Plains Exploration and Production Company Q4 2007 Earnings Call Transcript

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 |  About: Plains Exploration & Production Company (PXP)
by: SA Transcripts

Operator

Good morning. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Plains Exploration Fourth Quarter and Year-End 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 period. (Operator Instructions). Thank you.

It is now my pleasure to turn the floor over to your host, Scott Winters, Vice President of Corporate Communications.

Scott Winters

Cheryl, thank you and good morning everybody. Welcome to PXP’s fourth quarter and full year 2007 earnings conference call. We would like to begin this morning by welcoming Hance Myers, Vice President of Investor Relations. Many of you know him and have worked with him before and we are very excited to have him as part of our team.

Earlier this morning our earnings results were released and the 10-K was filed. Copies are available on our website at pxp.com. Included in the press release are several tables of summary financial and operating data, including GAAP to non-GAAP reconciliations, current hedge positions, proved reserves and costs incurred.

PXP reiterated today its previously issued 2008 full year financial and operating guidance and provided a range for estimated 2008 depreciation, depletion and amortization per unit costs of $17.25 to $17.75 per BOE.

This conference call is being broadcast live on the Internet and anyone may listen to the call or the replay by accessing our company website.

Before we begin today’s comments, I would like to remind everybody that during this call there will be forward-looking statements as defined by the Securities and Exchange Commission.

These statements are based on our current expectations and projections about future events and involve certain assumptions, known as well as unknown risks, uncertainties and other factors that could cause our actual results to differ materially. Please refer to our Forms 10-K, 10-Q, and 8-K filed with the SEC for a complete discussion on forward-looking statements.

On the call today is Jim Flores, our Chairman, President and CEO; Doss Bourgeois, our EVP of Exploration and Production; Winston Talbert, our EVP and CFO; John Wombwell, our EVP and General Counsel; and Hance Myers, our VP of Investor Relations.

2007 was the most active year in the company’s five-year history. We continued our strategy of acquiring oil and gas properties with meaningful current production and cash flow, large development project inventories and dynamic growth opportunities.

PXP continues to deliver strong financial and operating results. We entered 2007 focused on developing our large California oil resource base and exploring a significant number of Gulf of Mexico prospects.

In addition to accomplishing these goals to the execution of active development and exploration programs, we successfully added and integrated the Piceance Basin and Pogo properties. And through post acquisition divestitures and partnering, we high-graded and aligned operator strengths in order to maximize operating efficiencies and investment returns.

PXP increased sales volumes 58% and operating cash flow 149% in the fourth quarter of 2007 compared to the fourth quarter of 2006. Remember our operating cash flow was a non-GAAP measure. We reported proved reserves of 577 million BOEs, which is a 64% increase over 2006 total company year-end proved reserves.

The reserve amounts are pro forma for the previously announced asset divestments. We achieved competitive all-in $18.07 per BOE finding and development cost or $14.69 per BOE, excluding the impact of the Pogo acquisition deferred tax gross up.

We continued our Gulf of Mexico exploration success with two material discoveries, Flatrock and Vicksburg. We significantly increased production in the Piceance Basin as we followed through on our plans.

We announced and closed $4.6 billion in acquisitions, adding substantial future growth opportunities with producing assets in high quality basins, mainly in the United States. And we announced $1.75 billion of asset divestments. The XTO transaction closed on February 15 of this year and the OXY transaction is expected to close February 29.

Proceeds are planned for share repurchase and debt reduction. We also announced $1 billion share repurchase authorization supplementing the 2006 and 2007 stock repurchase program in which we purchased 7.7 million shares for about $342 million.

For the fourth quarter, earnings per share, production, operating cash flow and gross margin before DD&A all showed significant consecutive quarterly improvements. PXP reported $80 million of net income in the fourth quarter of 2007 compared to net income of $32.9 million in the third quarter and $383.6 million for the fourth quarter last year.

Remember last year’s results include a $637.5 million pre-tax gain on the sale of oil and gas properties and a $45.1 million pre-tax charge for extinguishment of debt.

On a per share basis, PXP’s reported net income of $0.81 per diluted share in the fourth quarter of 2007 represents an 80% increase over the third quarter of last year 2007, and a third consecutive quarterly per share improvement from $0.28 in the first quarter of 2007.

Operating cash flow, a non-GAAP measure, in the fourth quarter of 2007 was approximately $274 million, an 88% increase over the third quarter of 2007 and a third consecutive quarterly improvement.

Gross margin per BOE before DD&A in the fourth quarter was $45.14 per BOE, a 16% increase over the third quarter of 2007 and a fourth consecutive quarterly improvement. Please refer to the explanation and reconciliation of non-GAAP measures located in the table at the end of the press release.

Revenues in the fourth quarter of 2007 compared to the third quarter of 2007 increased approximately 65% due to stronger oil and natural gas prices, improved commodity price realizations and increasing sales volumes.

The average NYMEX price for the fourth quarter was $90.50 for oil and $6.94 for natural gas. Sales volumes jumped nearly 50% to 85.1 thousand barrels of oil equivalent per day in the fourth quarter of 2007 from 57.1 thousand BOE’s per day in the third quarter. Higher Piceance Basin volumes and nearly two months of Pogo properties accounted for the increase in the fourth quarter.

The average realized price for oil was 85% of NYMEX prices in the fourth quarter of 2007 compared to the third quarter 2007 of 84%. Looking forward, PXP estimates an average realized price of oil of 88% of NYMEX prices during 2008, due to the lower contractual price differentials in a large portion of its crude oil production.

The average realized price for natural gas was 83% of NYMEX prices in the fourth quarter compared to the third quarter of 2007 which was 69%. The increase is due to improved differentials in the Piceance Basin and the partial quarter contribution in the Pogo properties.

Again looking forward, PXP estimates an average realized price for natural gas of 87% of NYMEX prices during 2008.

Total production costs per unit in the fourth quarter compared to the third quarter of 2007 showed improvement, reflecting the partial quarter contribution of the Pogo properties. Lower steam, gas and electricity per unit costs were nearly offset by higher production and gathering and transportation per unit costs.

Higher stock based compensation expense accounted for a majority of the higher G&A per unit expense in the fourth quarter of 2007 compared to the third quarter of 2007. And we recognized the $12.9 million loss related to the mark-to-market derivative contracts, during the fourth of 2007.

Cash payments related to the contracts totaled $28.8 million. About $25.1 million of the cash payments are associated with the crude oil deferred premium put options. The balance of the cash settlements were associated with the Pogo crude oil callers.

First Call consensus earnings per share estimate for PXP’s fourth quarter was $0.69 per diluted share. The primary difference between the First Call quarterly estimate and our reported result is the loss on mark-to-market derivative contracts.

PXP continues to deliver operational results as well. Piceance Basin sales volumes increased 57% from the June acquisition through December 2007. The December gross rate averaged approximately 63.4 million cubic feet per day or 51.3 million cubic feet per day net to PXP and we continue to operate five rigs in the basin.

Flatrock in the Gulf of Mexico, the operator recently announced two additional offset successful wells that encountered multiple reservoirs. The Flatrock area encompasses five productive wells and as many wells drilled, with three additional drilling locations permitted.

Gross production to sales begin in January of this year with two of the five productive wells producing a current gross rate of 72.2 million cubic feet equivalent per day with 21.7 million cubic feet equivalent per net to PXP’s 30% interest.

Vicksburg in the Gulf of Mexico in February 2008, the operator announced a material oil discovery. The discovery well was drilled to a depth of approximately 25,400 feet and encountered a hydrocarbon column of approximately 300 feet. PXP expects to participate in additional similar offset prospect with the same the operator during this year.

Our accomplishments achieved through 2007 and into 2008 are notable. With an enhanced asset base and financial flexibility, PXP is well positioned to accelerate per share value going forward.

As in 2006, we ended 2007 with a strong balance sheet and the financial flexibility to repurchase PXP common shares and to seek investment opportunities with long term benefits for the PXP shareholders.

With that, I’ll turn the call over to Jim.

James C. Flores

Thank you, Scott and thanks for the great report. As everybody had seen in 2007, although it was our busiest year it was also one of our most profitable on an ongoing operational basis and also it put us in great position here for 2008 and beyond.

Our five operating areas, California, the Rockies, the Panhandle, Permian, the Gulf Coast and the Gulf of Mexico are all coming together quite nicely. Our plans for 2008 are development oriented and with less allocated for exploration; however we are going to do a couple we think are pretty exiting things that are follow-ons to Vicksburg and also might enter the Paleogene for the first time with a special operator out there later in the year.

So we’ll have some interesting things going forward to 2008. One of the key things that we have in this year’s financial plan and budget is flexibility, obviously because of oil and gas prices.

Oil and gas prices were stronger in the fourth quarter than we what we forecast them to be. Therefore the debt position of Pogo when we acquired it was lower with that additional cash flow. Our net debt is lower once we close the OXY. We closed XTO. Once we close the OXY sales, we’ll have a very strong balance sheet.

Our cash flows here in the first quarter obviously are higher with oil and gas prices being even higher than the fourth quarter. So as long as this commodity price environment stays around or continues, we will have increased financial flexibility.

Right now in our operating budget for 2008, we still have about 50% of our exploration dollars unallocated and are continuing to look for opportunities. But from a standpoint of making sure they meet only the highest standards that we’ve set out in our success in the past.

With that, we are looking at operational growth in certain areas like the Gulf Coast, like here in Texas, the Piceance, where we will be expanding those areas with small tactical add-on acquisitions in areas where we think we have good operating leverage now with our new footprint where we can accelerate the growth and accelerate the production per share.

So you will see us use our balance sheet for that on a small basis, at the same point in time maintain our commitment to buy the stock in our share repurchase program due to what we think as a compelling valuation with all the growth we have going forward.

Back to California, we are continuing to pursue our T-Ridge opportunity out there and it’s enhanced with the regulators at this point in time and we hope to have resolution on that this year.

And also, we are very excited about the Vicksburg area with our partners out there and continue our Friesian development this year; we should get it well drilled out there this year and have some more resolution around our host facility there as I said in the Deepwater.

The Panhandle Ranches area is giving a lot of drill bit activity this year, so we will have some information on that this summer of what we feel about that going long term, and the Piceance is continuing to perform very well in the growth side.

So all in all from PXP’s standpoint, getting 2007 documented in the books, showing the earnings power, we’ve also grown our employee base from 700 to over almost 800 employees and which resulted in 10% new employees coming from Pogo and outside where we staffed for the different operations.

That has been a great help and with the leverage with increasing production and reserves dramatically this year with only 10% growth in employees, we’ve got good production to employee ratio and it’s been reflected in their efforts and obviously their merits.

So with that, I want to turn it back over to the operator for questions, and we got a lot to cover as far as historical on the 2007 and also what’s happening here in 2008.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is coming from Larry Busnardo - Tristone Capital.

Larry Busnardo - Tristone Capital

In the Piceance Basin, can you remind me how many wells you have planned there with that five-rig program this year?

James Flores

We’ve got roughly 120 wells scheduled for this year.

Larry Busnardo - Tristone Capital.

And then in terms of the production growth, is it safe to assume that it’s going to be more of a stair step? Just given how the development is on the pad drilling out there?

James Flores

Yes, Larry, it’s going to do that. You got that and also we’re opening up pipelines, we got a pretty regimented schedule out there as far as how the production grows and it’s definitely back-end loaded from the standpoint of second half of the year because we have an opportunity to probably add some rigs this year.

Larry Busnardo - Tristone Capital.

Yes, that’s what I was going to ask. So, there is the potential just given where commodity prices are and obviously the environment’s a lot better now than what it was last year that you would look to add some rigs?

James Flores

What we hoped, when we bought into the Piceance and the difference was so wide and gas prices so tough and rig costs were up and frac cost were up and everything. We said, look, let’s just get in now, make sure to stabilize everything and let’s work with regulars for what we need and put together the long-term plan with them for permitting and, hopefully, by 2009 we’ll have better gas prices and by that point in time the rig contractors and everything, services, may come-off a little bit.

We had no idea it’d this quick in 2008 and so we are catching it perfectly where it’s good time to be adding equipment, and good time to be looking at accelerating the growth out there because of prices.

And also the market situation is getting clearer by the day and I think in our next conference call we’ll be able to give some details along that on some long-term situations. And of course, having OXY as a partner really helps.

Larry Busnardo - Tristone Capital.

How has that regulatory environment been? Are you finding it challenging to stay ahead on the permitting process or is it being going pretty smoothly for you?

James Flores

With our California training it’s worked very well at Colorado. They have a lot of commonality and our guys can talk the same language. So, we’re communicating quite nicely and we’re taking some extra steps. We’re trying to be out in front of what their needs are from the standpoint of trying to get above or beyond the call of what the base minimums are in it. That always seems to work, when you try a little harder, people work better with you.

Larry Busnardo - Tristone Capital.

All right. Just switching over to the Gulf of Mexico, I know you’ve laid out some of the appraisal drilling; you’ve got Flatrock, you have Friesian, you have Vicksburg. Can you talk about any of the other potential wells whether it’s going to be a PXP operator well or any non-operator types that you are going to participate in this year that we can keep an eye on?

James Flores

80% of our capital budget right now is development. Friesian is part of the development. Flatrock is part of the development. We don’t have Vicksburg in development right now, just because we’re going to drill offset prospect, we are not going to be actually doing Vicksburg proper development. And obviously are waiting on our operator to name the prospect we have several blocks out there. We think we know what it is but we are not authorized to talk about it.

So, if you look at major projects, that offset project to Vicksburg would probably be the one major project we have. We’re working on pulling together a Paleogene project, but I think that’s going to be first quarter ‘09. And of course Vietnam, we pushed that off because of some different issues on that.

So, this year it’s going to be more about drilling the ranches, drilling our development stuff, driving production and bringing the value of the Pogo and the Piceance acquisitions to the shareholders.

And be in a position to have clarity around the value that we’ve created in Deepwater with the exploratory drills and be making some commercial decisions on those early 2009 along with our real estate. So, I would have to say, to characterize 2008, it’s more about getting the work done and driving the numbers versus headlining the wells.

Operator

Your next question is coming from Duane Grubert - CRT Capital.

Duane Grubert - CRT Capital

Jim, if you could update us a little bit on what’s going on in Vietnam and in passing you mentioned T-Ridge. I know it’s in the hands of the regulators and so forth, but is there anything specific that’s happening at T-Ridge that is new?

James Flores

Internationally, as you know, is always little different. It is not always as it seems. So, we’re studying that area right now is the right way to put that because there is some challenges there that presented themselves at Vietnam. So, we’re going to idle Vietnam until we know further information there.

The aspect of T-Ridge, all the California regulators are working with us. They’re working with, obviously, to the best interest of California, so forth. We hope to have a meeting with the Santa Barbara Coastal Commission this spring and I think get on the schedule to where that project gets move forward. Other than that, Duane, it’s very difficult to talk much about it because there are so many people involved.

Duane Grubert - CRT Capital

Sure and then moving on to the OXY operatorship in the Permian, the deal hasn’t closed yet but, can you give us a sense of what change we might see out there? Are they going to do something considerably different than the prior operator?

James Flores

I don’t want to speak for OXY and so forth. Steven and the guys out there, they are very focused in the Permian, and we are very glad we did that transaction from our perspective. They’ve shown incredible amount of attention and focus to not only the assets, the growth, they have a lot of good institutional knowledge of the areas; they’ve tried a lot of different things over the years; they have all the Amoco and Shell/Altura Group and so forth.

So they’ve got some strong, strong geologic and engineering knowledge there that has definitely impressed our guys. Their operating cohesiveness and expertise and leverage out there and not only with CO2 and also with the rigs and so forth, is definitely a great trade for us.

We have not officially signed off on a business plan because they’ve got to get their hands around it; I think that’s going to be sometime this summer. But our guys were very impressed with the growth profile and growth thoughts that OXY was talking about there and very doable as well, they have taken a different approach on these assets.

So, I would have to point you toward OXY’s thoughts and feelings on these assets since they are the operator let them take the lead, but the coffee speak around here is that OXY is going to be impressive. And that, we obviously want to be like the same, just as impressive in the Piceance as the area where we’ll speaking of growth volumes and so forth and you’ll be looking to us to be articulate on that side of it with the Piceance, and OXY in the Permian.

Duane Grubert - CRT Capital

That’s great, and then finally if you could comment a little bit on a sector theme. What do you think the relative availability of deal flow is and some thoughts may be on sector consolidation over the coming period?

James Flores

Deal flow, what deal specifically, what types of deals, Duane, are you talking about?

Duane Grubert - CRT Capital

Just in this price environment and looking at the sector people are doing portfolio remodeling, you certainly have done that in very dramatic ways. If you could just comment on what you might suggest the sector might experience over the next year or so?

James Flores

Last year the big phenomenon was MLPs buying every asset that was out there, so that really did a lot of consolidation of the asset market and a lot of them were indiscriminate from the standpoint so it didn’t matter that they pulled everything out of the alleys.

We just look at our asset rotation, we wanted to make sure we were not competing in basins or areas where we couldn’t be competitive. Like the Permian has been consolidated by OXY and XTO and so forth so there’s no way we’re going to be able to compete in there. So, that’s why we were able to work it out with them; same thing with the San Joaquin and XTO and ConocoPhillips and so forth.

I think you’ll see less deals because of less availability and less opportunity and more about which assets are really going to perform in these. And even in spite of this price environment you’re going to see a lot of the technical plays pan out or not pan out. Everything will be economically justified by whether it’s really worth the time and effort.

And we’re going to be looking for higher return type projects maybe Gulf Coast, or stay in this Gulf Coast Basin area, from a standpoint of trying to allocate more capital to drive more barrels and Mcfs through our model here. So, $9 gas works for every project in North America, so I don’t see a whole lot of change in what the business looks like.

Operator

Your next question is coming from Nicholas Pope – J.P. Morgan.

Nicholas Pope – J.P. Morgan

You briefly mentioned this in the Piceance, but I was hoping you could discuss what you all are seeing in drilling and service costs in your different regions, some of the trends you’re seeing right now in terms of cost?

James Flores

They are all over the map, there are so many moving parts in the service side. There is a lot more thoughtful pieces by some of the service oriented investment banks that have better data than we have from that standpoint. We can go through piece-by-piece, you would be more confused than have the information I think, because it circles everywhere.

We are very comfortable with our cost allocation per BOE here, mainly because of volume growth and being able to bring on projects like Flatrock at 75 million a day and so forth from zero, that you can stand some service cost volatility and so forth.

And I think that is the best way we are going to manage cost going forward, but we are going to be right there with the industry except in the areas where we are strong like in California, where we can do our part to control the cost.

Nicholas Pope – J.P. Morgan

Sounds good. And also for the year end reserves and the pro forma reserves, can you give us the proved developed percentages of those reserve numbers?

Scott Winters

It is 51% prior to the OXY, XTO sale. After that it improved by about 1%, so it’s like 51%, 52%. Proved developed.

Nicholas Pope – J.P. Morgan

And has there been progress on Buckhorn in the Deepwater?

James Flores

I wouldn’t call it progress. We plugged the well and moved the rig off about a month ago.

Operator

Your next question is coming from David Heikkinen - Tudor Pickering.

David Heikkinen - Tudor Pickering

On Flatrock with five wells drilled and two producing and three permitted, will you have a couple of rigs running out there, when do you get all the wells on production is what I am trying to get at?

James Flores

Yes, we are going to be moving to get all the wells on production. There is obviously a scramble act; good projects like this everybody’s trying to get in the same direction and so forth and Chevron and McMoRan and PXP we’re having meetings weekly almost doing all that coordination.

What I see, David is, we’ve forecasted a gross rate of around 200 million a day by year end to target, it may be high, may be low. But it’s not going to be high by much, it could be low significantly; it all depends on production facilities and those types of things because we are going to keep two rigs running in the area; I’m sure will be drilling development at Flatrock and doing all the development work.

One rig, we’ll be doing some additional fault blocks and some additional drilling, in that earned area. Because now the big thing is this project right now is being geologically driven and geophysically driven through the analogs and what we are seeing is, we’ve recalibrated the seismic based on the Flatrock productive sands and we’ve got 10 productive sands that we calibrate to and we know what the signatures are.

So, you’re going to see some pretty interesting step-outs in different say, area names, within the Flatrock proper area that will be quite exciting.

So we think the production goals with what we drilled so far are well in hand and it’s going to be helpful. We want to push that number beyond that in facilities and what the overall plan is.

And I think by summer, we ought to have that kind of nailed down. We are moving at a pace of trying to coordinate three organizations. And one of them is moving very fast, one of them is moving medium, one of them is moving a little more thoughtfully. So, and you know the characters, so you can figure out where everybody slots.

David Heikkinen - Tudor Pickering

And then listening to the commentary on Friesian option to monetize or option to develop, which direction are you leaning now?

James Flores

We are not making a call on that at this point. The only option we have out there is to develop to a commercial state, and that’s where we’re heading right now. We very much are looking forward to drilling a second well to reach the deeper objectives not only the shallow that we found, but the deeper objectives that we haven’t seen, which are the Tahiti Sands just to the west.

But we are very encouraged with our discussions with BP on the PHA and so forth. They’ve been very cooperative and our operator, Shell, is very motivated. So we think by the conference call next year we’ll have a very commercial project in Friesian that we’re going to able to realize some value out of it either way.

David Heikkinen - Tudor Pickering

Okay. And then in the Piceance with the 120 wells planned with five rigs, just trying to get an idea of, you’ve had the properties now, thinking about efficiency gains in the Piceance and pad drilling. Can you get into, maybe, Doss, some of the devil in the details around number of days to drill wells and some hopes of how that could improve?

Doss Bourgeois

From the pad drilling and moving in the pad type rigs that are being picked up, we’re drilling 16 to 20 wells off a pad. We are looking at shaving numbers of anywhere from 20 to 25, 30 days off of drilling the bulk of those wells, which is pretty significant over the project being able to reduce those costs and then also stop your rig moves that were moving in and out for where we’d go in and drill, say like four wells, move out, complete them, frac them, come back in a couple of months later.

We’re able to just drill all the wells up so allows us obviously get a lot more production on quicker. It’s going to prove out to really be the way to go and a lot of other operators of course have been doing it. We’re not the ones that are inventing it.

James Flores

David, there is one other thing too on the land side, we’ve had to prove up some more acreage to hold it and that aspect, so we are still moving rigs, drilling two or three wells and moving rigs. We probably have about two thirds of our fleet doing that, establishing the production areas and then we’ll be able to get into more of the manufacturing process by mid-year to late-year; that’s when we start adding the rigs and we go to a six or seven rig fleet and we’ll start getting some more representative numbers.

But right now, it’s more about just making sure that we continue to establish all the production areas are going to get ready for that manufacturing phase. So you will see those numbers over the next three to four years trend in the right direction, because we’ll physically be in a position to do that.

David Heikkinen - Tudor Pickering

Okay, and then just one thing, wanted to tick through; the DD&A in the guidance is up in line with where your F&D is. Can you, just kind of thinking about long-term trends on op costs and with the higher commodity prices you didn’t change your guidance on operating costs. How sensitive are your op costs to higher oil and higher gas prices, particularly, the higher gas side of what you’re seeing for ‘08?

Scott Winters

Yes, the sensitivity on the gas price, for every dollar it goes up in gas price is about another $70, $75 million bucks to us in cash flow and revenue. It’ll cost us another $15 or $14 million in steam gas. So right now, we are, say $60 million plus, $60 million net on higher gas prices. And as we add gas volumes that number will get obviously higher because the steam gas cost is a fixed component of use.

Winston, you’ve got some comments on that?

Winston Talbert

Yes. The DD&A is affected by future development costs and future development costs are being influenced by what the industry is experiencing overall, in increased costs in drilling and well workovers and things like that. So, as those go higher, our DD&A is affected by that.

Especially, as we book and prove up more barrels in the out years, those get discounted to the front to create the DD&A. So that, I don’t think that’s anything unusual in the industry.

David Heikkinen - Tudor Pickering

No, it’s the balance of booking out years in the Piceance and some of the oil properties versus the development of some lower cost things like Flatrock that are impacting production, I thought it might have been a little more balanced. That was the only thing that I was looking at for ‘08.

James Flores

No, but you have a good point there, because that’s one of the things that we are looking at, if we are going to look at augmenting an area like the Gulf Coast or South Texas or whatever with a small property acquisition, whatever it’s from a standpoint of obviously, the acquisition is going to be part of it, but these are the higher rate of return stuff.

We have plenty of long-term reserves. We have plenty of long-term potential. It’s going to be the front-end that we are going to be focused on as far as continuing to grow.

Winston Talbert

The other thing on, just keep in mind that on Flatrock at the end of the year, we only had one well down there. So we really didn’t book a whole lot for Flatrock for 2007.

James Flores

Yes, that’s right; this will be a big year for Flatrock.

Winston Talbert

So all those were in, 2 and 3P reserves.

Operator

Your next question is coming from Gary Stromberg - Lehman Brothers.

Gary Stromberg - Lehman Brothers

A lot of moving parts here with Pogo acquisition closing November 6, plus the asset sales here closing in February, can you give us some range of expectations for first quarter 2008 production?

James Flores

93 to 95 kbd.

Gary Stromberg - Lehman Brothers

In terms of the reserve report, there was a big revision it looks like around 90 million barrels. How much of that was price versus performance for 2007?

Winston Talbert

That’s an interesting question because if you remember back to when we bought the Piceance, we said, we thought there are 65 million barrels in the Piceance, when we first bought that. But if you looked at SEC pricing, you were really only picking up 17 or so, 17, 18 million barrels of reserves when we actually booked it, when we purchased it. And that was really just based on the differentials and the gas price at the end of 2006.

So when we went to book 2007, that 17 million barrels went to about 88 million barrels, partly was just revising the pricing of the barrels we actually purchased. Part of it was the drilling activity that we had in 2007. So about 50 to 60 million of that is really just Piceance; so, do you call it acquisition or do you call it revisions, well the real key to it is that when we bought it, the SEC barrels were 17, so we had to put it in the revision category. So 50% to 60% of that revision is Piceance.

James Flores

Gary, Doss just corrected me. That was the forecast I was talking about because we’ve got so many moving parts, but we’re averaging 98 to 100 for the first quarter. So you take out about 11 or 12 for the OXY sales and that’s also net of XTO and net of sales, we are right at the bottom to middle end of our range of 88 to 92, 93. So then and with wells coming on towards the middle and the upper end of the range the rest of the year, that helps you a little bit.

Winston Talbert

Just to finish on the revision, if you take that 92 about 80% of it was price related. Most of that being Piceance.

Operator

Your next question is coming from Dave Kistler - Simmons & Company.

Dave Kistler - Simmons & Company

Thinking a little bit about moving to development in the Piceance. Last call you’d mentioned that you were testing some of the deeper sands. Can you give us some additional color on what’s taking place there before you do move into development?

James Flores

We have not seen any disappointments. I’d say on the margin it’s 5% to 10% better as far as thickness and reservoir quality and so forth. But the Piceance when we bought in, it was very little developed. So there was a lot of hope and I would say our best case was hopefully 80% of the hope was realized, and I’d say we’re at about 105%, 110% right now.

Dave Kistler - Simmons & Company

Okay. And then you talked about adding additional takeaway capacity in the Piceance to create these kinds of stair step changes in production. Can you talk about that also in conjunction with Rockies in general and what basis looks like there and how you are thinking about managing that over the next couple of years?

James Flores

Yes, we have plenty of takeaway capacity up to 200 million a day right now. But we are talking about long-term takeaway capacity, there’s all these large capital projects for the pipelines and liquids plants and so forth and obviously everybody who’s put those investments in are going to want them fully utilized.

So we’re working with them to finalize more of a long-term solution there that will basically give us all the capacity we need and we’re surprised that’s coming so quickly. And we should have that done first half of the year, and be able to articulate to everybody.

I think what’s happened near term in basis, everybody thought there was 1.8 Bcf ready to go into REX and we got to go drill some wells. And so the aspect of REX taking a lot of volumes from the other pipelines, a lot of the gas that was supposed to come East is going West now to California because of their gas demand and so forth.

We see a very good differential environment going forward and consequently it’s going to be reflected in our firm pricing. But we’re going to be looking at doing some firm transportation, just drive the volume meter and not have to worry about our differentials here pretty soon.

Dave Kistler - Simmons & Company

Great. And then one last question just on Flatrock, you’ve got three additional wells being permitted for this year. Can you talk a little bit about how long that relationship goes? Can it go into next year with McMoRan? What could we be looking at a year from now in terms of additional wells potentially?

James Flores

Jim Bob and I have a thirty-year relationship, so I certainly hope it lasts at least one more year. And the reason why I present the question is because it can change, it can expand, it’s opportunity driven and we have a relationship where we feel that with McMoRan we work well with them and so forth and we are going to do more projects with them, no question about it.

We like their geology, we like their geoscience and obviously on the heels of Flatrock, we’ve all gained some institutional knowledge that we’re going to try to franchise together and come together on additional stuff.

That being said, Flatrock specifically we have a lot of drilling to do at Flatrock this year. We can see more drilling next year. Obviously it’s going to need two other partners to see that. We have a lot more to do out there as each well seems to be setting up more locations.

The big guiding factor is going to be how do we want to produce the field? Do we want to produce it at 200 to 300 million a day or 400 to 500 million a day? And that’s going to reflect on what type of development plan and we’re going to be thoughtful around that and that’s going to take Chevron and McMoRan’s coordination.

So with McMoRan being the operator of that area for us, Chevron is going to be taking over more and more of the production operations, I think McMoRan will probably be more committed on what the plans are. We’ll obviously be involved in them and they’re all good, it’s just a matter of what level of development we want to show up.

And that’s again driven by some of these outlying fault blocks and these deeper wells we’re drilling in the Operc, the Gyro and so forth and continue to drive the production volumes out there.

Operator

Your next question is coming from Gregg Brody – J.P. Morgan.

Gregg Brody – J.P. Morgan

Where are the two additional wells, the fourth and fifth, delineation wells at Flatrock, where are they located and how far down are they right now?

James Flores

We have five wells that have pay behind pipe right now and we’ve got three more being permitted. Now we have two wells on production right now out of the three wells at that have pay behind pipe, so those three wells, they’re in Flatrock proper, or they’re a mile to east or a couple of miles to the west, they’re all hooked into the Flatrock structure.

And the reason why it’s a little confusing is that we had several prospects in this area and Flatrock became the dominant prospect, so it’s all in the Flatrock area and you will hear names like Cottonwood Point or Hurricane Deep, all that is Flatrock now. They’re all wells number 228 and 229 and 230.

So that’s where you’re going to get a little nomenclature change. But the three wells being permitted is just our current view of wells we’re permitting and that’s going to move around as we drill more wells and I think I’m very safe to say that’s not the last wells we’re going to permit in the area.

Gregg Brody – J.P. Morgan

Okay. That is helpful. I think in the beginning of the call, you spoke about what should we do with the proceeds from your recent asset sales. How much of that is going towards debt?

James Flores

It’s all going to go in our revolver first. It’s set to pay our revolver down, but we have a $1.9, $2 billion revolver, what’s our balance going to be at pro forma, Winston?

Winston Talbert

We think we’re going to have about, after the OXY sale, $400 to $600 million drawn under the revolver and we decreased the commitments on the revolver from $2.9 billion to $1.9 billion, so we’ll have, let’s say $1.4 billion un-drawn once we close the OXY transaction.

James Flores

And what I pointed to was the cash flow being significantly higher than even what our forecasts were there. We expect that strength to continue.

Operator

Thank you. There appear to be no more questions at this time. I would now like to turn the floor over back to Jim Flores.

James C. Flores

I appreciate everybody staying with us for the ride through 2007. We’re looking at 2008 to really put some good points on the board. So we’ll look forward to talking to you and giving you specifics around some of the plans and some of the outlook that we gave you today. Thank you.

Operator

This concludes today’s Plains Exploration Fourth Quarter and Year-End 2007 Results Conference Call. You may now disconnect.

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