Energy Partners Limited Q1 2008 Earnings Call Transcript

Energy Partners Limited (EPL)

Q1 2008 Earnings Call

May 8, 2008 9:30 am ET

Executives

Richard Bachmann - Chairman and Chief Executive Officer

John Peper - Executive Vice President

Joseph Leary - Chief Financial Officer

T.J. Thom - Investor Relations Officer

Dina Brochi - Controller

Tom Debrock - Senior Vice President of Exploration

Steve Longon - Senior Vice President of Drilling, Engineering and Production

Keith Vincent - Senior Vice President of Land, Senior Vice President of Acquisition

Analysts

Neal Dingmann - Dahlman Rose

David Adams - Jefferies & Company

Steve Berman - Pritchard Capital

Tom Nowak - Merrill Lynch

Ron Mills - Johnson Rice

Kelly Krenger - Banc of America Securities

Chris Galt - Lehman Brothers

Christy Parsons - [Clare and Rhode]

Eric Goldman - G3 Capital Partners

Presentation

Operator

Good morning. My name is Tim, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Energy Partners Q1, 2008 Earnings Release Conference 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). Thank you.

Ms. Thom, you may begin your conference.

T.J. Thom - Investor Relations Officer

Good morning everyone, and welcome to Energy Partners first quarter 2008 earnings conference call. Joining me today from EPL are Rick Bachmann, Chairman and Chief Executive Officer; Joe Leary, our Executive Vice President and Chief Financial Officer, and John Peper, Executive Vice President, General Counsel And Corporate Secretary. Dina Brochi, Controller, Steve Longon, Senior Vice President of Drilling, Engineering and Production, and Keith Vincent, Senior Vice President of Acquisitions and Divestitures are also on the call and will be available to answer question.

We’ll begin today’s call with first quarter 2008 results, as well as a review of some of the operational details, and a preview of our activities in the upcoming quarter. Joe will go into detail on our financial results for the first quarter 2008, and I’ll provide second quarter and full year 2008 guidance. Rick will then wrap up with some closing comments including the overall strategy of the company going forward.

Before we begin, first we need to get the administrative details out of the way with our Safe Harbor statements. This conference call may contain forward-looking information and statements regarding EPL. Any statements included in this conference call that address activities, events or developments that EPL expects, believes, or anticipates will or may occur in the future are forward-looking statements. These include statements regarding reserve and production estimates, oil and natural gas prices, the impact of derivative positions, production expense estimates, cash flow estimates, future financial performance, planned capital expenditures and other matters that are discussed in EPL’s filings with the Securities and Exchange Commission. These statements are based on current expectations and projections about future events and involve known and unknown risks, uncertainties, and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Please refer to EPL’s filings with the SEC, including Form 10-K for the years ended December 31, 2007 and Form 10-Q with the quarter ended March 31, 2008 to be filed for discussion of these risks.

I’ll now turn the call over to Rick for his comments.

Richard Bachmann - Chairman and Chief Executive Officer

Thank you T.J. and good morning. I’d like to begin with a brief discussion of our first quarter results and our outlook for upcoming operational activities, and conclude with a clear vision of our path forward.

Starting with our financial results, net income available common shareholders for the quarter was 2.3 million or $0.07 per share. Revenues were strong at $97.5 million, since the quarter benefited from strong commodity prices including record oil prices. Discretionary cash flow totaled $55.4 million, and cash flow from operations was $62.4 million.

Key to performance in the quarter was a decrease in overall expenses, including our cash costs, components of lease-operating in G&A expenses. LOE for the quarter was $14.2 million which was at the lower end of our guidance range. G&A was $9.4 million well below our guidance range. I am please to report our overall expenses are trending down as forecast, and we are continuing the process to reduce our cash cost to better match our narrowed focus within our core Eastern and Central offshore areas.

Additionally within the quarter, we’ve received proceeds of $15 million for two non-operated western properties, and recorded a gain on that sale of $7.1 million. Our net income was also impacted by $8.3 million in derivative losses of which $3.1 million were pretax non-cash unrealized losses. Joe will go into more detail on the other income statement components, and T.J. will provide guidance for the second quarter and full year.

Production for the first quarter was 15,799 BOEs per day. We achieved our first quarter production goals despite not having production from key wells in the quarter such as the startup of our deep water Raton well. As Noble the operator has most recently indicated, the Raton well is now expected to be online in the second quarter. Based on that delay, we are forecasting that the second quarter production will range between 15,000 to 17,000 BOEs per day for the quarter, and annual guidance will range from 17,000 to 19,000 BOEs per day. In addition to the Raton well, we expect to initiate production in the second quarter from another prior year shelf discovery. The West Cameron 252, #1 well which has also been delayed due to weather in the Gulf of Mexico, we have a 75% working interest in this well. The other shelf discovery the 100% EPL owned South Marsh Island #79 E1 well is awaiting completion and is anticipated to be online in third quarter of this year.

As our recent press releases have indicated, we are seeing good results from our drilled well programs located in our core areas of South Timbalier, Bay Marchand and East Bay. Our exploration drilled work well performance is inline with our historical success rate in the mid 70% success range, with three oil discoveries in the Bay Marchand field. We’ve just recently brought on the CC #3 side track well, which is now producing at a similar rate to the first discovery the CC 14 side track at approximately 1,100 BOEs per day. The CC 15 side track discovery is set to come online shortly. We have 27% working interest in these wells, our development drill well program at 100% success rate to-date is off to a good start in South Timbalier 26, and is turning in better than expected results in East Bay. We own 100% working interest in both of these fields. We currently have one drill well underway at South Tim 26 called the F18 Side Track, this well's exploratory objective is above the main development sand target in the bottom hole section of the well. Following the completion operations of the F18 well, we have one additional developed well the F32 to begin drilling in the second quarter.

Our operations at East Bay are going smoothly. Our previously announced OCS 694 #156 well that logged 120 feet of pay in 7 Sands online in one of the pay intervals at approximately 600 barrels of oil per day. We are currently drilling our first horizontal well in our two well pilot program in the East Bay field, and we are pleased with the results so far. This well the State Lease 10, 11 the #91 Side Track 2 is landed in the objective sand and we are preparing to drill the 500 foot lateral section over the next few days. In keeping with our potential to add additional sands in this field while drilling for primary targets prior to hitting the objective sand, we have already encountered 20 feet of pay in a shallower sand, that we can re-complete to at a future date. Following the drilling of this horizontal well, the rig working on this field will perform one work over, and then drill a development well the State Lease 10, 12 #322 in the second quarter.

Our second plan horizontal well, in this field will likely spud early in the third quarter. With regard to the March lease sale, we have thus far been awarded four of our eight leases on which we were the high bidder. The four awards to-date are all located on the shelf in our core focus area, and include South Timbalier blocks 83, 84 and West Delta Blocks 101 and 102. Our share of the eight high bids totaled 4.3 million, and 1.7 million has been expended to-date on the four leases awarded. It’s important to note that these awarded impendent leases have identified prospects and leads on them. Our pursuit of these leases is demonstrative of our staff’s focus on prospecting regionally in the Central Gulf, from Ship Shoal to South Pass, in an effort to generate new opportunities in our focus area.

I’ll now turn the call over to Joe to give you more details on our finances, and return to conclude with comments on our path forward. Joe?

Joseph Leary - Chief Financial Officer

Thank you. Good morning. The company earned net income of 2.3 million or $0.07 per diluted share for the first quarter of 2008, this compares to net income of 307 million or $0.09 per diluted share for the first of 2007. This earnings reduction was primarily caused by decline in production and a mark-to-market hedging loss partially offset by, 1) reduced operating expenses, 2) materially improved commodity prices, and 3), a pretax gain on the sale of two non-operated Western Area properties of 7.1 million. First call earnings estimate was $0.03 per share.

The first quarter 2008 production average 15,799 barrels of oil equivalents BOEs per day down 39% from 25,982 BOEs per day in the first quarter of 2007, this was due in large part to natural field declines, and the sale of the South Louisiana assets in 2007 representing approximately 3,300 BOEs per day for the first quarter of 2007 production, as well as minimal new production coming online within the quarter. The first quarter production was comprised of 6,432 barrels of oil and 56.2 million cubic feet of natural gas per day. Oil represented 41%, and gas 59%, of total production. The first quarter production was at the low-end of our guidance range of 15,500 to 17,000 BOEs per day.

As mentioned earlier commodity price remains strong for the first quarter of 2008 at $67.76 per Boe up 46% from $46.36 in the first quarter of 2007, for this period oil is $93.24 per barrel 75% over the $53.51 in 2007, and gas was $8.38 per Mcf 18% over $7.09 per Mcf in 2007.

First quarter hedging losses were 8.3 million made up of 5.2 million of realized losses on primarily oil contracts, due to approximately $84 price ceilings on crude collars versus the actual price received of $93.24 and 3.1 million of unrealized loss.

Strong commodity prices in the first quarter of 2008 were able to partially offset production declines resulting in revenue that 97.5 million down 10% from 108.5 million in first quarter 2007.

Cash flow from operating activities in the first quarter of 2008 was 62.4 million compared to 113.8 million the same quarter of 2007. The first quarter of 2007 benefited from higher production volumes and a substantial settlement in the insurance claims related to Hurricane, Katrina, and Rita. Discretionary cash flow, that is cash flow from operations before changes in working capital and before exploration expense was 55.4 million or $1.74 per share in the first quarter of 2008 compared to last year’s 71.2 million or $1.76 per share, the difference is primarily due to the reduced production volumes in the quarter. Discretionary cash flow first call estimate was $1.61 per share.

Now, to expenses for the first quarter. Lease operating expenses LOE for the quarter was 14.2 million, excluding transportation charges down 15% from 16.7 million in the first quarter 2007, this decrease was due to unusual repair costs in 2007 as well as the sale of onshore assets. LOE for the quarter was at the low end of the guidance range of 14 to 16 million.

Exploration expense was 23.2 million for the quarter, slightly higher than the first quarter of 2007. This was made up of dry hole costs of 21.7 million, and seismic and delay rentals expense of 1.5 million. Dry hole expenses was driven primarily by the previously announced dry hole expense of 18.2 million for an exploratory wells in South Timbalier 46. This was above the guidance range of 10 to 20 million in the quarter.

Depreciation, Depletion and Amortization DD&A excluding accretion of our abandonment liability was 28.8 million for the quarter a 40% decrease from 47.9 milliion incurred in the same quarter a year ago. This decrease was primarily due to the sale of our onshore South Louisiana assets and decreased production volumes. On a dollar per Boe basis DD&A for the quarter was $20.04 per Boe above guidance of 17.50 to 19.50 per Boe, primarily due to production mix and higher development costs in the industry.

Generally and Administrative expenses was 9.4 million for the first quarter, 58% below the 22.4 million for last year’s first quarter. This decrease was primarily attributable to 8.8 million of financial and legal advisory fees incurred in the first quarter of last year related to the strategic alternative review as well as decrease personnel costs of 4.5 million in the first quarter of 2008. G&A for the first quarter was below guidance of 12 to 14 million.

Net interest expense was16.6 million for the first quarter compared to the 6.6 million in the same period 2007, this is primarily due to a 50% increase in the company’s debt outstanding at 474.5 million from 315 million at the first quarter of 2007. The increase in debt resulted from the issuance of 450 million Senior Secured Notes offset by the repurchase of 145.5 million of the older Senior Notes both completed in the second quarter last year. Net interest expense for the quarter was within guidance of 11.5 to 12.5 million. Income tax for the first quarter was 1.4 million at a rate of 37% the majority of which was deferred.

Turning to the balance sheet, at quarter-end, we had current assets of 60.2 million current liabilities of 138 million and negative working capital of 77.8 million. At the quarter-end, we had 13.8 million in cash, 20 million drawn on our bank facility, 4.5 million remaining on our old Senior Notes, and 450 million of Senior Unsecured debts. We have recently completed our semiannual borrowing based re-determination. And as we projected in our last conference call, the borrowing base has been confirmed at 150 million down from 200 million. Currently, we have 25 million drawn on this facility. The company had 106 million of shareholder equity at the end of the first quarter. Thank you, T.J.

T.J. Thom - Investor Relations Officer

Thanks Joe. I’ll be taking you through our second quarter and full-year guidance, starting with production volume based primarily on the delay in production for Mississippi Canyon 248 Raton well. For full year 2008, as Rick mentioned earlier, we expect to average 17,000 to 19,000 Boe per day. And for the second quarter, we expect to average between 15,000 to 17,000 Boe per day with the percentage of oil in both cases falling between 30 and 40%.

In addition to Raton, we could also see production initiated in the second quarter from ongoing drill well program in South Timbalier 26 area and East Bay. Additionally, we anticipate the start of production soon on a prior year discovery at West Cameron 232 which has thus far been delayed due to weather. Production from the prior discovery at South Marsh Island 79 is awaiting completion, and has been delayed until third quarter. In regard to pricing, going forward we expect our price realizations to continue to be on-par with Henry Hub for natural gas, and $1.50 per barrel lower than WTI for oil.

Now turning to expenses. For LOE, we expect our absolute LOE in the second quarter to be inline with the first quarter at a range from 14 to $16 million. For the full year, we are unchanged from prior guidance of $59 million to $69 million. For G&A expenses, we expect this line item to range between 10 to 12 million for the second quarter, and we are lowering our annual guidance range to between 40 and $45 million for the full year. Taxes other than on earnings should be within 2 t o3% of our revenues for second quarter and full year 2008. For exploration expenses, we expect these costs to range between 5 and $10 million for the second quarter. For full year 2008, we now expect exploration expense in a range of 30 to $40 million.

Turning to DD&A. The guidance for our DD&A rate for the second quarter is $23 to $26 per Boe. For full year, we expect the DD&A rate to be in the range of $22 to $26 per Boe. For interest expense, we would expect for the second quarter to continue to range between 11.5 to $12.5 million and for full year to range between 43 and $47 million.

Finally, for income tax rate, we should range between 34 and 37% for the second quarter and full year 2008. As a reminder, we will post this second quarter guidance and full year 2008 guidance we gave you on this call through our website later today.

With that, I’ll turn the call back over to Rick for few more comments, and we’ll be happy to answer any questions you may have in a moment.

Richard Bachmann - Chairman and Chief Executive Officer

Thank you T.J. and Joe. We hope that this call has been instructional in regard to our 2008 performance to-date. We are excited about the programs we have underway and are focused on execution of our operational and financial plans. The first phase of our efforts with Rose & Associates, a leading risk assessment consulting firm that we hired to work with our technical staff has been completed, and we are now taking a detailed look at our current exploratory inventory and deciding how best to execute upon it. We will give you a more detailed information review on this during the second half on the next conference call. We are encouraged by the success we have thus far in 2008. We’ll continue to monitor that success this quarter to guide us in our plans for the balance of 2008. Meanwhile, we have more clearly defined our strategy going forward. We will divide our efforts as equally as possible, both in terms of technical staff emphasis in capital spending into three categories, exploration, exploitation, and acquisitions.

For exploration, we’ll limit our dry hole exposure to a maximum of $10 million per well. Based on the current cost environment in deeper drill depths of the prospects we pursue on the shelf and in the deep water, this will reduce our working interest in most future prospects going forward to meet this investment guideline. This will foster more partner relationships and validations of the prospects and lead to a more diversified program and increase the number of prospects we will participate in each year.

For exploitation, in keeping with our 2008 allocations of capital, we will continue to allocate the majority of exploitation capital to core field areas in South Timbalier and East Bay, to optimize their depletion. This effort is focused on stabilizing total company production. We believe that our ongoing effort to increase the number of exploitation geologists and engineers working on our opportunity rich East Bay field could help greatly in that effort.

Last but not least, our acquisition strategy is intended to provide a steady source of reserve and production growth each year. Our preference is for targeted asset acquisitions in the Central Gulf of Mexico from Ship Shoal to South Pass.

We now have a fulltime dedicated acquisition team in place, led by Keith Vincent our Senior Vice President of A&D actively working to find and secure transactions. We’ve also made some changes to our Board of Directors to include three new Directors to Jim Latimer, Bryant Patton and Steve Pully who were recommended by Carlson Capital. The addition of these board members is consistent with our commitment to good corporate governance and building shareholder value. With its substantial investment in Energy Partners, we believe Carlson Capital has demonstrated confidence in the company and its prospects for future successes. We look forward to working closely with closely with the three new directors as we implement our strategic plan, and are grateful for the services and many contributions to EPL, of our three directors who are not standing for reelection. John Phillips, Will Herrin and Philip Goad will not be standing for re-election. Their 20 years of combined board service are greatly appreciated. Mr. Phillips has been named Director Emeritus to begin upon the completion of his current term. We thank you for your support and patience, as we work to regain your confidence in our ability to grow shareholder value.

With that, we will open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions). And our first question will come from the line of Neal Dingmann with Dahlman Rose.

Neal Dingmann

Good morning guys.

Richard Bachmann

Good morning Neal.

T.J. Thom

Good morning.

Neal Dingmann

So, Rick on the plan, it looks like you’ve laid out a pretty good plan, as far as some of the wells that you’ve anticipated for the remainder of the year. Where do you sit, as far as sort of rigs scheduled for those, and then some additional wells that you’re looking at? I guess just what are you seeing in the rig market, in general, are there any issues as far as getting more rigs?

Richard Bachmann

Let me turn that to Steve Longon to give you operational update.

Steve Longon

Yeah, Neal we’ve -- yeah, the rig market is kind of tightening up in certain classes. However, we have a rig under contract right now that’s actually working in the South Tim area, and it’s a 300-foot class rig. So it can drill pretty much everything that we’re looking at in the future, and it’s -- we have like a well-by-well deal going with that rig. So currently, we control the rig.

Neal Dingmann

And you’ve got the rig in East Bay?

Steve Longon

Yeah, we have a rig in East Bay that was also -- or shallower -- It’s a shallower water rig, but for anything in shallower water, we’re controlling that rig that too.

Neal Dingmann

Okay. And then, Rick you mentioned, the strategy as far as exploration, exploitation and the acquisition market, what -- first of all what does the acquisition market look like these days, obviously there’s been a few public deals, a couple of private deals. What do you think remainder of this year, forward to next year, what it looks like?

Richard Bachmann

Yeah, I think it’s important to distinguish our acquisition effort in a sense that, we are basically talking with a number of companies who own the leases in the Gulf, these are principally opportunities that are not in the divestiture market, but our opportunities that properties we know very well, and we will be pursuing that. So, I think there is a reasonably active, publicly disclosed market that’s not necessarily the direction we are headed.

Neal Dingmann

Okay, okay. Then lastly, it looks like on costs, at least what T.J. was saying you sort of anticipate those coming down, is that just anticipation of less workovers, or you just -- you know what is involved in there in orders to mitigate some of those costs for the remainder of the year?

Richard Bachmann

It’s kind of A to Z, we have a very active program to cut costs. I think we’ve articulated earlier in the year that, we were looking to cut out $20 million of cash costs combination of LOE and G&A, we’re aggressively attacking that, those costs reductions are going to be coming in throughout the year particularly in the LOE range, but some of it is a result of work we are doing, some of it’s result of cost cutting, but it’s a pretty comprehensive program.

Neal Dingmann

Okay, guys. I’ll come back later. Thanks.

Richard Bachmann

Thank you.

Operator

Your next question will come from the line of David Adams with Jefferies & Company.

David Adams

Question is, when you talk about your exploration portfolio going forward, you’re going to take a lower working interest, can you kind of give us a sense of -- are the prospects that you are going to target more medium risk -- medium reserve potential or you going to adjust your profile to more lower-risk, lower reserve potential prospects, and is there a lot availability out there, I mean in terms of finding partners?

Richard Bachmann

In terms of the portfolio going forward, we have historically been a moderate risk player, we talk about amplitude AVO anomalies as risk reducers, that such still it’s very much the strategy going forward. The opportunities we have -- we’ve got some that are moderate, we’ve continue to look at high potential there will be deep water well or two in that. A $10 million dry hole cap is really an attempt to address any one well being too much of potential exposure on any one quarter. So, to me what this means is, you will see more wells as we take a smaller working interest, but I don’t see those working interest be much below a third to a quarter, its just -- in some of these areas when you are drilling at 18, 20,000 feet it’s hard to see well costs being below $20 million, so that pretty much forces you to get partners. Historically, we were successful in getting partners, don’t see that to be a problem, I think the nice thing about getting partners is this -- aspect of getting another party to validate what your geologists are saying. So, this serves as another check to the management team.

David Adams

Okay. And I believe you guys initiated a microbial EOR program or test. Can you give us an update on what’s going on there?

Richard Bachmann

The bugs are still in the wellbore. Let me let Steve to deal with that one, because it’s really a work in progress.

Steve Longon

Yeah, they’ve -- we’ve pumped all the jobs, and we’ve been bringing the wells back on, and we are monitoring -- phase of monitoring it right now. We’re kind of in the window of when we’ve still got maybe a month or two left to see if there’s going to be a response or not, but where the oil is coming up, we’re are still waiting on the full results, that it will be a couple of months before we’ll be done.

David Adams

Okay. Thank you.

Operator

Your next question will come from the line of Steve Berman with Pritchard Capital.

Steve Berman

Good morning.

T.J. Thom

Good morning.

Steve Berman

T.J. do you have a success rate for Q1, I’m not sure how meaningful it is, but just to have a number?

T.J. Thom

Sure, on the exploration side we are running 75% success three out of four wells, and on the development side we are running 100%.

Steve Berman

Okay. And kind of flipping Neal’s earlier question around that and looking at divestitures, Richard do you still have anything you are actively marketing right now to look to raising some capital?

Richard Bachmann

That’s something that’s constantly under review. Keith certainly has some properties. It’s the matter of looking at the benefit of the sale versus continuing to produce them. But we do not have any active packages out there. There may be something coming in the next quarter or two.

Steve Berman

And next question I guess may be for Joe. Most ENPs were reporting of adjusted EPS, and so I guess the question is if you back out the derivative stuff and then the gain on sale, could you say what your call it adjusted EPS would have been relative to the $0.07, looks like it would have been higher?

Joseph Leary

We are calculating that now, don’t have it right now, but --

T.J. Thom

Because we have to do that after-tax effects. We may have to get back to you on that one.

Joseph Leary

Yeah. Let us get back to you on that.

Steve Berman

Okay. I’ll turn it back to you. Thanks.

Richard Bachmann

Thank you.

Operator

Your next question will come from the line of Tom Nowak with Merrill Lynch.

Tom Nowak

Hi, good morning.

Richard Bachmann

Good morning.

Tom Nowak

Sorry if I miss this, but regarding the three exploration wells, what do you expect in terms of when they come online, and net volumes to you, and what kind of reserve potential are you looking at?

T.J. Thom

Were those the Bay Marchand wells you were referring to?

Tom Nowak

Yes, yes.

T.J. Thom

Yes. Those are actually -- one, now we’ve got of them online, and we are buttoning up a third one. So, impact has been really primarily in the second quarter, but first well did come on at the last week of March. But again, we are looking at similar rates anywhere from 500 to 1100 BOEs per day, just keep in the mind that those first two wells of course exceeded expectation, and are sitting at1,100 barrels of oil a day. So we’ll see how this last well turns out.

Richard Bachmann

On those wells, I think we indicated we are 27%. --

T.J. Thom

27% working interest.

Richard Bachmann

Working interest.

Tom Nowak

And what are your deep water plans for this year?

Richard Bachmann

Very much in a state of waiting to see what our lead operator, he is going to do. There may be some activity on Raton South. There may be activity on one of the leases that we bought with Davis Oil that is being marketed as we speak. But if there is activity, I would expect it would be later in the year.

Tom Nowak

Okay. And in terms of bringing partners in and is that a process that’s been started already so have you brought anyone else into your working interest or is that something TBD?

Richard Bachmann

On a number of the opportunities we are talking about, strong interest has already been expressed by industry partners.

Tom Nowak

Okay, great. Thank you.

Richard Bachmann

Thank you.

T.J. Thom

Thank you.

Operator

Your next question will come from the line of Ron Mills with Johnson Rice. Mr. Mills, your line is opened.

Richard Bachmann

Hi, Ron.

Ronald Mills

From a G&A standpoint, a question on the guidance or coming in below guidance, is that a function of some of the staff reductions that may be getting completed sooner than expected or what’s that related to, and then T.J. on the guidance how much of that G&A guidance are you expecting to have in the non-cash comp I know it was about 1.5 million in the first quarter was just looking for that guidance?

T.J. Thom

It’s 2.1 million of non-cash stock compensation per quarter.

Richard Bachmann

In terms of the G&A some of that is headcount. Some of it comes from insurance costs. Some of it just -- we’re again going through, line-by-line in the company, and driving out costs. We’re subletting some of our office space, will be subletting some of our office space. Again, you’re going to see G&A coming down throughout the year.

Ronald Mills

Okay. Is there -- in terms of your ‘08 drilling program you pretty well laid it out. Are you still expected to spend about $200 million this year and to the extent you have excess cash flow generation where is the plan still to pay down some debt?

Richard Bachmann

The plan is clearly to pay back at least $35 million worth of debt, in terms of capital expenditure a lot is going to depend on these deep water wells as to whether they get teed-up. But any available cash above and beyond that is going to be used for an acquisition.

Ronald Mills

And is the budget still set at 200 million?

Richard Bachmann

Yes it is.

Ronald Mills

Do you have that breakdown between development/exploitation and exploration?

T.J. Thom

We’ll probably have to fill in here to about 50/50, again keeping in mind that we are going quarter-to-quarter. And we will give you more detail as we get to the second quarter conference call, to let you know if any changes have occurred.

Ronald Mills

All right. Thank you guys.

Richard Bachmann

Thank you.

Operator

Your next question will come from the line of Kelly Krenger of Banc of America Securities.

Kelly Krenger

Good morning, just a follow up on the CapEx question, what’s the budget for the second quarter?

T.J. Thom

Yeah, roughly 75 plus or minus million.

Kelly Krenger

Okay.

T.J. Thom

Little bit of above the first quarter.

Kelly Krenger

Okay. And then, in terms of Rick the $35 million of debt that you noted you wanted to pay down. Is that from the beginning of the year is that basically just pay off the revolver, is that kind of the goal or the plan?

Richard Bachmann

That’s correct. It’s right.

Kelly Krenger

Okay. And in terms of the acquisition presumably, given where prices are you will have some cash flow above that I guess it is 235 which would cover CapEx plus the debt pay down. What should we look for in terms of either size or funding those, would you primarily look to fund out of either excess cash flow or asset sales or how should -- what should we except on that front?

Richard Bachmann

Yes. I would say that size wise, probably something between $50 and $100 million again properties we are not looking at companies, these are properties in the Gulf of Mexico. It will be a producing property; it will have proved reserves on it. It will meet a typical Gulf of Mexico profile. And in that regard so, we think we can finance about 50% of that acquisition based on its own merits. And the other 50% will come off its cash flow from the company.

Kelly Krenger

Okay. And in terms of the financing health of it, would the intent be to -- as I said used the incremental cash flow?

Richard Bachmann

Correct.

Kelly Krenger

To pay that down or asset sale proceeds to pay that down?

Richard Bachmann

I mean, we’ve already got some asset sale proceeds in hand, there may be some more but I would look more to excess cash flow.

Kelly Krenger

Okay. Then on the hedging any new hedges put in place since the end of the year, or any intent to modify the hedging?

Joseph Leary

Now new hedges put in place, we are approximately 30% hedged and we look at it all the time, of course if we decided to do something, it probably would be in the range of puts or 3-way puts, but we haven’t any on since the first of the year.

Kelly Krenger

Okay. And what’s your view on prices now are on hedging or that sort of thing?

Richard Bachmann

Yeah, Kelly, we said at the last conference call that, we have clearly shifted our go-forward strategy in terms of hedging. More toward what Joe’s just mentioned or they buying floors, buying puts or a 3-way synthetic that would have a very minor non-participation range. But we would not in any way to limit the cap of what we are doing.

Kelly Krenger

Is there any -- yes, what’s your view on putting more hedges in place to more I guess in this case floors in place or that sort of thing, then I guess it comes down to your view on commodity prices, is it something that you at these levels that you -- we should expect to see or you are happy with the 30% that you got hedge rate now?

Richard Bachmann

Yeah, right now we are happy with the 30%, but we look at it all the time, if the -- if $90 oil holds and $9 gas holds for this year we’ll be to execute the plan we talked about including some revolving debt reductions as well as having hopefully some free cash to support either accelerate drilling or an acquisition. So, right now, we are happy where we are, but we will look at it all the time.

Kelly Krenger

Okay. Thank you.

T.J. Thom

Thanks Kelly.

Operator

Your next question will come from the line of Chris Galt with Lehman Brothers.

Chris Galt

Hey, guys. I think most of my questions have been answered, but in regards to asset sale program, last quarter it sounds like you all were more interested in kind of divesting of some small packages, and this quarter it doesn’t sound as likely. Is that just due to the strip pricing you just don’t feel like its necessary or is there something else changed?

Richard Bachmann

No, I think we constantly look at where we have positioned the company strategically, and if someone feels that an asset we have is more valuable than we do it’s for sale, and that’s what happened this last quarter, that’s what happened when we got $5.40 an M for the onshore South Louisiana package. But, we aren’t -- we do not have an active ongoing divesture program. If we do divestures it’s going to be more targeted and we will certainly advise the street if we get to that point.

Chris Galt

Okay. And one last question, on that Raton well, have you all given any kind of guidance what gross production or net production may be, what we can may be expect?

T.J. Thom

Yeah, we’ve both ourselves and the operator have been talking somewhere between 30 million a day upwards of 40 million a day for the well, keeping in mind that there will be a ramp-up period as we start production out there hopefully in the second quarter.

Joseph Leary

We’re a third of that.

Chris Galt

Okay. That’s it for me. Thanks.

Richard Bachmann

Thank you.

Operator

Your next question will come from the line of Christy Parsons with [Clare and Rhode].

Christy Parsons

Hi, thank you. I just wanted to clarify something, when you were talking about the acquisitions and the financing, you are talking all debt financing for these or do you contemplate ever issuing equity in an acquisition?

Joseph Leary

No, I think that what we said is we would take 50% out of our cash flow. So, if a property cost 50 million we’d except to take 25 million out of cash flow and then finance the other 25% on the asset we’re acquiring. So it’s actually delivering the company in the sense that what you are putting on is 50% leverage versus where the company is, currently. There no current plan contemplated to issue equity at these very low levels.

Christy Parsons

Okay. Thank you.

Joseph Leary

Thank you.

Operator

(Operator Instructions). Your next question will come from the line of Eric Goldman with G3 Capital Partners.

Eric Goldman

Good morning, I think most questions were answered. I just wanted to clarify the 30% hedged -- production hedged, are you talking about ‘08 or ‘09 or both I wasn’t clear on that?

Richard Bachmann

Yes. Well, the answer is second half of ‘08 and all of ‘09.

Eric Goldman

Okay. And in terms of you hoping --

Richard Bachmann

I am sorry, the first half -- the second half of ‘08 and the first half of ’09.

Eric Goldman

Okay. So, on -- for the entire year of ‘09 what would you -- where would you be?

Richard Bachmann

Yeah. 23%.

Eric Goldman

Okay. And in terms of your hoping that $9 gas and $90 oil holds for this year, I mean are you basically feeling that we are in an $8 to $10 gas range or do you feel that -- because you are getting probably a lot more than $9 now, I mean excluding any hedges you are getting I am sure what $11 now, or somewhere around there. I mean the question, what is your feeling, do you feel that we are going to get into a $10 plus $12 plus range for gas for the year or do you feel we are going to be in the 9 -- $8 to $10 range?

Joseph Leary

Well, we can’t foresee. We are just reacting to what we are getting, and the forward curve for this year, we’re being I guess a little aggressive on the $90 or 9, but we’re comfortable looking forward at least this year on those numbers.

Eric Goldman

Well, what are you getting right now? You’re getting plus 11 aren’t you?

Joseph Leary

In the first quarter, we got $8 and some cents for gas.

Richard Bachmann

I think from a planning standpoint, we continue to maintain a relatively conservative price deck of $70 oil and $7.50 natural gas, if you want our personal views in terms of commodity prices, I think they’d probably vary as we go around the table. But I think with the onset of all these unconventional natural gas plays and the embedded expenses in that, I think most people would suggest that we probably have about a 7.50 floor in terms of breakeven costs on a lot of the onshore production in the United States. In terms of oil, that to me, is such a macro political or geopolitical situation that it’s going to be driven by political events. It’s going to be driven by world supply and demand. So I am not a raging bull, but I also don’t think we’re going to get back to levels much below 80.

Eric Goldman

Right and you’ve seen, of course, that winter UK gas is already plus $16. So that was an interesting indication of where gas prices have come. England led last year. So just an indication, obviously it’s affecting dramatically the limited LNG that’s coming in. So if we look at winter right now, or fall for UK gas it might give us some indication of where we might be. But hopefully we’ll be there, and certainly it would great for your modeling? Thank you.

Richard Bachmann

Thank you.

Joseph Leary

To go back to the earlier question if we -- on the earnings per share, if we are reporting $0.07, if we backed out the hedging loss and backed out the gain on asset sales, it would be $0.11 a share, approximately $0.11 a share.

T.J. Thom

And that was from Steve Berman with Pritchard from a couple folks ago.

Operator

And at this time, there are no further questions.

Richard Bachmann

We thank everybody for joining us. We’re very encouraged and I hope we’ve been able to pass onto you about the drilling wells we’ve drilled, to date. East Bay is clearly better than expected, South Tim is right on target. I think the strategy is working. We appreciate your patience. I think from a volumetric standpoint, everything that we control, we exceeded our performance expectation. It was really the non-operated wells basically, deep water that put us back in terms of our volumetric range. Weather seems to be giving us a little bit of break in the Gulf of Mexico to laying some pipe, it should progress as we move into the second quarter and 252 should be coming on in the next couple of weeks. Thank you for your participation, and look forward to the second quarter review. Thank you.

Operator

This will conclude today’s conference call. You may now disconnect. And have a good day.

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