Executives
Patrick Cassidy - Director of Investor Relations
Scott Josey - Chairman, Chief Executive Officer and President
John Karnes - Chief Financial Officer, Senior Vice President and Treasurer
Analysts
Scott Hanold - RBC Capital Markets
Neal Dingmann - Dahlman Rose
Pavel Molchanov - Raymond James
Richard Tullis - Capital One Southcoast
Joseph Bechman - Howard Weil
Philip Dodge - Stanford Group
Mariner Energy, Inc. (ME) Q1 2008 Earnings Call May 7, 2008 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Mariner Energy Inc. Earnings Conference Call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).
I would now like to turn the presentation over to your host for today’s call, Mr. Patrick Cassidy, Director of Investor Relations. You may proceed, sir.
Patrick Cassidy - Director of Investor Relations
Thank you, Erica. Good morning and welcome to Mariner Energy’s first quarter 2008 earnings release conference call. Today’s call is being webcast and a replay will be available on the Mariner website following this call for the next 10 days. This is Patrick Cassidy, Director of Investor Relations from Mariner Energy.
On the call today are Scott Josey, Chairman, Chief Executive and President of Mariner Energy, and John Karnes, Chief Financial Officer, Senior Vice President and Treasurer.
The new release announcing the Company’s results was issued last night after the market close and is available on our website. In today’s call Scott will provide opening remarks and an operational update. John will discuss the Company’s overall financial performance and you are welcome to ask questions after we complete our prepared remarks.
Before Scott begins his review, I would like to remind the audience that some of today’s presentation may include forward-looking statements reflecting Mariner's view about future events and their impact on company performance. All remarks other than statements of historical fact that address activities which Mariner assumes, plans, expects, estimates or anticipates and other similar expressions such as will, should or may occur in the future, are forward-looking statements.
Such forward-looking information may involve risks and uncertainties that could affect the Company’s operations and financial results causing our actual results to differ from our forward-looking statements. These risks and uncertainties are described in Mariner's filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2007.
In addition today’s discussion may include estimates of probable, possible for non-proved reserves, reserve potential or upsides. These estimates are non-equivalent to the SEC definition of proved reserves and are more speculative then estimate of proved reserves. Information disclosed during this conference call does not constitute an offer to sell or solicitation of an offer to buy any of Mariner's securities.
Now, I will turn the call over to Scott Josey.
Scott Josey - Chairman, Chief Executive Officer and President
Thanks Patrick. Good morning and welcome to today’s call and I want to welcome Pat, our new Director of Investor Relations to the team, you will be getting to know him as we go forward. As you have seen from the press release, we have had a very busy quarter with record results and our company is performing very well on all fronts.
We'll start with our operating performance. As noted in the news release our total net production for the three months period that ended March 31, was 31.3 Bcf equivalents. This is a 23% increase compared with the 25.4 Bcf reported for the same period a year ago. Keep in mind that although StatoilHydro acquisition was effective on January 1, because it closed on January 31, we do not book the production of approximately 1.5 Bcfe for the month of January instead, it is treated as a reduction in purchase price.
We also realized first production from two new assets in the Deepwater, the Bass Lite and Northwest Nansen fields both of which came online during February. We are especially proud of Bass Lite, as it represents a number of first and superlatives not just for Mariner, but for the industry as well. We are the designated operator for this project, which is located in water depths of 6,750 feet making it one of the ten deepest deepwater developments in the Gulf of Mexico and we were able to commercialize a challenging project that was dormant under the prior operator.
It is the second longest subsea tieback in the Gulf spanning 56 miles from our subsea tree and associated infrastructure for the Devils Tower Spar. It’s the longest tieback using fiber optic umbilical for communication and this is the first field development to feature to steel catenary riser system that meets the new MMS required criteria adopted following the 2005 hurricane season.
Although, we currently have only one well producing to the early production system, we have tested each well at 75 million cubic feet equivalents per day gross. So we continue to believe that we will have both wells online in the third quarter at around 120 million cubic feet equivalents per day gross.
As you will recall, we provided 2008 guidance of 130 to 140 Bcf equivalents, which equates to average annual production of 355 to 383 million cubic feet equivalents per day. Our current total company production rate is approximately 400 million cubic feet equivalents per day. Clearly, we believe we are well on track to deliver on our guidance of 30 to 40% growth in 2008.
I will now talk about structural changes to our portfolio, starting with recent transactions on the Shelf and Onshore. As I previously mentioned, we completed the $243 million purchase of StatoilHydro Shelf operations on January 31, boosting our estimated net proved reserves by 52 Bcf equivalents and another 24 Bcf equivalents in estimated net probable reserves.
At closing this transaction increased our net daily production by 53 million cubic feet equivalents a day and provides excellent growth potential including 256,000 net acres and about a dozen high quality exploration prospects.
In West Texas we added an estimated 14 Bcf equivalents in net proved reserve in our Spraberry Aldwell Unit at compelling prices as a result of an exercise where preferential purchase rate attributable to the sale of assets by Plains Exploration to Oxy. If you were to combine the reserves acquired in the StatoilHydro and Plains transactions of approximately of 66 Bcf equivalents, both of which were effective January 1, and add that amount to our year end proved reserves of 836 Bcf equivalents, our pro-forma proved reserve base exceeded 900 Bcf equivalents at the beginning of 2008.
We also further expanded our acreage position in West Texas, which currently stands at approximately 86,000 net acres. Although, the majority of the position is in the Spraberry, we have added significant positions in other place including the Wolfberry, Wolfcamp Detrital and Devonian and Fusselman plays. We are having good success with the drill bit in these new plays in West Texas, which I will discuss in a moment.
At the recent Gulf of Mexico lease sale held in March, Mariner was the apparent high bidder on 19 blocks with the net exposure of about $79 million, one of the blocks has been awarded. Collectively in the past two lease sales Mariner has been the high bidder on over a 140 million in new leases most of which are in the Deepwater. If all leases are awarded we will have supplemented our conventional amplitude based inventory and expanded into new positions in the salt overhang, Subsalt and Wilcox plays. We believe that the net unrisk potential of our exploration prospect inventory assuming all leases are awarded exceeds 6 Tcf equivalents. Maps depicting the location of these prospects by play type are available on our website.
We continue to perform field studies on our shelf assets and are very pleased with the results. To-date having reviewed approximately 60% of the assets, we have identified opportunities for 48 exploitation wells and more than a 100 re-completions, collectively with potential of approximately 400 Bcf equivalents. We believe that additional potential will be identified as we complete the field studies over the course of the next year or so.
In our first quarter conference call, I mentioned that we were preparing a package for divesting selected properties on the shelf, that work continues and we are in the process of finalizing the property set and intend to open a data room by the end of the quarter. Although, there is no assurance we will consummate a transaction.
I will now move on to drilling results. In West Texas, we drilled 36 wells in the first quarter with the 100% success rate. We are excited about our current results in a Devonian and Fusselman play, where we now have four wells on line, if the wells continue to perform, we expect to drill another 15 to 20 wells. These wells also have pay in Wolfcamp Detrital and Spraberry Dean. And overtime, we expect to commingle most if not all zones. And although, this may seem on the small side on the surface, we believe that additional down spacing could provide more locations and it is the model that we believe we can repeat in other fields.
Offshore, we drilled five wells during the quarter, with four successes. We have drilled two successes since the end of the quarter and currently have three wells drilling. All of our success is on the shelf are result of the field studies our teams have performed on the assets. We plan to drill a total of 5 to 6 wells in Eugene Island 342, one of which was drilled in ’07 and three of which are now online, 5 to 6 wells at Vermilion 380, two wells at SMI 76 and two wells at West Cam 110. We believe that the success of this program to-date coupled with the potential that we have identified, supports our view that we have considerable running room and upside on our shelf asset base.
We’ve also had success in the Deepwater at VK 821. We encountered approximately 90 feet of pay in six Sands, our pre drilled estimate for this prospect was in the 25 to 50 Bcf equivalents range and it appears that we could recover reserves in the upper end of the range. Although, we expect the initial proved reserve booking to be modest, which is typical for Deepwater projects. Mariner is the operator of the project through completion, Walter Oil & Gas Corporation will operate the subsea tieback operation and subsequent production. We anticipate that the well will be online in the next year or so.
I mentioned on our last call and at the past several conferences, that I would address our Deepwater drilling program on today’s call. We are currently drilling a well at Garden Banks 462, this is a conventional amplitude play at approximately 20,000 feet. The prospect is in the range of 100 to 200 Bcf equivalents, we are operator with the 60% working interest and Apache is our partner with the 40% working interest. With success we could drill additional wells there.
We expect to spot our surge prospect this summer located at Garden Banks 334, this is a salt overhang prospect with the pre-drilled estimate of 100 to 150 Bcf equivalents. We will operate with an expected working interest in the range of 40 to 50%. Surge was acquired at the lease sale last October. We also anticipate a lease maintenance well as well as a re-completion in the King Kong Yosemite field. All in, we hope to drill 6 to 7 deepwater wells in 2008 on 5 deepwater prospects.
We’ve extended the contracts on two deepwater rigs, The Noble Lorris Bouzigard and the Diamond Ocean America. And as you know we entered into these contracts in order to help and assure we can drill our inventory, as well as to expose us to the opportunities controlled by others seeking rigs in a tight deepwater rig market. The strategy has been very successful for us thus far.
On capital expenditures, earlier this year we provided guidance for 2008 operating CapEx. Our stated estimate was 760 million and with success, potentially in excess of 900 million excluding acquisitions and hurricane repairs. When we considered the success that we have experienced to-date along with some new previously non-budgeted projects, our spending could reach a billion dollars. However, because of commodity price increases and strong production, we expect this to be within our cash flow for the year and as you know we strive to live within our means.
I will now turn the call over to John Karnes to highlight financial results.
John Karnes - Senior Vice President, Chief Financial Officer and Treasurer
Thanks Scott. We enjoyed a very good quarter from a financial standpoint as well as operationally. The $72 million of net income we announced last night represents an 89% increase compared to the same period in the prior year. This equates to earnings of $0.82 per fully diluted share, which is up of $0.45 per share from a year ago.
Total revenues for the quarter increased 49% to $316 million also our quarterly record up from $202 million reported in the first quarter of 2007. For the quarter we’ve realized record prices across all products streams, our average realized price for natural gas was 857 per Mcf compared to $8.04 for the same period in 2007. Our average realized price for oil and condensate was 84.16 per barrel up from 57.76 for the first quarter of 2007.
For NGLs our first quarter 2008 realization was 55.65 per barrel compared with $33.04 in 2007. These prices reflect settlements during the period under Mariner’s hedging program. During the first quarter of 2008, Mariner’s natural gas hedges were essentially neutral and our oil hedges were unfavorable about $12 per barrel, combined this resulted in a net hedging loss of $14.2 million comprised of $10.3 million negative cash settlements and an unrealized 3.9 million loss related to ineffectiveness of certain open contracts not eligible for deferral under FAS 133.
By contrast we've reported net recognized hedging gain of $21.5 million at this time last year. Last years gain consisted of $23.6 million in positive cash settlements offset by unrealized $2.1 million loss under FAS 133.
On the expense side our lease operating expense for the first quarter of 2008, was approximately $45 million or $1.43 per Mcf equivalent. This reflects an increase over last year's of $12.8 million, where about $0.17 per Mcf equivalent. The increase is primarily a function of increased property insurance premium particularly Windstorm, which was up $4 million for the quarter, accounting for $0.12 of these $0.17 increase in LOE for the period. Also as I will address later LOE this quarter, includes $0.09 per unit of expanse relating to our Midland and Lafayette offices that were previously classified as G&A in last year's reported earnings.
Also included impacting LOE was the additional West Texas assets that we acquired at year end, which are long lived and typically carry a higher per unit LOE, as well as the commencement of Bass Lite and High Island 46 both of which had started up since the first quarter of 2007.
First quarter capital expenditures as Scott mentioned were 491 million consisting of about 254 million of acquisitions primarily StatoilHydro acquisition and about 237 million of operating capital. Our operating capital was split evenly between exploration and development with about 50% of our exploration expenditures due to the MMS lease sale acquisitions relating to OCS 2005 held in October of 2007, which lease weren’t awarded until the first quarter of 2008. Our development expenditures were allocated roughly 75% offshore and 25% in West Texas.
General and Administrative expense excluding stock comp expense was just over 9 million for the first quarter of 2008 or $0.30 per Mcf equivalent. This compares to a first quarter 2007 G&A of about $11 million or $0.43 per Mcf equivalent. Importantly beginning January 1, 2008 to facilitate comparability with our peers, we began classifying a portion of our Lafayette and Midland offices at LOE as opposed to G&A as we did last year. And we also began capitalizing bonus and stock comp expense to the same extent as we capitalized our wages generally. This had an effect of lowering Q1, 2008 G&A by $2.3 million for the LOE issue and $2.4 million for the stock comp issue. For a total impact the G&A this year of $0.18. So apples-to-apples G&A was $0.30 for this past quarter versus about $0.25 per unit a year ago.
Stock comp expense was $2.6 million or $0.08 per Mcf for the first quarter of this year, this compares to about $1.6 million or $0.06 per Mcf equivalent for the same quarter last year.
Depreciation, depletion and amortization expense increased during the first quarter of 2008 to $119 million, compared with roughly 99 million in the first quarter of 2007, an increase of about $0.08 per Mcf equivalent. This increase is the result of higher cost generally, accretion of our ARO expense and the impact of the StatoilHydro acquisition in January.
Looking at the balance sheet at quarter end, we had 430 million drawn under our revolver against our $750 million borrowing base and 600 million outstanding in senior notes. Debt-to-total capital at quarter end was about 43%.
As you may recall, during January we amended our credit agreement increasing the facility to a billion dollars extending the term through January 2012 and fixing the borrowing base at $750 million. As Scott mentioned, we are in the process of re-determining our borrowing base in the ordinary course of business based on our year end reserves and the addition of StatoilHydro shelf assets. Our lead agent has recommended a $100 million increase in our borrowing base to $850 million and we would hope to finalize the terms of that shortly.
Lastly, we believe we maybe nearing a potential settlement with our commercial carriers with respect to all of our Hurricane and Rita claims in excess of our primary oil layer and we are optimistic that we maybe able to finalize the terms of the settlement during the second quarter. So, overall as Scott mentioned a very stronger quarter with great realization, strong production growth, and good emphasis on cost control.
That concludes our prepared remarks and we will now open up the line for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Scott Hanold for RBC Capital Markets. You may proceed.
Scott Hanold
Thanks. Good morning.
Scott Josey
Good morning.
Scott Hanold
When you look at that CapEx number, obviously it looks like you are going to make a pretty hefty increase and some of them being success based on it and some just you know more activity. Can you kind of give us a little bit more color on how much of the increase could be attributed to how active you have been at the lease sales and that amount into that part of the budget? And then can you give a little bit more detail about, which areas you would actually accelerate you know, relative, would you see some more activity here in West Texas, as well as in the offshore areas.
Scott Josey
Sure Scott. Yeah there is a couple of reasons, two or three reasons as to why we may see that increase. The first thing is that you know we had some of the leases -- we took this into account but some of the leases that we actually bid in October sale didn’t get awarded until 2008. So that was roughly about $40 million. We are actually more successful this past March sales than what we originally estimated. We view both of those as positive.
The second thing is that we have to date pretty much had all successes on the wells that we have drilled and so when we put our budget together we always assumed some type of risk assessment on what the future capital possible be with those successes. And since they are all turning out to be successes, we need to increase the capital. So we basically de-risked it if that makes sense. The program is generally pretty well cast in stone at this point. Earlier in the year we weren’t able to cast it in stone because of rig commitments, finalizing partners on some of our deepwater projects. And now that that seems to be in place, we feel pretty comfortable. So the way we set it up originally was about 760 with success around 900 with lease sales success that adds another 40 to $50 or million there, plus de-risking of projects that is going to add another similar amounts of dollars probably. And so that’s how we get up in to that magnitude of billion. But as I said on the call, we believe this will be within and potentially well within cash flow for the year.
Scott Hanold
Okay. And relative to West Texas, it sounds like you are really encouraged by those I guess four Fusselman wells you drilled, how much more relative activity could you see in West Texas because of that?
Scott Josey
The way we are looking at West Texas as you know, originally we were primarily a Spraberry operator and we have made it a point to expand that area. We increased our team their substantially. We brought in engineers, geologist, geophysicist, explorationist, land personnel and so we are actively growing that area and we are doing it in some other place. So of the 86,000 acres that we have currently, about 57,000 is in the Spraberry, Spraberry Dean and the rest are in these play types, the Wolfberry, Wolfcamp Detrital, Devonian, Fusselman, etcetera. We are just getting started on these new plays and we like what we see so far. We are going to pursue one of the Wolfcamp Detrital ideas probably sometime this summer. So we will have a better feel for this as we go forward. But we do have lots of opportunity in West Texas, but I think we will probably spend in the vicinity of $100 or so million in West Texas as we stand right now. But we do have more opportunities there and we wanted to if we could spend more.
Scott Hanold
Okay. So potentially more acceleration there in '09 as what I am hearing, is that right?
Scott Josey
Yeah, we have a very good Spraberry inventory and then at these opportunities pan out like we are hopeful, then we could be doing even more out there. And in the mean time we were continuing to expand our position as expected, by the end of the year, our acreage count there is going to be even considerably higher.
Scott Hanold
Okay. Are you seeing lot of other operators coming there and pick up acreage and drill on these other [intervals] as well?
Scott Josey
Well, it’s West Texas like everywhere in the oil field these days, its competitive and there are Midland, we haven’t been there in a while is kind of back to a bit of a boomtown. So there is a lot of activity going on in Midland in Permian Basin, so it’s competitive.
Scott Hanold
Okay. And one last question kind of on the same lines, as you talked about capital and in such as -- where do you feel comfortable with debt to cap you know, you are in the sort of 40% range going forward, you may see an improvement because of strong cash hold on a relative basis, but where would you like to be as you kind of look forward for the next year?
Scott Josey
Well, there is a, I think a couple of things to consider there Scott, the first of on an enterprise value the company is sitting around 3.5, 3.6 billion somewhere in that range. And so our total debt of about a billion dollars is roughly a third on an enterprise value basis. I think, the second thing to consider it is roughly one times our cash flow, which is very, very manageable. So, I am not concerned about the debt, but we would like to see it reduced overtime and there is two or three ways that can occur. One, is just through access cash flow, which is possible this year that we use out to reduce debt. Secondly, as we talked about a possible asset sales on some of our shelf assets that may not be core to us going forward. Thirdly, as John mentioned we are in the process of working with our insurance companies on our excess insurance and believe that we are going to reach settlements there and we think that will be material to us which we can also use. And the fourth way is as I put it is just to grow the company and pass the debt. So if we can talk $3.5 billion company and turn into a $4 plus billion company within the debt becomes a smaller and smaller piece of the overall size. So, it's probably some combination of those four approaches.
Scott Hanold
Have you said what that insurance settlement amount was, again?
Scott Josey
We have not, because we are still working on it. But our team was in London couple of weeks ago and we've had good meetings and believe we are going to -- we’ve spent quite bit of money on Hurricane repairs over the last few years and we believe we are now going to start seeing some settlements that would help offset the debt.
Scott Hanold
Good, I appreciate it. Thanks.
Scott Josey
Sure, thanks Scott.
Operator
Your next question comes from the line of Neal Dingmann from Dahlman Rose. You may proceed.
Neal Dingmann
Good morning guys.
Scott Josey
Good morning.
Neal Dingmann
Maybe for John or even Scott, as far as what are you comfortable in the production continues to ramp it looks like and you see the commodity environment what would you do on hedges or what you’re thinking on additional hedges?
Scott Josey
Well I think, Neal we would just continue with our traditional policy as new wells come online, we typically hedge a portion of that production out one to three years using either swaps or collars. And we don’t try to speculate on hedges, but we do try to protect our balance sheet and ensure our cash flows. Some years, those hedges have made money, some years as we are seeing now you know they are out of money. But we are going to expect continue to that policy. This year would currently roughly about 50% hedge, so I don’t probably see any new hedges being added for 2008, but we could begin to layer on some new hedges for '09 to 2010 as provided we are comfortable with the production. With Bass Lite on and Northwest Nansen on, we need to let those wells produce for a while and make sure that we are comfortable with those rates and then we also have a lot of other new production coming on later this year and next year and we’ll look at it at that time.
Neal Dingmann
And does it make sense, I guess from what they cost in your opinion just to do swaps and collars versus just putting a straight coat on?
Scott Josey
We can debate that, there is probably times when all these strategies work under different scenarios and with the puts you have to write the check. And the way we look at our hedging programs, for instance when we were sitting at this stage, at this point a year ago, people thought 2008 or 2009 oil prices would be around $50 a barrel and today it’s around $120 a barrel. So we have to take simply 2 to 3 year view particularly in the deepwater and when we can go layering hedges at $85, $90 a barrel we just think that makes sense. And even though oil is moved more than we expected it to, we still have very good hedges in place and we still have very strong cash flow. We are only about half hedged and really don’t have a whole lot hedge for 2009 and 2010. So if price strength continues, we will be able to take advantage of it.
Neal Dingmann
Okay. And then Scott you could give color on as far as what you thought was your current activity behind Nansen and Bass Lite, you said the only thing more you can add as far as the next few quarters what additional upside you could see from here at this point on?
Scott Josey
Well you know at Bass Lite, we brought that well on sooner than we expected originall,y brought it on in the mid February, early to mid February. And originally we thought we would be on in probably May or so of this year, but we are able to do that and working with the Devils Tower owner and with an early production system they work well with it and enabled us instead of coming on full well stream, we at least were able to bring it on at the partial well stream. Our initial estimates for that well and as you know, Neal you are generally unable to test deepwater well. So you had to rely on a lot of science to make these production estimates. We thought that one well would produce about 60 million a day when in fact they both tested about 75 million a day. Now the next thing it has to happen is for the full well production system to be put in place just some modifications that need to be made at the Devils Tower Spar and we believe that those are in process and will be available to us in the third quarter. So to the extent that it occurs as we currently believe then we will be able to come on in this 120 or so million a day range for the much of the second half of the year. And then later, we anticipate compression being installed at the facility, which should allow us to keep this production rate up for a while. And so as you know, there is a fair amount of probable and possible reserves, if the reservoir continues to perform like it has then this well could be on for a while at a fairly high rate. At the Northwest Nansen it is a little different scenario. We have got four wells, the first well being a gas well at East Breaks 558, which was the originally Lasalle well that we were in and then we drilled three wells at 560. The other three wells have multiple completions in them. And so that production in Anardarko, can probably speak to this better than I can, but we anticipate that production have may be somewhat of a salt tooth pattern on a per-well basis. Although, in the aggregate, hopefully will be fairly smooth. So its going to have some ups and downs these wells are also completed with smart completions, which means that with the click of a mouse we can shift zones pretty easily. So right now, Northwest Nansen is performing at least at if not north of our expectations and we are pretty pleased with it.
Neal Dingmann
Okay. And then last question, Scott how would you describe kind of now as you look at the offshore market, I guess the remainder of this year, does it still look like I guess in your opinion a buyers market or is it down some of the certainly look little more positive in looking more of a sellers market, how would you sort of describe that market?
Scott Josey
What we seen at least from the public market standpoint, we have seen a fair amount of stock price appreciation and some of our peers, which hopefully the market is beginning to appreciate the cash flow that the Gulf of Mexico provides. We also saw a lot of competition at the lease sales particularly in the deepwater, particularly by the large independence, as well as the majors. And so we believe the Gulf particularly deepwater is going to be a competitive area also lot of the international firms are active in the deepwater, I think the shelf it is more and more difficult to buying good opportunities on the shelf and that’s why we feel very good about the asset base that we have. We feel like that our asset base has a lot of running room and we think we are going to be busy on it for several years and years to come. I do suspect there is going to be further consolidation in the Gulf of Mexico shelf. Although, I don’t know who will do it, I mean there are several players, I mean we just saw the stone Bois d'Arc transaction and I suspect it over time there will be some others. And we have already played a role in the consolidation of the shelf through the transaction we forced, as well as the acquisition with StatoilHydro asset. Our criteria is to be able to find assets that we believe were paying a fair price for with good upside and both of those transactions met that. And if we can find others then we will take a look at them, but they are hard and harder to find. And we have looked at just about everything in the shelf to date.
Neal Dingmann
Scott, is it fair to say then that you will be incrementally as active offshore than as you would with West Texas as far as onshore going forward?
Scott Josey
Well, we've made a significant commitment to the Gulf of Mexico and we have made a significant commitment to the Deepwater Gulf of Mexico and we are happy that today I mean we have the balance sheet to be able to expand further in the deepwater and into these new play types the salt overhang, the subsalt, and even potentially into the Wilcox. So, those are as you know capitally intensive areas and so the Gulf is going to be our bread and butter I think a while. But overtime on an opportunistic basis, we will look at other onshore opportunities. We have done very well in West Texas. Our team has done a great job there. And we believe that we could repeat that in some other areas provided we had a footprint on a base of operations. So we will look at selective opportunistic onshore transactions. But I believe for a while, our cash flow and our capital spending is going to be probably continued to be dominated by the Gulf of Mexico.
Neal Dingmann
Alright, thanks guys. Keep up the good work.
Scott Josey
Sure, thanks Neal.
Operator
Your next question comes from the line of Pavel Molchanov from Raymond James. You may proceed.
Pavel Molchanov
Hey good morning guys.
Scott Josey
Hi, Pavel.
Pavel Molchanov
Quick question and you may have mentioned this before, on the three wells you are currently drilling can you give us the pre-drill reserve estimates?
Scott Josey
Yeah, first off the deepwater well that we mentioned at Garden Banks 462 is in the 100 to 200 Bcf equivalents range and we have a 60% working interest. The other two are shelf assets and they are part of kind of 30% to 50% Bcf potential projects in 456 wells. So at Eugene Island 342, we’ve already had success at three wells on, we have got another two to three wells to drill there. Vermilion 380, we have already had success. We have got another several wells to drill there. SMI 76, we have had one success. We have got another well to drill there potentially West Cam 110 we have had success, another well to drill there potentially. So, the shelf projects kind of on an individual basis are probably typically around 8 to 10 Bcf, but we will typically get these platform rigs and try to put three or five wells programs together and collectively those can be 30 to 50 Bcf type of projects. In most of these, we have a 100% working interest with the exception of Eugene Island 342, where I believe we have a 50% interest in some of those.
Pavel Molchanov
Great. Any non-operated wells that you are looking to participate later in the year?
Scott Josey
The well at King Kong that I mentioned, there will be a deepwater well drilled there and ENI is the operator of that and that’s at Green Canyon 517.
Pavel Molchanov
Okay, great. And then lastly, in terms of rig rates in the Gulf, are you starting to see any pickup in pricing, for example, when you extended the two contracts you mentioned?
Scott Josey
Yes, we on the deepwater rig, historically we’ve had I guess we’ve been successful in renewing those contracts ahead of the price increase so generally those have been favorable to us and then we just recently extended the Diamond Ocean America and Lorris Bouzigard rig and we did see price increases on those two rigs and the Ocean America was around $475,000 a day and the Bouzigard is around $270,000 a day. The deepwater rig market has continued to get competitive, but it does seem to have leveled off somewhat, but it has not leveled off completely. The shelf market seems to have -- is experiencing somewhat of a decline and has become more competitive, which is good news for people like us that have a substantial shelf position and we can use that to our advantage.
Pavel Molchanov
Okay, good perfect. Thanks very much.
Scott Josey
Alright. Thanks, Pavel.
Operator
Your next question comes from the line of Richard Tullis from Capital One Southcoast. You may proceed.
Richard Tullis
Hey good morning Scott.
Scott Josey
Good morning.
Richard Tullis
Just to verify as you said your current production is $400 million a day?
Scott Josey
Yes.
Richard Tullis
Okay, good. Just looking forward as we move closer to the hurricane season how do you see your activity say July through September?
Scott Josey
Our activity is fairly steady throughout the year. I mean when we do spud work, I mean -- first half hopefully, if we have success at Garden Banks 462 then we could drill another well or two there which may go through hurricane season. Our surge prospect that I mentioned that’s going to spud in hurricane season and so we are going to be active all year along and we have generally never really modified our drilling program around hurricane season. We already have that exposure by being a Gulf of Mexico operator and the way we deal with it is obviously we watch the storms. If we believe we have people that could be in harms way we mobilize them get them out of the way typically the storms flow through and then you get people back out and they get back to their activities. So some of the rigs have been improved to make them able to weather these storms conditions a bit more, so it is just something that we have to deal with and we do not really work around it.
Richard Tullis
Okay. How many wells do you ultimately see being drilled in ‘08 is it still the 28 overall?
Scott Josey
It is probably going to be around 26 to 30 wells in the Gulf of Mexico with six to seven or so in the deepwater and with substantial interest though in these deepwater wells, as well as pretty high interest on the shelf wells.
Richard Tullis
The Viosca Knoll 821 I know it is rarely but what do you expect that will flow at as you get into ‘09?
Scott Josey
It is really hard to say. We can probably have a better feel for that maybe by our next call. But this was kind of a smaller deepwater type of prospect. The appeal to us was that it’s very close to infrastructure and can be connected pretty quickly. We have had a good relationship with our partner there of Walter Oil and Gas. They have expertise at this and the nice thing about this prospect is a lot of times the prospects come in a little below your expectations and this one actually came in at and upper end of expectation Six Sands and about 90 feet of pay. So, we think it will be a good performer, but I’m not sure we’re ready yet to come up with a rate.
Richard Tullis
Okay. And then last question, what’s the Nansen flow in that right now?
Scott Josey
Northwest Nansen collectively on a gross basis is around 130 or 140 million a day equivalent.
Richard Tullis
Okay, very good. I appreciate it. Thank you.
Scott Josey
Sure, thank you.
Operator
Your next question comes from the line of Joseph Bechman of Howard Weil. You may proceed.
Joseph Bechman
Good morning guys.
Scott Josey
Good morning
Joseph Bechman
Just had a couple of questions, first on the Garden Banks deepwater prospects, Scott did you say that Apache was your partner in that well?
Scott Josey
Yes.
Joseph Bechman
Okay, great. And then the second question is regarding the length of the contract extensions for those two rigs?
Scott Josey
The Ocean America is going to go through about mid 2009 and the Bouzigard contract will go through about mid 2010. And that sort of typical for us where we entered into one to two year extensions on these rigs and we have had these rigs under contract now for I guess the last several years. We have good relationships with both Diamond and Noble, we appreciate doing business with them and hopefully will be able to continue our relationship with them going forward.
Joseph Bechman
Do you guys still share these rigs with another party, part of the year to offset the cost of the day rates?
Scott Josey
Yeah, we do, I mean we have never taken the entire contract as Mariner. We will typically make the arrangements with Diamond and Noble and then bring in partners to pick up various slots on the contract and we want to leave enough room for our inventory. But, we also worked with partners that we may have joint interest in but we do different lay off a portion of the contract to others.
Joseph Bechman
Okay great. That’s all I have. Thanks guys.
Scott Josey
Okay. Thank you.
Operator
Your next question comes from the line of Philip Dodge from Stanford Group. You may proceed.
Philip Dodge
Yes. Good morning, thank you. I will limit it to one. On the five deepwater prospects that you are planning to drill this year the six to seven wells what were the priorities in selecting those five prospects, I am checking here in terms of quality, technical work that have been done, partners wishes those kinds of things?
Scott Josey
It is a variety of things. First of with a deepwater program it is difficult to do a deepwater program on an impromptu basis so you have to try to plan that at least probably 6 to 12 months in the future. So some of the projects that we identified last year and we are anxious to get moving on them we had to work them in to our rigs schedule. At least a couple the prospects were driven by past lease sales successes in October and then we have projects in our existing inventory that we have been lining up for the past two to three years. So, it is a combination of really those factors and you know what we are looking for are opportunities that we believe are you know from risk reward or risk adjusted rate of return is going to be very rewarding to us and as well as trying to make sure that we live within our means so when we saw the amount of cash flow that we will be able to drill this year then that enabled us to you know add or subtract you know some prospects. In this case, we were able to add a couple of things and actually drill more things in 2008 than we drilled in 2007 and as we go forward into 2009 we assuming leases are awarded we should be able to pursue some of these subsalt as well as more of these salt overhang opportunities at that point.
Philip Dodge
Okay. Thanks very much. Hope it goes well.
Scott Josey
Thank you.
Operator
(Operator Instructions). Your next question is a follow up question from the line of Scott Hanold from RBC Capital Markets. You may proceed.
Scott Hanold
Thanks just a question on the production unit, you know Scott as you said its about 400 a day. Approximately how much of that is West Texas. Is that about 10%?
Scott Josey
Yeah approximately, it’s probably just under that, it’s probably about 8%.
Scott Hanold
Okay. And obviously you guys are well on your way hitting your growth target this year and just doing simple flat lining, you’ll get well over that? What are some of the things we need to think about the second-half year in terms of the production rate?
Scott Josey
Yeah, just to reiterate some points I made earlier with deepwater wells like Northwest Nansen and Bass Lite, again we can’t flow test these wells before they come on, so we have to model the production and make estimates. So, both of these projects are producing above what we had initially estimated which is great. The next thing is the implementation of the full production system there at Devils Tower so that we can roughly double the rate at Bass Lite. The compression at Bass Lite is really not effective for us this year but hopefully would be installed by the end of the year I think it will help us in 2009 and we had some success already and so some of those would be on before the end of the year which we view as positive and we typically don’t we put very little current production from exploration into our model so that should be additive. Then on the negative side though we do have to worry about hurricanes Northwest Nansen and Bass Lite are both fairly new wells and although they are performing very well we want to make sure that they continue to perform. And we don’t really have Scott, any issues, well we have to rely on other third parties to get something done at this point. So, I think most of the rest of the years are within our control other then the full well production system at Bass Lite which is not within our control. So, those are the points I would make.
Scott Hanold
Okay. Thank you.
Scott Josey
Okay. Thanks Scott.
Operator
This concludes the question-and-answer portion of the call. I will now like to turn it over to Mr. Patrick Cassidy for closing remarks.
Patrick Cassidy - Director of Investor Relations
As I final note, I would remind you that this conference call will be posted on the company’s website this afternoon and will be available for replay through May 17. Thank you for participating in our call this morning.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.
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