Clayton Williams Energy, Inc. Q1 2008 Earnings Call Transcript

Clayton Williams Energy, Inc. (CWEI)

Q1 2008 Earnings Call Transcript

May 6, 2008 2:30 pm ET

Executives

Clayton Williams, Jr. – Chairman, President, and CEO

Mel Riggs – SVP of Finance, Secretary, Treasurer, and CFO

Analysts

Mike Scialla – Thomas Weisel Partners

Greg Boty [ph] – JPMorgan

Bill Nasgovitz – Heartland Funds

Brad Evans – Heartland

Steve Ore [ph] – Ore Investors [ph]

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Clayton Williams Energy Inc. first quarter 2008 results conference call. My name is Sean and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Clayton Williams, Jr., President and CEO. Please proceed.

Clayton Williams, Jr.

Thank you very much. Welcome. If you have read our releases, we have enjoyed a very solid quarter with increases in oil and gas production, certainly increases in prices. We have paid down some debt and we are in pretty solid position and we are proud of our achievements. As we go forward in a normal method, Mel will cover the financials first. After that, he will take questions and after that, I will give you a little overview of where we have been and where we plan to go. With that, Mel, why don't you take it and run with it.

Mel Riggs

Okay, thank you. We are pleased to report excellent results for the first quarter of 2008. These results were driven by both product price and oil and gas production increases. Our reported net income of $7.2 million for the quarter and that's $0.62 per share compared to a loss last year of $12.3 million or $1.09 per share for first quarter of '07. Our cash flow from operations for the current quarter more than doubled to $78 million or $6.78 per share. That was led by a 94% increase in our oil and gas sales. Of the $57.7 million increase in oil and gas sales for the current quarter, 30% is attributable to incremental oil and gas production growth and 70% was related to higher or a function of higher product prices. Our oil and gas production on an Mcf basis averaged 110 million cubic feet a day, which exceeded the upper end of our guidance for the first quarter I think by about 3% and actually production exceeded our guidance, the midpoint of our guidance, by 6%. So, we are well on track going into 2008 now with our original guidance, we are ahead. Compared to the first quarter of 2007, oil production increased 26% and gas production rose 28%.

In all of our areas of current drilling (inaudible), North Louisiana area, South Louisiana Austin Chalk which is also called the Trend and the Permian Basin, all contributed to these production gains, kind of across the board. Oil and gas production also increased from the fourth quarter of '07 to the first quarter of '08, just of quarter-to-quarter, we had a 7% increase in production, result of our increased drilling in the Chalk and Permian Basin.

Looking at product prices, our average realized oil price in the first quarter of 2008 increased 75%. It was $96.37 per barrel. Our average gas price realized at the well head increased 28% to $8.88 per Mcf and these prices exclude the effect of hedging. The benefit from the rising product prices was partially offset or actually pretty substantially offset by a current quarter net loss of $46.1 million on derivatives. This is compared to a $16.8 million loss last year. Of the $46 million loss, actual settlements for the current quarter, and these are settlement hedges, resulted in a net loss of $14.1 million. The remainder, roughly $32 million, was the mark-to-market adjustment on future hedge positions.

As you will recall, we have some hedges that were acquired several years ago when we acquired Southwest Royalty and we still have 1,400 barrels a day of oil hedged at $25.07 and also 5 million cubic feet of gas hedged at $5.15. These hedges roll off in September of 2008, only just a few months from now, thank goodness. At $100 oil and $10 gas, this hedge kind of going forward would cost us about $4 million a month in future potential cash flow. So, the good news is these hedges will expire and we should benefit both in our profitability and cash flow going forward.

Our operating costs – the metrics for operating costs and G&A per Mcfe declined in the current quarter compared to last year and that's mainly due to increase production. Production costs were within or actually we beat our guidance on production cost. As far as our guidance goes, the real increase where we were sort of out of line was in the DD&A per Mcfe. It increased 61% to $2.77 per Mcfe and that's due to downward reserve revisions in the Floyd area where we have about a dozen wells or so in South Louisiana. We have production issues and so we have been revising those reserves down and the DD&A reflects our finding costs, it is kind of company-wide, but primarily in that area.

Exploration costs were not significant in this quarter. Roughly $300,000 compared to $11 million last year. This really is due to the current emphasis on development drilling. We didn't drill many exploratory well in the first quarter. I will caution though that we are still carrying forward about $28 million of cost on Big Bill Simpson and Margarita #1 which were Bossier [ph] previously drilled and if we, at some point in time, we could face impairments there potentially if our valuation of these wells turns out that either they are not commercial or they end up being non-productive and if we do not continue to drill in these areas. But, we are still focused on the Bossier which Clayton will talk about here in a few minutes. It is still going to be a big part of our future we believe. We have got a great position there.

Looking at the balance sheet, the company's financial condition at the end of March, end of the quarter, we had $155 million outstanding on our secured credit facility. We had a borrowing base of $275 million. In April, we sold part of our proved reserves in South Louisiana. We sold a group of wells, we've netted proceeds from that sale of about $88 million. These proceeds were used to pay down debt and we paid down our credit facility to around $60 million. In connection with the sale, the borrowing base with our banks, we have reached a new borrowing base, we have reduced the borrowing base to $250 million from the $275 million. So we currently have $190 million of availability on our line of credits. We are in great shape there.

Looking at just total debt from the end of the year to where we are today, we have paid down almost $113 million. We have taken our total debt down from $453 million at the end of the year down to $340 million currently. We said we were going to do that. We kind of finally got it down. We are proud of that. It's taken a lot of work, but it is going to pay off. To recap our current debt position, at this time, we have got $60 million on the bank line which I commented on earlier. We have the senior notes which we have about five years left to maturity on those, the $225 million and we have got rig debt of $55 million. So it is a total of $340 million of debt right now. The rig debt too, we have paid down from $75 million to $50 million. We have nearly paid a third of the rig debt off so far and the activity level at both the SandRidge and Clayton Williams Energy in using these rigs, we feel confident we will be able to amortize that debt out over the next couple of years and own those rigs free and clear of the debt. SandRidge will hand us one of those rigs, so that will be a nice accomplishment.

CapEx, for the first quarter, we spent $57.7 million on exploration and development activities. 79% of that was really going into developmental projects. We had extremely strong operating cash flow, as you can tell by these numbers, again high product prices and our production is growing. It has given us an opportunity to relook at our capital spending for '08 and we are going to increase it by $88 million. It will bring the total projected spending to $344.5 million. Most of this is going to be related to drilling in the Permian Basin. Permian Basin will be about 49% to 50% of our total expenditures for the year. We are expanding our plans out here. There is also an increase of about $26 million that is related to additional seismic in the East Texas in the Bossier play and also we plan to drill a Bossier test in North Louisiana. It is an offset to a well drilled a year or two ago that we are going to go back and we never really were able to test the Bossier.

So based on these estimates for the new numbers, the new estimates, our development drilling will be about 68% of our exploration and development. Even though we would say in the Permian Basin we are doing quite a bit of exploratory drilling. I think it is lower risk, (inaudible) production on the wells, we are going to payout. But, we feel pretty good about what we are doing out here and in the Austin Chalk.

And with that, I think I will conclude and take questions if anybody has anything right now.

Clayton Williams, Jr.

Any questions for Mel? When we finish with his question, then I will give an overview and then you can ask questions of me or Mel at that time.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Mike Scialla with Thomas Weisel Partners. Please proceed.

Mike Scialla – Thomas Weisel Partners

Hi, guys.

Mel Riggs

Mike, how are you doing?

Mike Scialla – Thomas Weisel Partners

Just fine, thanks. Question on the asset sale, can you give us the reserves associated with that and how much production?

Mel Riggs

First of all, I will take the production. We sold about 700 net barrels of oil production and about 11 million cubic feet of gas. I think what will happen, we are going to update our guidance here shortly for the rest of the year and I think you will see a little dip in second quarter, but with the activity level we have, we are going to probably be right back to kind of the original plan pretty quickly, if we continue at the same pace. And on the reserves we sold, it is roughly 1.8 million barrels or 11 Bcf, about 4% of the company's proved reserve volumes.

Mike Scialla – Thomas Weisel Partners

Okay. The timing of the close, that was I believe you said April 1. So, none of that production will be in your second quarter numbers?

Mel Riggs

That's right. Actually, (inaudible) was March 1 I believe on that. So, we have already – it will not affect – that production will not be in the second quarter at all.

Mike Scialla – Thomas Weisel Partners

You said you have paid down $113 million of debt. Where does your debt to cap stand now?

Mel Riggs

We are down to – in effect we are still around 60%, something like that.

Mike Scialla – Thomas Weisel Partners

Okay. And then last one on the Bill Simpson and the Margarita, do you have any sense on the timing of when you'll know how much you are going to impair there or if you are going to impair some?

Mel Riggs

No. We don't really know yet. There is just going to be – I think there is still little work to do on those wells, (inaudible). Clayton may be able to talk about that in a minute. But, the wells are producing and we will look at that each quarter and see if there is an impairment needed. It has to do a lot to do with what we plan to do in the area too around those wells, our future activity.

Mike Scialla – Thomas Weisel Partners

Right. Thank you.

Mel Riggs

Thank you.

Operator

Your next question comes from the line of Greg Boty [ph] with JPMorgan. Please proceed.

Greg Boty – JPMorgan

Good afternoon, guys.

Mel Riggs

Hey, Greg.

Greg Boty – JPMorgan

Just a few questions. Just following up on the asset sale. You said that the proceeds were $88 million, the net proceeds?

Mel Riggs

Yes, that was the net of – we had a March 1 effective date. So there were – that property was cash line of about $6 million a month.

Greg Boty – JPMorgan

Got you.

Mel Riggs

That was the main difference.

Greg Boty – JPMorgan

So that's all from the adjustment, no tax consequences?

Mel Riggs

That's right.

Greg Boty – JPMorgan

How much of that was proved developed out of the reserves?

Mel Riggs

Almost all of it.

Greg Boty – JPMorgan

Almost all of it, that would help explain the high valuation.

Mel Riggs

Yes, right. It was a PDP deal. At least from our standpoint. The buyer may have seen something else. But, that's the way we saw it from our reserves.

Greg Boty – JPMorgan

I think that made a lot of sense with the valuation. When I look at – you mentioned Floyd production. You had some downward revisions. Does that have any impact on your reserve base, on your current proved reserve base as of year-end '07?

Mel Riggs

Yes, it was reflected pretty much in the year-end reserves, the revisions.

Greg Boty – JPMorgan

That already was revised.

Mel Riggs

Yes, that was happening and reflected for the most part I believe in the year-end reserves. That's right.

Greg Boty – JPMorgan

I think on those matters that's all I have for right now. I will come back I think after Clayton speaks.

Mel Riggs

Thanks.

Operator

Your next question comes from the line of Bill Nasgovitz with Heartland Funds. Please proceed.

Bill Nasgovitz – Heartland Funds

Yes, Bill Nasgovitz.

Mel Riggs

Hi, Bill.

Bill Nasgovitz – Heartland Funds

Congratulations on paying that debt down. We think it is smart to do when the price of oil is going parabolic here.

Mel Riggs

It has, hasn't it?

Bill Nasgovitz – Heartland Funds

Yes, it sure has. Great days for you folks. Could you give us some guidance in terms of, going forward, where you would like to keep your debt to total cap?

Mel Riggs

We paid the debt – we felt along with the shareholders, including you, that we wanted to reduce our debt level and we have done it and we will try to keep it in the range of, our bank debt somewhere in the range it is in right now. I think we can as long as production and product prices stay high. We are going to ramp up our spending a lot more out here in the Permian. But, at the end of the day, if something changes, if oil prices drop, production is not working, we have the ability to change our budget. It is discretionary spending. So that's kind of where we are. We are going to try to drill out our cash flow. That's been our game plan.

Bill Nasgovitz – Heartland Funds

So you want to keep debt to total cap around 60%, is that what you are saying?

Mel Riggs

Yes.

Bill Nasgovitz – Heartland Funds

No higher than that level?

Mel Riggs

Yes, I would say at that point in time – yes, I think that's kind of where we are and that's our plan right now, if you look at our budget and everything, we are going to spend our cash flow and our debt should stay in the same range that it is now.

Clayton Williams, Jr.

I need to interrupt and say, Bill, you and I have argued about this for years. I have been in the business for 50 years and occasionally something may happen that changes that. I'm not, nor have I ever, run the company totally tied to debt capital ratio. I don't intend to do that now. We have done exactly what I told you. We said we were going to consolidate. We will drill producing wells, which we have done. We will probably keep our debt in a that ratio but that is not a commitment because that will depend on the opportunities and the things that happen in many categories. So, do not say that we will keep that at that exact level because we probably won't.

Bill Nasgovitz – Heartland Funds

Well, nonetheless, we are pleased that it is down. That's great. It gives you flexibility for the unknown.

Mel Riggs

That's right.

Bill Nasgovitz – Heartland Funds

Thank you.

Mel Riggs

Thank you.

Operator

Your next question comes from the line of Brad Evans with Heartland. Please proceed.

Brad Evans – Heartland

Gentlemen, good afternoon and again congratulations on a great quarter. I was curious with the asset sales, can you just talk about the LOE of those properties versus the company average and how that will affect LOE going forward?

Mel Riggs

Yes, those properties – I think we will probably see a slight increase in LOE. We are going to be guiding to that here pretty quick. We will take a hard look at that. Those properties are out in the swamps and they were still fairly high lifting costs out there. I know but they were high flow rate wells too, so I'm not really sure if I can answer that. I don't think it will be material though.

Brad Evans – Heartland

Okay.

Mel Riggs

It is pretty nice high flow rate wells out in Chalk right now which is going to really nicely offset what we just sold.

Brad Evans – Heartland

That's very helpful. Is there anything unusual that happened in the first quarter on the G&A basis? In absolute dollars, it was down about $0.5 million versus the first quarter of '07. Is there any explanation there?

Mel Riggs

I think there were just timing events in the first quarter of last year. I'm not sure exactly what it was. I think it is more of a timing issue. I think the first quarter last year was a little bit high for some reason off the top of my head I'm not sure. Yet, we are analyzing that right now for our 10-Q filing for MD&A. Our guidance should hold – I think if you looked at our guidance for the year for G&A, it ought to be, even though we are much under that in the first quarter, I think it will all kind of even out as the year goes by. We will hit it – probably pretty close to hitting it where we projected.

Brad Evans – Heartland

Just pertaining to the CapEx budget, the $344 million, how much of that is going to be land, and G&G and seismic?

Mel Riggs

Land and G&G is about $67 million of that number.

Brad Evans – Heartland

Okay.

Mel Riggs

And the rest of it is drilling.

Brad Evans – Heartland

You wouldn't happen to know off the top of your head how much of that drilling budget would be reserve additive drilling versus PUD to PDP conversion?

Mel Riggs

We talk about exploratory drilling and developmental drilling, but a lot of what we are doing, in the Permian Basin, it is not really some development drilling because some of it is probables and possible and things like that. So really, it is going to be play [ph] – I think our budget is split pretty much 50/50 between truly what is a PUD drilling and 50% other. So non-proven.

Brad Evans – Heartland

Okay. Thanks.

Operator

Ladies and gentlemen, that concludes the Q&A session. I would like to turn the call back over to Mr. Williams for closing remarks.

Presentation

Clayton Williams, Jr.

Thank you. That's an overview. We made a decision to shift all of our emphasis into drill and producing wells. We have been doing that for over a year. The wells I would say sometime we have had them on the shelf. We have known we had infield drilling in the Chalk. We've known we had the water frac. We've known we had development wells out here. When the price was right, we said now it is time to consolidate almost 100% development wells. That's what we are doing now.

But at the end of this year, I want to focus again only deep Bossier where we have probably over 300,000 acres. We will phase into some exploration while we continue doing all the development drilling that we have available. Development drilling (inaudible) gas from Central Louisiana where we have done very well, then from the Chalk, from the Permian. We will continue these programs but we will then shift to evaluate our deep Bossier and I want to start with the Louisiana where we have substantial acreage and we are moving to build [ph] location shortly on our Barton well which we, and drilling the first well, a little review for you, we encountered pressure in the upper Bossier. We have a large section that we believe we have a potential, very large amount of high pressure sands that we think we have a good chance of encountering commercial production. Obviously we do. We have substantial acreage there in two of the prospects.

Moving back west, as I mentioned, one of you folks mentioned the Big Bill. 3-D shoot is underway. We should have the first records in November, interpretation by the first of the year. We will most likely be drilling another well on Big Bill that is on seismic. You may recall, we encountered substantial amounts of sand. Moving back to the main block and the old home base of the Ginnie's [ph] Deanville area. We have several prospects there and we will probably start – we have a separate 3-D going in the, I'm going to call it the Deanville. It's west of – we had two 3-Ds there. We had a gap in between, so we got a shoot tying the two of those together. So in the Fazzino area, which was our first discovery, we will have real solid 3-D as we move forward there. We will probably be drilling a well in there some time after the first as well.

We also have two other prospects we will consider drilling. Our plans will be taking the cash flow and we have liquidity now we didn't have before and applying that into evaluating our Bossier. We also plan to have a well in Utah this year along with our partners the Hunts & Yates [ph]. So basically, we have done what we said we would do and now we continue to – we will go back to our exploration of the deep Bossier which we still have a great amount of confidence in, that we will develop some significant production there. What did I miss, Mel?

Mel Riggs

You are very good.

Clayton Williams, Jr.

I think I will take questions on that. Questions?

Question-and-Answer Session

Operator

(Operator instructions) Your next question comes from the line of Mike Scialla. Please proceed.

Mike Scialla – Thomas Weisel Partners

Clayton, I guess I was little surprised – I know you are focused on the deep Bossier but. You didn't mention anything about the Hanesville. Do you think your acreage over there in North Louisiana and East Texas for that matter is prospective for that as well?

Clayton Williams, Jr.

I don't know that – in the big acreage where we have 180,000 acres, Hanesville would be 23,000 feet deep. I question very much if it would be commercial air. We have some other acreage where we are doing development drilling that it might be. We do not know a lot about it. We have read Chesapeake's release. We don't know enough to tell you much. We do not have a major position that might be a potential, but we have some and we have not taken the time to study which of ours might be. It will all be held by production, but it won't be major as far as it pertains to the company. But it would be welcome if it comes along.

Mike Scialla – Thomas Weisel Partners

Okay. Could you describe a little bit more about, in the Permian where you have the big CapEx increase, what type of projects you are going to be drilling there? Is it more in the War-Wink and Amacker-Tippett areas or outside of that? What kind of break even?

Clayton Williams, Jr.

These are fairly typical. We have some in the Amacker-Tippett that some were PUD that we are developing and we are pretty pleased with those. We have done some leasing in some areas. So in the War-Wink, I think we have two rigs drilling, maybe a third is we are about to move one out. We are also staking a location in the area of Barstow. We have drilled a well in Andrews County that we are hopeful, but we don't know if it is commercial yet or not. I think we are making a typical play in the Permian. We have acreage that we bought with Southwest Royalty. We had a lot of prospects – let me rephrase that. We had a lot of farm out requests to Southwest Royalty and we are evaluating each of those to see how many prospects might develop. I think our objective is to become a steady ongoing player in the Permian and we are becoming more up to speed on the activities and the opportunities. Did I answer your question?

Mike Scialla – Thomas Weisel Partners

You did. I guess one follow-on to that is what kind of breakeven oil price do you think you need for a lot of these projects?

Clayton Williams, Jr.

That depends.

Mel Riggs

Depends on drilling.

Clayton Williams, Jr.

Yes. For example, in War-Wink, some of those wells are costing over $6 million. You better have more reserves in the horizontal. We think we are. Some of the Wolfberrys are in the neighborhood of $2 million, so we think they are commercial and we can keep drilling. But, it is a variable ongoing play and it is hard to put one figure on the whole operation.

Mike Scialla – Thomas Weisel Partners

Sure.

Mel Riggs

One thing I would like to add to that, Mike, is the oil prices have gone up but everything has gone up too. When you say oil price, you have to say what happens to the service companies and drilling companies, how much are they going to cut because the margins still aren't what people think because costs have grown so much so –

Mike Scialla – Thomas Weisel Partners

So you are still seeing some inflation over there at this point?

Clayton Williams, Jr.

Less rapid than it was. I think that we are seeing some leveling but there is still some inflation. The other thing that is happening finally is we are able to do a better job of drilling than we were earlier and completing.

Mike Scialla – Thomas Weisel Partners

And I guess one more if I could, switching over to the Chalk, it looks like you actually are planning on spending a little bit less than you had said originally. Wondering are you still planning on the same level of activity there, 24 wells and 24 refracs?

Clayton Williams, Jr.

Well, I think we may have more refracs, but we don't have 24 wells to drill to date. We are hopeful as we learn how to do we get to more marginal areas that the cost will be the same and reserves less. So there will be some point there we may not be able to continue drilling. I think that is the more likely case. However, if you multiply by $122, then we can go further than we were able to when we were multiplying by $90, believe it or not.

Mike Scialla – Thomas Weisel Partners

What kind of spacing are you on there now?

Clayton Williams, Jr.

Well, we're infield on an equivalent of a horizontal of 40 acres. That's not the typical Chalk. Ours is up dip and we have micro fractures, so it performs in the area of where we are more like, let me call it, a vanilla reservoir where the down dip Chalk, you get huge flows and deplete very quickly. We are getting good flows, but we have a nice reserve life out of it. These flows are pretty predictable because we have done so much work there. So our engineering and forecasting on the Chalk are relatively dependable in being in this like the oil business.

Mike Scialla – Thomas Weisel Partners

One more follow-up, I remember one point in the past, you'd looked at extending that play down dip I guess to the south. Is that –

Clayton Williams, Jr.

We are in the process of doing that. When I say no more than 20 wells, I'm counting on some of the down dip work in.

Mike Scialla – Thomas Weisel Partners

Got you, okay. Thank you.

Operator

Your next question comes from the line of Brad Evans. Please proceed.

Brad Evans – Heartland

Yes, I was curious as to a couple of things, one with the Austin Chalk, can you talk about what your inventory is, Clayton, in terms of the number of prospects you have in the Chalk?

Clayton Williams, Jr.

I can't tell you I think at this point. I will answer that question to the extent that we have continuous drilling. We have no more than 20 that we believe today is commercial. Now, if the price goes to $200, then we will have more. I think it is not unlimited, I need to tell you that. We are doing very well. We wish we had a lot more, but the facts are the facts.

Brad Evans – Heartland

And then as far as the Bossier is concerned, whether it be in I guess either East Texas or North Louisiana, is there any movement at all in terms of bringing in a joint venture partner in that prospect or those projects?

Clayton Williams, Jr.

We have no – let me say we are not – we would not rule out taking in a partner but we are making our plans to go ahead without one from our own cash flow as we have done more or less in the past. Let's talk about the Bossier a little bit. We are doing two 3-D shoots. What we did, we stopped our Bossier exploration to get our finances in better order and take the producing locations off the shelf and drilling to improve our overall financial position. Now, we have done that and now we are refocusing again on the Bossier because we continue to believe it has a very large potential and we have two shoots going. We will probably have more if we are successful. So I'm very hopeful about it. That's about as far as I can go I guess.

Brad Evans – Heartland

Okay. I guess the only other thing I just had was in terms of the Hanesville. I was under the impression that the company thought it had about a roughly about 25,000 acre position within the Hanesville play. Is that still an accurate number?

Clayton Williams, Jr.

I'm not comfortable with it. We talked about it at lunch and I've question we have that much acreage in that. I would not want to represent that to you. We've talked about it, I'm not sure. I know the big acreage, as I've told you, the Hanesville is 22,000 to 23,000 feet deep. I don't think that will be commercial. Where we are drilling in the Austin Cotton Valley, it might be, but I don't want to represent that to you because I don't know enough about it. We have been so busy we've not focused on it because we don't feel it is our play to start competing with Chesapeake. I don't know is the best answer I can give you.

Brad Evans – Heartland

So, your intention is just to let that play develop and then see how it may encroach upon your acreage?

Clayton Williams, Jr.

I think from my experience I would tell you wherever Chesapeake has it figured out, they are paying big prices and how could we compete when we don't have the knowledge they do. So I'd say whatever we happen to have, we will still have and we would intend to own it. But we are not representing that we have anything because we have not studied it and we just have been busy doing our own thing.

Brad Evans – Heartland

Okay, great. Thanks.

Operator

Your next question comes from the line of [Greg Boty]. Please proceed.

Greg Boty – JPMorgan

Hi guys. Most of my questions have been answered. I guess just one small question.

Clayton Williams, Jr.

Speak a little more loudly, please.

Greg Boty – JPMorgan

Sure. Most of my questions have been answered. Just one more question. I think you were participating in the UT Austin acreage auction. Are results out on that yet and, if so?

Clayton Williams, Jr.

I still didn't hear.

Greg Boty – JPMorgan

The UT Austin acreage.

Clayton Williams, Jr.

Yes, we were successful in the bids there. We think we did the right thing. We are drilling another well, but it is still too early to tell do we have a lot of development drilling there or not. We can't represent that we do or do not. Obviously we're hopeful. Obviously we thought we did the right thing, but it is too early to tell.

Greg Boty – JPMorgan

How much did you end up spending there?

Clayton Williams, Jr.

I'm sorry how much –

Greg Boty – JPMorgan

How much did you end up spending there?

Clayton Williams, Jr.

3 million –

Mel Riggs

About 3 million.

Clayton Williams, Jr.

About 3 million total. I would say like to tell you more, it is just a little premature. By the next conference call, we will be able to give you a report. We just don't know yet. We have built a well in the middle of some of that. The logs are encouraging. We are running pipe. Don't know if we've announced that yet, but we do plan to run pipe and we will just have to see. The logs on some of the Permian stuff of what we are drilling today are not highly conclusive, so you almost have to watch as each well produces and see it is somewhat statistical. We feel good about it, but I cannot represent to you that it is commercial production because we don't know yet.

Greg Boty – JPMorgan

That's helpful.

Operator

Your next question comes from the line of Steve Ore [ph] with Ore Investors [ph]. Please proceed.

Steve Ore – Ore Investors

Yes. Good afternoon, gentlemen. Given the sale of the South Louisiana assets, what is the status of the agreement that you had or have perhaps with a partner to drill six wells where they handle 85% of the costs to the casing point and 50% thereafter and so forth, if you remember that agreement?

Clayton Williams, Jr.

This sale was independent of that. That is an ongoing agreement. We expect them to start their operation within the next month or so. This was just a specific sale of older properties that's objective was to not sell anything that had an upside and we just sold some cash flow properties that were somewhat short lived and we think that best fit. We had that on the market for a long time before it worked and then, unfortunately, after we agreed to sell, the price went up another $15 a barrel. So, it wasn't as smart as we thought (inaudible). Every time you sell too quick, sometimes you make a mistake, particularly in this bull market.

Mel Riggs

Steve, one other thing. As you can tell by our capital budget, we are still spending money in South Louisiana. We will spend money with that joint venture partner and we have a rig running right now drilling one of our other prospects. So we are still going to have some activity. We have got a prospect inventory we are still working so.

Steve Ore – Ore Investors

Very good. And then one follow-up. Given you exceeded your guidance, at least in the oil production, I know you had asset sales that we just talked about, what do you foresee for your production forecast going forward?

Mel Riggs

We are going to put out – we're going to publish our guidance probably next Tuesday or Wednesday for the rest of the year, kind of update everything. We sold roughly I think probably 11% – 10% or 11% of our production total company-wide production. That is going to have some impact on the second quarter. I believe – we are already ahead of our original guidance based on the first quarter results. I think with the drilling we're doing, with the Chalk activity that has been going on, we are going to build to kind of get back on track pretty quickly with what we had originally said we would do before the sale and hopefully do better.

Clayton Williams, Jr.

There is one thing I would like to add in overview of upright [ph] in this company. If you look at the record, we have continually placed hedges to protect our ongoing business plan. To me it has always been important and we have maintained a high percent hedge. For example, in January or early February, we hedged our '09 production for $85. That looked kind of safe at that time. It looks dumb today. I think I would say very much of the time, we will continue to have hedges to protect the downside and in so doing you are always, or generally always, going to see in a bull market like we are seeing today, we will have substantial losses from derivatives but to me that's called insurance, the price we pay to be able to be aggressive in our overall drilling plan and so that's the price you pay to be aggressive in some ways. You have to protect your downside with hedges to be sure you don't get under cut with some serious price drops and I want to bring that in because that's an ongoing part of our plan. We have always done that and we think it is right. I wish our crystal ball was better sometimes when you are seeing $123 per day and we are hedged for $85 to $95 in '08 and '09. That's what we did at that time. We thought it was sure because we saw that our ongoing production was unhedged and as we bring it forward, then we are receiving the top price, but our existing production was basically nearly all hedged and we did that for safety's concern or insurance, if you would.

Steve Ore – Ore Investors

Last question from Steve Ore, given the conversation on the hedges, have you taken out any new hedges here recently?

Mel Riggs

No, not anything that you haven't already probably seen.

Clayton Williams, Jr.

Somewhat, as I have said we have hedged a substantial amount of '08. We've hedged I think a fourth of the gas in '09. But, '08 and '09, we are nearly pretty well hedged with oil.

Mel Riggs

Yes, based on – when we did the '09 hedges, we hedged a high percentage of kind of our existing property base with the decline, but at the end of the day, we were going to end up – it will end up being less than 50% of our total production just because of our drilling activity.

Clayton Williams, Jr.

And I think I hopefully made that clear. We said our upside and our unhedged property comes from our drilling program that you couldn't hedge in any case because you don't know what you are going to have. So we think it is the right way to do it. Hedge our existing production to guarantee your business plan and as you drill forward then that takes whatever the market is and we have done that and it makes us look a little smarter than the $85 oil.

Steve Ore – Ore Investors

Thank you, Clayton. Thank you, Mel.

Operator

Ladies and gentlemen, that concludes our Q&A session. I would like to turn the call back over the Mr. Williams for closing remarks.

Clayton Williams, Jr.

I think we've covered it. We are happy with our achievements here. We have focused on drilling and producing wells to get our finance and cash flow up. I think we have done that, of course, with the help of prices. Hedging is a very significant part of our business where you see the hedge losses. We are intending to focus on the Bossier starting next year because we still are very optimistic about developing some good commercial deep Bossier [ph] production. Mel, do you have anything else?

Mel Riggs

No. I think that's good. It's a great quarter. Appreciate everybody listening in. Thank you.

Clayton Williams, Jr.

See you next time.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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