TXCO Resources Inc. Q1 2008 Earnings Call Transcript

TXCO Resources Inc. (TXCO)

Q1 2008 Earnings Call

May 6, 2008 11:00 am ET

Executives

Roberto R. Thomae - Vice President-Capital Markets, Corporate Secretary

James E. Sigmon - Chairman of the Board, President and Chief Executive Officer

James J. Bookout - Vice President and Chief Operating Officer

P. Mark Stark - Vice President, Treasurer and Chief Financial Officer

Gary S. Grinsfelder - Vice President of Exploration

Analysts

Phil McPherson – Global Hunter Securities

Daniel Loeb - Third Point LLC

Neal Dingmann - Dahlman Rose & Co.

David [Nesgar] - RVC Wealth Management.

Neil Fagans - Fagans Consulting.

Patrick Walker - Walker Smith Capital

Kenneth Hunter - Calm Waters Investments

Presentation

Operator

Welcome to this quarterly call of TXCO Resources to discuss the company’s first quarter 2008 earnings and to review current operations. Operator Instructions) I would now like to turn the call over to Bob Thomae, Vice President of Capital Markets.

Roberto R. Thomae

Good morning and welcome to TXCO’s first quarter of 2008 conference call. Joining us this morning are James Sigmon, our CEO; James Bookout, our Chief Operating Officer; Mark Stark, our chief financial officer and Gary Grinsfelder, our Vice President of Exploration.

This morning we are going to focus on our quarterly financial results that we published yesterday, and update you on some current operations. After some brief prepared remarks, we will have time for some questions as well. I would like to remind you that this conference is being recorded, and will be available for replay approximately one hour after we finish today. The archived conference call, press releases and other information that we have published in the past can be found on our official resources website at www.txco.com, for your reference at your convenience.

Please also be advised that included in our answers to questions may include statements that we believe to be forward looking within the meaning of the private security and litigation reform act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

All of these risks include matters which we have described in our past filings with the SEC, including our annual report on form 10-K for the year ended December 31, 2007. We will also file our first quarter 10-Q in just a few days. We disclaim any obligations to update these forward looking statements. During this conference call we may make references to EBITDA, EBITDAX, or other non-GAAP financial measures. The reputations of these non-GAAP measures to the applicable GAAP measures can be found within the earnings release.

With that, I would like to turn things over to our Chairman and CEO, Jim Sigmon.

James E. Sigmon

TXCO had a good first quarter. As those of you who have followed us for a while know, the first three months are typically our weakest point of the year. Despite the slow quarter, we achieved record results in many areas during this quarter. I hope everyone has read the earnings release we sent out yesterday. If not, it is available in the news release page of our website, www.txco.com. We will not take time here to repeat all of those numbers.

However, I will ask our CFO, Mark Stark, to provide some color on our financial results.

P. Mark Stark

Again, Q1 of 2008 marks the first full consecutive twelve month period of combined operations of TXCO and our output acquisition. As we have discussed on previous calls, our first quarter of 2008 will be skewed in comparison to Q1 of 2007, but this will be the last such quarter. With that said, I would like to take a few moments and review some key metrics.

Let us first focus on the first quarter. Looking at revenues, our oil and gas sales more than tripled compared to last year. Total revenues nearly tripled versus the first quarter of 2007. Looking at product pricing, average realized prices for oil for the quarter were $91.49 per barrel, inclusive of hedging, up $32.96 per barrel compared to this quarter a year ago. Average realized price for natural gas for the quarter was $9.07 per thousand, again, inclusive of hedging, compared to a year ago.

Turning to sales volumes for a moment, in the first quarter of 2008 we had in round numbers 247,000 barrels of oil and 665 million cubic feet of gas produced for the quarter. On a BCFE basis, that is 2.15 BCFE for the quarter. That is certainly less than Q4 and Q3, which were 2.38 respectively, but consistent with the drilling limitations in the maverick basin during the fourth quarter of 2007 and the first quarter of 2008.

Turning to costs and expenses for a moment, total costs and expenses increased 86% above the first quarter a year ago. This increase in costs and expenses is consistent with our acquisition, along with current activity levels. Total costs and expenses are in line with Q4 of 2007 and, in fact, declined slightly by 2.3% quarter over quarter. Interest expense, we occurred $2.5 million of interest expense for the quarter, relating to our long term debt financing and are again reflected in the downturn of interest rates we have all seen in the last quarter.

When we take all that down to the bottom line, we had a net income of $4.25 million. After paying preferred dividends, we had net income available to common stockholders of $3.27 million, or $0.10 per basic share, $0.09 per diluted share, again, for the quarter.

I would like to turn to our liquidity metrics because again, time after time, I have said that our business is much more about cash flow. Looking at our cash flow statement, before certain changes in operating assets and liabilities, net cash provided by operating activities for the three months was $15.5 million compared with $9.7 million for the first quarter of 2007. These changes in operating assets include increases and decreases in current receivables, payables, and prepaid expenses from our year-end balances.

Taking those adjustments into account, the net cash used by operating activities was $9.9 million for the quarter compared to net cash provided from operations of $1 billion for the prior year period. From the standpoint of EBITDA and EBITDAX, we had another outstanding quarter and, in fact, we are on pace for a record year. We are very proud of our ability to maintain financial discipline as we continue to grow, as evidenced by our EBITDA and EBITDAX margins.

In the first quarter of 2008 we had EBITDA of $19.2 million and EBITDAX of $19.8 million. These are certainly in line with the Q4 of 2007 where we had $20 million EBITDA and $20.3 million of EBITDAX for Q4. Taking a look at the balance sheets let me take a moment to review our balance sheet which remains very, very strong.

For March 31 we had total assets of $384.1 million, more than double that of Q1 of 2007 and current assets of $45.4 million, current liabilities of $43.1 million, long-term debt of almost $111 million, and debt to assets of 29%. Our line of credit, we had $10.7 million outstanding on our revolver at quarter end, with a borrowing base of $50 million, leaving us $39 million of dry powder.

And with that, I will turn the program back to Jim.

James E. Sigmon

Overall, it was a good quarter from a financial point of view. Now let me take a few minutes and look at operations. I would like to focus on the status of our key plays. First, the Pearsall resource plays.

As many of you may remember, we entered into an agreement with EnCana last year that gives us the opportunity, during a 50% interest and approximately 200,000 acres in a Pearsall formation, by drilling horizontal Pearsall wells. Under that agreement, we drilled the first horizontal well in the Pearsall shale that has been drilled to date. The case 26-2. Unfortunately, we were successful in fractioning only two of the five zones in the shell that we intended to stimulate in this first well.

In one zone, the fractioning company ran the tail ends in too early and caused the zone to screen out prematurely. At another zone, the packer apparently failed and the zone cannot be stimulated. And yet in a third zone, was not actually in the shell section because the casing screen could not be run to the end of the lateral. Consequently we only stimulated two zones in the Pearsall shale section.

In spite of this, the well flowed an average of over 1.1 million cubic feet of gas per day, for the first 30 days after the fractioning treatment, while flowing over 100 barrels of water per day to the fract tanks. Although this rate is not as much as we hoped to obtain, we are very encouraged by this result considering that the lateral was so poorly stimulated.

However, we learned a lot from this experience. We have now completed drilling our second Comanche 34-1 that is over eight miles from the first well. This time we successfully ran casing to the end of the lateral and are scheduling to fracture treatment once again in five intervals. We have now moved that rig, that has finished drilling the Comanche 34-1, over 15 miles to the east. We will spin our third well, the Mars 2683, shortly.

TXCO and Saint Mary Land and Exploration Company entered into an agreement with EnCana petroleum in April that allows TXCO to earn a 25% interest and up to 349,000 acres. Under that agreement we have already begun reentering Anadarko Super Ranch number one in order to drill a 2500 feet lateral in the Pearsall shell. This well is over 15 miles south of the cage well.

We plan to drill a second Pearsall well in the Anadarko acreage, after drilling the Meyers well. We hope to have five widely spaced wells drilled and stimulated in the Pearsall shell within the next few months. Based upon the initial results of the poorly stimulated first well, we are very hopeful and cautiously optimistic that once we get five laterals successfully stimulated we will get to the place that we need to be to make this an excellent play.

Next, regarding Glen Rose Porosity. Our Glen Rose Porosity sales for the first quarter averaged 1676 barrels of oil per day, which was less than the 2300 barrels of oil per day we averaged during the fourth quarter. Those of you who have followed TXCO over the years know that Glen Rose oil sales seasonably decline in the first quarter due to the annual hunting season drilling moratorium on many Maverick County leases from November to mid-January.

By the time we can get a rig into the leases, it is usually about 1 February. Since the wells take at least 30 to 40 days to drill and complete, the wells drilled during the first quarter usually do not produce much oil during this quarter. In addition, a little less than 100 barrels of oil per day was shut in during the first quarter and remained shut in while our permit to discharge water was being renewed.

April production increased as usual, and produced 2100 barrels of oil per day. By the end of April, our Glen Rose production was down only 216 barrels of oil per day from what it was at the fourth quarter number, and we have Glen Rose proxy wells not yet on production.

You should also keep in mind that we did not increase the rig count from the three rigs we typically are able to run during the slow hunting season, to the five to seven rigs in the Glen Rose owned during the first quarter as we have done in the past because we were waiting on Schlumberger’s comprehensive reservoir optimization state. Schlumberger presented us this long awaited study late last week. The study is now under review by our technical staff. It will then be discussed with Schlumberger prior to implementing any recommendations that they may have.

Next, regarding our oil sands pilots. We received and are finished installations of our second 2500 BTU generator from China for our SAGD pilot. We should be injecting steam in this pilot within a couple of weeks. All five vertical wells on our second pilot are fracture assisted steam technology pilot have been drilled in a way to steam generator.

Additionally, we are nearly finished drilling our second of three horizontal wells for our third pilot using horizontal wells that are, again, fracture assisted steam technology pilot. Our partner, Pearl Information and Development, just came back from China and reports that our two 50 million BTU steam generators are being manufactured and it should be on the boats by May for delivery in June in the U.S. We would hope to have both of these new pilots injecting steam during the third quarter.

As to our Fort Trinidad area in east Texas, as many of you remember, we have been actively increasing our acreage positions around the Fort Trinidad field. First we bought out the other partners in the Glen Rose shoals, increasing our interest to 100% in most of the block. We drilled a first well, the Forest 2-H, and lost over 38,000 barrels of water in the Glen Rose B section as we drilled horizontally. Despite this loss, the well is still flowing an average of 535 mmcfd and 35 bcpd during April, with 160 barrels of water per day.

We then drilled a Forest 3-H, and currently are testing the Glen Rose D and E zones, prior to drilling horizontally in the B interval. We have subsequently farmed in 50% of an 18,000 acre block adjoining our acreage. We are currently drilling the Meyer Gold number one to test the Glen Rose interval in this acreage, prior to drilling horizontally in the buda formation.

We have a second rig contracted to move into the area as soon as possible because we are very excited about the potential we see in this area. Not only from the Glen Rose shows, but also from the buda. As you can see, we are busy. I believe our strong first quarter financial results shows that we are on track for a great year.

I certainly want to take time for a few questions.

Operator

(Operator Instructions) Your first question comes from Phil McPherson - Global Hunter.

Phil McPherson – Global Hunter Securities

Jim, a few questions on the Anadarko and the Pearsall. Can you talk about how all of this came about? Did Anadarko come to you guys and say ‘we are finding what we like’ or ‘we want you to bring your experience in this acreage’. Can you talk a little about that?

James E. Sigmon

Well, a part of it, Phil, is that we always try to keep an open line of communication with other operators that are operating in the areas that we are, and we try to share information. As we were sharing information with Anadarko about some of the things we were doing, they could see that we were doing things a little bit different than they were. Then it was just one of those things that gradually evolved into trying what we were doing on their acreage block, because they were having a hard time getting management to focus on it. Consequently, it is just one of those things that happen as you continue to talk to other operators.

Phil McPherson – Global Hunter Securities

And you are the operators in all of this stuff, right?

James E. Sigmon

We are the operators during this earning phase while we are drilling the wells because we are doing some things differently than what Anadarko was doing on their acreage block. Once we operate the wells, then we turn for production. We operate through the drilling side, Phil, and then we turn over the production to Anadarko. We do the same thing with EnCana. We will turn the wells over to EnCana for the production side.

Phil McPherson – Global Hunter Securities

As far as the spacing of these wells, I am trying to picture how you have spread these out across the acreage. Are you picking sites based upon trying to extend the play and see how far you can go, or is there something that drives these sites in particular for a reason you’re going to these certain locations?

James E. Sigmon

Well, one of them is just exactly what you are talking about. We are trying, as you have noticed in my comments earlier, to spread it over this large acreage block. That is why you see wells that are eight miles apart and fifteen miles apart, etc. So we are spreading a long way in between wells.

At the same time, we are taking into account the acreage position that we have 3D seismic, that we have all of the stuff that we farmed in from EnCana. Under that block of acreage we are also drilling different looking targets on 3D seismic, trying to determine what the best one might be or if 3D might be something that we need to go forward, or would improve the results or not.

Phil McPherson – Global Hunter Securities

Anadarko is 3D on their acreage? Are you getting a peek at that and are using that?

James E. Sigmon

Unfortunately, Anadarko did not have any 3D on their acreage, Phil. They do have quite of bit of old 2D seismic, but they do not have any 3D. From the logs that they have built going across their acreage, we see the same things on the logs that we do on the EnCana acreage. We are correlating the logs on the areas; we just do not know exactly what happens away from the well bores as far as a little bit fractured, or not fractured, or some structures that we may be locating wells on.

Phil McPherson – Global Hunter Securities

On the Pearsall, do I understand right that the case 26 was not cased to the end in the Comanche 31-1 is cased all the way to the end of the horizontal?

James E. Sigmon

Both of them are open hole completions with packers with liners run in it – what is called a packers plus technique. You are running a liner all the way to the bottom and isolate intervals using open hole packers.

The problem was, on the first well, we did some things a little different than we did on the second well. We were not able to get that packer, that completion system all the way to the end of the lateral. When it got stuck where it was at, there were 500 feet then that we did not actually get stimulated. Our last stage was not actually in the shale level any longer, it was up above the shale level. They will both have casing in them with open hole packers behind it.

Phil McPherson – Global Hunter Securities

So, the last stage then was closer to the vertical portion of the well bore?

James E. Sigmon

That is right. That is exactly right, Phil.

Operator

Your next question comes from Daniel Loeb - Third Point LLC.

Daniel Loeb - Third Point LLC

Jim, I have a bit of an issue. You go on saying that you had an excellent quarter but as a shareholder it is hard to get excited about the excellent quarter, given that the stock is actually down 1.7% this year and the S&P, E&P index is up 31%. It just seems that there is a very complacent attitude about the poor stock performance and the poor production performance. You are using specious statistics such as your EBITDA results which did not include the output acquisition.

I would like to hear a little bit more of an apologetic tone about the problems and challenges that the company faces, unless backslapping and patting ourselves on the back over meaningless statistics like increase in EBITDA and language about our ‘excellent first quarter’. Frankly, we are pretty frustrated over here and would like to know what you are doing specifically to address the significant production problem?

James E. Sigmon

Dan, none of us like to have the stock go down. We are all shareholders and none of us are happy about that. I apologize to you for the impression that we have given that everything is fine and dandy and roses. We recognize that this is the best quarter that this company has ever had. So consequently, I recognize that you are not a long term shareholder and therefore it is probably not as meaningful to you as what it might be to

Daniel Loeb - Third Point LLC

Let us just stop that right now. There is no distinction between long term and short term. I have a broad prospective of the E&P industry and of this company. Whether I bought my shares two seconds ago or have been sitting with this under performing stock for a longer period of time, it is irrelevant. So, no, please do not address what the term of my investment is, as if there is some sort of distinction between long term and short term. By the way, we are not going anywhere, so we will be long-term shareholders here.

We will figure out a way to work with you guys to reverse this, but this is just shameful in this environment to have a stock that is down in the most robust E&P market that I have seen in this business for over twenty years. We are just very disappointed and it seems like it is business as usual over there. You guys need to make some hard choices and take some steps to improve the production and to realize the potential that this company has. You are sitting on some tremendous assets. We all understand the potential here, but we are just frustrated that this potential is not being realized.

James E. Sigmon

I appreciate that, Dan. As we have tried to explain to you during the conference call in the remarks section of what we are doing in each of these areas. In the Pearsall, we are ramping that up as far as we have got with two rigs running on that area to see what it is. As I have just mentioned, just this past week, we got the Schlumberger report in. That has to be analyzed and then we will have to determine what portions that they have got to drill. I am sure that you, as a shareholder, would not want us to waste money in drilling things, and bringing in five to seven rigs. Yes, I could ramp up oil production if that was our goal, if that is purely the simple goal. If it is not prudent spending of our dollars, then I am sure you would not be happy, as none of us would be.

We believe that it is prudent for us to wait to analyze that report before we ramp up the number of rigs we are getting because we need to have a way to go drill it. Those things that we can control and ramp up – we are doing that. Such as the Glen Rose shoals over in east Texas and the Pearsall plays. We are actively going forward to try to do it as quick as we can. We are trying to keep shareholders informed that we are not just sitting on our thumbs and not doing anything. We are actively working at it. Hopefully you will see some results about it and we have given you some time frames about when those things will be.

Daniel Loeb - Third Point LLC

I just want to remind you that you have engaged in highly diluted convert financing, so we will be looking not just at the overall increases in production and in reserves, but also in terms of a per share, fully diluted basis. You guys have your work cut out for you.

Operator

You have a follow up question from Phil McPherson - Global Hunter.

Phil McPherson – Global Hunter Securities

Jim, I wanted to get a little more color on what you have seen in the Schlumberger study. Are you at liberty to talk a little bit about what they are saying? What kind of timeframe were you going to give us to peek at that?

James E. Sigmon

We probably do not know enough about it, Phil, to comment. We just received it Friday. Or Thursday, I guess it came in here. It was distributed to people on Friday. They have just had it over the weekend, had time to talk. I have been gone yesterday. We will have to discuss it in here, and then we will get with Schlumberger. There are going to be questions we have about their conclusion.

With them, and with our people, we will make the decision. It will take a week or two for us to decide what to do and then we will start implementing those things. Even when we implement them, just keep in mind, for those shareholders out there, even when you implement what they are suggesting that we do, you do not want to make the assumption that they must be 100% right. That means you have to go drill some wells and see what the results are based on those wells, before we just go completely crazy.

Now, some things may give us a lot of confidence as we get the report analyzed. We have not gone that far yet.

Phil McPherson – Global Hunter Securities

A couple of questions on the [inaudible] and I will take them through each project. The SAGD, from what your comments were, this is a continuation of the first pilot where the first two wells were drilled?

James E. Sigmon

It is in the same area. I would not call it a continuation. We hope to get some benefit from the heat that we have put in earlier.

Phil McPherson – Global Hunter Securities

Have you continued pumping steam into those first two wells from the previous steam generating equipment that you had there?

James E. Sigmon

No. No. All the purpose of what we did there was to get samples of the tar so that we could wind up using that information to progress, get our reservoir stimulation studies done, and to try to get some indications of what kind of discount we would have on the oil prices.

Phil McPherson – Global Hunter Securities

As to the steam equipment, are you planning on getting that going again in conjunction with the new one that was just installed?

James E. Sigmon

Yes. They are being installed and hooked up now. Lines are being laid and they are being tested as we speak. We hope to be up within the next couple of weeks.

Phil McPherson – Global Hunter Securities

Is that a five spot pattern that we are looking at?

James E. Sigmon

No, that fact is just two wells. One sits on top of a producer. They are both horizontal wells, one on top of the other.

Phil McPherson – Global Hunter Securities

The first two were just vertical, they were not horizontal?

James E. Sigmon

Yes, they were just vertical wells to get some steam and some information out of the reservoir. We heated it up some, and we are hoping to get some benefit from that heat.

Phil McPherson – Global Hunter Securities

Let us just take a conservative approach here, and let us say that the first steam starts at the end of May. Each cycle then takes, is it, fifteen to twenty days that we are looking at? Without holding you to a timeline, can you tell us what we should be looking for as far as potential news events in relation to this project?

James E. Sigmon

Well the SAGD is different than the cyclical. In the SAG-D, there is no huff and puff. We are just going to start injecting steam and will continue injecting steam into the producer for a little while to get it heated up. Then we will inject steam into the injector. Then we will continue to inject steam into the injector and gradually, as the reservoir heats up, the oil will flow by gravity into the producer.

What we try to tell people is that we will anticipate under the SAGD program by the end of the year to have some numbers coming out of this reservoir that would give us some idea about how well we are doing on the SAGD program.

Phil McPherson – Global Hunter Securities

Hopefully those numbers will give you what the SOR is, right?

James E. Sigmon

The SOR, or final SOR, will not be able to be determined until you complete all drilling and everything that you are doing on a well and to get the ultimate reserve. That being said, though, we can take what information we are getting, how the well is responding, and put it as an analog to what has been done in other areas. Then we make an estimate of what we think the ultimate steam to oil ratio will be. We will not be able to have the final one until we finish the project. We should be able to get an indication of what we are doing.

Phil McPherson – Global Hunter Securities

On this project, are you preparing it in the sense that you can put this oil to sales? Are you going to tank it or are you going to truck it out?

James E. Sigmon

We will have to truck it out. We will not have the volumes but on pipelines and things like that. We will be using [digulence] to move the oil to refineries up until we get volumes in the 5,000 to 10,000 barrels a day range. Until we get to those volumes it will all be trucked out.

Phil McPherson – Global Hunter Securities

With the two fast projects, is it going to be the same timeframe? Once you get the steam generators in June and maybe it takes you thirty days to lay the pipes and the lines. Then you start injecting probably by the end of the third quarter. Maybe we would have something by the end of the year or first quarter 2009? Is that a fair statement?

James E. Sigmon

I think those are fair estimates. We ought to see some responses in that timeframe.

Phil McPherson – Global Hunter Securities

You should see a faster response, right?

James E. Sigmon

Based on what Conoco did before in their reports, they completed their entire project in about eighteen months from start to finish. Once they started putting steam in the ground and then stopped, they had about 50% of the oil recovered.

Phil McPherson – Global Hunter Securities

In eighteen months?

James E. Sigmon

In eighteen months. We should expect by the end of the year to see some response.

Phil McPherson – Global Hunter Securities

Because you are injecting a tremendous amount more of steam in this simulation versus the SAGD, right?

James E. Sigmon

The SAGD is going to have 50 million BTU’s of steam per day going, and this fast technique will have 50 million BTU’s available per hour. Not per day. Per hour. So, they are both actually putting out the same amount of steam but because the patterns are different, and the methodology of the way the steam progresses through the reservoir is different, it should respond quicker.

Phil McPherson – Global Hunter Securities

I saw in the press release that you have an offshore well going in Louisiana. Do you want to comment on that real quick, Jim?

James E. Sigmon

Well, we have not gone into the offshore business, Phil. When we bought OutPut, OutPut had a small interest, about 3% or so, of an offshore well that they had picked up that the Apache is operating. We have been trying to divest some of these assets like that, and this is just one of them that has to be divested. We needed to go ahead and drill when they proposed the well because it was a PUD location. We will not be getting into the offshore business.

Phil McPherson – Global Hunter Securities

Did you guys have it booked as a PUD?

James E. Sigmon

Yes.

Operator

Your next question comes from Neal Dingmann - Dahlman Rose & Co.

Neal Dingmann - Dahlman Rose & Co.

We were just wondering if you have started looking into rigs? Obviously from what I have been hearing from some of the rig guys hear in town, it sounds like things are already starting to tighten up. Do you have any concern around that issue going forward?

James E. Sigmon

We have been able to get rigs. They have been available coming into the area. We keep our hands on it and people are calling us because typically, we do keep them busy. At this moment, we are not really worried about getting a rig right now. Again, it is going to take us a couple of weeks to get ready. Then we will have to determine, from what we see from the Schlumberger report, just how fast we want to ramp it up based upon their recommendations. The better we feel about their recommendations, then we will probably ramp it up faster.

Neal Dingmann - Dahlman Rose & Co.

Do you have any issues with permitting going forward?

James E. Sigmon

As a general rule, we have not had any problems. There have been a few wells that we want to drill closer to other wells, and it takes a little bit longer. The ranches are 100,000 and 70,000 acre ranches; typically that is not an issue.

Operator

Your next question comes from David [Nesgar] - RVC Wealth Management.

David [Nesgar] - RVC Wealth Management.

With this last little move here in oil and natural gas, have you picked up your hedging activity and can you quantify it in any way?

P. Mark Stark

Yes we have. In fact, we recently layered on some additional hedges for the balance of this year, going out into the first half of 2011. The whole hedges, they are costless collars and typically I have had $90 floors. Depending upon near versus longer term, the end years are having caps north of almost $130. Then over time they decline to caps of about $125 or thereabouts.

Operator

Your next question comes from Neil Fagans - Fagans Consulting.

Neil Fagans - Fagans Consulting

I was just curious, are you still moving forward with the outside third party I think it’s [Skosha] on strategic options for the oil stance plays? If so, is there a timeframe for when that would be concluded, successfully or unsuccessfully? Are you seeing any interest from some of the big boys potentially coming in and wanting to buy that from you, or partner up on it?

James E. Sigmon

We have finished our [Skosha] project and did not get any bids that we would be willing to look at seriously. There were a lot of people that did not know that the oil was here, or interested in it. At the stage that we were at, at the present time, they decided to not go forward.

Which is one of the things that we said that was a possibility when we entered into it, but they wanted a little bit more of the information and operational information that we are gaining from these different projects and pilots that we are doing. There was interest. There was definitely interest there, but it is not at the point yet to be able to turn it into cash or shareholder value right now.

Neil Fagans - Fagans Consulting

On the work you are doing with Pearl, am I correct that Pearl only has an interest in a small portion of our acreage position? Are you heads up now on paying your proportionate share on everything that we are doing with Pearl?

James E. Sigmon

Well, Pearl is interested in about half of our acreage position and an AMI of about half of our acreage. We are heads up now on the well. We are past the carried point this year, so now we are paying our position. If you look at our budget this year, I think we had put in $10 million as our portion of these pilots and projects that we are doing this year.

Operator

Your next question comes from Patrick Walker - Walker Smith Capitals.

Patrick Walker - Walker Smith Capital

I wanted to follow up on the Comanche 34-1 and the Meyers 2683 that have been drilled in the shale.

James E. Sigmon

The Comanche well has been drilled and we have moved the rig to the Meyers well.

Patrick Walker - Walker Smith Capital

What is the status of the Comanche, then? Has it been completed yet?

James E. Sigmon

No, we just moved the rig last week, as a matter of fact. We have a scheduled fract date at the end of the month.

Patrick Walker - Walker Smith Capital

Are you using the same crew as you had last time? Are we hoping to get better results?

James E. Sigmon

No, I think we are going to make a change.

Patrick Walker - Walker Smith Capital

How is the service availability in the pressure pumpers out there?

James E. Sigmon

We get the same people that everybody else does, company wise. There is a lot of turnover from the personnel and we are very, very busy. In this day and time with green hands, they are going to have problems. All we can do is just try to help them through it and make sure that we get more consultants on location to try to cover more things. See if we can keep that from happening to us.

Patrick Walker - Walker Smith Capital

Your CapEx plan for the year, how many personal shale wells do you plan on drilling? What does that project?

James E. Sigmon

Right now we have a budget of five wells going on this year. That could be increased depending on what we are seeing on these first wells.

Patrick Walker - Walker Smith Capital

What is the availability on the revolver? I know that it was up at 110 at the end of the quarter, but you subsequently closed almost $14 million in the convert.

P. Mark Stark

As I indicated, we have $10.7 million borrowed against our revolving credit that has a borrowing base of $50 million. We have just under $40 million available right now, in terms of dry power.

Patrick Walker - Walker Smith Capital

Now, is that as of today plus the post to closing on the April 4^th deal or is that effective as of March 31?

P. Mark Stark

That is effective as of March 31.

Patrick Walker - Walker Smith Capital

What would you project to have at the end of June, or at year end? What would you expect that balance to be?

P. Mark Stark

We have not been given any forward guidance on that.

James E. Sigmon

One of the things you can look at is our cash flow. That is why we give the EBITDA numbers. The first quarter is typically the slowest quarter of the month and you can use those numbers, and what past histories have been, in order to be able to see if we are able to cover everything we have got this year. Right now we believe that we will be able to.

Operator

Your next question comes from Kenneth Hunter - Calm Waters Investments.

Kenneth Hunter - Calm Waters Investments

My question has to do with the Mertha Basin and what the plan was with the shale well that we had drilled there. What is the timeline on that?

Gary S. Grinsfelder

We are working in conjunction with our partner, Continental Resources, as you might recall. We are in the process right now of perforating a shallow zone in that well bore that we fracture stimulated last year. We have watched with great interest the sand ridge play over at Ping and Creek, a county or so away.

It looks like our acreage is well positioned in the long trend with some of that activity and we are putting a lot of study into trying to draw some parallels to our acreage to the effect that Sand Ridge and others have had over at Ping and Creek. Our plans for the year revolve around, with our partner Continental, acquiring some seismic 3D data, with the intent toward the end of the year of drilling at least one well.

Kenneth Hunter - Calm Waters Investments

On the Fort Trinidad field, you had talked about the buda. Could you touch on that briefly?

James E. Sigmon

In that particular area, the buda is a very active play. In fact, companies like PetroQuest and some others have come in with wells that are a thousand barrels a day kind of wells. Very excellent wells. There is buda production across our blocks that have up to 200 thousand barrels on vertical wells. Consequently, we are drilling a well on this new block of acreage to look at the Glen Rose. Our plans are, because of where it is situated, close to and offsetting some good buda production, we are going to go horizontally into the buda. We are very interested in what that might do.

Kenneth Hunter - Calm Waters Investments

Is that above or below the Glen Rose?

James E. Sigmon

That is above the Glen Rose. That is where we will drill through the buda section, down into the Glen Rose section, then come back up and go horizontal in the buda.

Roberto R. Thomae

I believe that was our last caller.

James E. Sigmon

I want to thank everybody that did ask questions and those that are on the line that did not. I appreciate your interest in TXCO and joining us today. As always, call Robert Thomae or myself if you have any further questions.

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Comments

[twinnkie:]

dan is right on the top of this. this stock very undervauled i hope can shake these guys up caution is good but come on lets go as a shareholder i agree with 100 percent. this stock shohld be 20 dollars which i think it will be im not going away either give em hell daniel.

2008 Jun 28 02:35 PM