Newfield Exploration Co. Q4 2007 Earnings Call Transcript

Apr.30.08 | About: Newfield Exploration (NFX)

Newfield Exploration Co. (NYSE:NFX)

Q4 FY07 Earnings call

February 12, 2008, 09:30 AM

Executives

David A. Trice - Chairman, President and CEO

Terry W. Rathert - Sr. VP, CFO and Secretary

Lee K. Boothby - Sr. VP of Acquisitions and Business Development

Gary D. Packer - VP, Rocky Mountains

Analysts

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

David Kistler - Simmons & Company International

Ellen Hannan - Bear Stearns

Joseph Allman - J.P. Morgan Securities Inc.

Brian Singer - Goldman Sachs

David Tameron - Wachovia Capital Markets, LLC

Operator

Good day everyone and welcome to Newfield Exploration's Fourth Quarter Full Year 2007 Conference Call. Just a reminder today's call is being recorded and before we get started one housekeeping matter. Our discussion with you today will contain forward-looking statements such as production targets, planned capital expenditures, and drilling plans. Although we believe that the expectations reflected in these statements are reasonable, they are based on assumptions and anticipated results that are subject to numerous uncertainties and risks. Please see our most recent annual report on Form 10-K for a discussion of certain risk factors that may cause actual results to vary.

At this time, for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. David Trice. Please go ahead, sir.

David A. Trice - Chairman, President and Chief Executive Officer

Thank you. Good morning, everyone and thanks for dialing in today. I have with me here in Houston office, Mike Van Horn, Terry Rathert, Lee Boothby and Steve Campbell and on the phone with us are George Dunn from Tulsa and Gary Packer from Denver.

We took some bold steps in 2007 that made Newfield a better company and positioned us for top tier performance in 2008 and beyond. We received over $2 billion from asset sales last year inclusive of abandonment obligations associated with the properties. The most significant steps were the sale of our shallow water Gulf assets and our North Sea business.

In total, we sold nearly 400 Bcfe of proved reserves. We received excellent prices and closed these transactions tax efficiently. And we had good uses for the proceeds paying down debt and funding a significant Rocky Mountain acquisition and funding our other internal growth programs.

But more importantly these sales completed the transition that began almost a decade ago. Our story is pretty simple these days, 90% of our reserves are located onshore U.S. and our growth is organic, visible, predictable and reliable. We grew our business in the Rockies with an acquisition that added 200 Bcfe of proved reserves and even in greater amount of 2P and 3P reserves and nearly $600,000 of exploration acreage. This was the first acquisition of any size that we had done since 2004. The transaction was an excellent fit and complemented our position as a leader in the Uinta Basin.

It also opens the door for us in all of our targeted basements in the Rockies. If you hadn't had a chance to review the presentation that Gary Packer made in Vail, last week, I encourage you to get the presentation off of our website. 2007 was a big year for us at Monument Butte, our 20-acre infield pilot program is no longer a pilot. We have now drilled more than 50 wells on 20-acre spacing. We have a rig dedicated to drilling 20-acre locations with great results.

In last week's new release, we mentioned the new alliance with a private company that will allow us to accelerate the assessment of the deep gas potential beneath Monument Butte in the Mesa Verde, Wasatch, Blackhawk and Mancos Shale. Although it's very early, this deep gas play is about where the Woodford was three years ago. There is multi TCF potential here and we control the timing as all of our acreage is held by production.

Gary Packer will fill you in on Monument Butte later in the call today. The Woodford Shale remains our most important play and our production from the Woodford doubles in 2007. As a result of our fanatic drilling pace last year, a substantial portion of our Woodford acreage is now held by production. Our finding and development cost were higher last year due to inefficiencies inherent in our fast pace program to hold the ground. But we have now entered the development phase of a large portion of our acreage in the Woodford.

Our drilling and completion cost have improved and will continue to do so as we move forward. We highlighted our recent improvements in cost on today's add-in effects [ph] in last week's press release and we expect to report continuing good news, throughout the year. Lee Boothby will provide a more detailed update on our Woodford play, later in the call. As I've said often, this is a great play that is getting better everyday and we are the clear leader in the play.

In the Deepwater Gulf of Mexico, we have captured a solid inventory of prospects that will allow us to drill 4 to 5 wells a year for the next several years. We have two deepwater rigs running today under a balance program that will expose our shareholders to significant reserve potential in 2008. We have two field developments underway that will provide significant production growth in 2008 and 2009 and we will be active in next months Federal Offshore Lease Sale and expect to add new prospects to our growing prospect inventory.

In Malaysia, our Abu Field has reached its peak estimated rate of 15,000 barrels of oil per

day and is performing very well. Our Puteri field development will commence production around the 1st of April and should ramp up to 8,000 barrels per day. Our East Belumut and Chermingat fields will begin production around mid-year and will ramp up to about 15,000 barrels a day shortly thereafter. Our volumes in Malaysia were nearly tripled over 2007 and we have additional fields slated for 2009 developments.

The developments at Puteri and East Belumut have been hampered by poor weather conditions which have increased cost and delayed production by about a month or so. Fortunately, our production sharing contracts protect us against substantially all of the cost increases. Because of our strong production increases in the Woodford and the Rockies and recent new wells in South Texas, these short term delays will have no impact on our 2008 production guidance. Despite asset sales we exited 2007, 10% larger in proved reserves, marking the 19th consecutive year that we have more than replaced our annual production with new reserve additions.

We added 870 Bcfe of new reserves including 200 Bcf new acquisitions. We replaced 350% of our 2007 production, increased our proved reserves to 2.5 Tcf and our Reserve Life Index expanded to 13 years that's a long way from 4.5 years in 1995 and even eight years in 2006.

Today 45% of our reserves are located in the Mid-Continent, 28% in the Rockies, 19% Onshore Texas, 12% in the Gulf of Mexico and 3% in Malaysia. Over 70% of our proved reserves are in onshore resource plays that have years of drilling inventory and predictable future organic growth.

There is a table in our earnings release that will allow you to calculate finding and development cost in many ways. As I calculated, we added reserves in the U.S. at $2.75 per Mcfe and worldwide at just over $3 per Mcfe. There are some things that impacted these numbers and its important that you understand them.

First we spend capital associated with the properties we sold in the Gulf of Mexico shelf of approximately $150 million. The value of those reserves was captured in the sales price. Second, we spent $236 million internationally on development projects in Malaysia and China or reserves already booked as spuds or cannot yet be booked under SEC rules. When production commences we have approximately 5 million barrels or more to book associated with our Puteri and Penara Southeast developments.

We also made a significant discovery in the North Sea, which was not booked as of the time of the sale of that business unit. Our Seven Seas exploration well had tested an over 50 million cubic feet equivalent per day and probably proved up reserves between 70 and 140 Bcfe, and we had a 75% interest in Seven Seas. Its value was reflected in the $500 million sales price for these assets.

We posted strong production growth in 2007. We produced 247 Bcfe in 2007 which includes about 2 Bcfe associated with our UK volumes, consistent with our previous guidance. Although difficult to precisely determine what production would have been had we kept all of these assets, we estimate that production would have been between 290 to 300 Bcfe, or up more than 20% over 2006.

We enter 2008 with lots of excitement and enthusiasm and are confident in our ability to deliver the good results that you expect. Terry Rathert will now provide our fourth quarter and full year 2007 financial and operating results, before we give you updates on our operations and plans for 2008.

Terry W. Rathert - Senior Vice President, Chief Financial Officer and Secretary

For the fourth quarter our reported net income was $313 million or $2.38 per share. Net income from our discontinued operations was $338 million or $2.57 per share. These results include a $341 million gain on our UK sale and unrealized commodity derivative losses under FAS 133 of $98 million after-tax or $0.75 per share, and $11 million after-tax or $0.08 per share of G&A expense associated with our incentive compensation plan related to the sale of our UK business. Without the effect of these items and the added bonus expense associated with the sale, net income from continuing operations would have been $84 million or $0.64 per share.

Our revenues in the fourth quarter were $404 million including the benefit of hedges that settled in the quarter. Our net cash provided by operating activities before changes at operating assets and liabilities, was $258 million. Our production in the fourth quarter of 2007 was 50.3 Bcf equivalent. This equates to average daily gas production of 411 million cubic feet per day and oil production of about 22,500 barrels of oil per day.

For the full year of 2007, net income was $450 million or $3.44 per share, including income from discontinued operations of $278 million or $2.78 per share, which includes the gain on sale of our UK business I mentioned earlier.

Income from our continuing operations includes FAS 133 expense of $365 million, which is $237 million after-tax or $1.82 per share, and the increase in incentive comp expense of $11 million after-tax related to the UK sale. Without the effect of these items, income from continuing operations would have been $420 million or $3.22 per share. Our hedge positions added $170 million in gains in 2007. Revenues for 2007 were $1.96 billion including the benefit of hedges that settled during the year. Our net cash provided by operating activities before changes in operating assets and liabilities was $1.3 billion.

As stated earlier, our production in 2007 totaled 247 Bcfe, right in the middle of our guidance range. In yesterday's release, we provided operating cost guidance for the first quarter of 2008. For the full year, our lease operating expense is expected to be just over $1 per Mcfe. For the first quarter, LOE is a bit higher at $1.20 per Mcfe. Production taxes on Mcfe basis will be higher due to our production mix changing in the first quarter and throughout 2008.

First, we'll not have a large component of offshore production which is not subject to production tax, and secondly, our mix will be more heavily weighted towards production from Malaysia. Production taxes in Malaysia are currently estimated to be over $12 per barrel, due to high oil prices in the way that state PSE works. Higher oil prices are a good thing.

We also have additional major expense work, a component of LOE that includes well work and major well maintenance and this is estimated to be about $10 million in the first quarter. We have some major expense work planned on the acquired Stone Properties in Rockies in the first quarter. Major expense should decrease to about half that amount in the second quarter.

We have detail disclosure on our hedging positions in yesterday's @NFX Publication. Approximately 75% of our 2008 gas production is hedged in NYMEX floor price of about $8 per million Btu. From November 2008 to March 2009 we have hedged approximately 55% of our natural gas production at a minimum price of $8 per million Btu.

Our balance sheet is strong and we have excellent capital structure. In October 2007, we retired our first issue of public debt, $125 million of senior notes we issued in 1997. Our long term debt is $1.05 billion and we ended the year with $370 billion in cash. Additionally we have full availability under our $1.25 billion credit facility.

Our projected cash flow for 2008 which is substantially underpinned through our hedges, coupled with the cash on the balance sheet as we enter the year, will allow us to fund most of our 2008 budget. That concludes our financial overview and as always we would happy to answer any financial questions you have at the end of our remarks.

Back to you, David.

David A. Trice - Chairman, President and Chief Executive Officer

We entered 2008 with a better inventory of opportunities than we have ever had, with the potential to meaningfully grow our company organically with a drill bit our developing assets that we control today. Our 2008 capital budget has announced last week is $1.6 billion and about 15% is dedicated to exploration. Here are some of the highlights of the exploration program, 4 to 5 wells in the deepwater Gulf of Mexico, several wells to assess the deep gas play beneath the Monument Butte oil field. Our new tight gas end play in the Mid Continent, offshore wells, two PSEs in China and in Malaysia including the deepwater well on Block 2C offshore Sarawak, and wells on several new onshore Gulf Coast joint ventures.

Although Lee Boothby is now resonant in our Houston office, he remains close to the Mid Continent and he'll give you an update on our activities there. Lee?

Lee K. Boothby - Senior Vice President of Acquisitions and Business Development

Thank you David. Last week's news release on the Woodford Shale relate great information on our progress. As reported on our most recent 10 extended lateral wells were drilled and completed for an average cost of $7 million. The average production from our extended lateral wells with up to 400 days of data, is tracking above the 4.5 Bcfe EUR type curve. On these metrics, we have attained sub $2 per Mcfe finding cost. We aim to repeat this again and again in 2008.

The Woodford Shale play is the most active play in Okalahoma today. There are 42 industry rigs drilling Woodford wells and production from industry is estimated at nearly 300 million cubic feet per day. We are the leader with operated production of more than 170 million cubic feet per day. We expect to exit 2008 with operated production at 250 million cubic feet per day from the Woodford, an increase of 50% over our 2007 exit rate and we are still very early in the plays ultimate development.

Our confidence in the growth can be seen in the recent 250 million cubic feet per day and firm transportation agreements we signed and the announcements from the Mid Continent Express pipeline and MarkWest about their continued investments to build new infrastructure to support this important growing gas play.

One of our major goals in 2008 will be to determine ultimate spacing of our development wells. Because we anticipate drilling more than 3,000 wells, it's imperative that we understand well spacing early on. To accomplish this we have several pilots planned in 2008, spread throughout our expansive acreage base to help determine the appropriate spacing. We are very confident today that the development spacing will be 80 acres or less.

As discussed previously, our first pilot was called the Cattle. This pilot included 4 wells drilled 660 feet apart, or wells on 40-acre spacing. We now have over four months of production data from the Cattle, an amount of time that our engineers say is starting to provide a meaningful production curve. We have compared the data from the Cattle with 37 Newfield operating wells surrounding the Cattle pilot. These 37 wells are drilled across an area little more than one township in area.

We have included a plot of this information in our @NFX Publication. Cattle wells are performing inline with wells in our sample set which were drilled on 640 acres spacing or higher. We are still collecting pressure and production data and are learning. But we are very encouraged with what we see in this area and more planned in 2008.

In addition to the Cattle pilots we have two additional pilots online the Whitlow and Morris pilots. These pilots benefit from pad drilling and all seven of the wells were drilled and completed for less than $5 million per well on average. We are encouraged by the recent cost efficiency gains we have seen in our Woodford development. Our team is working hard to continue this very positive trend and I look forward to providing additional information as the year progresses.

We continue to provide lots of information on our Woodford progress and I would encourage you to see our updated slides in our @NFX Publication.

Half of the wells we are planning in 2008 will be extended laterals. We expect that our drilling complete cost on extended lateral wells will average about $7 million in 2008 and the EURs will be in the 4.5 Bcf range. The other half of our wells will be 2,500 foot laterals which we expect have EURs of around 3 Bcf per well with an average cost of about $5 million.

As David noted earlier, we are improving efficiency, we are optimizing completions and frac designs and we expect to drive refining and development cost in the Woodford towards $2 per Mcfe in 2008.

Let me now turn the call over to Gary Packer for an update from the Rocky Mountains.

Gary D. Packer - Vice President, Rocky Mountains

Thank you Lee. Our production... excuse me, our production in the Rockies business unit is growing. Today we have 700 Bcf improved reserves and healthy inventory of opportunities to substantially increase both reserves and production. Nearly 20% of our company's reserves are located at Monument Butte, an oil field that covers 120,000 acres when you include the Ute acreage immediately north of the field.

There are over 2 billion barrels of original oil in place and small increases in recovery add millions of barrels to our proved reserves. Our production at Monument Butte continues to grow and is approaching 14,000 barrels a day gross. Because we are the largest black wax producer and have a steady growth profile, we are a preferred provider for the area refiners.

We have also seen increased demand for our crude. Today 100% of our production forecast at Monument Butte is being sold under four term agreements. Area of refiners have been taking more than their required volumes and capacity to refine black wax increase 6,000 barrels a day over last 12 months. And additional upgrades are expected to add an additional 6,000 barrels a day in 2008 and 2009.

We are also encouraged by Holly's recent announcement on building a refined products pipeline from Salt Lake City to Las Vegas. This should incentivise further growth and capacity and allow acceleration of the vast resources at Monument Butte. There are three main value buckets at Monument Butte but are very important for you all to understand. Bucket number 1, is the 40-acre development that has been underway for years, in fact there are more than 1,100 producing wells, we've drilled over 600 wells since we purchased the field in the second half of 2004. And we have as many as 1,000 remaining locations on 40-acre spacing.

We are drilling 200 locations a year and our 40-acre development is expected to recover at least 10% of the 2 billion barrels of oil in place. In addition to the legacy 40-acre development, we have potential being realized on our acreage adjacent in north of Monument Butte. 47,000 acres signed last year through an alliance with the Ute Indian tribe. We've had a rig dedicated drilling on this acreage, we are now drilling our 16th well with results to date consistent with our main field wells. We have potential here to drill hundreds of wells on this acreage position. Overall on 40 acres our remaining potential here is 15 million barrels net.

Value bucket number 2, is the 20-acre development. 20-acre wells are wells drilled 930 feet away from producing 40-acre wells. Set a little differently these are wells drilled between existing producing wells with very little risk. We have drilled more than 50 wells on a 20-acre spacing, these wells are showing initial production rates more than double the original 40-acre wells and the EUR benefits from the aggressive water flood efforts in field.

We have up to 2,500 potential locations and our unbooked potential in the 20-acre in field program is more than 110 million barrels. This program could increase recoveries at Monument Butte as high as 18% to 20% of the original oil in place.

And finally, value bucket number 3, is the developing deep gas play throughout the Uinta Basin that is pushed into the Southeast position or portion of our field. We have now drilled 7 wells and we are encouraged by what we've seen to date. These early wells targeted at the Mesa Verde and Blackhawk formations.

Recently we have participated in 2 wells that have been drilled deeper and penetrated the upper portion of the Mancos Shale. We have seen material cost reductions in drilling and are very encouraged by the logs we have seen, plans are underway to complete both of these wells. If we can exploit the Mancos Shale economically, it would incremental reserves to what we are seeing in the shallower section. We have a 58% interest in these 2 wells and they will be completed and tested in the first quarter.

We also recently signed an agreement with a promoted industry partner that will allow us to assess as many as 71,000 net acres in the Central and Western portions of the Monument Butte field. Drilling will commence in the second quarter and we will retain approximately 65% working interest in this area. Excluded from this agreement is more than 10,000 acres and proximity to our recent test wells. We will drill up to 11 wells on this acreage in 2008 as well. Throughout our Stone transaction we added 42,500 net acres to the deep section and weakened our control an average of 83% interest in these horizons. This is the play that is being actively made throughout the Uinta and the net potential could be several Tcf.

We look forward to reporting on our progress throughout 2008. And I'll turn this back over to David.

David A. Trice - Chairman, President and Chief Executive Officer

Let me close with just a few words about our Gulf Coast program. The lion share of our Gulf of Mexico exploration budget in 2008 will be invested in the deep water. We are currently drilling the Clearwater prospect, a sub salt well operated by Shell. We have a 10% working interest and expect that the well will be doing in the next 2 to 3 weeks. Last week we spud our Anduin West Prospect in Mississippi Canyon. This is an 8 to 10 million barrel oil prospect, it is amplitude supported, its in relatively shallow water and is close to infrastructure, we operate Anduin West.

In addition, we operate our Gladden prospect which is also in Mississippi Canyon. This is a 10 to 15 million barrel oil prospect. Its also amplitude supported and also close to infrastructure. Our greatest exposure will come through the drilling of our Lyell Prospect in the second half of 2008. This Prospect which was the second most highly contested lease sale... lease sale block in 2005 is 150 to 200 million barrel oil prospect in the prolific Green Canyon Sub Salt play.

We will have a 25% interest in the well which will be operated by Anadarko and our interest is substantially carried. We continue to have outstanding success under our joint venture in South Texas with Exxon-Mobil. We have drilled 21 successful wells to date and have an inventory of about another 20 drill-ready locations.

We are drilling a significant exploration test today that has 30 to 50 Bcf of potential. We continue to find new and deeper pay sections as we exploit the fact this acreage south and east of our existing Sarita Field production. We also have some interesting programs ongoing in the Val Verde basin and in East Texas.

Time doesn't allow us to cover these in detail today, but there is an overview in our @NFX Publication on the website. Operator, we are now ready to take any questions that any one has.

Question And Answer

Operator

Thank you Mr. Trice. [Operator Instructions]. And we'll take our first question from Ben Dell from Sanford Bernstein.

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

Good morning guys.

David A. Trice - Chairman, President and Chief Executive Officer

Hi Ben.

Terry W. Rathert - Senior Vice President, Chief Financial Officer and Secretary

Good morning.

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

I had a couple of questions really around the outlook for '09, obviously you have a pretty strong production profile for '08. Do you have a feel for what your two or three year outlook is going to be for production growth rate?

David A. Trice - Chairman, President and Chief Executive Officer

Just generally Ben. I think we are in a position without any significant exploration success to grow the company at the 8% to 10% range. And with exploration success we can be higher than that.

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

Okay. And when you look at 2008 F&D, internally what sort of number are you targeting. It sounds to me from your commentary is that you expect it to come down year-on-year, is that right or am I just reading too much into what you said?

Terry W. Rathert - Senior Vice President, Chief Financial Officer and Secretary

Yes, that's right I think we are targeting around... keep in mind that in the Rocky Mountains that we target almost exclusively oil and if you look at the Rockies, we are probably targeting around $3 F&D cost or $18 a barrel which is obviously very acceptable, finding and development cost for oil and then overall company wide, we are around the 250 range.

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

Okay.

Terry W. Rathert - Senior Vice President, Chief Financial Officer and Secretary

Mcfe basis.

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

And just lastly obviously you mentioned in the quarter a couple of pipeline agreements that you made. But my calculation that only really covers, best case scenario sort of two years worth of incremental growth from the Woodford Shale. Are you actively looking to secure more pipeline agreement?

David A. Trice - Chairman, President and Chief Executive Officer

Yes.

Benjamin Dell - Sanford C. Bernstein & Co., L.L.C.

Okay. Great, thank you.

Operator

Our next question comes from Dave Kistler from Simmons & Company.

David Kistler - Simmons & Company International

Good morning.

David A. Trice - Chairman, President and Chief Executive Officer

Good morning.

David Kistler - Simmons & Company International

Just on the Woodford for one second, you are taking your cost down pretty substantially I guess from the last update of about 5.8 to 5.6 million down to about 5 million. Can you talk about primary driver of taking those costs out on the 2,500 foot laterals and do you anticipate take additional cost reduction with service cost compression in general across the space?

David A. Trice - Chairman, President and Chief Executive Officer

I think our primary drivers just been efficient say, just as we have told everybody over and over that as we move into development and you drill wells the same 640s you know, what you are doing, we have three day data on all days. We have referenced... Lee referenced pad drilling in his remarks on the call. And then obviously, we are seeing a bit of softness on the service side. So it's a little bit of everything but the answer would be going forward, we certainly hope and expect to see further cost reductions, Lee or George have anything you want to add to that.

Lee K. Boothby - Senior Vice President of Acquisitions and Business Development

No, that covers it.

David Kistler - Simmons & Company International

Great. And then one thing you did mention the Woodford which you have in the past, there is a little bit on the Caney obviously, additional upside their, any incremental color from the last quarter on what you have seen in the --

David A. Trice - Chairman, President and Chief Executive Officer

I will give you a couple of quick comments. Number one as we are planning to introduce some horizontal tests in several horizons above the Woodford this year, that would include the Caney the Wapanucka and Cromwell as we have those three horizons above it that all gas charge. We have commercial production out in Wapanucka and Cromwell from vertical wells that really started this play back four years ago.

So, we are going to target more of those and we will be looking at, is it attractive enough to do stack laterals out here. The other thing and that's why we've drilled two Caney wells, we've continued to observe those wells and they are just producing flat. So while those early tests were very short laterals and we think there is more work to do and really unlocking the Caney, it's been really interesting to observe the production from those wells to-date. So again we are encouraged by... we have a long way to go.

David Kistler - Simmons & Company International

Great. And then just switching really quick to Monument Butte last question on it, you guys had in the past talked a little bit about the potential for CO2 flood there. Is that something you are still looking at or there is just enough to chew on right now that that's fairly --

David A. Trice - Chairman, President and Chief Executive Officer

A lot going on, we are... we do have a tertiary study ongoing this year and it's I believe is still on going. Gary do you have any updates or comments you want to make.

Gary D. Packer - Vice President, Rocky Mountains

Dave the work is continuing right now. But I do think we have enough to chew on, and our focus right now is to get the secondary recovery underway and fully implemented and optimized. However with any type of tertiary recovery you got to start early and we are making efforts in that area.

David Kistler - Simmons & Company International

Great. Thanks so much guys.

Operator

Our next question comes from Ellen Hannan from Bear Stearns.

Ellen Hannan - Bear Stearns

Good morning. Actually I think most of my questions were answered, I just had one small housekeeping question for you on capitalized interest in 08 you mentioned that what you expect to capitalize in terms of overhead and interest... and the second question is did you retain an interest in the Blackbeard well?

David A. Trice - Chairman, President and Chief Executive Officer

I will answer the second one. I will let Terry to answer the first one. Yes, when we sold our shelf assets to MMR, last year we retained a 15% interest in the Blackbeard well and we retained working interest in the other Treasure Island as well as the Treasure Bay prospects but the bulk of our interest went to McMoRan, McMoRan is now the operator of what we operated in the past.

Ellen Hannan - Bear Stearns

Great. Thank you.

Terry W. Rathert - Senior Vice President, Chief Financial Officer and Secretary

And so, on the capitalized portion of our interest expense will be in the range of $50 million.

Operator

And we will take our next question from Joe Allman from J.P. Morgan.

Joseph Allman - J.P. Morgan Securities Inc.

Good morning everybody.

David A. Trice - Chairman, President and Chief Executive Officer

Good morning.

Terry W. Rathert - Senior Vice President, Chief Financial Officer and Secretary

Morning.

Joseph Allman - J.P. Morgan Securities Inc.

What in the Woodford Shale, why only 50% with the longer lateral? Is it a least geometry issue?

Lee K. Boothby - Senior Vice President of Acquisitions and Business Development

Its geology, mostly.

Joseph Allman - J.P. Morgan Securities Inc.

And can you elaborate a little bit?

Lee K. Boothby - Senior Vice President of Acquisitions and Business Development

Of course its geology. We are focusing our activities in '08 in areas where we already have 3-D enhanced and we're drilling in and amongst areas that we already have well control. Clearly, our folks are pushing to extend those laterals, every opportunity that they get to drill the extended laterals as they're certainly the most cost efficient means that we see to exploit the resource at this stage. We offered those ratios on a planning basis. That's how are plan is constructed for '08.

Joseph Allman - J.P. Morgan Securities Inc.

Okay. And then, I think David, I think you mentioned still some service cost softening. Can you elaborate on what you're seeing in terms of just drilling and completion cost, that's still coming down?

David A. Trice - Chairman, President and Chief Executive Officer

Well, we've recently gone out to bit on all of our pressure pumping contracts companywide and we have seen a lot of competition for that business, some significant reduction in pressure pumping services. I would say that we're seeing that basically in all goods and services right now. So, we think we'll see some reasonable cost reductions this year.

Joseph Allman - J.P. Morgan Securities Inc.

Okay, that's helpful. And, then moving over to Monument Butte, can you talk about who your partners are over there in the deep gas?

David A. Trice - Chairman, President and Chief Executive Officer

It's a private equity partnership called RTA, which has an affiliation with Halliburton.

Joseph Allman - J.P. Morgan Securities Inc.

Okay, is that the only alliance you have got. Is that the recent alliance?

David A. Trice - Chairman, President and Chief Executive Officer

That's the only alliance we have there, yes.

Joseph Allman - J.P. Morgan Securities Inc.

Okay, got you. And then are you planning to drill to the Dakota formation as well?

David A. Trice - Chairman, President and Chief Executive Officer

Probably not. It's pretty deep on our acreage. Gary, do you have any comments on that?

Gary D. Packer - Vice President, Rocky Mountains

The first two wells will be drilled through the middle Mancos section, we will evaluate the results of those wells and then we'll look at drilling deeper as David suggested, as we get further north on our acreage position Dakota gets pretty deep. However, it has enjoyed some success in the Basin.

Joseph Allman - J.P. Morgan Securities Inc.

And, then in terms of reserves. What kind of reserves expectation do you have in '08 but reserves expectation, what kind in cost?

David A. Trice - Chairman, President and Chief Executive Officer

Yes, I'd say that on the wells we drilled to-date through the Blackhawk, we're looking at wells that are in the 2.5 Bcf range. I don't think we really know enough about the Mancos Shale to tell you what that could add out here. But it could certainly be a game changer if it's a commercial completion. Any comments Gary?

Gary D. Packer - Vice President, Rocky Mountains

I think you are right on, that's exactly right.

Joseph Allman - J.P. Morgan Securities Inc.

And with costs?

Gary D. Packer - Vice President, Rocky Mountains

What we've seen on the cost side and really its just AFEs to-date because a lot of the completions are yet to be realized, but the AFEs on the wells that we've seen to-date through the Middle Mancos have been $4.4 million. That's a significant improvement over what and really enhanced the shallower well economics which those wells now are down to little over $3 million.

Joseph Allman - J.P. Morgan Securities Inc.

Then lastly with that prospects you are drilling in the shelfwood shale [ph], what's the name of that one, what's the size potentially?

David A. Trice - Chairman, President and Chief Executive Officer

Its sub-salt deep water play its in the... put those in Garden Banks prospects size was gross 200 million barrels. We have 10% working interest.

Joseph Allman - J.P. Morgan Securities Inc.

Okay, do you have a name on that one?

David A. Trice - Chairman, President and Chief Executive Officer

Clearwater, but that's in the high risk, high potential category.

Joseph Allman - J.P. Morgan Securities Inc.

Got you, alright thank you. Take care.

Operator

[Operator Instructions]. And we will take our next question from Brian Singer from Goldman Sachs.

Brian Singer - Goldman Sachs

Thank you good morning.

David A. Trice - Chairman, President and Chief Executive Officer

Hi, Brian.

Brian Singer - Goldman Sachs

Just a follow-up on, one of the last questions with regards to where you decided to drill the longer lateral wells? Is that decision just based on where you had to 3-D seismic results, so as you get more results you could increase that percentage or do you see a decent sized portion of the Woodford that you think won't work with the longer laterals?

David A. Trice - Chairman, President and Chief Executive Officer

We feel that that's a safe and conservative number to give you based upon our plans for 2008 and based upon our assessment of the acreage underlying the 3-D that we already have in hand. Clearly, as we get additional 3-D data geosciences will continue to incorporate that data and we will be working hard on the actual follow-up in terms of the ratio of extended laterals to the normal what we call previously the design well. We are going more and more towards extended laterals and I think you will hear more of that as the year enfolds.

Brian Singer - Goldman Sachs

So you are getting additional seismic results in equal increments or is there some period over the course of the year where you are expecting a large batch of seismic results.

David A. Trice - Chairman, President and Chief Executive Officer

We should have the majority of our 3-D seismic data in hand for existing acreage position by this summer, the summer of 2008.

Brian Singer - Goldman Sachs

Okay, thanks. Shifting to the Welston [ph], can you talk about the timing of drilling any of this Bakken related prospects this year?

David A. Trice - Chairman, President and Chief Executive Officer

Gary you want to take that one?

Gary D. Packer - Vice President, Rocky Mountains

Yes sure. The timing is today. We have executed a drilling program through the second half of 2007 in the Bakken initially in Montana that program is now moved over into North Dakota. We are currently drilling our second test on the Nesson anticline and we anticipate extending this program drilling primarily Bakken locations throughout 2008.

Brian Singer - Goldman Sachs

Great. And a last follow-up on Blackbeard going back historically, I am trying to remember did you have... got a 26% interest and now you said you still in the 15% interest?

David A. Trice - Chairman, President and Chief Executive Officer

We had a 25% interest which went as high as 41% after a couple of partners dropped out and then we sold 26% of that to McMoRan and we retain 15%.

Brian Singer - Goldman Sachs

To which you will still be responsible for the capital cost or you carried on any additional work?

David A. Trice - Chairman, President and Chief Executive Officer

We would be paying partner.

Brian Singer - Goldman Sachs

Great. Thank you.

Operator

And our next question comes from David Tameron from Wachovia.

David Tameron - Wachovia Capital Markets, LLC

Hey good morning. I am sorry to beat the dead but the Woodford again, is there... and may be you covered this David, and if you did I apologize. But is there a general geographic rate you can give us on where the longer laterals are being drilled, I mean most of the northern acreage or southern acreage? Can you characterize it that way?

David A. Trice - Chairman, President and Chief Executive Officer

We drilled longer laterals throughout our acreage. Most of our... right now most of our development drilling is going on in the northern section and I think of our nine wells that they are drilling now believe all, nine are own extended lateral wells. So it's either eight or nine or all nine or on extended laterals.

David Tameron - Wachovia Capital Markets, LLC

Alright but no, no. You can't necessarily say that the laterals are going to there exclusively in the north?

David A. Trice - Chairman, President and Chief Executive Officer

No, no absolutely not.

David Tameron - Wachovia Capital Markets, LLC

Okay. A question for Gary, Gary you talked about the new wells in the Williston, did you have some Stone recompletes that you're planning on doing in 2008 or 2009, or did those get done in '07?

Gary D. Packer - Vice President, Rocky Mountains

As far as recompletes, we had re-frac program that was pretty healthy and successful and that program was executed in 2007. We do have few extending into 2008 but it's going to be pretty minor relative to our total program.

David Tameron - Wachovia Capital Markets, LLC

Okay. And then one more question. Can you... obviously Questar is out there among other still... Gasco, Barrett, XTO everybody is chasing the Mancos, where is your acreage perspective for the Mancos versus say Questar?

Gary D. Packer - Vice President, Rocky Mountains

I'd encouraged you David to look at our website in the presentation that I made avail last Monday. In that you'll see a map that I think clearly depicts our acreage position relative to Questar. The short answer is we are southwest of Questar's drilling. They recently drilled over very close to our position. It's immediately southeast but I think they've got and have talked publicly about drilling 30 wells in 2008 and they would be northeast of us. Gasco's drilling is immediately adjacent to our position and kind of robust Monument Butte to the southeast.

David Tameron - Wachovia Capital Markets, LLC

Okay and it sounds like you are going more to the middle Mancos and lot of these wells where Questar is going all the way through the bottom. Is that... am I reading... hearing that right and if so what's... in your opinion what's the difference, is it just geology?

Gary D. Packer - Vice President, Rocky Mountains

Well let's start... its geology but its economics. Right now and again it's very early here. It looks to us in our acreage position based on the results that we've seen to-date that the middle Mancos by extending that well through the middle Mancos its accretive to returns in order to make the additional capital investments to drill through the lower Mancos and into the Dakota. We are just not seeing the results to-date in that section in our acreage position. I know Questar has talked about some pretty impressive numbers on theirs. We just need to start getting some locations drilled on our leases, the joint venture that David spoke to gets us there. And once we start seeing the results of those wells I would envision us pushing deeper as time progresses.

David Tameron - Wachovia Capital Markets, LLC

Alright and you said 10,000 acres got excluded. That's what's in the press release is that stuff that you've drilled Mancos/Dakota test on, or Mancos test on.

Gary D. Packer - Vice President, Rocky Mountains

Yes. If you look at our acreage position David, the 71,000 acres is kind of the western portion of our acreage. The most of these geologic trends run North-South and the 10,000 acres would be a North-South extension of the results in the wells sort of already been drilled with Gasco.

David Tameron - Wachovia Capital Markets, LLC

Alright. Thanks.

Operator

And our next question comes Joe Allman from J. P. Morgan.

Joseph Allman - J.P. Morgan Securities Inc.

And just a couple of quick ones. That first, North Dakota Bakken well, do you have results on that and what technique did you used for drilling and completing that?

Gary D. Packer - Vice President, Rocky Mountains

The well we have chord [ph] and we are doing some additional testing. So we do not have test results on the first well that's been drilled. And these are all single laterals,

Joseph Allman - J.P. Morgan Securities Inc.

And these single across 640 or across 1280?

Gary D. Packer - Vice President, Rocky Mountains

They are going to be across both depending on what our acreage positions are. It's we are not going to have a luxury of just picking one and sticking with that.

Joseph Allman - J.P. Morgan Securities Inc.

Got you then on un-cemented liners, how are you doing there?

Gary D. Packer - Vice President, Rocky Mountains

Un-cemented liners, that's correct.

Joseph Allman - J.P. Morgan Securities Inc.

Okay. And then I think David at the beginning of the call you talked about a new kind of tight gas plant in Mid Continent, if you addressed that, I missed that can you talk about that?

David A. Trice - Chairman, President and Chief Executive Officer

It would be an extension of a... the Mountain Front Wash play that we have been playing over the Texas Panhandle back to the east.

Joseph Allman - J.P. Morgan Securities Inc.

Okay got you. Okay, I appreciate it. Thank you.

Operator

And we have no more questions at this time. I will turn it back to you Mr. Trice.

David A. Trice - Chairman, President and Chief Executive Officer

We appreciate your patience here with us a long time this morning, and as always we appreciate your support. If your questions didn't answered, feel free to call Steve or any of us and we look forward to seeing you here in our office in Houston or on the road. So have a great day and we will see you soon. Thanks.

Operator

This does conclude today's presentation. Today's presentation is available for replay by dialing 1-888-203-1112. We thank you for your participation. And have a wonderful day.

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