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Executives

Brent A. Collins - IR

Anthony J. Best - President and CEO

Javan D. Ottoson - EVP and COO

Analysts

Larry Busnardo - Tristone Capital

Scott Hanold - RBC Capital Markets

Joseph Allman - JPMorgan

Stephen G. Beck - Jefferies & Company, Inc.

Philip R. Dodge - Stanford Group Company

David Tameron - Wachovia Capital Markets

Rehan Rashid - FBR Capital Market

Patrick Oey - FIG Partners

St. Mary Land & Exploration Co. (SM) Q1 FY08 Earnings Call May 2, 2008 10:00 AM ET

Operator

Good morning. My name is Tunika, and I will be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Brent Collins, Director of Investor Relations. Please go ahead, sir.

Brent A. Collins - Investor Relations

Thank you, Tunika, and good morning to all of you joining us by phone and on line for St. Mary Land & Exploration Company's first quarter 2007 earnings conference call. Before we start, I would like to advise you that we will making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks which may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks you should refer to the information about forward-looking statements in our earnings press release from yesterday and the risk section... risk factors section of our 2007 Form 10-K/A.

We'll also discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our earnings press release from yesterday.

Additionally, we may use the terms probable, possible and 3P [ph] reserves and estimated ultimate recovery or EUR in this call. Probable reserves are unproved reserves which are more likely than not to be recoverable. Possible reserves are less likely to be recoverable than probable reserves. Estimates of probable and possible reserves which may potentially be recoverable through additional drilling or recovery techniques or by their nature more uncertain than estimates of proved reserves and accordingly are subject to substantially greater risk of not actually being realized by the company. EUR means those qualities of petroleum which are estimated to be potentially recoverable from an accumulation plus those parties produced there from.

The company officials on the call this morning are Tony Best, President and Chief Executive Officer; Jay Ottoson, Executive Vice President and Chief Operating Officer; Jerold Hertzler, Vice President of Business Development; Dennis Zubietta [ph], Manager of Reservoir Engineering; Mark Solomon, Controller; Matthew Purchase; Treasurer and Planning Director; and Brent Collins, Director of Investor Relations.

With that, I'll turn the call over to Tony.

Anthony J. Best - President and Chief Executive Officer

Thank you Brent. Good morning and thank you for joining us for our first quarter earnings conference call. St. Mary has had a very successful start for 2008. Let me now review some of the quarterly highlights. We had improved operational results in some of our key operated programs particularly Woodford shale. The step change improvement in the Woodford has led us to increase our capital investment in that program this year.

In addition, we continue to add to our project inventory during the quarter. We had a series of both-on acquisitions in East Texas that added to our inventory Cotton Valley locations which may also have potential in the Haynesville shale. Jay will discuss our Haynesville shale exposure in his operational report in few minutes.

We completed the divestiture of non-strategic properties in January for approximately $131 million. This divestiture not only allows us to focus our efforts and resources on higher growth projects, but it also helps improve our operating cost structure. We are successfully executing our 2008 business plan which will maximize the potential and the value of our existing assets. We will also add new inventory to fuel future growth and focus our efforts in achieving operational excellence.

Yesterday we released our quarterly earnings press release and financial highlights. I won't spend a lot of time this morning reviewing the comparative numbers, but instead I will focus on the financial highlights for the quarter

Reported net income for Q1 was $96 million, which included a $56 million gain related to the divestiture of non-strategic properties that closed in January of this year. Diluted earnings per share for the quarter was a $1.50 per share, adjusted net income which adjust for a non-recurring and significant non-cash was $73.6 million or a $1.15 per share in the first quarter, which exceeded the main First Call estimate by 16%.

Discretionary cash flow for the quarter was a $198 million or $3.09 per diluted share. This also exceeded the main First Call estimate by 13%. We also exceeded guided production, primarily driven by our programs in the ArkLaTex and in the Permian regions. Higher production and strong realized commodity prices combined with lower than projected lease operating expense and G&A allowed us to maximize revenue and cash flow for the quarter.

The positive performance in lease operating expense was due in large part to the divesture of non-core assets in January of '08. All these properties comprised relatively small part of the reserve base, their cost structure was meaningfully higher for recurring and workover costs than the retained property base.

G&A was lower than anticipated as a result of lower stock compensation expense being recognized in the quarter. DD&A was higher than we had budget. Directionally as higher F&D properties become a larger portion of our base, DDD&A will go up. Specific to this quarter we were impacted higher DDD&A wells in the Gulf Coast and in the Permian regions.

In summary, we had solid financial results for the quarter. We can answer any specific questions you may have related to our financial results in the Q&A segment of the call or you can get with Brent offline afterward. In all, it was a strong first quarter. We are delivering on our 2008 business plan and objectives.

Before, I turn the call over to Jay I will give a quick update on our CFO search. We have retained an executive recruiting firm and the search is well underway. We are interviewing candidates now and hope to name our new CFO in the next several weeks.

With that, I will turn the call over to Jay. Jay?

Javan D. Ottoson - Executive Vice President and Chief Operating Officer

Thank you, Tony, and good morning everyone. I will now provide a brief overview of some of the significant operational activity occurring in the company and make a few comments about our capital plans for the remainder of the year and our financial guidance.

In the Woodford shale, we continue to see positive results in the play. Our operational results are improving and we believe we are doing a better job on drilling these wells than a number of other operators. The average EUR for the last 10 wells for which we have meaningful data is between 2.7 and 3 BCFE, and on the cost front we build and completed our last free wells for between $4 million to $4.4 million per well.

These wells had long lateral and utilized the multistage fracture stimulations that are common through out the play. We disclosed during the first quarter that we were increasing our capital investment in Woodford shale by $20 million for the year which allows us to operate two rigs in a play for the remainder of the year, and have the third rig in a play for parts of the year. This was consistent with the plan we laid out and that we said we would accelerate activity based on success. We will continue to look at our result and may accelerate further in the second half if we can do so efficiently.

News out of the ArkLaTex region gets more exciting all the time with announcements on new plays and good well results from a number of operators. We are very happy about the result we're seeing on our own Cotton Valley program in the region. Our first operated horizontal well Boise Southern 1-H averaged $4 million a day for the month of April with essentially no decline. We are drilling a second horizontal well in the area that targets the Taylor Sand in the Cotton Valley, and we will be completing and in the next couple of weeks.

These two wells were drilled on acreage that we already had in the Carthage area, and we plan to drill our first well on the acreage we acquired in the bolt-on acquisitions Tony mention earlier in the second quarter. Elsewhere in the Cotton Valley program our operating partners are very active and we are pleased with the results we are seeing.

At Elm Grove, we remain impressed with the performance of the Killen 13-3H well that our operating partner Petrohawk has discussed publicly. As they are the operator we will let them discus the specifics of the horizontal program in Elm Grove, but we're very encouraged by what we are seeing in that program.

In the James Lime, we have several wells either drilling or completing at this time. We continue to like the play and are working to grow our acreage position, particularly to filling contiguous blocks. So we can get far enough ahead with our land work to increase the pace of our drilling program in several areas.

We want to provide the quick update on our exposure in the Haynesville shale which is the newest topic in the ArkLaTex with a frenzy of leasing going on. Most of the discussion about the Haynesville has been about an area in northern Louisiana Caddo, DeSoto and Bossier parishes. The 10,000 net acres in the play that we have disclosed previously is located in fields in this general area.

We've recently heard of leases being taken in that area for numbers approaching $7,000 an acre. However, based on the geologic work we've done so far, it appears to us that there is Haynesville potential in a much larger area than just these three parishes. At this point, we believe, we have roughly 50,000 net acres in the ArkLaTex with Haynesville shale potential.

Obviously, it's very early days in the play, and it's going to be a learning pair of associated with making really successful wells in what is very different rock than in some other successful shale plays. Right now we're pursuing the very economic cotton valley horizontal program that I talked about earlier and we're ramping up on our technical effort on the Haynesville.

Moving north, we thought for sometime that although the North Dakota Bakken play clearly has some sweet spots then it could potentially be a larger resource play. Our approach was to buy acreage in some areas that were initially less competitive to avoid the risks associated with a high cost of entry. We currently have about 37,000 net acres secured and are leasing.

Activity has been moving toward us, and we participated in several wells and learnt from it. We have recently permitted 21 wells in our Powers Lake prospect area that's straddles the county line between Montreal and Burke counties in North Dakota. We're reallocating capital within the region to drill two to three wells later this year. And assuming good initial results, we're well positioned with resources and permits in place to accelerate that program.

As many of you know, we've entered into an agreement with TXCO to participate in a program to test the Pearsall shale in the greater Maverick Basin in South Texas. We have a four well commitment for 2008 and the first well is currently drilling. If this program is successful, it exposes up to a large acreage position potentially at 75,000 net acres at a very low cost of entry. Deals like this are consistent with our desire to enter leverage plays earlier, something you should expect more often St. Mary in the future. I should also note that this opportunity came to us as a direct result of the strategic decision we made last year to enter the Maverick Basin through two almost play acquisitions.

My last operational comment will be that our folks are doing a good job on what we call our operations excellence effort here internally. We test on that some in our comments on the Woodford, another example is been our operated Sweetie Peck asset in West Texas where we roll our drilling prospects 13% in 2008, this is something that we're working very hard at across the company and we're seeing positive results, some of which are already been reflected in the results we announced yesterday.

On the guidance front we're increasing our production guidance to 108.5 to 112.5 BCFE for the year, this is as a result of additional capital investment in the Woodford, the impact of production associated with our bolt-on acquisitions in the Carthage Field in East Texas, and increased production from recently completed wells on our free lands of South Louisiana and offshore Gulf Coast.

Offsetting these increases to the production forecast, our reductions totaling approximately 1 BCFE related to minor divestitures in the Rocky Mountain and Gulf Coast regions that will impact the remainder of 2008. We have left LOE per MCFE guidance flat for the year. The improvement in our cost structure as a result of our divestitures should continue to benefit us throughout the year. That said, there is continuing upward pressure on operating cost resulting from strong commodity prices and high activity levels in the industry.

High commodity prices are also impacting our G&A, several components of our G&A are impacted directly by profitability, which is driven through a large extent by commodity price. In addition, our costs were hiring and retaining technical operations staff or increasing as prices stay high. Even where the future's markets are we felt we needed to bump up G&A a little to reflect the current market, both for our products and for our people.

With that I'll turn that call back over to Tony.

Anthony J. Best - President and Chief Executive Officer

Thank you Jay. St. Mary has started out the year strong and I am excited to see the growing success in many of our key plays. In addition, we continue to identify and pursue new play opportunities such as our operated horizontal Cotton Valley's program, our new pierce all sales Pearsall shale JV in South Texas, the Haynesville Shale potential of 50,000 net acres and our new North Dakota Bakken position which is now grown to 37,000 prospective acres.

Seasonal opportunities just announced this quarter are perfect examples of how we expect to continue strengthening and growing our long term drilling inventory. I am very pleased with our year-to-date performance and our slate of projects going forward and I remain confident in the delivery of this year's business plans.

With that I will now turn the call over for your questions.

Question And Answer

Operator

[Operator Instructions]. And your very first question comes from line of Larry Busnardo with Tristone Capital.

Anthony J. Best - President and Chief Executive Officer

Good morning Larry.

Larry Busnardo - Tristone Capital

I guess first on the Bakken play was all of that acreage acquired or did you have any event previously?

Unidentified Company Representative

Also what we discussed today on the... in the Mountrail and Burke County was acquired in just the last year. We do have some additional acreage over on the Neznana [ph] cline area in North Dakota, and we have some of course in the traditional Bakken trend, trending down from Richmond County, but this is new acreage that we acquired.

Larry Busnardo - Tristone Capital

And that's how of the 37,000 acres correct?

Unidentified Company Representative

Right.

Larry Busnardo - Tristone Capital

How far away is the nearest production from where you are looking to drill?

Unidentified Company Representative

Paul its coming right up in there. There have been some wells drilled recently right just a little bit South East of us so its pretty close.

Larry Busnardo - Tristone Capital

Okay and then the plan is to drill a couple of wells later this year see what the results have and then at that point you make a determination how you would expand that program I think in the next year?

Unidentified Company Representative

Yes I think its also that there is a number of wells being drilled all around our acreage position, so it won't just be results from our wells, but we will also be able to watch quite a bit of industry activity around us.

Larry Busnardo - Tristone Capital

Right.

Unidentified Company Representative

You know we have the capability to accelerating even in this calendar year if we need to like we see it.

Larry Busnardo - Tristone Capital

Okay. Other than permitting process work if you got the 21 are there any stipulations you impose or is it just once you have to permits then they can be drilled at any time?

Unidentified Company Representative

I am not aware of any stipulation which would prevent us from going out there, we did permit a number of then ahead of time in order to be able to do this acceleration if we see get results.

Larry Busnardo - Tristone Capital

Okay, shifting over to the Haynesville you have mentioned the 10,000 acres on Northern Louisiana where are the additional 40,000 acres located, is it outside of there in other areas?

Unidentified Company Representative

Yes I think we... if you look at a lot of our James Lime acreage and our Cotton Valley acreage in Carthage we looked at all that acreage and there is quite a bit of Haynesville potential under a lot of that.

Unidentified Company Representative

Larry one of the maps that we shared in the number of our road shows, shows the James Lime trend which is about 75 miles long extending from Northwest Louisiana in the Texas and that's basically the area that we provided additional focus and evaluation.

Larry Busnardo - Tristone Capital

Are you currently looking there to expand that position, I know you mentioned that prices are increasing competition a lot harder there?

Unidentified Company Representative

We are really, we're still focus on expanding our James Lime position which again we think has additional Haynesville potential. We are not actively participating in the frenzy [ph] in Caddo parish at this point.

Larry Busnardo - Tristone Capital

Okay and what's the can you give us just the sense of when you might be drilling from these Haynesville wells?

Unidentified Company Representative

Well we talked a lot about that, I think our objective is to get something drilled this year. We're going to do our technical work, there is is going to be a steep learning curve here. We want to learn from other people, I think our experience in the Woodford has taught us that we need to learn a lot before we started spending money. So we are definitely going to do our homework before we start a well.

Larry Busnardo - Tristone Capital

Okay great thanks a lot.

Unidentified Company Representative

Thanks Larry.

Operator

Your next question comes from the line of Scott Hanold from RBC Capital Markets.

Scott Hanold - RBC Capital Markets

Good morning.

Unidentified Company Representative

Good morning.

Scott Hanold - RBC Capital Markets

In the Woodford you indicated that you could accelerate here in the second half of '08, can you give us a sense on would that mean just keeping a third rig for the back half of the year, or could that actually go to a fourth rig?

Unidentified Company Representative

I think we have the potential to go to four rigs, what we want to do is make sure that we can apply that capital efficiently, as there is lot more than to this than just drilling the wells, you got to be able to get the infrastructure in place, get your gas handling handle and there is still a lot of project related to stuff to do in that, but we could get to a forward program. We're just going to see... we're going to just look and see how as we ramp up here look how this goes, make sure we are actually delivered, getting the gas out of there that we produce, and we can continue to ramp we'll do that.

Scott Hanold - RBC Capital Markets

Okay, and a couple of quarters ago I think Tony you indicated that, you are really kind of moving forward to start a build an inventory for the future and clearly obviously you guys are moving in that direction both organically and in part by adding some pieces to the story. Obviously there has been some competitors that come on indicated they are potentially going to sell their position in the Woodford. Is that some you all be interested in or what's there your thought on making acquisitions across your position.

Anthony J. Best - President and Chief Executive Officer

We would certainly be interested in looking at additionally opportunities. We've heard the same things as far as some increase in laying off some acreage or position in the Woodford. So we certainly be interested in looking at that but obviously it depends on the jack where it is located and how perspective we believe the acreage might be.

Scott Hanold - RBC Capital Markets

Okay and going to the Bakken Play I guess you all indicated that you had some acreage on the Nessen net side included in that 37,000 acreage, is the... what size of that position there and can you sort of talk about if there is any potential to actually drill these Bakken wells out there as well?

Unidentified Company Representative

We got about 12,000 acres net on the Nessen.

Unidentified Company Representative

That's included in the 37,000 --

Scott Hanold - RBC Capital Markets

Okay all right so the well is included in it. Got that. And then in ArkLaTex at James Lime what is your sort of recent experience there in, there has been some nice wells drilled by industry there but --?

Unidentified Company Representative

Well we announced a while the mass well here just that was about a month ago and I feed around... we quote 10 days sales rates and I think the quarter was about 6 million a day, So we've got some very good results. I think the thing that's really, people ask me, how come you don't accelerate and I think I mentioned in to my comments, we don't... we've been struggling to get some really big contiguous blocks of acreage that would allow us to pick up a lot of rigs and just drill a bunch of wells. Our acreage is kind of cut up so we're trying to add I think some of our competitors have been fortunate and skilled in putting together blocks that will allow them to permit a bunch of wells. Your drilling these very long laterals, they require you to get a whole bunch of... if you don't have all the acreage, it's a lot of land work to get that thing put together.

Scott Hanold - RBC Capital Markets

Right.

Unidentified Company Representative

So our focus is really on getting these blocks cored up so we can get drilling locations out in front of the rig so we can pick up more rigs and start working.

Scott Hanold - RBC Capital Markets

Yes, so do you have what one rig working there right now, is that right?

Unidentified Company Representative

Yes, we got one rig working in the James and one is moved over to the horizontal Cotton Valley, clearly we can do more and we just need to get our land work done and get ahead of it.

Scott Hanold - RBC Capital Markets

What is your position there, land position there right now?

Unidentified Company Representative

Right now, we have about 50,000 net acres in the James Lime across the trend, so we got a good acreage position, well like Jay says the land challenges are what we need to tackle to allow us to proceed at a faster pace there.

Scott Hanold - RBC Capital Markets

Okay

Unidentified Company Representative

But we're working, we got the guys warming it.

Scott Hanold - RBC Capital Markets

Thank you.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the line of Joe Allman from JPMorgan.

Joseph Allman - JPMorgan

Back to the Haynesville for a second, just to clarify out of your 50,000 net acres about how much of that is East Texas and how much of that is North Louisiana?

Unidentified Company Representative

About 10,000 in North Louisiana and about 40 in East Texas.

Joseph Allman - JPMorgan

Got you, and then when you look at the data you have, can you just talk about like what specific data are you basing your kind of prospectivity on and how many data points you are looking at?

Unidentified Company Representative

Well I don't know how many data points but we've pulled lots across that whole area and if you look at the logs, this stuff looks pretty much the same across that whole big area there. I think East Texas is a harder place to work for a lot of people because there is a lot of HPP, the area that's gotten hot I think in Louisiana there was leasehold available. And my sense of that is that people went where you could pick up leasehold fast first. And those of us who HBP [ph] or a leasehold positions in East Texas, we are just getting end up with sort of a legacy position here at obviously a very low cost.

Joseph Allman - JPMorgan

Got you. And in terms of... there is some confusion... they are confusing Haynesville and the shale and when you move over in East Texas, in your view what is the equivalent of the Haynesville shale in the Louisiana. Is it combined both the Bossier shale and the lower Bossier shale with a line member in between. Can you kind of clarify that?

Javan D. Ottoson - Executive Vice President and Chief Operating Officer

I am not a geologist so I probably can get out of my depth here but. Clearly the Haynesville, the portion of the Bossier, total lower Bossier section, and I understand they are differing nomenclatures between East Texas and Louisiana. But what m geologists are telling me is that we follow a lot across that we have from Louisiana into Texas, but that section looks pretty much the same.

Joseph Allman - JPMorgan

Got you. Okay. And then I know your cost... switching over to another topic. Your costs in Woodford are coming down, and it appear that that's mainly just improving efficiencies, and clarify that if you would. And then looks like somewhat Sweetie Peck [ph] you said you are rolling your cost. Could you... what are you seeing in terms of capital costs. I know you talked about upward pressure on the operating costs and G&A, what are you seeing in terms of drilling and completion costs across your different regions.

Unidentified Company Representative

Well, let me talk about the Woodford just a minute because I am really proud of what the guys have done. We just TDed a well in the Woodford. TDed cemented liner on bottom in 25 days it admittedly was almost a perfect well. It's just tremendous achievement. We started these wells and when we started we were drilling 40 day wells and now we are TDing [ph] at a 25, and that's a combination of bit selection, and just really learning how to keep these well straight, and whole bunch of things that are going very, very well. There are some other people out there who are drilling good wells. So I can assure you we participate in a number of columnar wells here, and we are best in class, or at least close to best in class in drilling this well.

So we benefit on the drilling side from both day rate production and reduction in number of days. We are seeing significant reductions in our pumping costs in the Woodford over the last year. Part of that is new entry from other participants and part of that is just significant reductions that we have seen from our adjusting pumping suppliers, being very positive.

Same thing on the on the Sweetie Peck area in West Texas, again focused on updating our rig contract and rig fleet faster drilling, lower pumping costs. Offsetting that I think as you look forward steel prices are increasing rapidly and significantly. If you look at cost of a well typically the day rate associated with the rig and the steel are almost exactly the same costs in one of these wells. So about 20% of the cost is steel, about 20% of the cost is actually day rate. And steel has come up dramatically, and you been watching the steel market in the last few months.

So our sense is that costs are going to be fairly flat from here to end of the year. We look at this when we did our forecast.

Unidentified Company Representative

Joe, couple of other comments relatively to the Woodford, not only are we seeing the significant improvement in drilling costs, but our EUR is of almost double there over the last several wells. So the combination of that certainly makes this much more economic project. And that's why we are pleased to be accelerating it. And I would also note in the Permian, year ago we had a contract drilling support group and we indicated that we were going to hire and develop our own internal drilling group, and we have done that. And we are seeing the benefits of that now through lower costs as well as higher efficiency in the program.

Joseph Allman - JPMorgan

Got you. And then beside the steel cost are you seeing the day rates level out here, or even increase and what about the fracture stimulation rates?

Unidentified Company Representative

Well, so far, as I said pump and services have been coming down. I actually anticipate as prices stay where they are, and you are seeing ring counts are up again. I think you are going to see day rates firming [ph] and coming back up a year or so. Directionally, I think costs are on their way up.

Joseph Allman - JPMorgan

Got you.

Unidentified Company Representative

And so, again I think for the year, we are thinking costs are going to be pretty much flat to where we budgeted.

Joseph Allman - JPMorgan

Got you. And then just quick follow-up, in term terms there are some Woodford packages out there for sale I know Scott asked that question. Would you guys be interested in moving up pretty sizable in terms of your acreage position there?

Unidentified Company Representative

Sure. I think we have proven to ourselves and we can drill these wells now. The question is, is it going to be come at a price that we can we can... where we can make real... generate real economic value, and that's the real question.

Joseph Allman - JPMorgan

Got you. Okay. Thanks for your time guys.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the line of Stephen Beck with Jefferies & Company.

Unidentified Company Representative

Good morning Stephen.

Stephen G. Beck - Jefferies & Company, Inc.

Staying with the Woodford, on the last three wells they drilled or the three wells that you drilled that had $4 million to $4.4 million costs. Can you tell us which wells those were?

Unidentified Company Representative

I don't have the names right in front of me here.

Stephen G. Beck - Jefferies & Company, Inc.

Okay. I am curious if... are those with the longer laterals, do you know if they had 3,600 foot or longer laterals?

Unidentified Company Representative

The last 10 wells we drilled averaged 3,600 feet. Typically what we... we drill 4,000 feet wherever we can, unless we are limited by leasehold issues. And then several of those last three wells that I mentioned were 4,000 foot laterals.

Stephen G. Beck - Jefferies & Company, Inc.

Okay. And currently you still have about 40,000 acres in the Woodford?

Unidentified Company Representative

Yes, that's right. And I just... someone just handed me the numbers there. Actually the IDA [ph] 612 was a 4,400 foot lateral. And our well cost there... we don't know. It was $4.2 million. So that's a... here we go 4,400 feet for $4.2 million. A sense of the kind of number we are able to put up.

Stephen G. Beck - Jefferies & Company, Inc.

Thanks. That's very helpful. I appreciate that.

Unidentified Company Representative

You bet.

Stephen G. Beck - Jefferies & Company, Inc.

And I know that recently you talked about costly divesting some additional non-core assets properties. Any update on that?

Unidentified Company Representative

Well we're going to sell a couple of small packages. Albrecht has marketing one for us in the Green River Basin in Wyoming, and we should have bids back shortly on that. And then we have a small package that we're selling in the Gulf Coast. Again about a BCF the total production for the year, not a big impact, typically these assets have higher LOE, higher operating cost which is part of the reason, we're able to keep our LOE guidance flat.

Stephen G. Beck - Jefferies & Company, Inc.

Great. So, congratulations on the quarter and thank you very much.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

Thanks so much.

Operator

Your next question comes from the line of Philip Dodge with Stanford Group.

Unidentified Company Representative

Hey Phil.

Unidentified Company Representative

Good morning Phil.

Philip R. Dodge - Stanford Group Company

Good morning everybody [ph]. On the Powers Lake prospect, I am interested in two things. First how much technical work you have to identify these 21 locations, and also whether the Red River is also prospective?

Unidentified Company Representative

Well, we don't really have a Red River play in that area. I think, I don't want to get into too much detail here on what we aiming for. But there is a several different prospective intervals, and we are doing quite a bit technical work. As we mentioned we have participated with other people, MDUs drilling in the area and we're partners with them in a number of these wells.

Unidentified Company Representative

Fidelity.

Unidentified Company Representative

Yes, Fidelity is a branch of MDU as far as work is related. And we have done quite bit of clinical work. Frankly, we've been watching the play, kind of watching it come toward us looking at the completions. Our view on this was that we understand our sweet spots, and some of it appears all stuff [ph]... I am sorry, the partial area, clearly the sweet spot in the play. And real issue was whether it's going to be regionally expensive or not. And our sense for that was that this may be technology play in the sense that the completions are going to open this up in a bigger way. The issue is not going to be okay. We are going to spend more money on completions. Are the wells are going to be good enough to pay for, and that really is the question as you get bigger in the play and the play stretched out and we afford to spend the $4 million and $4.5 million that these wells are probably going to ultimately cost, what kind of reserves you are going to be generating, we're very optimistic.

Philip R. Dodge - Stanford Group Company

What's your net interest in these 21 wells at average?

Unidentified Company Representative

I don't have that number, Phil, but a lot of

Unidentified Company Representative

Very high.

Unidentified Company Representative

Lot of it's 50% plus.

Philip R. Dodge - Stanford Group Company

And then like everybody else moving with Haynesville, I think I heard you say that the shale quality was considerably different for the lot of the other shale areas, could you elaborate on that?

Unidentified Company Representative

Yes, I think it describe to me that when you actually get a core of this stuff, that if you take it out in ambient conditions and squeeze it, it's almost like silly putty [ph]. It's a very different material than the shale's that we are fracking in the Woodford or in the Bakken.

Philip R. Dodge - Stanford Group Company

And what does that mean in terms of cost and recovery?

Unidentified Company Representative

Well that's a good question. I know think... I don't know the answer to that yet. And until I know kind of know the answer to that we probably won't explore the well. But I think it's clearly a different rock and it's going to require a different completion techniques, and we're talking to the number of service companies about what they are recommending on these jobs, and how this is going to play out. But it's definitely different than what you are typically seeing in other places. So there is... I think there is going to be a learning curve here. There maybe some really good wells, but at the end of that curve, we just don't want to waste a bunch of money on the low end of the curve. We want to get up the curve fast. So that's our objective.

Philip R. Dodge - Stanford Group Company

Fair enough. And then finally just a very mundane one, what the after tax of profit was in the sale of the properties in the March quarter?

Unidentified Company Representative

Well I think the gain was $35 million after tax.

Philip R. Dodge - Stanford Group Company

Okay. Wanted to confirm that. Thanks.

Unidentified Company Representative

Phil, one other clarification on the Bakken. In addition to the work that Jay mentioned, we also have smaller interest in several wells, further south in the trend towards the partial field. So we have been also label to acquire the well information from those wells as well. And we're using that to learn from.

Philip R. Dodge - Stanford Group Company

Yes. Alright, hope it goes well. Thank you.

Unidentified Company Representative

Thanks Phil.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the line of David Tameron with Wachovia.

Anthony J. Best - President and Chief Executive Officer

Good morning David.

David Tameron - Wachovia Capital Markets

Good morning Tony. I hate to ask the boring questions here, but can you talk a little bit about South Texas. This time what you are doing on there, and then may be a little bit on the Permian?

Unidentified Company Representative

Sure well we've got to rigs running in South Texas drilling up the almost stuff we acquired last year pretty much on pace. Permian we are drilling some 40s there looking at proving up our 40-acre locations. We feel very optimistic about that but we are continuing to drill those up bounce back to South Texas, I talked about the TXEO deal, we are very impressed with the technical work that they've put into the Pearsall play. We have those four wells that we are committed to there is two re-entries and two grass roots wells. Right now, we are on one of the re-entries already got the window and we are in the horizontal section.

So, we should add some results there pretty soon. Four wells in a very large acreage position. We are probably going to end up commitment to Phase 2 next year in order to get enough wells and this thing to really understand it, but very optimistic again a lot of wells. The good thing about the Pearsall is they is actually being gas produced from the shale as opposed to some of the shale plays you see where nobody has really ever made any gas. The Pearsall has made gas. So, we are optimistic about that.

Unidentified Analyst

Okay by willing [ph] to almost everything is kind of tracking?

Unidentified Company Representative

Yes, pretty much. I mean we have had some positives and negatives but I think in general things are coming out how we expected.

Unidentified Analyst

Okay. And then what about the... you guys talked about the Wolfberry, Sprayberry and the potential there Sweetie Peck have these can you just give us an update there I maybe have missed... maybe you discussed that I missed it?

Unidentified Company Representative

Well, we are drilling 40s, we've got a forward program running on Sweetie Peck right now we'll probably be at 5 for some parts of year. We have picked up some additional acreage and are looking to drill that. So, we are basically right on plan with the Sweetie Peck.

Unidentified Analyst

How many rigs running do have out there Jay?

Javan D. Ottoson - Executive Vice President and Chief Operating Officer

Four right now.

Unidentified Analyst

Okay.

Unidentified Company Representative

David one thing there, to keep an eye on will be the results from our 40-acre testing. We are going to drill 43 wells at Sweetie Peck this year and 15 of those are 40-acre down spacing. So, we are anxious to see how those 40-acre test come about but in three different areas of the field. So, that will be a key element going forward for us.

Unidentified Analyst

Okay Tony one question for you obviously you stepped in here a couple of years ago you've done a lot from acquisition kind of reorganizing new portfolio. Where do you see you are at I don't want to call it as turn around because there was turnaround but what you saw you added in that process?

Anthony J. Best - President and Chief Executive Officer

I think we are very clearly up on stair, obviously these kind of building blocks, looking forward David, the things that we have really focused on first of all is building the leadership as a key element, focusing on organizational optimization, we brought on incredibly sounded technical and support staff over the last year. So we continue to expand the inventory and grow that and I am really pleased with where we are today and what we are seeing. A lot of that you are hearing about are basically new plays for us and just the last quarter too. So that's the inventory continues to grow. The level of confidence in terms of delivery and execution of plan is an obvious focus for us. We absolutely are focused on performance and executing our plan. They are very good, you look at those key building blocks and what we are doing now and I think we get enough on staff and I am excited about where we are going?

Unidentified Analyst

Okay and then probably I remember that term organizational optimization. Sounds better than re-org, but this is just as it relates to divestitures and acquisitions only acquisition front going forward, what size of deal can you swallow today without having to go back to capital markets.

Unidentified Company Representative

All I think right now we have got plenty of dry powder so we look at a variety of opportunities on the acquisition side, some of that are quite large due to corporate deals some others that are down to what we have typically done any where from $59 on up. You know we have had most of our success with negotiated deals. Variance scientists and we continue to look at vast array of those. I think a couple of things that we've mentioned both in our release as well as our conversation today is something you can expect from St. Mary going forward would include getting in earlier on some of these developing plays, finding ways to establish a position where we're not having to pay significant cost per acreage. So we're going to be focused a lot earlier in some of these plays. We're going to be looking at expanding our footprints in each of our regions as well as National [ph] we're also taking a look at not just asset acquisitions but also additional resold and resource play entries.

Unidentified Analyst

Okay did you swallow the $300 million deal without just financed that deal the balance sheet?

Unidentified Company Representative

Yes we can actually do them.

Unidentified Company Representative

Hey let me just run through this we've got a $1.4 billion borrowing base and If you say we did take $700 million of that. Right now we've only got $250 million borrowed against our revolver. So we have $450 million worth of capacity just in our revolver right not. In addition to that we don't have any plans to issue equity this year but we could certainly do it. If we had to for a really good deal. So... we have a lot of capacity, very clean balance sheet and the capacity to do a significant deal if we need to do it. With that said, we're only going to do deals that make sense to us and are accretive or we are not are intended, its never to dilute our shareholders. So we are going to do accretive deals.

Unidentified Company Representative

But I can tell you we will remain very active in terms of sourcing deals and looking at deals to come to us. In the last couple of years we've looked at on average over and $4 billion per year worth of opportunities and we'll continue to do that. And we certainly need to do that, if we are going to expand our footprint which is our intent.

Unidentified Analyst

All right thanks.

Unidentified Company Representative

All right thank you.

Unidentified Analyst

Nice quarter.

Unidentified Company Representative

Thank you.

Operator

: [Operator Instructions]. Your next comes from the line of Rehan Rashid with FBR Capital Market.

Rehan Rashid - FBR Capital Market

Good morning. On the Woodford really quickly the well design and kind of in terms of how much lateral length are you finding optimal and kind of what kind of a fracs are you doing 6 to 8, 7, 8, 9?

Unidentified Company Representative

Well in general we kind of drilled 4,000 foot type laterals on all the wells when we do that where we can not limited by either faulting or lease hold issues. Typical... and we work up on the same fracs pretty much everybody else is doing these days in 4,000 feet about 5 probably an 8 stage every 500 feet pretty high volumes. We are running 5.5 on bottom and pumping probably a 110 barrels a minute. So it's a pretty aggressive job.

Rehan Rashid - FBR Capital Market

Okay and in terms of your Sprayberry assets are you how... Pioneer came out a little while ago and talked about increasing recovery factors where are you in the thought process in terms of what is the recovery factors in your current acreage and then kind of where do you think you can take it to?

Unidentified Company Representative

Well I think its important to recognize that we are in a... this isn't a Sprayberry play its really a Wolfberry... what we call a Wolfberry. A lot of production is coming out of the Wolf camp section.

Rehan Rashid - FBR Capital Market

Okay.

Unidentified Company Representative

So its not we make sure people don't compare this to the traditional Sprayberry assets. If you look at the reserve recovery on one of these wells it's probably say 145 to 160,000 barrels and that's including gas and oil, you get very lower, typically all of this kind of rocky get fairly low percentage recoveries, it's pretty tight rock. Again we pump massive frakes very economic refining cost here about $3. I should make the point that current oil prices if you take a similar type curve for an oil property and gas property, you get similar economic for a $2 F&D on gas and $4 F&D on oil. We are an oilier company than many and that... and so to some extent our F&D will be a little higher because we are focused on a number of these oil properties. We had very similar economics in that $2 to $4 range.

Rehan Rashid - FBR Capital Market

Alright, thanks.

Unidentified Company Representative

Thank you.

Operator

Your next comes from the line of Patrick Oey with FIG Partners.

Unidentified Company Representative

Good morning Patrick.

Patrick Oey - FIG Partners

Hi guys. Going back to the Bakken and you said you had, as far as accelerating activity for the rest of years, you said you're on pretty good services position. Could you elaborate on that a little bit?

Unidentified Company Representative

Well, we think we can get the rigs we need and we certainly have the people resources to accelerate. We have the permits in place, if we have success and we certainly hope, we think we will as we go forward, and we additional drive pattern in terms of the capital to be able to accelerate as well. So, with success we think we can certainly keep the rig running there and accelerate do more than we're saying at this point.

Patrick Oey - FIG Partners

Okay. Do you have a rig up there now, or is that, is one slated to be there later on this year?

Unidentified Company Representative

It'll be a little later this year.

Patrick Oey - FIG Partners

Okay. And just another thought here, is it still too early that to talk about additional leasehold adages up there, temporary adages out there?

Unidentified Company Representative

I tell you, we are getting very competitive and so again we took the approach going into this, that we weren't going to go in and pay really high lease cost to get into this because we weren't sure how big it was going to be, we then... we have picked a lot of acreage for $15,000 on acre and clearly help our economics to be in that position, buts it's been pretty competitive now, I seen some of the result just of the lease sales that occurred just recently and some of these numbers are really high. So, we have other things to focus on this well and we are going to do what we think is economic.

Patrick Oey - FIG Partners

Okay. And that 50 to 100, that's what you are paying for?

Unidentified Company Representative

Powers Lake area up there, when we started up in there we were paying those kind of lease cost, now they are higher now but at the time we acquired a lot of the acreage that was what we were paying.

Patrick Oey - FIG Partners

Okay, that it for me. Thanks.

Unidentified Company Representative

Thank you.

Operator

At this time, there are no further questions.

Unidentified Company Representative

Alright. Thank you very much; we appreciate all of you turning in this morning. Again we are very excited about where we are today. We have got a good solid quarter under our belt and we focused on delivering on our business plan for this year. Thank you for your time this morning.

Operator

Thank you for join the first quarter earning call. You may now disconnect.

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Source: St. Mary Land & Exploration Co. Q1 2008 Earnings Call Transcript
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