Edge Petroleum Corp. Q1 2008 Earnings Call Transcript

Edge Petroleum Corp. (EPEX)

Q1 2008 Earnings Call

May 14, 2008 2:00 pm ET

Executives

Michael Long - EVP and CFO

John Elias - Chairman, President and CEO

John Tugwell - COO

Analysts

Ron Mills - Johnson Rice

Andre Mansoor - Mansoor Asset Management

Paul Halpern - Guardian Energy Management

Wayne Andrews - Raymond James

Bob Bruce - Bruce & Company

Brett Reiss - Janney Montgomery Scott

Charlie Cheever - Corsair Partners

Presentation

Operator

Good day everyone and welcome to this Edge Petroleum first quarter 2008 Earnings Call. As a reminder, today's conference is being recorded and to get it started, I'm pleased to turn the floor over to Edge's Executive Vice President and CFO, Mr. Michael Long. Please go ahead sir.

Michael Long

Thank you, Jim. Good afternoon, everybody, and welcome to Edge's first quarter 2008 earnings conference call. The call will cover our first quarter financial and operating activities.

With me today as participants in the call are John Elias, our Chairman, President and CEO and John Tugwell, our Chief Operating Officer.

Before we begin our review I need to remind everyone that we will be making forward-looking statements today. Statements regarding any evaluation, review, assessment or process, any transaction, including the timing or effects thereof, shareholder value, change of or continuation of the current business plans, cash flow, financial condition, forecasted production derivatives and effects thereof, reserves, estimated volumes as well as any other statements that are not historical facts are forward-looking statements that involve certain risks, uncertainties and assumptions, many of which are beyond Edge's control to estimate and are subject to material changes.

Such risks, uncertainties and assumptions include but are not limited to results of the Board's evaluation process, any process or transaction, market conditions, availability of financing, Board and stockholder approvals, actions by third parties, Edge's financial and operational results, the availability or terms of any alternative or transaction, uncertainties, costs, and delays relating to transactions, prices for oil and gas, including natural gas liquids, drilling and operating risks, generally the risks related to exploration and development and uncertainties about estimates of reserves and other factors that are detailed in the Risk Factors and other sections of Edge's most recent Form 10-K, Form 10-Q and other filings with the SEC.

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. The specific terms resource, potential, or 3P reserves is not meant to be the equivalent of the SEC definition proved reserves.

In addition, I would like to remind everybody that due to the continuing nature of our ongoing strategic alternative assessment process, we will not be able to entertain any questions concerning that process, including any reference to the status, timing, or expectations surrounding it.

I'll be brief in my financial review comments and refer you to the detailed information in our press release and in our 10-Q which was filled Monday afternoon.

Our oil and natural gas sales prior to any derivative activities were $47 million for the quarter. This compares to $39 million a year ago and $46 million in the immediately proceeding quarter.

Production for the immediately proceeding quarter was about 5.8 Bcf equivalent or 63 million cubic feet equivalent per day, as compared to 5.4 Bcf equivalent or 60 million cubic feet equivalent per day for the first quarter.

First quarter financial results were negatively impacted by our outstanding derivatives contracts. We recorded a non-cash net unrealized pre-tax derivative loss of $25.4 million. In addition, we had about $4 million of cash settlement door after door on those derivatives.

We stop for a minute to provide a little more detail regarding our derivative position and some of the second quarter impacts that we are estimating may occur. As you're well aware both oil and gas prices have continued to strengthen steadily through the first part of this year.

In April, our cash settlements were an outflow of about $2.8 million and our best estimate for May as of this time is a range of $4.5 million to $5 million. Our unrealized derivative loss for the month of April was $12.7 million. The April 30, 2008 balance sheet would reflect a current liability of about $45 million and the long-term liability of about $6 million related to those derivatives.

As you probably recall, our derivative level drops off dramatically in January 2009.

Oil and gas operating expenses totaled about $4.5 million for the quarter and we currently expect that cost level to be flat to modestly lower in the second quarter as we benefit from the disposition over the full quarter of certain assets sold during the first quarter which were relatively higher cost properties to operate.

Our severance and ad valorem taxes were unusually low in the first quarter particularly on the ad valorem side, as we reduced our ad valorem tax accrual to reflect a change in estimates for those taxes on properties acquired during the first quarter of 2007. That change reduced our ad valorem expense by about $400,000 in the quarter.

We are still finalizing that accrual adjustment as the final tax bills come in for the 2007 year over the next month to 60 days and we expect we may see another downward accrual adjustment in the second quarter of about the same level in the first.

Depletion expense increased to about $5 per Mcf equivalent. This increase was primarily due to the very low cost basis in the properties that we sold during the quarter. Pro forma net income excluding the after-tax impact of the non-cash unrealized derivative loss was a negative $1.8 million and reported net income was a loss of $18 million for the quarter. Obviously, the derivatives had a substantial impact.

On a comparative basis, however, the increase in our depletion rate was also a major contributing factor to that net loss for the quarter. In early May, our borrowing base was reset at $250 million and our current level of usage is 245.

We expect to further reduce our usage as we move through this quarter. Our plan is to work with our banks to re-determine the borrowing base again in late June, as we continue through this strategic assessment process and the execution of the interim capital program that we're currently operating in.

With that brief financial review, I would like to turn the call over to John Tugwell for operations review.

John Tugwell

Thank you, Mike. This afternoon, I'll discuss production and I'll give an update on our second quarter activity and ongoing operations. We are currently running slightly ahead of our internal projection for second quarter production of about 4.5 Bcf equivalents and estimate the second quarter production will be in the range of 4.5 to 4.8 Bcf equivalents, after the divestment of certain non-strategic assets during the first quarter of the year.

For comparison purposes, first quarter production would have been approximately 5 Bcf equivalents or about 55 million cubic feet equivalents per day after normalizing for the divested properties that Mike mentioned and some out-of-period accrual adjustments. These two items account for about four-tenths of a Bcf equivalent of the 5.4 Bcf equivalents first quarter reported production.

Estimated production today in the second quarter is running in the range of 52 to 53 million cubic feet equivalents per day, slightly below the normalized first quarter rate of 55 million cubic feet equivalents per day.

During the first quarter, we logged eight wells and had logged three additional wells to-date during the second quarter. All 11 of these wells are apparent successors for a 100% success rate. Three of these wells were proven undeveloped location and eight will add new reserves.

Expectations are to drill another two to three wells during the balance of the second quarter for a total of 13 to 14 wells during the first half of the year. Three of the 11 wells built to-date were in Southeast New Mexico and the remaining eight wells were in South Texas, primarily in the Flores-Bloomberg complex where we have logged seven successful wells and have one rig currently operating.

Our most recent completion in the field, the Slick State B #15 well came online late in April and is currently producing at a gross rate of about 3.5 million cubic feet equivalents per day. We have a 100% working interest in this well.

Our Slick State B #17 well, which we have a 50% working interest in and have just recently logged, found an estimated 69 net feet of apparent pay in three Vicksburg sands. We are currently completing this well where we plan to complete two of the three zones and then commingle them. The first of these two zones has been completed and tested at a rate of about 1.8 million cubic feet equivalents per day and we are preparing to complete the second sand, which looks very good on the logs and makes up over 70% of the total apparent pay logged in the well.

The success of these recent wells has proven up additional locations on the Slick lease where we have also identified potential in the Yeso section beneath the proven Vicksburg phase.

Current plans are to test this deep section with a 14,500 foot well sometime in the third or fourth quarter of the year. We also have an active ongoing recompletion program in the Flores-Bloomberg field where we have a significant number of quality behind-pipe recompletion opportunities in existing wells. This recompletion work typically has a low risk profile and generates a high rate of return.

Also in South Texas, we've signed an agreement with an industry partner to acquire new 3D seismic data over an approximate 140 square mile area. The majority of this area has not been imaged with 3D Seismic and is prospective in multiple horizons from 2,000 to 17,000 feet.

Current plans are for this to be a 2008 pre-acquisition with drilling activity projected for the latter half of 2009. We plan to participate for a 50% interest and operate the acquisition phase as achieved.

We will recoup 50% of our subcost of approximately $2 million in this project and will be carried on a third for quarter basis to casing point on the first well drilled in the project. In Southeast New Mexico, we finished the completion work on our Prairie Fire well where we have 50.8% working interest.

Our completion of this well was in the Morrow section and the well is currently flowing at a rate of about 7 million cubic feet equivalents per day. We are very pleased with the performance of this well which also has a behind-pipe zone up the hole in the Wolfcamp section which will provide for a recompletion opportunity in the future.

Current plans are to install the compressor on this well which is designed to maintain production at the 7 million to 8 million cubic feet equivalents per day level. We are currently waiting for permits to proceed with this work which should be completed 30 to 60 days out.

We spud an offset development location to this well in April to Prairie Fire #2, which is currently drilling below 11,000 feet and has a planned total depth of about 13,600 feet. Our working interest in this well is approximately 38.2% and could be as high as 39.6%, pending the participation election of one remaining working interest on it.

We have recently drilled one additional well in Southeast New Mexico the Federal #4 well which we have an 18.75% working interest in. This well logged apparent pay in the San Andres, Premier, Grayburg, Queen, and Yates, Seven Rivers, the shallow primarily all bearing Sans in the red like area of Southeast New Mexico.

In Mississippi, we are near in completion of our reprocessing work on 72 square mile data set over the Midway Dome field using third-party processors who specialized in processing 3D seismic data around salt dome. The goal of this effort is to improve our image of the salt dome interface. We were encouraged with the preliminary results of the reprocessing efforts and have a number of both shallow and deep lead and prospects at Midway Dome which we plan to refine with this enhanced data set.

Pending success at Midway, this reprocessing effort would be extended to other 3D data sets in the basin. Our technical staff is continuing to work to identify new opportunities in many of our core operating areas and we are securing leases where required to add these opportunities to our inventory and bring them to grow very fast.

These new opportunities are coming in large part from areas where we acquired new 3D seismic data in 2007 and from 3D seismic reprocessing efforts on these and other shoots we have in our data library.

On the cost side of the ledger, rig rates after stabilizing for short time are beginning to increase again, with the strengthen in commodity prices. Tubular prices have also been rising and lead times for delivery of certain tubular goods are increasing. The other oil field service costs are also trending up along with rig rates.

With that summary, I'll now turn the call over to Mr. John Elias.

John Elias

Thank you, John. Good afternoon. The Edge board and management continue to believe that the best way to recapture lost shareholder value is through a merger or sale of the company. Consequently, the Board and management along with our advisor, Merrill Lynch & Company, have and will continue to spend significant time and energy exploring alternatives with different entities.

We're not just focused on instant gratification for PUD. Our goal is to ultimately execute the transaction that adds value in the near-term for all stakeholders, revise the opportunity for a future physical and fiscal growth that will at least recapture, if not exceed, the lost market value Edge has experienced over the last year or two. Negotiations with different entities are always time consuming. Changing market conditions all through the expectations of the entities involved in our negotiations and there are any number of other important issues that need to be resolved before seeking final approval of a merger agreement from our Board.

Process has its ups and downs just like riding a roller coaster and can be frustrating to everyone involved at times. Consequently, we have and probably will continue to find, then an acceptable transaction is just not possible to some entities but our evaluation and negotiation efforts are ongoing.

Finally, I can assure you that we are not going to just give the company way because we strongly believe that Edge has an asset base with considerable upside potential along with numerous ideas and opportunities for future growth that our operating personnel are identifying on a regular basis. We've been involved in a strategic alternative evaluation process.

Our operating program has been designed to preserve capital. We are maintaining a capital expenditure program within our cash flow and paying down debt along with the disposition of non-strategic assets, $12 million of which were sold in the first quarter followed by another $5 million thus far in the second quarter.

Hindsight is a wonderful thing. At the time we were making decisions on commodity price hedges for 2008, our consensus viewpoint for oil and gas prices were as much different than where they are today, and our production forecast for this fiscal period were higher as well.

Why and what is different? Our production is lower because of unanticipated wellbore and reservoir problems in three areas. At Chapman Ranch, we may where we had an underground flow and temporarily abandoned the well we were drilling before reaching the primary reservoir objective. At our Patterson #1 well in Mississippi, our unresolved down hole problems have prevented us from bringing the well back on production at the forecasted level and a dry hole in Southeast Texas to South Hardin.

As a result of the unanticipated problems in these three areas, we elected to defer several planned wells in the third and fourth quarters of 2007 and into 2008, all of which were expected to contribute some level of production to our risk adjusted production forecast over this period of time and beyond.

My comments are not indented to be excuses but are simply what really happened. I hope you understand that we don't believe these are lost opportunities and have been diligently working on solutions for the problems encountered so that we can proceed with a program to capture the significant development and exploratory growth potential we believe still exist in these three areas.

On a more positive side, we are drilling wells in our Flores-Bloomberg field in South Texas for 1.2 million to 1.3 million, approximately 300,000 to 400,000 below our original AFE, and at a time when rig rates are beginning to go up somewhat because of the increasing demand for rigs, we are finding multiple stack plays in these recently drilled wells and additional drilling locations for new reserves are being identified as a result.

We are pleased with our Prairie Fire discovery in Southeast New Mexico and the implied need for further drilling to fully evaluate the potential of the multiple Morrow and Wolfcamp pay zones that were encountered in the Prairie Fire discovery.

As John Tugwell has already mentioned, we are drilling on the first offset, Prairie Fire at the present time. Finally, we are finalizing the ground work for the start of a 140 square mile 3D seismic program in South Texas with an industry partner along with an option on approximately 9,000 acres in the heart of the shoot. We expect to complete the shoot this year.

I will now turn the call back to Mike Long

Michael Long

Thank you, John. Jim, we're ready to go ahead and open up for questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today comes from Ron Mills with Johnson Rice.

Ron Mills - Johnson Rice

Good afternoon.

Michael Long

Good afternoon, Ron.

Ron Mills - Johnson Rice

Question Mike, just one clarification on the operating expenses, you'd said from an operating expense standpoint you expect second quarter absolute level to remain flat or slightly below the $4.5 million you reported in the first quarter?

Michael Long

Yeah, I think a number between $4 million and $4.5 million is where we would expect the actual lease operating expense to run.

Ron Mills - Johnson Rice

And then on the production taxes you would expect another accruals that we should have another quarter of lower production/ad valorem taxes than previously modeled?

Michael Long

Yeah, I mean production taxes of course are related pretty directly to receive commodity prices. But I think we had about $2.6 million in production taxes in the first quarter and think that's probably a reasonable number for the second quarter. Ad valorem will again be a little lower than a normal run rate probably in the $1 million range and then holding steady at about typical $1.3 million to $1.4 million range per quarter.

Ron Mills - Johnson Rice

Okay. And from a current production standpoint, I think John you said you were running $52 million to $54 million a day. You provided the second quarter range. And if you look through the rest of the years, the interim budget in your mind design to try to maintain that somewhere in the low $50 million a day range over the remainder of the year or we just expect continued decline just from your more legacy properties?

John Tugwell

Ron, I think our programs at least through the third quarter, right now we're expecting this to be relatively flat to the second quarter based on the interim plan and then it becomes a little more up in the air just given process that we're going through, if you go beyond that.

Michael Long

But Ron in that regard, we're really focused on trying to maintain this balance program to the full year with the inventory of opportunities to expand and grow from that base, but we're spending so much time and energy on this strategic process that we feel that interim program has balanced and as flat as it can be through the full year.

Ron Mills - Johnson Rice

And that interim program is designed to spend just to remind me, is it $60 million or $70 million?

Michael Long

Yeah, I think towards the bottom end of that range.

Ron Mills - Johnson Rice

Okay, thank you.

Operator

Next we'll hear from [Andre Mansoor at Mansoor Asset Management].

Andre Mansoor - Mansoor Asset Management

Well, good afternoon.

Michael Long

Good afternoon, Andre.

Andre Mansoor - Mansoor Asset Management

I've got a question as far as your valuation of the securities right now. And I had a analyst that had valuated I guess around 7 or 8 bucks value with around 253 on your Bcu and with gas prices somewhat higher now. What would you look at growing concern for proven reserves?

Michael Long

First, with respect to securities valuations, we are not going to get there and relevant to those kinds of issues in this call, clearly the increase in commodity prices are not benefiting as in the short run because of our hedge position. Those forward commodity prices beyond 2008 have all moved up substantially and add value to anyone playing in this sector out into the future. I have not spent a lot of time following recent industry transactions for asset sales in terms of dollars per Mcf in the ground type of number relating I would say in that regard it's often difficult to compare an actual asset purchase to a corporate purchase if there is two different analysts.

Andre Mansoor - Mansoor Asset Management

I guess the other question is what would you guys at this point of time value the company?

Michael Long

And that speaks to my opening comment, that's an area we're just following in this process, we are not going to be able to respond to.

Andre Mansoor - Mansoor Asset Management

And have there been any offers at all at this point or are you all still in negotiations or--?

Michael Long

I sound like George Bush when I'm saying read my lips, so that's just an area where we are not going to go.

Andre Mansoor - Mansoor Asset Management

Okay. Well I just thought you might have something go on force.

Michael Long

That's fine.

John Tugwell

Nice try.

Michael Long

That's fine then.

Andre Mansoor - Mansoor Asset Management

Okay.

Michael Long

The process is going on, we are not stand and still.

Andre Mansoor - Mansoor Asset Management

Well, good. Is there any time period or is it I may not guess you have been looking since December?

Michael Long

Though we announced in December and there are just quite a bit of preparation on our part before we were able to invite whole host of parties that came in and filtered into, all of that is taking time and then discussions take time and circumstances change as I mentioned which caused further delays. So it has ups and down as I tried to imply.

Andre Mansoor - Mansoor Asset Management

Okay. Well, thank you very much.

Operator

Next we'll hear from Paul Halpern at Guardian Energy Management.

Paul Halpern - Guardian Energy Management

Good afternoon, gentlemen.

Michael Long

Hey, Paul.

John Elias

Before you ask I was not home last night, how did the basketball game go?

Paul Halpern - Guardian Energy Management

It went very well, it went very well

John Elias

Good.

Paul Halpern - Guardian Energy Management

I know it must be very difficult for you guys in light of the continued negative performance, particularly when compared to your peers in the industry. John had said earlier today you're not going to be giving away the property which is great but running it into the ground that might not make sense either.

So the question I've got for you guys is, it's been a dramatic lack of confident leadership as demonstrated by results. The Board and management have decided it might be best to sell the company or the assets of the company. When will the Board take appropriate actions with respect to senior management to reflect the poor performance and to start to get costs in line with the value and level of your property?

John Tugwell

Well, that's an ongoing process. Our Board is very active. They're not yes parties and looking at all the alternatives available to us. They took steps both last year and this year with respect to the compensation that was not increased for key parties or the management as an indication of a dissatisfaction or the results that we have and the process that we're going through is weighing our effectiveness and working out a relationship with someone else or dispose into the companies such that it does start a path for increased shareholder value in the near term. There is no way that any one can visualize that there will be an instantaneous recapture of all the lost value that has been experienced over the last year or so.

But to start out with some recapture that and a portfolio is not just [pin upon] South Texas but dependent upon several core areas that by themselves can stand on their own. And I guess, some hope and expectations that there will be a physical and fiscal growth that will add value to the shareholders over a sustained period of time. And so that is an ongoing process and nobody hear and this management is trying to do something to preserve our particular decisions. We're trying to do what is right for all stakeholders in every case.

Paul Halpern - Guardian Energy Management

Well, I appreciate that compensation wasn't increased in light of the extreme performance over the last 18 or 24 months and not in a positive sense. What steps have been taken to control and reduce cost personnel etcetera in light of the reduced activity in production? I don't know if your headcounts is going down, I remember you used to tell us on these calls how you basically were able to add headcount in these difficult times etcetera, John. I assume you've dramatically headed costs.

John Tugwell

We were headed towards over 100 to 105 employees. We currently stood at 80 employees. We stopped hiring that we're going through. We've had some people that had departed for a variety of different reasons that I wish not to get into. We have supplemented when there was a need with contract personnel about to keep our personnel in line with what we believe is required to carry on the interim program that we have at this juncture.

We also are looking at always to trim our cost as I mentioned in our drilling program in spite of the fact that rig rates are going up and we've been very diligent on the part of our operation personnel to manage our drilling operations in the most effective way possible, which we're experiencing in the Flores-Bloomberg and the problem wells in the Chapman Ranch, of course we deferred those wells right now until we can come up with a workable solution to deal with that. So there is a whole assortment across the board of things that we're doing down to the small items of assorted articles and beverages and things like that as opposed to I mean the source company provide that going to cost [goals]. There is a whole assortment of things throughout the whole company that we're looking at.

Paul Halpern - Guardian Energy Management

John I appreciate, we're taking the actions to save the nickels and dimes that clearly certain operational personnel have been confronted with various situations and made decisions that didn’t work out well and those aren't nickels and dimes those are millions and millions and tens of millions of dollar. What are we doing as a company to address those short comings to change the personnel who have obviously not been able to make the right thing happen for Edge?

John Elias

It's an on going process that we're looking at to improve the efficiency and interaction of the all the people involved that bring the experience to bear on a problem that we are confronted with. And there is no one person that has accountability for a decision on a particular well or production issue, it’s a collaborative effort of the entire workforce.

Paul Halpern - Guardian Energy Management

Well the collaborative effort hasn't been working and it’s a very difficult business and we might not be able to say there is one person who has let us down, but we can say that the team has let us down. And my question really to the board of which you are a member is are you looking at the hard steps that need to be taken to put the right people in place to prevent this from happening again or continuing to happen?

John Elias

I think that we are. And I think the Board believes that we are and that we are meeting on a regular basis to discuss all the relevant issues with the board and to ensure that we are making the progress that we are expecting of ourselves at this point in time.

Paul Halpern - Guardian Energy Management

Okay, well. That the question maybe I should ask it more directly. What senior personnel are not responsible for the same areas of responsibilities that they were responsible for before, so that we can have confidence the same mistakes won't be repeated again and again?

John Elias

Well, I don’t necessarily feel that it’s a movement of a specific senior personnel of a particular job. We got confident people and I think a good many of the decisions that were made at different points and times along the way were the right ones. I don’t know which -- I obviously recognize some of the deterioration in the market value, because we fell well short of the expectations we created out there in terms of our reserve decisions and our production flow, which were translated into solid revenue performance and increased profitability. Let's go back on the solid decisions for our advantage point and that of the Board to withdraw from the Yates/Hostetter area, which we bought into. Saving ourselves from the well commitment, saving ourselves from future drilling cost to expectations.

Paul Halpern - Guardian Energy Management

Yeah, John. Can I ask a question? You withdrew from the Yates commitment, et cetera and that was a great decision. Somebody was responsible for getting the company into the Yates position. So I hate to declare victory when you walk away from something that you voluntarily chose to go into and paid some money. So, again walking away from a bad deal is great, but walking into a bad deal is not so great.

John Elias

Paul we walked away from a portion of the deal that was not so great, not the entire one. We firmly believe that the Flores-Bloomberg is much better as part of that transaction we envisioned and all said some of the other parts. We firmly believe that the South East Texas where we drilled the South [Houlton] dry hole and not only took the reserves off the books associated with that well but in the surrounding area took the 3-D seismic reprocess that now feel that the reserves that we took off the books which we now have in probable, that we will recapture in future years and if not some this year, later next year and so it's an evolving target there and if took a point in time last year that Tennessee would be stable by the Board and the management that we paid to much for it. Today I think there is a little different view point from some of us as we look at it here and so it'll take time to prove that. With respect to the hedges that I tried to touch on here, we put hedges in place right here that are preventing us from capturing a lot of added value that comes from today's prices and I'm not making excuses for that, that's where we were at that point in time and the judgments that we made there.

Paul Halpern - Guardian Energy Management

Well, there have been a lot of less than stellar judgments and yet I see the senior management team staying in place. I'm looking for accountability, I'm not saying I know who or what the right action is, but clearly what we've been doing isn't right. I think your hedge problem is because you thought production would be a lot higher and it's not. It all begins with production and the cost of production and that's the problem.

John Elias

Paul we hear your concern, I guess ultimately the answer to your question of what's being done is that the management and the Board continue to believe that the best course is the sale or merger of this company and in the interim the company has to be run to preserve value.

Paul Halpern - Guardian Energy Management

I agree and I just hope everybody is doing their best to preserve value and contain cost and look at the most viable alternatives and I appreciate your tolerance of my ramp.

John Elias

No, that’s fine. [Danny] you have a right to do that and we think we're making the right decisions and its not being made in isolation, its being made also with the full awareness of the Board as we go through that. We have a very well informed Board and they are asking many if not more than the same kinds of questions that you are asking Paul.

Paul Halpern - Guardian Energy Management

Okay. Well, thank you for your time.

John Tugwell

Thank you.

Operator

Wayne Andrews with Raymond James. Your line is open, sir.

Wayne Andrews - Raymond James

Thank you. Good afternoon, guys.

John Elias

Hey, Wayne

Wayne Andrews - Raymond James

Hey, just thought, maybe to spend a little bit of time, if I heard this correctly, you've drilled 11 wells so far this year and out of those 11 wells only three were PUD's, is that correct?

John Tugwell

That’s correct, Wayne.

Wayne Andrews - Raymond James

So, can you give us some more detail on the total number of wells and then, I know you had some issues with Chapman Ranch and while that’s on hiatus at the moment, isn’t there an opportunity there that you'd like to try to capture here? And I'll stop there.

John Tugwell

Sure, just to kind of give you a little bit more flavor on the wells Wayne, seven of the 11 wells we've drilled within the Flores-Bloomberg.

Wayne Andrews - Raymond James

Yeah,

John Tugwell

Three of the wells we've drilled have been in Southeast New Mexico and we drilled one well on our Encinitas property earlier in the year.

Wayne Andrews - Raymond James

And where were the three PUD's, if you can be specific?

John Tugwell

The one in our Encinitas then a couple at Flores-Bloomberg and ...

Wayne Andrews - Raymond James

So, you've got five new wells that were not PUD's at Flores-Bloomberg and three in Southeast New Mexico?

John Tugwell

Correct.

Wayne Andrews - Raymond James

And I know it's probably early but can you maybe even review what sort of reverse potential was that you had originally estimated at those wells and so we can a get a feel for what sort of new additions you might have?

John Tugwell

Yeah. As reported I think on our last conference call, our estimated adds in the first quarter were only order of around 3D's, a little above 3D's, and just to give you a feel for the Flores-Bloomberg wells that we drilled so far this from a growth standpoint you’re looking at something on the order of 2 to the high 2 B range on a gross basis per well.

Wayne Andrews - Raymond James

Yeah.

John Tugwell

And we've got 100% in one of those and 50% in the other one that we're completing right now. So that should give you a feel for the second quarter and the Prairie Fire was part of our first quarter adds which has been a real might to add and in the wells performing really well we're -- the second well that we're drilling is of course not in prudent category right now so that will be new reserves assuming success on that well. And we'll continue our drilling at Flores-Bloomberg. This quarter so far, we've been primarily drilling on the north side of the field in the Slick lease, which we've been having very good results up there. So we're encouraged that we'll have some additions to the proven category to drilling up there as well as some exploratory potential in the deeper section up there.

Wayne Andrews - Raymond James

And finally just a quick comment on any ideas of how you would pursue what we all believes as an opportunity at Chapman Ranch and then just run through, how many rigs you have operating today and so what's their schedule here over the next just say three months or so?

John Tugwell

Yeah, at Chapman Ranch as we talked about before on Chapman Ranch 19, we had the underground flow in that well and we have temporarily abandoned it. From a mechanical standpoint we were disappointed, we counted much on our [four] pressures there than we had designed the well for. From a potential standpoint we are encouraged that we have some potential that we had not previously identified there in the Anderson section and we are in the process now of designing a well to test that potential, which we have scheduled here for the second half of the year, not scheduled for this quarter.

As far as our ongoing drilling program we've got one rig drilling at Flores-Bloomberg which we plan to keep there through the balance of the year and maintain that drilling program we have been able to keep our cost low in that area and we have been real pleased with the results that we are having. We also had the well drilling over in New Mexico on the Prairie Fire and looking at the second half of the year, we are looking at some additional exploratory opportunities, our South Lovington prospect in New Mexico, our Oso Grande prospect over in Chapman Ranch, which is a deep high potential prospect. As I mentioned in my part before at Midway Dome finishing up our 3-D evaluation there, reprocessing effort there and we do have plans for drilling there later in the year.

Also at [Santa] we have got El Fortunado prospect which we are in the process of restoring that potential third party partners. We planned, we've got a 100% control of that prospect and we plan to bring in partners for 50% of that and promote them on that 50%, 75% for 50% so that our capital exposure is minimized there. We really liked that prospect and are anxious to get it drilled. So we've got part of it planned for the rest of the year of course that hinges around the process that we're going through right now as well so.

Wayne Andrews - Raymond James

Yeah I was just trying to get a feel for exactly, not only what sort of plan and potential but what exactly is going to occur over the next month two? And it sounds like you'll continue to keep one rig working, drilling wells at Flores-Bloomberg. You've got one rig working drilling in New Mexico and anything or everything else is sort of not necessarily set in stone at this point, is that right? Or do you have a definitive place where after you drill this next well in New Mexico you drill either, is it contingent, if its successful you drill another one there and at Flores-Bloomberg you keep that rig busy there for the remainder of the year.

John Tugwell

Right, we do have some other drilling that we do have in New Mexico as planned in our Lusk area and also our South Lovington prospect. Those are things that we plan to drill here -- we plan to spud those in the next two or three months. So those will be additional rigs that we pick up and then drill those and then probably let those rigs go after that, but we do have a number of opportunities. Some of them aren’t set in stone, particularly as timing goes but we are moving those ahead to get partners in the wells where we are going to lay some interest of and have a partner coming on a promoting basis. And we are moving ahead on all those fronts to get those projects ready and get them lined up for the rest of this quarter and into the third quarter and fourth quarter.

Wayne Andrews - Raymond James

All right, thank you very much.

John Tugwell

You're welcome, Wayne.

Operator

And now we'll take a follow-up from Ron Mills at Johnson Rice.

Ron Mills - Johnson Rice

Hey, Mike just to go back to the CapEx question I asked earlier, it looks like you spent a little bit over $20 million in the first quarter, but that's just a significant ramp down or do that include some accruals from fourth quarter drilling?

Michael Long

That's there was, we're probably on a normalized basis on the quarter would have been in the $15 million to $20 million range, but from some carry over activity coming in from the end of 2007, I think a quarterly number in the high teens on an average quarterly basis $16 million to $18 million of quarter, which is the neighborhood that we are looking at right now and both in relation to that and maybe in relation to Wayne's questions earlier. There has been a considerable focus of effort and capital going toward getting prospects that we have identified and worked on drill ready. But not yet scheduling the drilling of those prospects from our land seismic everything else standpoint. We're continuing to move the prospects into the pipeline. So we have a very deep pipeline of drill ready prospects. And we're just being cautious about that the approach to moving forward on those while we are still engaged in this process.

Ron Mills - Johnson Rice

Okay and then from a production breakdown standpoint. Is the first quarter pretty representative from a gas oil/natural gas liquid breakdown?

Michael Long

Yeah, I think, I think that -- I, maybe we have to look at little bit harder, but I think that's pretty good mix.

Ron Mills - Johnson Rice

And then finally on the G&A you had is the cash and non-cash breakdown from the first quarter a pretty good run rate as well.

Michael Long

Yeah. I think in some respect G&A is coming down a little bit. Last year at first quarter year we're about $0.69, this year we're about $0.61 first quarter. The cash, non-cash breakdown is probably consistent, but I think we're as touched on with some different questions before hand, we're certainly not adding to G&A, we're not replacing where we're losing G&A, we're being very cautious about it.

Ron Mills - Johnson Rice

Okay. And then, with the excess cash flows, so I am assuming you'll go to the pay down debt and should or have already paid down $5 million of debt this quarter I guess that’s associated with that asset sale.

Michael Long

Yes. We're 245 right now. I would expect to continue to drop that number through the quarter. There are a couple of smaller asset sales that we're working on. They're not material in terms of necessarily reserves or production, but I will expect another $2 million to slightly over $2 million of asset sales this quarter, but in addition to that using excess cash flow to pay down debt.

Ron Mills - Johnson Rice

Okay. Thank you very much.

Michael Long

Thanks Ron.

Operator

(Operator Instructions) We'll go next to Bob Bruce at Bruce & Company.

Bob Bruce - Bruce & Company

Hi, I have a couple of questions. What was your outlook for gas prices at the beginning of the year?

Michael Long

We have built a budget around a kind of just a flat 750 number, but I think as we went into the year, our view on the forward commodity prices, was if there was more forward gas prices, there was more downward pressure than upward pressure. If you recall at the beginning of the year, I think there was very significant concerned about growing inventory levels and we experienced some good cold weather in the last part of the winter that has been reversed that a little bit and then I think, I mean, we are looking at, I think at a about an $80 oil price forecast for the year and have clearly didn’t forecast all prices where they are today.

Bob Bruce - Bruce & Company

And secondly, if you had never entered into any derivative transactions where would you be today? How much ahead or behind would you be if you had not entered in any of this derivatives?

Michael Long

The short answer for the first quarter is that that revenues which would have been about $47 million without the derivatives, ended up at about $18 million with the impact of the derivatives on an yearly forecast basis. That’s a harder one to answer, because I don’t know exactly which commodity price to use going forward but it is a substantial change in revenues to those derivatives.

Bob Bruce - Bruce & Company

So is the derivate program has been more to less a disaster?

Michael Long

Yeah, it has not helped us.

Bob Bruce - Bruce & Company

Okay, thank you.

Operator

Next question from Brett Reiss at Janney Montgomery Scott.

Brett Reiss - Janney Montgomery Scott

Thanks for taking my question. Over the next seven months before the derivate contracts wind down, what prices would we like to, what prices in oil and gas do we need to release some of the pressure that these derivative contracts have encumbered the company with?

Michael Long

From the gas collar we haven’t place for this year. It had a cap of couple of collars to that $9.02. So, in the sense that you asked the question if gas was flat at $9 we would enjoy all of the benefit of those prices and not have any derivative cash settlements, the oil this year is in slop at $66 a barrel. I can't say that I'm wishing for $66 oil, but it would take $66 on oil for us not to have any cash settlements under the derivative. As we go into 2009 our caps on the gas moves up to 10 and volume decreases dramatically on oil, again volume hedged are a couple of derivatives dropped by two thirds and we move to a collar with a cap of 93 instead of slop flat 60%.

Brett Reiss - Janney Montgomery Scott

Alright so I should be rooting for moderately lower oil and gas prices?

Michael Long

I think, the environment that we would find most attractive from an overall cost of operating structure rate of return on drilling wells is, maybe something a little bit more moderate than what we're seeing now, but not a dramatic downward drop in commodity price as what you balance the lost revenue versus everything else that those higher commodity prices do from an asset valuation and--

Brett Reiss - Janney Montgomery Scott

Alright, right, right, right. Alright thank you.

Operator

(Operator Instructions). We go next to Charlie Cheever with Corsair Partners.

Charlie Cheever - Corsair Partners

Question is, if you again back on the question on the hedges, if you were not hedged in any of these areas, what would be your EBITDA for the first quarter approximately?

Michael Long

Well I mean, if there is about a $30 million drop in revenue associated with those both the cash and non-cash charges, I couldn’t tell you over the course of this call in terms of how that will trickle down to EBIDTA, but it would be a pretty substantial increase. I mean, the bulk of that would trickle down to EBIDTA. So you've got the same severance taxes, same cost structure going through the system.

Charlie Cheever - Corsair Partners

Right, okay. Any guess on that or not?

Michael Long

I don’t think guesses are appropriate.

Charlie Cheever - Corsair Partners

Okay, and what is your revenues for an employee compared to your competitors?

Michael Long

We don’t have the ability -- I don’t know-- we don’t have that number.

Charlie Cheever - Corsair Partners

Okay. Where do you think which at this point know what you know going into or will be going into the '09 season at some point? Are you guys going to hedge as much you did or you are going to keep the hedges off? No really, I had a good a question as where do you think gas prices are going?

Michael Long

I think, well, everybody has an opinion on gas prices. I think our collars of 750 and 10 in '09 are not bad collars. We could redo that at different levels today, but they are reasonable collars personally. And this is just a personal opinion at this point. I think a gas price ranging between eight and ten in 2009 is not a bad fairway to be in. I don’t have any ability to give you a good hard number on oil.

Charlie Cheever - Corsair Partners

Okay. The next question on this call, there is lot of frustration obviously between company and shareholders and we may be willing to propose a, I don’t want to say a change in the Board, but we may have an interest in sliding some people, maybe yourselves and some other folks as a new directors which would be independent, which may give shareholder sort of frustrated or you've loss lot value last 18 months, some comfort that we can evaluate the situation and make sure their interest are as best as just like ours and that the value whether it's in transaction or not that would be maximized. Some of that that out as a kind of an offer to bridge some of the hostility between the two different parties?

Michael Long

I hear that certainly I've taken back to our October conference call when you said something similarly and then I think it was close to the last time we heard from you until this conference call.

Charlie Cheever - Corsair Partners

Well it's not like you guys have call me either and we are shareholder and we've been a shareholder for years even though I live in East coast and my family has been in Texas for 150 years, we know most of the people in South Texas and we think we could add value to the process, but I think one of the caution is that you guys need pick up the phone and call your shareholders and have a conversation with them, so--

John Tugwell

We appreciate those thoughts.

Charlie Cheever - Corsair Partners

That's all I have.

John Tugwell

Thank you.'

Operator

Next we will go Ron Mills with Johnson Rice

Ron Mills - Johnson Rice

Just I had one more for John Elias, you have talked about form the staffing stand point you are now around 80 people some people have left. Any more color on that comment John, has that been technical or has it been financial or is it just been a little bit across the board?

John Elias

We've had financial primarily. We've had one in the drilling area, senior drilling party. We've had one in land and one explorationist.

Ron Mills - Johnson Rice

Okay.

John Elias

And those have been for different reasons

Ron Mills - Johnson Rice

Okay.

John Elias

Across the board and we have, we've set up 80 employees at this point in time. And we have anywhere from 18 to 20 contract people in the field that are assisting us there in our operations and we have two interns in our financial group that are working with us in the invoices area.

Ron Mills - Johnson Rice

Okay, thank you.

Operator

And at this time, we have no further questions from the phone. Gentlemen, I'll turn it back to you for any additional or closing remarks.

Michael Long

Very good, thank you Jim. And by the way, we appreciate your time today and all the information you have given us to think about.

Operator

That does concludes Edge Petroleum's first quarter '08 earnings conference. We thank you all for your participation. You may now disconnect your lines and have a great day.

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