Noble Energy Inc. Q1 2008 Earnings Call Transcript

May. 1.08 | About: Noble Energy, (NBL)

Noble Energy Inc. (NYSE:NBL)

Q1 2008 Earnings Call

May 1, 2008 10:00 am ET

Executives

David Larson - VP of IR

Chuck Davidson - Chairman and CEO

Chris Tong - CFO

Dave Stover - COO

Analysts

Ellen Hannan - Bear Stearns

Gil Yang - Citi

Robert Lynd - Simmons & Company

Irene Haas - Canaccord Adams

Nick Burt - JPMorgan

Joe Magner - Tristone Capital

Operator

Good morning everyone and welcome to the Noble Energy's first quarter 2008 earnings call. As a reminder today's call is being recorded, and now at this time, I would like to turn the call over to Mr. David Larson. Please go ahead, sir.

David Larson

Thanks, Dana. Good morning, everyone. Welcome to Noble Energy's first quarter 2008 Earnings Call and webcast. We appreciate your interest in Noble Energy. I would like to start out with a few introductions today. On the call we have Chuck Davidson, our Chairman, CEO, Chris Tong, CFO, and Dave Stover, Chief Operating Officer.

The agenda for the call includes opening comments by Chuck including some discussion of the increased capital program that we announced in our news release this morning. Chris will then provide a little more detail on the items affecting this quarter's results. Dave will finish up with a discussion of our operating highlights for the quarter and the program for the remainder of the year. We will leave time for Q&A and try to wrap up the call in about an hour. We hope everyone has seen our earnings release issued this morning. You probably noticed that we significantly changed up the format of the release and the supporting schedules. Hopefully, you find them easy to follow and will allow you to improve your models going forward.

Later today we expect to be filing our 10-Q with the SEC and it will be available on our website at www.nobleenergyinc.com. Before we get started, I want to mention that we will be holding an analysts meeting on May 14th at the St. Regis in New York City. We intend to provide a corporate update plus a detailed look at the company's key assets and our on going programs. Please make sure to let us know if you are planning to attend. We will be webcasting the presentation for those who aren't able to make it.

I also need to remind everyone that this call contains projections and forward-looking statements based on our current view and most reasonable expectations. We provide no assurances on these statements as a number of factors and uncertainties could cause actual results in future periods to differ materially from what we discuss. You should read our full disclosures on forward-looking statements in our latest news release and SEC filings for a discussion of the risk factors that influence our business.

We will reference certain non-GAAP measures today such as discretionary cash flow. When we refer to these items it is because we believe they're good metrics for us and our stakeholders to use in evaluating the company's performance. Be sure to see the reconciliation in our earnings release.

With that, let me turn the call over to Chuck.

Chuck Davidson

Thank, David and good morning everyone. It is certainly was a stellar quarter for Noble Energy. As I commented on last quarter's call that we're starting 2008 with the wind at our backs and I guess I just didn't realize how strong the breeze was blowing.

Our record volumes for the quarter combined with ever strengthening commodity prices helped to generate record revenues for the company just over $1 billion. That was up 38% from the first of quarter 2007. Sales Volumes averaged 222,000 barrels of oil equivalent per day and that was up 23% from the first quarter of last year and up a strong 11% in the fourth quarter of last year.

We saw a strong operating performance across our worldwide assets with volume growth being reported for both our United States as well as International assets. We continue to be very pleased with the performance of our Rocky Mountain properties, there at Wattenberg Piceance and Niobrara. Collective our Rocky Mountain volumes were up significantly from the first quarter of last year even after adjusting upward our first quarter 2007 Rockies production to account for the storm downtime we've experienced last year.

The deepwater development projects that we completed late last year at Lost Ark, at Swordfish, and at Ticonderoga have really worked out well and are adding very strong production to the company.

Outside the United States, we had record natural gas sales in Israel supported by good liquid and natural gas sales in Equatorial Guinea.

Managing costs remains a very important part of our strategy on a unit of production basis, combined lease operating expenses plus G&A were down approximately 7.5% in the first quarter of f 2007 and they were down almost 10% from last quarter. The unit DD&A rates were down about 1% from first quarter last year and down around 2% from last quarter. So you combine the increasing commodity prices with lower per-unit costs and throw in record production it should be no surprise that we ended up with record quarterly adjusted earnings and discretionary cash flow.

Now just a couple of comments on our capital increase that we announced. Our original capital budget for 2008 was approximately $1.6 billion. We have now raised that to $1.9 billion, it was not driven by increased commodity prices or rising costs but instead by our identifying several excellent new opportunities during the quarter. This is a process we go through every year. We know we won't or can't know what incremental opportunities might present themselves after we improve our capital budget.

Our approach has always been to make sure our budget leaves us the flexibility and that's flexibility from both the capital standpoint as well as from a staffing standpoint. To take on incremental opportunities during the year, you may remember, we did something similar last year.

Dave will discuss in more detail some of these new opportunities. They fall into three broad categories. The first category involves shifting future projects forward, such as what we are doing to accelerate the next phase of development in the Dumbarton field in the North Sea.

The second category is where we are adding new drilling opportunities. In some instances these new opportunities are tied to newly acquired acreage. And the third category has to do with building future inventory, and with probably the most obvious example in this latter category being the recent Gulf of Mexico lease sale where we identified some exceptional prospects.

We continue to believe that investing in a high return projects creates value for value for our shareholders. And I would expect and we are certainly pleased that we have been able to continue to identify and capture some quality opportunities. We certainly expect to continue to search further as we go through the year.

On another note, we just announced the 50% increase in our quarterly dividend, which is now at $0.18 per share a quarter. We know our shareholders are focused on total returns. Our dividend yields for companies E&P companies don't play a large role in returns especially if times like what we have been experiencing.

But we do believe having a relatively strong dividend for Noble Energy is justified given our financial health and our confidence in our future. I'd like to finish up with a quit run down on this exploration drilling as our programs are really just getting kicked off here in the second quarter.

I am more excited about this year's program as compared to last year. And that's tough for me to say given the success we had in 2007. This year's program is a bit more diverse, with significant prospects in multiple areas of the world. Last year, our success in West Africa opened a huge future opportunity for the company. In the area that we will see significant investment and growth going forward.

Now this year, we have the opportunity to do the same, perhaps in Israel perhaps in Suriname or perhaps in the deepwater Gulf of Mexico where we've already had significant success in the past. The deepwater Gulf is particularly exciting this year as we will be focusing on some higher impact opportunities.

Gunflint, one of our largest prospects to date with gross potential resource to exceed 100 million barrels [equivalent inches] by here at the end of the second quarter. And it just got even more encouraging for Gunflint with the recent announcement of the Kodiak discovery, just to the north of our prospect.

We'll also start drilling our Tortuga prospect which is in the area of our Isabella discovery from last year, in the next few weeks and we will likely have one or two more prospects to be drilled in the second half of the year. One of those may actually be a prospect that we picked up in the latest Gulf of Mexico lease sale.

Dave will breakdown our lease sale results in just a couple of minutes, but I am certainly very encouraged with how our prospect portfolio in the deepwater continues to develop. Internationally, we now have two rigs operating in Equatorial Guinea currently exploration test in Felicita on Block 'O' in the Benita appraisal on Block 'I'.

We look forward to the results from both of these important wells in the very near future. We also plan to drill another exploration prospect named [Diega] immediately after, Benita. We may have one or two other wells in the second half of the year.

Our first ever drilling has Suriname has now begun with old prospect in Western Pier. We also plan to drill the significant Tamar prospect in Israel later this year. The exploration wells in Suriname and Israel are particularly exciting considering the significant amount of acreage that we have there and the potential running room any of those are successful.

In summary, the strong momentum continues here at Noble Energy, our programs combined with record commodity prices now is in a position to deliver great results for the company and our shareholders. We're certainly on track to deliver on our guidance projections that we provided earlier this year.

In addition we continue to remain optimistic about the potential for our ongoing exploration programs. So with that, I will turn the call over to Chris.

Chris Tong

Thank you, Chuck and good morning everyone. As Chuck mentioned, the first quarter was an outstanding one for the company. Reported net income for the quarter was $215 million on revenues of just over 1 billion.

As you recall from the last conference call, we voluntarily switched from cash flow hedge accounting to mark-to-market accounting for our commodity derivatives effective the first of the year. As such and due to significant increase commodity prices since the beginning of the year, included in net income was an unrealized mark-to-market charge of $149 after-tax.

Excluding this item, first quarter '08 adjusted net income was a record $364 million, or $2.05 per share. Discretionary cash flow was a record at $ 662 million for the quarter. Hopefully you've had a chance to read through the press release and accompanied tables, as I plan to mention a few note noteworthy items.

Operating income, earnings and discretionary cash flow during the quarter were well above last year levels due to overall stress in commodity prices and sales have volume growth. Worldwide commodity markets were very strong during the quarter, and as a result, our price realizations for all of our products increased compared to the first quarter of '07.

Consolidated crude oil and currency prices for the quarter were up nearly 60%. Realized natural gas prices were strong as well globally, up 4% excluding the impact of our West African gas. Of particular interest is our realized price in Israel, which averaged over $3 for the first quarter, due to record volumes sold, some of which brought very high prices.

We also saw the benefit of a stronger US gas price in Henry Hub and CIG were higher than the first quarter of last year. In addition, methanol prices for the quarter hit a record, at $1.63 per gallon.

First quarter sales volumes were very strong. Contributions came from several sources, including our deepwater Gulf of Mexico developments at Swordfish, Ticonderoga and Lost Ark, as well as continued growth in our Rocky Mountain assets which reached record volumes in the quarter.

Also natural gas sales volumes in Israel achieved a new record for us due to strong seasonal demand. Finally the quarter also saw a bit more liquid sales due to the timing of liftings in West Africa as well as the closing of the Argentina asset sale.

As we look into the second quarter and the balance of the year, we continue to be comfortable with our '08 production guidance that we provided earlier. We had a great start with the first quarter, but we have considerable uncertainty over our natural gas sales volumes in Israel for the balance of the year due to seasonal demand and the impact of Egyptian gas deliveries.

Of course any delays or interruptions in Egyptian gas sales will benefit our forecast, but that's something we can't control. The good news is that the programs that are under our control such as in the Rocky Mountains seem doing very well.

As a reminder effective this quarter, we have begun reporting our natural gas liquid volumes where we have the right to take delivery of the liquids recovered from third-party processing plants. In those instances, the related natural gas sales volumes were proportionally reduced.

You can see the reported volume reduction predominantly in the lower US natural gas sales volumes reported compared to last year.

On the cost side, oil and gas operating costs including workover and repairs for the quarter were $4.06 per Boe, down from $4.85 in the first quarter of last year. Additional volumes in Israel and EG which are both relatively lower cost to operate contributed to lower per barrel metrics. It's a similar story for DD&A as the increased volumes brought the average DD&A rate down to $10.05 per Boe for the quarter.

Looking ahead for the full year, we are still comfortable with the annual guidance estimates we've given on both these items. Exploration expense came in on the low side for the quarter. The second quarter will be much more active with the number of tests in EG, Suriname and deepwater Gulf of Mexico. Also as significant interest expense came in lower as interest rates continued to decline during the quarter.

Our first quarter effective tax rate was 32% consistent with the guidance that we provided for the full year. In our tax liability in the quarter, 35% was deferred which is in the low-end of our annual guidance and reflects higher levels of taxable income.

Looking now at the balance sheet, our cash balance continues to grow during the quarter ending at just over $800 million at the end of March, an increase of nearly $150 million since year-end. The growth in our cash balance reflects our continued free cash flow and excess of capital expenditures even after our successful Gulf of Mexico lease sale awards.

Total debt was unchanged just under $1.9 billion. Our debt-to-cap ratio decreased slightly to 27% at the end of the quarter, and once you factor in the cash balance for debt-to-cap, net of cash decreased to 17%.

Just a brief comment about the commodity derivative hedge accounting change that I mentioned earlier, hopefully you saw the 8-K that we furnished to SEC on this matter, detailing all the relevant information this quarter on commodity derivatives. Going forward, we intend to regularly furnish this to the SEC on an ongoing basis prior to reporting our earnings, so you should be on the lookout for it each quarter.

The switch to mark-to-market accounting is very positive for us, we have far greater flexibility in our hedging program now and our administrative burdens are significantly less. Since we last provided our hedging positions to you, we have continued to support future capital programs in '09 and '10 by layering in some additional commodity derivative transactions at very attractive prices for both crude oil and natural gas. Our 10-Q that we'll be filing today will have the full details of our hedges and I wanted to make sure you captured these new hedges in your models as go forward.

This concludes the financial review and now I will turn it over to Dave.

Dave Stover

Thanks, Chris and good morning, everyone. I will first review how our 2008 capital program has changed and then discuss some of our operational highlights for the quarter and remaining programs for the year. Of the $300 million increased to the 2008 capital program mentioned by Chuck earlier, approximately half of this amount will go to additional acreage and lease sale activity and the remaining portion will be targeted to additional drilling focused on the new opportunities as well as the acceleration of phase two development at Dumbarton in the North Sea.

Since the beginning of the year, we have closed or we're in process of closing on approximately $55 million of onshore acreage acquisitions in the US for an additional 335,000 net acres stretching from the Rocky Mountains to East Texas. At the same time, we were high bidder on 15 blocks with the net exposure of $167 million in the March Gulf of Mexico lease sale with options on another $50 million in two additional blocks. A portion of the offshore lease sale was covered in our original budget.

Turning to our operations in the US, let's begin in the Rocky Mountains where we continue to execute a large number of low risk development projects. Starting with our largest domestic property, the Wattenberg field, production averaged a record 262 million cubic feet equivalent per day in net for the first quarter. This is the 20% increase over 2007's first quarter which was significantly impacted by severe winter storms and nearly 5% over the fourth quarter of last year.

We continue to gain momentum as we extend the productive limits of the field. Recently we picked up an additional 7000 net acres which fits in nicely with our existing acreage and could add over 400 drilling locations, so we have focused more activity away from the center of the field, we continue to see higher liquid recovery. Currently we are producing approximately 275 million cubic feet equivalent per day in net with about 45% liquids production.

Increasing drilling efficiencies remains a very important part of our success in the field. Our coiled tubing units currently drilling wells right at three days spud-to-spud. The automated drilling rigs we're using are on pace to shatter US footage drilling records and our traditional rigs are seeing continued drilling day improvements as well. It is really a testament of the teamwork of our employees and our contractors who oversee and analyze every aspect of the drilling process on a daily basis.

In the Piceance basin, our net production for the first quarter was up 13% over fourth quarter 2007. Currently, we are producing 36 million cubic feet equivalent per day in net, which is already up another 13% from the first quarter average. We remain on pace to exit the year around 60 million cubic feet equivalent per day in net, with our four operated rigs targeting approximately 100 new wells in 2008. We drilled 22 wells in first quarter and expect to drill another 26 during the second quarter. Two of these rigs are flex fit-for-purpose rigs and conduct simultaneous drilling and completion activities.

In the eastern part of the D-J basin in the Niobrara trend, net production is around 27 million cubic feet equivalent per day and we target exiting the year over 35 million a day in net. With the recent acreage we have added in northwest Kansas, we will continue to ramp up the activity in this area throughout the year. The economics are extremely attractive at just over $1 per Mcf development cost. We now anticipate drilling closer to 365 wells in this area during 2008 compared to the original budget of 300.

Turning to East Texas, our activity level continues to increase in this area. In our Oliver Creek field, we drilled two wells during the quarter and continue our drilling and completion operation. Part of the onshore US acreage acquisition that I mentioned earlier included 13,000 acres in East Texas. This new acreage is close to our current activity and we believe it as the potential in the Travis Peak James Limes, Haynesville Cotton valley formations. We'll be moving another rig into the area this month to begin a James Lime horizontal well drilling program for the remainder of the year.

In deepwater Gulf of Mexico, production for the first quarter was nearly 29,000 barrels of oil equivalent per day. The Ticonderoga, Swordfish and Lost Ark development projects are on line are adding some very significant production and in the current commodity environment, the return on all of these projects has been outstanding. In fact, both the Swordfish and Lost Ark developments paid out within four months of initial production and Ticonderoga should pay out in only five months from its initial production.

During the second quarter, our Raton gas development should begin ramping up to around 3,000 barrels of oil equivalent per day in net. Deepwater volumes for the second quarter should remain relatively flat with first quarter prior to experiencing some normal decline in the second half of the year.

On the Exploration side, we will be spudding the Tortuga prospect shortly. Tortuga is an offset to our 2007 Isabella discovery and we will operate this Miocene amplitude prospect with 40% working interest. Expected total debt should be reached in July.

Our second exploration prospect for the year at Gunflint where we have 37.5% working interest should spud late in second quarter. Chuck mentioned, Gunflint is our most significant deepwater Gulf of Mexico prospect today in terms of resource size it's also in a great neighborhood in the same depositional fair way the recently Kodiak discovery which is approximately 12 miles to the north.

Also specific for the deepwater Gulf of Mexico in the quarter was the central Gulf of Mexico lease sale. We are really encouraged with the number of quality drilling prospects within 15 blocks where we were the apparent high bidder. These blocks included three of our top four targeted subsalt Miocene prospects, our top two Miocene amplitude plays, and our top targeted lower tertiary prospect. Two of the prospects are drilled, ready and we anticipate at least one of these could be drilled in the second half of the year.

Let's turn to international. In the first quarter our international assets made up approximately 40% of our total sales volume. In the North Sea, the original development of Dumbarton reached payout in first quarter, just slightly over a year from first production. Sales volumes in the quarter averaged over 8,000 barrels of oil per day net and our rig is on location to begin development work on Phase 2 at Dumbarton.

Initial activity will consist of drilling two new producers and one injection well, and later this year as usual subject to receiving the necessary government approvals, another four producers and one injector will be drilled. Two producers in the [La Crianza] discovery will also be drilled late in the year or early 2009.

Overall, we will continue to see some decline in this field until Phase 2 production starts ramping up later this year then we will see continued production increases through 2009 and 2010. Turning to Israel, first quarter production and realized prices were records due to continued strong market demand.

Net volumes of 145 million cubic feet per day were up over 40% versus the first quarter of last year from 30% compared to fourth quarter. As we mentioned in our last quarter call, there were some uncertainties impact our project projections for Israel production in 2008. Although the power plants Gezer and Hagit are getting closer to coming online.

The timing of the plants conversion to gas as well as the timing and extent of the Egyptian gas are hard to estimate. Looking forward, the second quarter is typically the lowest in terms of in country demand so we are certainly expecting lower volumes in the quarter and we'll just have to see when the new plants come on and the impact hits the market.

During the quarter we executed a new contract for natural gas deliveries to Israeli Chemical Limited. But we can't disclose too much regarding that contract. It is significant that we continue to find additional customers who want natural gas and the market price for gas in Israel continues to rise.

This contract will provide a five-year base load averaging around 18 million cubic feet a day and that's starting in 2009. Our planning for the significant Tamar exploration prospect offshore Israel continues. We are anticipating spudding that well later this year.

Our acreage position provides substantial running room for other prospects if Tumar is successful. In Suriname, we've recently spudded our West Pier exploration prospect with our partner's operator.

Since our last conference call, we found out a portion of our interest, so we are drilling this well with 45% working interest. Moving to West Africa, we had a very nice quarter with strong volumes. Liquid sales with condensate and LPG totaled around 23,000 barrels per day net and our net natural gas volumes averaged 220 million cubic feet per day in the quarter.

The AMPCO methanol plant was down for 20 days in the quarter for compressor upgrades as a result with lower volumes in the quarter, but methanol plant is now back up and running at full capacity.

As Chuck earlier mentioned, we have two rigs on location in Equatorial Guinea, and jack up drill in Felicita and a semi-submersible on the downdip oil test Benita. Just a reminder on Felicita it is a Miocene prospect in Block 'O' that's a nice tieback candidate to Belinda, which should have result from the next month.

At Benita, we are currently drilling a downdip oil portion first discovered in the original Benita appraisal well with results likely by midyear. After Benita, we plan to drill a prospect in Block 'I', named [Diega] another Miocene tieback opportunity. Diega has a greater chance of being gas condensate, but it also has some potential being oil discovery. Our production teams remain extremely busy working with development scenarios of discoveries in West Africa.

We continue to narrow down the development options that allow us to create most value for our resources. Overall, it was a milestone quarter for the company. Production started off the year exceptionally strong, particularly with the demand in Israel and the ramp up in deepwater. As we head into the second quarter, we have kicked off our high-impact drilling programs with well spud in Equatorial Guinea and Cameroon.

Two rigs will soon be initiating this year's deepwater Gulf of Mexico exploration program. We've also captured opportunities to expand our portfolio in the US both on shore and offshore and allocated additional capital to accelerating development of these and other high quality projects.

Overall, we remain excited about our worldwide programs and look forward to providing additional insight at our annual analyst meeting May 14th.

At this time, Dana we would like to go ahead and open the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And we'll go first to Ellen Hannan of Bear Stearns.

Ellen Hannan - Bear Stearns

Good morning, thank you.

Chuck Davidson

Morning.

Ellen Hannan - Bear Stearns

Just got a couple of quick questions, first thank you for the new format, it is easier to read and second now that you are breaking out NGLs, can you give us some idea what you think that trend is going to look like for the balance of the year? Should we continue that number to grow?

Chuck Davidson

Yeah. On NGLs, we would expect that to be relatively flat. We have to be careful some of those NGLs are extracted from our deepwater production that has a bit of volatility. And as Dave mentioned we'll see in the latter half of the year, probably after we get Raton on then we'll probably see some natural decline there.

But I don't think you will see a dramatic change in NGL especially because Wattenberg which also is a food source of NGLs, and of course we have got a strong growing production there.

Ellen Hannan - Bear Stearns

Okay, thanks. And just one other follow-on, do you know when you plan to drill your first tertiary lower prospect?

Chuck Davidson

We are a long way from drilling the lower tertiary prospect, that lease has not even yet been awarded and came out of this last sale. We're very pleased with it. It was one that we targeted, it was our best lower tertiary prospect, but as I think you know those take a lot of additional work.

So, we would not anticipate that for drilling for quite some time. The nature of it is it's a candidate for drilling with the new rig that we will be receiving in '09, which will be required to go after that type of prospect, so more to come on that.

Ellen Hannan - Bear Stearns

Great. That's it for me. Thanks very much.

Chuck Davidson

Thank you, Ellen.

Operator

And we'll take our next question from Gil Yang of Citi.

Gil Yang - Citi

Good morning.

Chuck Davidson

Good Morning.

Gil Yang - Citi

Could you just update us on the situation? You mentioned the timings in West Africa. Have those things been done, and would you expect that to return to a more normal level in the second quarter?

Chuck Davidson

Yeah, I think so, Gil. I mean when you look at the full year, production and sales will be fairly close to equalized as we look through the full year over there.

Gil Yang - Citi

How much was the timing issue in the quarter?

Chuck Davidson

It wasn't

Chris Tong

It was very little.

Gil Yang - Citi

Okay. All right. You didn't make any comments, Dave about New Albany Shale, could you give us an update on what is going on there?

Dave Stover

Yeah, I think the rig is just now moving back into the area, so we will start drilling. Our plan was to go in and start drilling about 20 miles to 25 miles south of where our activity was last year and drill at least four or five wells at the beginning and get a look at how continuous or how well our model is playing out.

Gil Yang - Citi

What is the reasoning for such a large distance between the old wells and new wells?

Dave Stover

We want to see, what we are checking is based on our model looking how the fracturing where we anticipate, we are trying to pick areas that we think have the best chance of potential and that we can test quickly and then compare over a some kind of a distance, so we can see how much running room we really have in that play?

Gil Yang - Citi

If this was successful would you have acreage in between and would the success here have any implication to the acreage in between the two regions?

Dave Stover

Well, it will definitely give us more comfort that we have a better idea of where to drill. I would say, yeah, we would probably next step out and try to expand around the northern area and the southern area and then go back and test some of the areas in between.

Gil Yang - Citi

Okay. So the move is not an indication that you are disappointed with northern area at all?

Dave Stover

I don't think anything has changed at all there really from our expectations. We are just starting to put some of that on production earlier in the year. We are producing around 2.5 million a day, probably right now on the program and so everything is still going along as planned.

Gil Yang - Citi

Okay. Thank you very much.

Dave Stover

Thanks.

Operator

And we will take our next question from Robert Lynd of Simmons & Company.

Robert Lynd - Simmons & Company

Hi.

Chuck Davidson

Good morning.

Robert Lynd - Simmons & Company

Can you guys talk a little bit more about Egypt specifically what you are seeing from the Egyptian gas, is there any update on the potential timing there and also an update on the demand.

Chuck Davidson

Well, I think we can talk a little bit about the timing as they had started to bring their pipeline into service earlier in the year and they ran into a little bit of a problem. I think our understanding is they have that fixed and they're beginning to resume flows again. The big wildcard there is we have no idea ultimately what they are going to flow into the market. We do know with the two power projects at, Gezer and Hagit the demand jumps considerably, but as we talked about at the beginning of the year, our assumption is that the incremental demand is going to be satisfied by the incremental Egyptian gas this year. That's an assumption that right now we don't know exactly how it is going to come about and that's why we are being so careful in terms of projecting Israel volumes this year.

Keep in mind that when you compare our first quarter production of this year and just looking what the seasonality effects could be. When we look at the second quarter of last year, we swung down that we were producing around 97.5 million a day of production. That is a swing of almost 8,000 barrels a day equivalent going from first quarter this year to what we would have produced second quarter last year. We don't know where the second quarter of this year is going to end up because of the potential for Egyptian gas, but there's a lot of demand in Israel. There is certainly growing demand that kind of accommodate both our production as well as Egyptian. What we just don't know is how much will flow out of Egypt.

Robert Lynd - Simmons & Company

Have you already contracted volumes for the month of May in Israel, additional volumes?

Chuck Davidson

The only incremental volume is a result of under our contracts where they have the ability to take peaking volumes, but that's strictly on the call and is really electric. We don't. For instance contract such in that way on a month-to-month basis. Our contract has a base amount which they have been satisfying and then we deliver under our contract some optional peaking volumes which is their call on how much they want.

Robert Lynd - Simmons & Company

It has more spot.

Chuck Davidson

Exactly.

Robert Lynd - Simmons & Company

Okay. And then, one question I guess for Stover. [The Diega] prospect I assume that's in Block I and is it sort of a similar structure as Benita. Is that a better way to think about it?

Dave Stover

It is not. It is kind of between Benita and Belinda, up in the northern part of Block I. We have been talking about it in that 20 million to 80 million barrel type of range. So it is probably a little smaller than Benita and Belinda, but it would be a nice tieback to one of those two.

Robert Lynd - Simmons & Company

Okay. Thank you. That's all I had.

Chuck Davidson

Thank you.

Operator

(Operator Instructions) We will go next Irene Haas of Canaccord Adams.

Irene Haas - Canaccord Adams

Yeah, hi, just wondering if you can break up what you have earned in the power plant from Ecuador this quarter away from the income? Can you split that out for me please?

Chuck Davidson

Yeah, Irene, in the quarter it was about $15 million as in showing up in other revenue.

Irene Haas - Canaccord Adams

And that's all Ecuador?

Chuck Davidson

Yes. And then the remaining piece in other revenue is our marketing business that I believe it was about $4 million in the quarter.

Chris Tong

There will be more details in the Q that we filed this morning.

Irene Haas - Canaccord Adams

Got you. Thank you.

Chuck Davidson

Thank you.

Operator

And we will take our next question from Joe Allman of JPMorgan.

Nick Burt - JPMorgan

Good Morning. This is actually a Nick Burt. I was curious, it sounds like you are bringing a number of rigs on line. What are you seeing in terms of cost trends? I mean, you said, you're not increasing the budget due to increased cost, but what are you seeing in terms of drilling cost, service cost right now?

Chuck Davidson

I'll let Dave talk a little bit in terms of some of the onshore programs. I'd just say keep in mind the big rig that we are talking about for deepwater or in international, those have been contracted a long time ago. So they were really factored into our budget. We do have a little bit of pluses and minuses in it. So that has been previously factored in.

And we all know that the trend overtime in the deepwater, that pricing is continued to move up, but also keep in mind anything we drill, the ring we have under contract, under a multi-year contract that pricing is fixed and will remain fixed until the contract on that expires in 2009. Dave may want to comment a little bit about other service and drilling costs as well.

I think we are in pretty good shape for this year. As Chuck mentioned we planned out the program well in advance and windup, rigs and other equipment, we actually saw pretty good pricing when we bid out for the full year, late last year for this year's program.

So I think the real question will be as we head into the later part of this, how it plays out for next year as we get into bidding next year's programs.

Nick Burt - JPMorgan

Okay. With commodity prices where they are, is there, stuff that you would accelerate outside of just the normal looking at all of your prospects in increasing your CapEx there?

Chris Tong

Well, I think, we started the year, and we had a budget that allowed free cash flow, so we were not constrained certainly by cash flow. I think what it really gets down to is the capacity of our organization or the industry to move forward and things. We just want to make sure is, what we've really been doing is adding some incremental opportunities as exhibited by our budget.

And those are the things, we want to use that excess capacity for rev and just automatically trying to for instance put another rig into Wattenberg, which would be an acceleration program which might, running into other constrains having to do getting locations revenue and other things like that. So, we are trying to use their excess capacity for new opportunities.

Nick Burt - JPMorgan

All right. Well, thanks a lot.

Chris Tong

Thank you.

Operator

(Operator Instructions). We'll go next to Joe Magner of Tristone Capital.

Joe Magner - Tristone Capital

Good morning.

Chris Tong

Good morning.

Joe Magner - Tristone Capital

Great quarter, this quarter, just any thoughts or any more information you can provide on sort of on longer-term production growth expectations. I know '08 production guidance has been reiterated; CapEx spending went up, combination of increased acreage as well as lease sales, but also an acceleration activity in the Rockies.

Your long-term expectations out there in Rockies can kind of grow 5% year-to-year, where could that number go with acceleration of drilling programs, what kind of impact could that have on the overall company, and then what are the, I guess, growth drivers do you see out there beyond Israel, so they are lumpy projects prior to EG developments coming online.

Chuck Davidson

Well, I think just sort of putting it back in the context of how we laid out our long-term growth, and this goes back to May of last year is, since we talked about our business growing 6% to 10% per year for a multiple years, and as we get closer to 2009 and' 2010, we will be to tweak those numbers, but that's what the range is that we are in this year, and so we are still once again comfortable with our overall longer-term guidance for the company.

We've got multiple projects onshore, US that will be support of growth, some of them are being some so these new opportunity we brought on, we've go as Dave pointed out, we've certainly got some help this year from deepwater beyond Raton, the additional deepwater projects we have will be in later year. We'll talk more in May about how the impact of those will be seen in 2009 and 2010.

Dave referenced that Dumbarton projects growth and market demand long-term in Israel, China project sanctions so, it's no different. We are running a very diversified program, unfortunately very high proportion of the areas that we are running in now have good solid potential going forward.

Joe Magner - Tristone Capital

Okay. And with interest this year in CapEx, any thoughts future years, the longer-term expectation has been in that sort of $1.6 billion range? Any thoughts there?

Chuck Davidson

I think it's too early to tell for 2009 the wildcard, and I am sure as you are aware when do we start spending for development in West Africa, and it's too early to tell right now as to what our expenditures' would be, but I know if you want to talk anything more about just our organic development projects?

Dave Stover

I think that range of $1.5 billion to $2 billion is probably pretty comfortable range for us from the type of activity that we see and I think that being on the low or high side that depends on some of these big project developments, both in deepwater and West Africa, as there is a timing of those and what rolls in one year out of the next year.

Joe Magner - Tristone Capital

Okay. Thanks for your comments.

Operator

And Mr. Larson, we have no further questions, sir. I'll turn the call back over to you for any additional or closing remarks.

David Larson

Okay. Well, I appreciate everybody joining in on the call today. Just to remind people, we thought we had a pretty good quarter, good growth and look forward to delivering on our expectations for the rest of the year. Thank you.

Operator

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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