select assets is the right direction for this company in the near term. For the longer term, as outlined earlier, we will seek to grow the company through exploring and acquiring additional anchorage and reserves within the Central and Eastern offshore areas with a clear preference to opportunities that fall within these core areas.

These areas in which we have repeatedly demonstrated the technical and operational expertise in areas we believe hold a lot of upside potential. We will also evaluate other basins for investment opportunities that could lengthen our reserve life and provide a more predictable production base to enhance our shelf and deep water pursuits. With this clear path forward, we intend to return this company to a level of growth and profitability that we will be proud of. With that, we will now take your questions.

Question and Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Neal Dingmann with Dahlman Rose.

Neal Dingmann –Dahlman Rose & Co.

Say, Rick, my question is, around your current reserves, how would you describe the sort of optionality around sort of either the current reserves or your current assets that you set now kind of just a generic question first of all?

Rick Bachmann

Neal, I am not fully understanding your question.

Neal Dingmann –Dahlman Rose & Co.

Just wondering, as you look at East Bay and looking at the various properties, I guess my question is, are you just based on the properties you own and control now, how much will you be able to boost reserves and/or production around that or will it be more dependent on some o f these acquisitions and external properties you had mentioned.

Rick Bachmann

Our program this year is focused on the properties that we control. We are very excited about the East Bay program. I think TJ has spoken about the horizontal wells going down, we think there is an oil rim, but has not produced in the East Bay field given the fact that this is oil, given oil prices, we think we need to add to our production at East Bay, the well going down now at South Timbalier 46, we would expect to continue hitting the ball at 100% the way Tom DeBrock and his team have in the South Timbalier field, so yes, I think the program this year is really focused in that sandbox and we think we can do some good.

Neal Dingmann –Dahlman Rose & Co.

Okay, and then last question on acquisitions, you mentioned offshore, does is still look like there is quite a bit opportunity out there would you call it, I guess somewhat of a buyers market out there, does it look attractive to you?

Rick Bachmann

I think there are opportunities, the reason we have promoted Keith Vincent into the acquisitions role is to further emphasize that that role within the company. What we have not done a whole lot of in the past is targeting some of the majors, it is pretty easy to know who controls these blocks, a lot of these blocks have not been drilled on for a number of years because they are controlled by the majors and we have already had some approaches from the majors with the discussions with the majors about coming in to that West Delta Grand Isle Ship Shoal type area.

Operator

Your next question comes from the line of Tom Nowak with Merrill Lynch.

Tom Nowak - Merrill Lynch

Can you disclose what the remaining reserves in the Western region are?

T.J. Thoms

Not that at this point. Again, we will be looking at select property sales there, so as those get either capped or discarded, we might have some information that would be forthcoming, but at this point, we do not have that info.

Tom Nowak - Merrill Lynch

Regarding debt reduction, you have got 30 on the revolver, are you intending to reduce debt beyond what is on the third unit, so any thoughts on how you would execute that?

Rick Backmann

Right now, we are looking at from excess structure in cash flow reducing the bank facility down to a very minimal amount at the end of the year. We are doing that from excess cash flow.

Tom Nowak - Merrill Lynch

And any thoughts on what your borrowing base gets moved down to with the lower reserve base?

Rick Bachmann

Well, we are looking at that. We do not want to speculate here, but it is going to come down a little bit. Certainly, we are going to raise what we can live with, but we are going to work hard on that to keep it in size as we can.

Tom Nowak - Merrill Lynch

And you were also talking about acquisitions, so just help us with that, is that going to be funded with proceeds from property sales or are you planning to fund that with capacity on the revolver?

Rick Bachmann

It is going to come from a number of different sources; the property sale that we have just announced gives us a little dry powder, I think if you look at the volumetric ranges that TJ has given you, then you apply the current strip that is above the cash flow that we use internally from a forecast standpoint and when you look at asset acquisitions, we typically believe that we could if we wanted to borrow 50% on the asset we are requiring and taper the other 50% out of cash flow or as it is.

Tom Nowak - Merrill Lynch

Just one last one, the 1Q volumes you are putting out have a pretty wide range on them, we are two-thirds of the way through the quarter, so I am wondering what swings that from the low end to the high end?

T.J. Thoms

We do have a few workovers that are pending. They are short in their activity level and should come on towards the end that could swing up and so we do have a wider range for the month of March.

Operator

Your next question comes from the line of Eric Kalamaras with Wachovia Capital Markets.

Eric Kalamaras - Wachovia Capital Markets

A couple of questions on just and just to follow up on the balance sheet a little bit, your leverage is pretty high here given the operational performance and the absolute debt reduction is not that much on the aggregate size of the debt outstanding, what is the thought on that going forward? If we look through mid 2008 and beyond, how do we see that going?

Rick Bachmann

Let me get the first and then turn you over to Joe, our first priority in this company is to grow production and we are certainly mindful of our leverage, but we are also currently focused on returning this company to the growth profile that we have enjoyed in the past by cutting our expenses to some of the levels that we are talking about, again, we think that we are going to have some more cash to play with and maybe currently forecast from some year models.

Joe Leary

We have approval to spend up to $200 million in capital expenditures for 2008, but as Rick said, our first priority is to pay down some debt, so we are going to modulate our spending so that we have free cash flow to pay down debt, it will be bank debt, some asset sale, it would be bank debt, ideally down to very, the minimum amount by the end of the year, hopefully, as we are profitable, as we find reserves in growth production, our metrics are going to slowly come in line with our peer group averages, but it is a long process, but we are going to start with living with cash flow and saying that paying down as much debt as we can.

Eric Kalamaras - Wachovia Capital Markets

Regarding the cost reductions, can I get some granularity as to, you mentioned the 20% reduction, can we get a little more specific as to the what specific actions?

Rick Bachmann

Well, in order of magnitude, we are talking about $20 million and they come from three buckets if you will, one bucket would be your typical G&A; one is LOE and I am going to make a third bucket which is included in G&A, but I will call it consultants.

Eric Kalamaras - Wachovia Capital Markets

And also regarding the Western offshore area, presumably then, you did not write down the whole thing, so what is the fair value that you are using under the PV10 basing on calculations?

Rick Bachmann

I think we are probably going to pass on that question because it would not be in our best interest to disclose those numbers.

Eric Kalamaras - Wachovia Capital Markets

One last one, we will try this one, the discount rate that you applied when you did the impairment on that, was that 10% or was that the cost of capital?

Rick Bachmann

10%.

Eric Kalamaras - Wachovia Capital Markets

I guess, just from my understanding, if you use the cost capital approach, and then obviously the impairment would have been larger, do you have discretion as to, I guess you have complete discretion as to which metric to use?

TJ Thom

We only had three very minimal amount of that write off, it was actually cash flow. Most of it was full field impairment.

Joe Leary

Remember, we had a lot of mechanical difficulties that required us to do a complete write off.

TJ Thom

You are not looking at much impact there.

Operator

Your next question comes from the line of Steve Berman with Pritchard Capital Partners.

Stephen Berman – Pritchard Capital Partners, LLC

A couple of questions, the $60 million asset sale, was that part of the package you had announced last year, the offshore package or is this something separate from it?

Rick Bachmann

This was something separate from that?

Stephen Berman – Pritchard Capital Partners, LLC

And on the lease sale awards, can you say what the one that you were not awarded which was blocked out?

Rick Bachmann

It was the block that we have been on for the last three years, about two years using the South Tim.

Stephen Berman – Pritchard Capital Partners, LLC

Can you bring us up to date on where you are on the wells that are drilling on shelf particularly the South and 46 number 5?

Rick Bachmann

The South Tim 46 in Lapa which has been renamed the eighth grid because we are drilling it from our eighth platform. We ran into some mechanical problems early on. We have just kicked off a side track, but currently was we speak, we are testing BOPs which is an MMS regulation and we should be back to drilling tomorrow, so it will probably be another two weeks before we are down to TD on that particular well. The CT 14 sidetrack at South Tim plate which Chevron and Bay Marchand and Chevron is operating, we are nearing TD on that particular well, we are on a note, but something shortly.

Stephen Berman – Pritchard Capital Partners, LLC

And at this point, on the full year program, can you say how many total wells that might include or are you just going quarter-to-quarter?

Rick Bachmann

It is really quarter-to-quarter, we are pretty confident with what we have. We do want to complete this peat rows, of course have that muscle over our shoulder and then look at actual results.

Stephen Berman – Pritchard Capital Partners, LLC

On the deep water with Noble, the other two discoveries there, is there any update on that as far as development plans go?

Rick Bachmann

There is no specific information. They are both being worked, actually looking at the potential for a sidetrack, we are going South to take position, but that is really work in progress.

Stephen Berman – Pritchard Capital Partners, LLC

The La Pasada well, do you anticipate going back in there soon or is that just a discussion among the partners that has to still happen before you decide what happens there?

Rick Bachmann

It is really a work in progress. The well was TNA-ed. We are still going through the post mortem on the drilling program and then there is a new plan in terms of both location and Wilbur so, a lot of discussion, no conclusions by the partners at this time.

Operator

Your next question comes from the line of Ron Mills with Johnson Rice.

Ronald Mills – Johnson Rice & Company

Just a follow up on the Raton gas production, can you refresh memories as to what you and the operator believes Raton’s deliverability will be when that oil comes online?

T.J. Thoms

Last we had seen from Noble was around $40 million a day range between probably a low of $30 million up to $40 million a day that they anticipate on a growth basis for the well and there has been no indications particularly the well pass we have taken at this point that it should be deviating from that.

Ronald Mills – Johnson Rice & Company

And you installed a 25% working interest, what is the revenue interest?

T.J. Thoms

We have actually increased 33% in revenue interest, it was just off that, just slightly above. It is 33%. We do believe we have relative relief, that is something we will check on for you.

Ronald Mills – Johnson Rice & Company

What are the other two shelf wells that you expect to come online either late in the first quarter or early in the second quarter that will also contribute to that production ramp?

T.J. Thoms

Those two projects that we talked about or the exploration?

Ronald Mills – Johnson Rice & Company

The projects that you said that you said are due to come on in the second quarter?

Ronald Mills – Johnson Rice & Company

That will be in South Marchand 179 and West Cam 252.

Ronald Mills – Johnson Rice & Company

And what kind of deliverability rates are we looking at for those wells?

T.J. Thoms

They are typical shelf wells. They can range anywhere from five to ten to fifteen at the max.

Ronald Mills – Johnson Rice & Company

And can you walk through your revenue interest in those wells?

T.J. Thoms

Sure, I am going to hand it over to Steve. He kind of finish up.

Steven Longon

Yes, well, the South Marchand 179, we have a 100% working interest and revenue interest is something off of that, but we rolled the interest into MMS and I believe, West Cameron 252, we have a partner there, so it is 75% working interest with the roll off payment out there.

Ronald Mills – Johnson Rice & Company

And then, just directionally TJ or Rick, when you look at your full year production guidance level and given your focus more on exploitation on lower risk drilling, once you get kind of the second quarter production jump, is the expectation for sequential production over the remainder of the year sort of remain fairly flat or just slightly grow because the kind of projects you are drilling, I would assume do not have as large as upside opportunity as you move down the risk profile.

TJ Thom

That is correct.

Rick Bachmann

I think we are quarter essentially flat subject to any acquisitions or additions to the drilling budget.

Operator

Your next question comes from the line of Marianna Kushner with Nomura Management.

Marianna Kushner - Nomura Management

I wanted to verify a few things. First of all, your leverage to reserves at this point is $1.75 to MCFE, and am I correct in I know reading this that you will not be able to do any more share buybacks according to your indenture?

Rick Bachmann

Yes, just to improve reserves, we are the over $10.00 and we do have a carve out in the indenture to buy back shares under our $50 million program, as long as our debt to improve reserves is under $10.00, so right now, we will not be taking advantage of that and we want until our debt to improve reserves just down below $10.00.

Marianna Kushner - Nomura Management

Also, I am a bit confused about kind of your strategy on asset dispositions or asset acquisitions because on one hand, you are talking about how it is a priority to reduce debt, and on the other hand, you are talking about potential deals, could you kind of explain this to me better, what are the priorities at this point?

Rick Bachmann

With any Gulf of Mexico producer, you are relatively short reserved; they are not a b pretty steep decline. We are number one focused on maintaining production which is the cash flow and getting our reinvestment acumen back to where it was, having said that, we have provided for taking part of our cash flow and paying back debt. What I am trying to get to is, it would not be a sound strategy to take large amounts of capital on the cash flow and cut the reinvestment in oil and gas and see the production decline so we are trying to walk that very narrow line and get responsible debt paid down, but at the same time, keep our production up.

Operator

Your next question comes from the line of Terran Miller with UBS.

Terran Miller - UBS

I was wondering if you can give us some more details in terms of the raw study, in terms of timing and whether or not there are any benchmarks we should look for or critical items that we should look to, to judge progress on that.

Tom DeBrock

We have Rose scheduled to be in-house in our New Orleans office to give the course and we get a five-day course. We will be kicking off beginning April 14th through the 18th, that particular week, we have already had them contracted to be in-housed here in the New Orleans office. It will be given to all of our technical staff and it will only be EPO folks in that particular class, so I guess, we are bringing Rose instructors into our shop to instruct them.

Operator

Your next question comes from the line of Chris Gulf (ph) with Lehman Brothers.

Chris Gulf– Lehman Brothers

Just to go back to asset sales again, but, the offshore package that you all had out there last year is that still on the market right now or is that off the market?

Rick Bachmann

It is kind of still out there. It is heavy on reserves and very, very light on production and the collapse of the credit market certainly has had an impact on that, the type of buyer or the type of people we were talking to were smaller companies or basically start-ups that we are relying heavily on the credit markets. That package is still out there, we may add a few assets to it to improve its production characteristics, but that is a work in progress.

Chris Gulf– Lehman Brothers

And have you said what the reserves are on that?

Rick Bachmann

We have not said what the reserves were.

Chris Gulf– Lehman Brothers

And any additional asset sales? Is that more a lever that pull during the year if you are in a situation where you need to do that because of lack of exploration success or is that something you are definitely going to be targeting regardless?

Rick Bachmann

We will be targeting asset sales regardless.

Chris Gulf– Lehman Brothers

Can you give any kind of thresholds on that dollar reserves or anything?

Rick Bachmann

I prefer to move that to the second quarter as we go through the year and some of these are subject to depletion plan reviews and looking at where we stand on those Western asset base.

Chris Gulf– Lehman Brothers

And the $200 million CAPEX budget, how much of that is allocated to exploration versus development?

TJ Thom

In that case, it is about 50/50. It may be slightly higher on the exploitation side, but it is about a foot down the middle in the $200 million.

Chris Gulf– Lehman Brothers

And in regards to your bank facilities, I know you said the re-determination date is, or did you say what the date was for that?

Rick Bachmann

Typically, they are in the spring and the fall, so the answer is that it will be in the April-May kind of timeframe.

Operator

Your next question comes from the line of Kelly Krenger with Banc of America Securities.

Kelly Krenger - Banc of America Securities

Can you update us on what your current hedge position is? And what your thoughts on hedging are at this stage?

Tom DeBrock

Yes, we are on a BOE basis. We are approximately 30% hedged of full production. That is accommodation of collars on oil and natural gas. Breaking it out, I guess we are about 40% hedged on oil and about 25% hedged or so on gas. If we continue to look at it, where prices have gone, we continue to look at it and possibly put some more hedges on, but nevertheless, we gave it for 2008, so we continue to look at it and we would do either collars like we had done or possibly put, treat it as insurance if you will to protect the floor, but we want as much as we can to keep some upside. Now, we tend not to hedge in the third quarter because it is what we call our bad weather hedging strategy where we tend not to hedge in cases of hurricanes that come through.

Rick Bachmann

Let me just add to that a little bit, hedging is an ongoing dialogue with our board and while in the past, we had used what is called collars, our strategy may change in the future to looking more at setting floors and just acknowledging that there is a cost associated with that as opposed to putting a ceiling or a collar on the hedge. That also is a work in progress.

Kelly Krenger - Banc of America Securities

And then on your $200 million capital budget, what is the breakdown? How much do you expect to spend in the first quarter in the first half?

T.J. Thoms

It is about $120 million in the first two quarters and then you will have all the rest second half again where quarter by quarter leaving you about $80 million discretionary for that period.

Kelly Krenger - Banc of America Securities

Is there any thought to if that money can get redirected towards acquisitions if good opportunities avail themselves?

Rich Bachmann

Sure, that is always a possibility.

Operator

Your next question is a follow up question from the line of Ronald Mills with Johnson Rice.

Ronald Mills – Johnson Rice & Company

Kelly just asked most of the questions, on the hedging, have you all not added anything since your latest update that is on your website, I think which is posted in July or August?

Rich Bachmann

Correct.

Ronald Mills – Johnson Rice & Company

And then the time of cost savings, if Rose & associates are coming in April, it sounds like they will really be most of a second half impact, the 20% cost savings, is that accounting for a second half start up of cost savings, or is that what you would anticipate on a full year once all the cost savings are fully implemented?

Rich Bachmann

That is a full year number, but the G&A savings will start up right at the start of the second quarter, LOE is something that you are making no changes right away as you go through the year so that may take a little longer to realize, but we would expect to realize $20 million this year in terms of our cash cost.

Ronald Mills – Johnson Rice & Company

So $20 million, okay. Great.

Operator

Your next question comes from the line of Evan Templeton with Jefferies.

Evan Templeton - Jefferies

Most of my questions have been asked, but can you just give us a little bit more color on the Raton volumes, when you anticipate those will kick in?

T.J. Thoms

It should be here; mostly likely it will be April. That is our schedule. We could have a little bit of an earlier start here at the varied scale end of March.

Operator

And there are no further questions at this time.

Rick Bachmann

We thank everybody for joining us. We are as disappointed as you are about the performance, but we have reported, I think the path forward is a path that is quickly going to put this company on the right path going forward. We have made some significant management changes. These carrying down of cost plus focus within our sandbox are all intended to make this look a whole lot better as we go forward. So thank you for joining us and we will talk to you.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Energy Partners Ltd. Q4 2007 Earnings Call Transcript
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