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Executives

Bob R. Simpson - Chairman of the Board & CEO

Keith A. Hutton - President

Louis G. Baldwin - EVP & CFO

Analysts

Joseph Allman - JP Morgan

Brian Singer - Goldman Sachs

Kent Green - Boston American Asset Management

Eric Hagen - Merrill Lynch

Stephen Beck - Jefferies & Company

David Heikkinen - Tudor, Pickering, Holt & Co. Securities

XTO Energy Inc. (XTO) Q2 FY08 Earnings Call July 22, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 XTO Energy Incorporated Earnings Call. My name is Eric and I'll your coordinator for today. [Operator Instructions]. XTO's management will be making forward-looking statements during this call. Risks associated with such forward-looking statements have been outlined in our latest 10-K and 10-Q news release. Actual results may vary materially. The company undertakes no obligation to publicly update or revise any forward-looking statements.

I would now like to turn the call over to your Mr. Louis Baldwin, Executive Vice President and CFO. Please proceed.

Louis G. Baldwin - Executive Vice President & Chief Financial Officer

Thank you very much for joining us today to discuss our second quarter 2008 results and acquisitions that we have announced today, including exciting new acquisition to our Barnett Shale core position. Participating in Fort Worth today are Bob Simpson, XTO's Chairman and CEO; Keith Hutton, President; Vaughn Vennerberg, Senior Executive Vice President and Chief of Staff; and Tim Petrus, Executive Vice President of Acquisitions.

We'll start today's conference call with announced acquisitions which we are particularly proud of and then talk briefly about second quarter results. To recap acquisitions announced today, in aggregate we announced $2.1 billion in acquisition, $1 billion of which closed during the second quarter and the balance would close as we go through this year, including the aggregate total 485 Bcf of proved reserves represented by 55 million cubic feet a day of production and 280,000 net undeveloped acreage in some of the best basins in the U.S., including the shale basins. That brings our acquisitions for 2008 to a total of $10.6 billion, which we view as a handcrafted company unique compared with any other public company available.

In aggregate, for the year, we've announced 2.3 Tcf of proved reserves acquired, 420 million cubic feet of daily production and 1.4 million net undeveloped acreage, which have 6 Tcf to 8 Tcf of upsides. We plan to fund these acquisitions that we have announced today through a combination of long-term senior notes, equity and our commercial paper facilities. As always, we'll address our capital markets transactions when appropriate.

Looking to the second quarter, it was a strong quarter with XTO beating both First Call estimates for earnings and cash flow, production up 29% compared to the second quarter of '07 and up 4% sequentially compared to the first quarter. Adjusted earnings were up 28% for the same period of last year and cash flow was up 41%. Results for the remainder for the year will benefit from additional development growth, closing of acquisitions, including the already announced Headington and Hunt acquisitions and those announced today along with higher commodity prices.

Comparing to First Call estimates, our earnings per share $1.09 basic, a $1.07 diluted compared to First Call of a $1.05. It was like... compared to GAAP earnings, we had $575 million and $1.11 in diluted earnings per share. The difference was a non-cash gain, a derivative fair value of $22 million, bringing our adjusted earnings to $553 million.

If we compare and look at our production for the quarter, gas production was 1.795 billion cubic feet a day, that is a 35% increase from the same quarter of last year. Oil production just over 51,000 barrels a day, that is 11% up from last year; NGLs 15,574 barrels per day, up 3%. So as I previously mentioned Mcfe about 2.2 Bs a day and that is up 29% for the year. If we look at breaking out that 29%, 16% of that compared to last year comes from acquisitions, 13% comes from development. I did mention there was a 4% quarter over quarter growth. Of that 4%, 3%, the large majority comes from development growth and about 1% from acquisitions.

We didn't [ph] benefit from higher average prices as we went through the quarter. Natural gas was $8.51 compared to 7.94 last year and 7.70 last quarter. Oil averaged $90.89 up from $80.74 last quarter and NGLs $58.87 up from $52.98 last quarter.

Give you a brief hedging update, we have put some additional hedges in place for 2008, '09 and '10. Looking at the balance of the year, we have 1.2 million cubic feet a day hedged at just over $8.30 that has been put in place last year, and we've announced some new hedges, a 100 million a day at 12.64 for September through December. Looking into 2009, we have about 300 million cubic feet hedged at a price of $10.26 and 2010, a 100 million cubic feet at a price of $10.27.

On the oil side, hedges put in place a couple of years ago, 30,000 barrels a day at $74.20, and looking into the fourth quarter, 13,000 barrels a day addition to that at $135.35. Looking into next year, we have 20,000 barrels a day hedged at a price of $126.20 and for 2010, 15,000 barrels a day hedged at a price of $134.56. As typical, all hedges are in the forms of swaps with most having basis hedges in place that are expected to be put in place.

Looking at revenues and cash flow of the quarter, revenues $1.936 billion, up 46% from the second quarter of '07, operating cash flow $1.23 billion, up 41% from the same period of last year, and cash flow margin remains very constant at 64% compared to about 65% last year.

Looking at operating cash flow per share, we are at $2.38 on a basic... diluted basis, and that's up 29% from the same quarter of last year. Gas gathering and processing margin, $16 million this year, that's up from $9 million in the second quarter of last year.

Turning to unit cost and guidance, if we look at production expense, it was $1.08 for the second quarter. That was above guidance of $1.00 to $1.05. However, we're keeping our guidance consistent in the $1.00 to $1.05. If we look into some detail of production expense for the second quarter, we'll see that labor and overhead was $0.25, which is flat with the first quarter of '08. Maintenance and workover increased to $0.60 per Mcfe, that's up from $0.55. So of the $0.08 increase, $0.05 came from maintenance and workover and that really came as a result of increased work in San Juan Rockies and Permian division, primarily on the Dominion properties. As we bring those up to our standards, we expect those numbers to come down.

The second-largest component of increase was power, fuel and CO2, that's up $0.03 to $0.21 per Mcfe. And if you look at the average prices for the quarter, natural gas increased on average basis NYMEX, $2.90 from $8.03 to $10.93. Oil prices were also up, so a good portion of this increase comes just from the higher than projected commodity prices. Compression and other expenses were $0.02, so they were flat. So the majority of the increase came solely from maintenance and from power and fuel. Therefore, we are looking at our pricing case for the remainder of the year and we expect, given the benefit of additional acquisitions coming on, particularly Headington and Hunt that have a lower per Mcfe cost, that cost to come back within guidance of a $1 to $1.5.

Looking at taxes, transportation and other, again higher than expected due to the increased commodity prices and that was the sole reason for that. Again, we averaged about $3 higher on gas and were about $26 higher on oil compared to the first quarter. Exploration expense $0.07, within guidance, DD&A $0.07 within guidance. We are increasing our guidance range for the remainder of the year due to the acquisitions at a higher per Mcfe cost in particular the Headington and Hunt acquisitions.

As a retirement obligation, a $0.03 in guidance, cash G&A $0.29 within guidance, stock-based non-cash G&A $0.16 as expected and interest expense of $0.51 within guidance. If you look at the capitalized interest, that was $8 million for the quarter and we are increasing our guidance moving forward due to increased borrowings for the acquisitions that have been announced. Income taxes 36.4% effective rate with a current portion of 32% paid in cash for current.

Looking at our capital expenditures, development costs of the quarter were $767 million which are equal to the development cost of the first quarter, also $767 million, so 5.35... excuse, $1.534 billion for the first half. Unproved property acquisitions, $910 million, that is an increase from $739 million for the first quarter bringing us to $1.649 billion for the first half of the year. Proved property acquisitions, $850 million. When added to $521 million for the first quarter, it brings us to $1.371 billion for the year. Gas gathering and processing and other asset acquisitions, $200 million, when added to a $150 million for the first quarter gives us $350 million for the first half. If you look at our total capital expenditures for investing activities, $2.727 billion for the second quarter, when added to 2.177 billion for the first quarter comes up to $4.904 billion for the year.

If we look at the balance sheet, total assets at 6/30 $630 up to $24.3 billion, long-term debt, 6... $7.9 billion which does include the effect of $1 billion in acquisitions closed during the quarter that were announced today; shareholders equity, $8.9 billion, which does include other comprehensive income of $1.2 billion. That number did spike up from 500 million due to the increased commodity prices. So, if we look at debt-to-cap net of other comprehensive income, 43.7%, so the balance sheet is in good shape at the end of the quarter.

With that, I will turn it over to Keith Hutton to talk about our acquisitions and the quarterly results.

Keith A. Hutton - President

Thanks, Louis.

If we take a step back and kind of look at what we've done this year chronologically with our acquisitions and how that layers into our operations, we announced $1 billion worth of acquisitions in February right before our analyst meeting. And with East Texas and San Juan Basin bolt-ons and about 76,000 net acres that put us in a good position in the Woodford and Fayetteville and added to our Barnett position.

The next acquisition we announced was the Marcellus acquisition from Linn in April, $600 million acquisition. That's added 150,000 net acres in the Marcellus. We talked about the Marcellus and Bakken being two big shale basins we would like to hit in during the year that we were not in '07. And in addition, adding to our Woodford, Fayetteville and Barnett positions as we went through the year, this Linn acquisition was a nice start. And the Marcellus, if you look at where the acreage is, it is in Southwestern Pennsylvania and the northern part of West Virginia, which right now is where many of the good wells are being drilled by some of our outside operators. In addition to that, we added to that through the year, I'll talk about that in a minute.

Next was the Southwestern Fayetteville acquisition. We're already in a nice position in the Fayetteville. It was a $500 million acquisition that's added 55,000 net acres and gave us a nice contiguous operating position with which to expand from. So, we added to our Fayetteville position. Next was the Bakken from Headington. In late May, early June, we just closed that one, a $1.85 billion acquisition that made us one of the largest acreage holders in the Bakken play, one of the best oil plays in the U.S. That was a 350,000 net acre position and we've added 100,000, so that make us one of the top two or three acreage holders in the Bakken.

In addition, we just announced a well at 650 barrels a day net equivalent production from the middle of Bakken and we're in a position where we are drilling a Sanish/Three Forks test as we speak. I mean, a lot of our acreage is surrounded by continental trends, wells that are... announced recently in the Sanish and Three Forks. Next was Hunt in June, a $4.2 billion acquisition, that was a nice bolt on in East Texas, our Freestone Trend happened to add Haynesville acreage position as well to what we already had, I mean put us in a position with nice cash flow properties in the Gulf Coast and offshore just the drilling budget, and our Haynesville position anchored to about [ph] 100,000 acres. We added today $1.3 billion miscellaneous type acquisitions, spread out again across East Taxes and the San Juan basin and along with acreage in all of the shale plays in general that we are in.

And last but not least, our Barnett acquisition that we announced today as well, an $800 million acquisition that we surround most of that acreage currently with our production. We take much of their production into our own pipeline system, and put this in a position for us... easy for us to grow up. We know a lot about the properties and we think it has the Bcf potential going forward. So you wrap all that up and you end up with $10.6 billion in acquisitions, most of that in areas that we already know, or have looked at for a long time. We are now at all the shale basins that are actually working in a large position. So you know us as XTO as we go along with our operations, I think you'll see us grow those positions and be one of the leaders in all of the shale basins.

With that let me step to the production in the second quarter. Oil and natural gas liquids were relatively flat during the quarter. Gas was up 5%, some 87 million a day. It was in the middle of our guidance. It would have been higher except for some operational issues we had in East Texas Freestone Trend where we had a couple of our plants go down along with one of our third party plants. And I think you'll see when we talk about Freestone Trend that right now production has kind of kicked up hard here in July and expected to grow rapidly in the third and fourth quarter. We've always talked about our Freestone Trend being a little lumpy depending upon what's going on with pipeline systems and plans and well completions. And so if we look at the Freestone Trend, it was relatively flat from second to the third quarter, first to the second quarter, making about $680 million gross... it was I think 675 or something in the first quarter, so it was relatively flat. So, a lot of that again is due to downtime tied to plants and pipeline auditions plus timing of recomposed completions. What was really exciting about the quarter is we completed two of our deep horizontals Cotton Valley Lime, the Gail King 1AH and Gail King 25, one [inaudible] 21 million a day, the other at 10 million a day. So we now have 3 deep wells that we've completed here this year. The first one was 13 million a day and then these two at 10 and 21 million a day. So, we originally said we thought these wells would probably be on average 12 million a day. Obviously, that adds up closer to15 million over the first three we've gotten done, and then we think there is somewhat around 10 Bcf per well for about $7.5 million. So, very nice economics, about as good as you'll see in any place. And what I would to tell you is a lot of the Hunt acreage we bought with the Hunt acquisition is direct offset to many of these wells that we are drilling, so we've added to our opposition there.

And again Freestone Trend is actually making 710 million a day or greater as we speak or an average 680 in the second quarter. So you can see that as we go forward in the third quarter our volumes are kicking up pretty hard. We should actually start up a new pipeline that connects our Southern Ball Perry area [ph] back to our main plants which will allow us to bring on more production and complete some of the wells we've drilled down there. We currently have 15 wells that are not completed, sitting there and waiting on that top line expansion.

If we then flip to the eastern side East Texas, the Sabine Uplift and Cotton Valley, this is where most of the growth occurred during the second quarter in the Tri Cities field and the Cotton Valley field, both where we are drilling Cotton Valley sand wells, very good wells and anywhere from 2 million to 5 million a day to about 8 [ph]. And our Angelina River trend around Doyle Creek and Decker Switch where we've got wells ranging from 2 million to 2.5 million a day that came on during the quarter. This was responsible for most of our growth in the Eastern region during the second quarter.

If we flip from that to the Barnett Shale, currently running 18 rigs, 16 in the core, two in the non-core. A lot of core wells that are averaging 4 to 5 million a day start rates, a very good quarter where we were up 8.5%, 9% on a net basis. I mean, currently our production is growing fairly rapidly, we're about 630 million a day. We have some major pipeline expansions in the northern end of the core that should come on here in the third quarter, allowing us to ramp production at a pretty good pace. So I think everything is going well in the Barnett Shale and you should see us pick up a couple more rigs here as we go into the third and fourth quarter, and probably exit the year at 22 rigs in the Barnett Shale set up for next year's growth.

Permian Basin, kind of operations as usual, six rigs drilling, big growth fields in Russell and University Block 9. Russell is now at an all-time high for us at 43,000 barrels a day, and Block 9 continues to perform well. Goldsmith is also at a record for us at 4,300 barrels a day as well as we've begun to bring on some really good [inaudible] field was down a little during the second quarter mainly due to storms in West Texas and currently production is on its way back up to the 28,000, 29,000 barrel a day range. If you look at South Texas, we brought on an couple of really good wells, the Jacobs 1H5 [ph] which is 6.8 million a day and the VA Petru which is a deep Frio well at 8.8 million a day.

So, South Texas is going as we expected. But the San Juan Region, in general, everything going well. Raton Basin still growing and currently making 76 million a day. We are going to try and drill two Pierre Shale well tests before the end of the year... I'd get it done until early in the first quarter of next year. But if you watch some of our competitors and their announcements, we believe Pierre Shale is under the majority of 54,000 net acres, and so we have some nice upside that we haven't really talked about for going forward.

Natural Buttes that we bought from Dominion last year, everything is kind of in line. It is making about 77 million a day. We are currently running three rigs, and again working on our takeaway capacity there is... Dominion was kind of behind in their infrastructure and work done as we go, but the wells are producing kind of as we expected and the costs are in line. Mid-Continent region, one of our new growth areas really associated currently having 14 rigs running and really most of it focused in the Woodford Shale and Fayetteville Shale.

In Woodford Shale, we brought on a couple of wells at 3 to 4 million a day during the quarter, currently have five rigs running in it... six rigs running in the Woodford Shale, excuse me, and we will probably be seven or eight by year end. Fayetteville shale where we have now 380,000 net acres from our acquisitions and leasing efforts, brought on three or four wells at the 1.5 million to 2 million a range. Most of these wells are in the shallow portion of the basin, where they are 1,500 to 2,000 feet deep, probably going to average around 2 Bs per well and it'll cost about 2.2 million dollars to drill, so very good economics. We currently have five rigs running there probably driving that to seven to eight by the end of the year.

With that, let me turn it over to our CEO, Bob Simpson to give an overview of the new company. Bob?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Good morning, everyone. Welcome to the update of our second quarter results and then also the ongoing acquisition efforts in 2008. I'm going to talk about the acquisition for a little that's in the progress to give you a better feel for our view of that and where we think we are. If you look at aggregate, we acquired or committed to acquire $10.6 billion this year, which is more than double any year we have done before. So, it's a very aggressive year in terms of building for the future. I think what I would draw your attention to is the concept of the aggregate of the company we're building and then our goals that we're going to be announcing in terms of progress for the company.

If we look at the new company that we've added and again we look at... we, if you... I'll call your attention to the website, you can go see these at your leisure today or any time in the future, but the way we look at the $10.6 billion, I'll give you the summary statistics for it, so that you can see our perspective. We are projecting $2.4 billion in cash flow out of the acquisitions that we've done this year for 2009. If you look at that, it's about $440 million a day equivalent of production. If you look at our hedges positions, it's about the same. So what I would tell you is that we protected the cash flow that's projected here for this new addition of about $2.4 billion, substantially protected the 90%-some [ph] substantially. So these numbers that we talk about are firm.

And for perspective, I'll call attention to the history of the company. Our cash flow in 2004 was $1.2 billion. So these acquisitions are... have twice the cash flow that the company had four years ago. So, it's a very dramatic change in terms of the growth profile for the company. Within that... so it's cash flow rich and protected and within that it's 6 Tcfe to 8 Tcfe of upside. So, the interesting thing to me is for a little over four times cash flow for next year, we've got a tremendous set of assets that are protected from the cash flow growth and at the same time we have acquired 1.4 million net undeveloped acres with those same dollars.

So what you've got is a rather low multiple cash flow in aggregate coupled with a very high octane 6 to 8 Ts additional upside for those dollars. And this was a company what we would submit would not have been available in the world. It's created by us, we've literally bottled in [ph] hundreds of small acquisitions and the mass of it's done in about five transactions. And so the... again, it's hard work doing it this way, but it is not an opportunity that would be available otherwise in the marketplace.

And if we look at where that acreage is and then compare it with where the overall company is, what I would tell you about the overall company is that we have 2.4 million undeveloped acres. And so we require 1.4 to 2.4 on the undeveloped side and, of course, obviously you can get large numbers by leasing ram pasture [ph]. I've seen it done my whole career. That's not actually... we don't do ram pasture leasing or heights [ph]. These are solid, basically shale play acres that are multi thousand dollars and anchored by of some up to 30,000 in different market. So it's not something designed to look like [inaudible] but it is real potential and growth for this company.

One of the things we will be putting out on the website today is what this does for the company, and we going to announce a plan that we think that this will allow us to double the size the company from the last year by the end of 2011. And when we say double, we mean double production and double reserves. Production last year was 1.8 Bcfe equivalent. We think this... we've now got in place the assets that'll allow us to take that to 3.6 Bcfe by the end of 2011. And then the reserves are well over 11 Ts last year moving towards 22 Ts by the end of 2011. And one of our goals we talked about earlier was the 15 Tcf ego [ph] by the end of 2009. I am going to have to change that to the end of 2008 with these acquisitions. So we've pretty accelerated that a year with this movement.

If you look at the overall production number, this would be the greatest natural gas company ever built in America. The current production by the largest producer that we're aware of in America is a little over 2.1 Ts... excuse me 2.1 Bs a day. With this projection of 3.6 equivalent, that's probably around 3 Bs a day production with it for natural gas. And so we're bearing down… this process is bearing down on the largest gas producer ever in this United States.

That's not [inaudible] one of the co-founders, that I submit that we are mind boggling [inaudible] but what it says is the XTO process [inaudible] excellence, but it's going to result in the largest ever. And so the... for those us who are part of this process, we point to that with pride and also we also point to those owners that along with that will come nice robust value creation for the owners because we are doing... because we are going to do that within... that means that we are building and that it will be accretive to value per share. I've got almost 7 million shares that's looking forward to the doubling of this company.

So, going back and looking at it by area, you look at four years at 2.4 million acres of undeveloped, again I call you to go to the website. If you look at what we did this year, out of the totals, Bakken Shale, 450,000 net acres all this year, Woodford Shale 80,000 acres out of a 120 for the company this year, two-thirds this year, Fayetteville 170,000 acres out of 380, almost half this year, Marcellus Shale 280,000 acres that for the company all this year, Haynesville Shale 65,000 acres over approximately 100,000 acres of the company, so two-thirds this year.

The eastern region which is again one of the basic core areas of the company being what we would call East Texas, Louisiana, 300,000 acres out of 950, about a third this year, Barnett Shale, 30,000 acres this year out of 280. And then Gulf Coast, the Gulf of Mexico region 330,000 acres out of 425, and then the North Sea which is nearly up to 300,000 acres up from zero. So, again looking at in total, you see that the over half of our undeveloped acreage came this year, that is on an acquisition that we are paying a little over four times next year's cash flow. So, that's a very exciting transition for the company. It allows us to announce this new goal of doubling it. It's a lot of hard work, a lot of excellent opportunities.

I've talked about this earlier this year and I've seen it transaction after transaction. This opportunities were largely driven by the peer tax change in America as of the dollars were driven by that and the decision making process. So I think we've had a unique opportunity this year to reach out and acquire a very substantial amount of them. I am sure we are the leading field maker 2008 so far in terms of reducing property acquisition.

Now, so where does that bring us and where are we in the context of what we plan on doing this year. We've done a lot. The organization has been busy and what I would advise is to do is to start the digestion and development of these assets. [inaudible] for the rest of the year that would be, what would be the pace of that. You think that would be around the billion dollar pace. It is July, so obviously what I'd say is we are probably 90% done this year or thereabouts in terms of activity. I think there will be a reward for having done it sooner than later. I have seen some transactions recently that were substantially more expensive than the ones we've done, those two out there, have seen those two that follow them, and so I think there is a reward for being early and aggressive and getting this done.

And so turning to for example the $800 million deal we just announced in Barnett Shale, when we talk about upside, upside on that would be like four times current rate over the next three or four years. That's not just a little upside, that's quadrupling. If you look at our total Barnett Shale production, where it is now, it has the potential to increase to 30% all by itself over the next three or four years, so it's significant in terms of the impact it can have. Again if you look at our core acreage in the Barnett Shale, 155,000 acres, that was about 10% of that, but it also shows you the power of the Barnett Shale.

We'll be looking at you know, the overall, you know impact of the upside and we should have some very exciting updates at year-end on of the total upside of all these assets now we talked about, and we'll update that every year. I think last year it was 35 [ph] or so of additional upside on book; that should grow and should grow substantially. And so if you look at the company, never had an asset base like this in the hands of one of the largest companies in the industry, and it has what we think is now visible means double which is I think phenomenal.

What's allow that is a combination of the company's expertise in doing acquisition exploitation coupled with the emerging shale plays. The shale plays are significantly... we are well-positioned, probably the best positioned as anybody in the core of shales and spread across the U.S. So, that is an exciting feature at XTO. And what it means is not high but it means real growth for us. We don't need hides this. Some other people might specialize in it, our deal is delivering value for the owners and value means production, it doesn't mean rhetoric. So, that's what you will see us doing quietly as we go about our jobs delivering that value.

It is the year of aggressive expansion, the most aggressive in our time here in terms of dollars. Percentage wise, the base company, I would have probably done it before with a smaller company. But we're going to go ahead and target as Keith had communicated to you. But you know what we are doing, what we deal with, and then grow from here.

If you look at the market, the gas markets of late, they are kind of going into their own tail spin. I think it has been exacerbated by the hype of some of the hype artists in our industry of the shale plays that the calls like, maybe a psychological surplus but it's not in the numbers. And hence we'll be a little careful following those people, they have a different agenda. I believe that... they've... some of them were offered the proved unleased category in our industry and there is the kind of that rhetoric, and so they are irritating from our viewpoint because we are real fundamental guys that [inaudible].

But if you look at... really what went on with that one bad storage number which includes the July the 4th and if you go back in time [inaudible] has a holiday in it, it is a little high, and I don't know why the Street hasn't figured that out yet but I see year after year. Now, we will bring more gas over time, yes, and then there is already to a slight degree, but are we in the surplus? No, we're not. Our gas is a great bargain today. It's about 13 to 1 of the intrinsic value of 6 to 1.

So it is less than half price protected, it'll be a great product for the future, it's made in America, it's going to have less of political downside than oil and energy in general because and again I touch on my original career in the 70s under a democratic administration, I saw this as a... that's friendly or trade money than in a hostile environment for energy and I that I don't think I've seen one more hostile than [inaudible]. I don't think we'll return to that level of hostility because there is... there's a lot of mistakes made with policy back then that we are still paying for. So if you look at the future events of that, I actually think over time having the visibility of greater supply will actually help develop markets for a greater reliance on in terms of its use. It's good to know that you're going to have it.

I remember back in the '70s here in Texas in the new home additions, you couldn't get natural gas. They said they've run out of it, we had to be on electric. Certainly that was short sighted, and again it is the cleanest burning fossil fuel. It is a premium fuel and it will serve us well in the future. So, yes, you look at... you don't see LNG imports coming in this year, [inaudible] other places. China is still overcoming an earthquake and their use of gas supply... hurricane still ahead of us. I think we probably pulled back about half the run we've had which is sort of what markets tend to do, and so I think natural gas is a great investment at the moment.

So, well, with that we will turn it open for questions.

Question and Answer

Operator

[Operator Instructions]. Your first question comes from the line of Joe Allman with JPMorgan. Please proceed.

Joseph Allman - JP Morgan

Hi. Good morning, everybody.

Keith A. Hutton - President

Hi, Joe.

Louis G. Baldwin - Executive Vice President & Chief Financial Officer

Good morning.

Joseph Allman - JP Morgan

A couple of questions. Keith, could you just give us your general thoughts on the Bakken, especially on the prospectivity of the Three Forks/Sanish and also talk about, I guess, the Barnett, what are your thoughts about when that play... the gas play in the Barnett Shale will peak? And it sounds like you guys are expecting some pretty good growth over the next several years there?

Keith A. Hutton - President

Well, let's Bakken first. Both Continental's wells that were drilled in the Sanish/Three Forks kind of surrounds a bunch of our acreage. Petro-Hunt actually has one of the best wells drilled in the Sanish/Three Forks along the Nesson Anticline that's been a 1,500 barrel a day well that they brought it on, that's been on for about a year, year-and-a-half. We have recently drilled a well in that particular area and corded, we don't have the data back yet, but we have really good shows and things to report.

So we think it's got some running room. Obviously it's a little early. I mean, people need to drill more wells into it to figure it out, but it was always one of the options that we thought that Bakken play was worth playing with, especially after the Petro-Hunt well. It showed up to be that good and I think you will see the industry actually testing that in a lot a places. So we are pretty excited about it, there is a big upside.

If you go from that to the Barnett, in general, what's going to be remaining in the Barnett as we go forward as people drill it down to 40s, where everybody is heading and then heading into 20s, you are going to end up being in the inter city and I think that would be somewhat of a trap for growth. A lot of our stuff is not in the inter city but we are playing some of it for future growth. This current acquisition is not in the inter city. It was just announced and that would help us in our growth in the next couple of years.

As to when the Barnett peaks I would guess you've got maybe two or three more years of growth and it would go slow because people have to pick up rigs in order to keep growing. You've got to add rigs at least 10 or 15% every year to keep that kind of growth rate up. We are at peak [ph] your guess is as good as mine, but I would guess it's not as high as a lot of people think. You got to take away issues as well in the Barnett. In particular for us, I think we are positioned in a good spot and you will see good growth out of us in the next three or four years but may not be [inaudible].

Joseph Allman - JP Morgan

Excellent. And then you know in terms of drill complete cost, can you give us comments on what you are seeing these days and also any concerns about the availability of equipment or... I am especially thinking about steel, the availability of steel?

Keith A. Hutton - President

You know, it's a worry for every body. We've been able to stay ahead, we've got some really nice deal that we've worked with some of the steel suppliers. You know we are not peaking our rig count up but it's just a massive pace. And some of the wells we're drilling happen to be pipe, it's readily available, somewhat more. But we haven't had a big problem yet but we are sure watching it. I think that may impact the buyers who are going to pick up a lot of rigs going into next year, steel may be one of the big issues. It's already doubled in price, so it's obviously a slight amount of inflation.

You drill wells and we've kind of priced that into our budget increase this year. You know, so it's a question of we had the same effect in '04, and at eased as you got into the last half of the year. There is kind of a mixed bag of people saying it might ease the last half of the year and then others saying, it wont. It will fly out. I think we will be able to get the pipe we need. Again I think those that don't have good connections with pipe suppliers and are pressing their rig count really fast may have... that may be more of an issue for them than they actually understand at this point.

Joseph Allman - JP Morgan

And drilling complete cost?

Keith A. Hutton - President

You are probably up you know 5 to 10% in some areas. You know really we haven't impressed... rigs haven't gone up as much you would have expected, frac costs are not up much, relatively down compared to last year to some degree, but I am sure [inaudible] but pipe's really been the biggest issue.

Joseph Allman - JP Morgan

This 5 or 10% versus what time period?

Keith A. Hutton - President

Last year.

Joseph Allman - JP Morgan

Got you. All right, thanks everybody.

Keith A. Hutton - President

Thanks, Joe.

Brian Singer - Goldman Sachs

Your next question comes from the line of Brian Singer with Goldman Sachs. Please proceed.

Brian Singer - Goldman Sachs

Thanks. Good morning.

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Hi, Brian.

Brian Singer - Goldman Sachs

Bob, when you think about getting to 22 Tcfe, what are your expectation for the additional acquisitions that may be necessary to get you there versus what your own portfolio and what you are in the process of acquiring can generate?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

What I see within that is, the current portfolio we have coupled with what we would do within cash flow, it's not the... what it says is that you basically own it with some spit polishing, normal bolt-ons as we go along that are... that will be within cash flow. And you look at free cash flow, next year, given yesterdays prices that we rented at, we were looking at cash flow next year about 8.6 billion budget, 4.6 plus infrastructure 700 plus dividends, would give you about 3 billion cash flow. Now... so what that says is that we have a free cash flow machine that's growing.

Our free cash flow under that projection is as large as last year's cash aggregate cash flow. Now, it doesn't have a lot of assumptions in terms of an aggressive acquisition problem to make. But what I would tell you is that given our model and our low-cost finding assumptions the thought would be to communicate as it's basically what we own going through the normal XTO process to bring it online plus bolt-ons within cash flow. It doesn't have an extraordinary acquisition problems such as the one you just experienced. And so that's the flavor we are trying to give.

What this allowed us to do... and if you look at across the nation, we have such multi Tcf upsides in many, many areas now. It's not hard to imagine 10 Tcf plus upsides in some of these areas. And so to get the 22, I think you own it. Now what you won't want to do as we are building a company that gives a wall at 22, your job will be the same as always as to have envisioned and create potential beyond that, and so the process we think will allow that too.

So it's not a... it's not a hit the one spot [inaudible] it's over planned. It's simply to give... I think that the reason we do it is when you go through what we've just done, you have to give some guidance and share a thought process with the world and your fellow owners because they want to know what are you doing and did you have a plan. And the answer is what we are doing is taking advantage of this environment and yes we have a plan.

What we're trying to do is build a model that doesn't hit the wall and become a sort of a if you will an old Burlington model where you hope to have some growth, you can buy enough shares, and the treasury stock model and that's not interesting to us, that's an easy one to run. But it results in probably the disappearance of the organization as it did for Burlington. And that was... they had a fine set of assets, fine run company. I would not have to say anything negative about the way they were running that thing, it's just their model took them there. Now what we have it means and the column here is to avoid that model and then to me the good fortune of the time in the industry that the opportunity should be there.

We are having these fields that are unlike anything in my career that are being discovered. And it is exciting time, it's much like probably the people on the 40s and 50s felt like in West Texas and elsewhere that they got to live through it. And so if you recognize it, act on it and it is actually exciting and fun.

One of the things you will see the majors do at some point is notice it and comeback and play it to. And again I think you see a little evidence of that with BP buying the Woodford Shale last week because they are starting to come back to the shale play. But it really is like [inaudible] time you got a 50 Tcf plus discovery around Fort Worth. And it went the way, you know, a giant field was 2 Tcf 10 years ago. And so I think the combination of our expertise and our ability to acquire in the right areas we recognize opportunity has allowed our owners to participate in the vehicle, that the growth vehicle is the giant, and that's what we're doing.

So we gave the guidance so people can understand that we're not having to buy growth. We are not just bored here buying stuff. We actually have a conception that we can double this thing, double the value. Next the stock is going from 13 to over 900 since we went public. In the next level is another $900, and so that... just as many dollars as we've ever made in the history of this company even though it is just the double, it is a phenomenal amount of wealth, the stock going from 13 to 1800, with that dream. Now to do that, all you've got to... you've got to do a lot of things right and you've got to have a plan.

And so what we're simply trying to do is communicate the plan here, and not... and I am glad you asked the question, gave me an opportunity to talk about it. It doesn't have the vision in it that we will be doing $10 billion worth of acquisition every year, and that's... we need to emphasize that to the owners. It's not a dilutive plan or our new goal now is size not value. And that's important to understand. You do have to understand to make this move we have had to put out some equity. But it's not... we're not a reaping [ph] equity issuer. We've got equity and it is precious and so we make [inaudible] Board's intention of a great reward in the long run for our owners.

Brian Singer - Goldman Sachs

If I could follow up on one of the points and I certainly respect that you definitely don't want to have any inventory issues or be at a point where your growth moderates considerably and you are forced into stock repurchase. If we I guess turn back the clock six, seven months before you embarked on the beginnings of the $10.6 billion acquisitions, when do you think you would have hit that wall?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

I don't know , I mean it is a good question. We've always managed the move, so we don't really dwell on the finite. I guess we always believe we'll find a way to not hit that wall. And so we're probably in terms of doubling the company, obviously, you would hit it sooner, but again I don't have a good answer for that because we don't dwell on that. We spend out energy on trying to find a way to not hit the finite wall and that's... we don't.. I just don't focus on it yet.

Brian Singer - Goldman Sachs

Great. If I could ask one quick one, Keith, on South Texas, is there anything I guess specific based on the well results that you've seen that should boost confidence and repeatability or is that just kind of normal course South Texas well results for the quarter?

Keith A. Hutton - President

I think it is normal course, but I would say some of those were surprises on the upside. They are in some sands that there is much production out of in particular fields, so that does obviously add to the inventory for drilling and some of those are great stuff. But when it is coupled to the whole company, it is not a really big number.

Brian Singer - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Kent Green with Boston American Asset Management. Please proceed.

Kent Green - Boston American Asset Management

Yes.

Keith A. Hutton - President

Hi, Kent.

Kent Green - Boston American Asset Management

Hi, how are you [inaudible]? The question pertains to some of these announcements, particularly the Haynesville where, suppose there are 750 Ts in place of which 250 Ts are recoverable. Have your engineers looked at these other shales at, are these just wide-eyed expectations for natural gas or is this possible?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Yeah, if you look at and I am going to let Keith addressed most of this, but I like the flavor of that shale projection. If you look at the Barnett Shale, we're basically 10 years hard into the development of it. And we talk around 50 Ts as addressed. As you get into the plays you would expect to find something that's not as magic, as some overall model might suggest. Now there could be faults in it, there could be... maybe the process where people thought... there is just not enough data for somebody who could say that's proved, even though it's being communicated to you that way.

But that, at this moment, has a tremendous amount of hype in it. Now it may come true, but certainly there is no one in the right mind because of the foggiest idea, that you'll recover 250 T's, our 10-year's U.S supply, that's ridiculous [inaudible]. Now... but they hype artist, okay, they've been hype artists for ever, trace their history. Now, we don't do that, we will tell you yes, we go along. How it's going and you know obviously if you believe it's that easy to fine tune your supply, well then, what is the value of natural gas, it's not zero. And so that's the implication of that, and the danger of that and so the... now there will be areas where it worked more fine, and then apparently they [inaudible] that.

But to extrapolate into that is the greatest gas field approaching in the world. It's just silly and I say that with some experience and I'm dismayed that it's going on frankly. I think it leads to potentially a very [inaudible] things... in fact, there is not a [inaudible] payments. And our credibility is on the line and a lot of other things where they kind of hype.

So again so don't... again don't talk that away, if not, when you weigh down and say well I know [inaudible] it's just the big number and that the Barnett Shale is a wonderful spot. That's kind of what we think at the moment. But anyway the... it certainly makes it feel easy to find gas [inaudible] more shale and more shales around the world. And so the advent of the shale's natural gas is here. I will let Keith talk about it more tactically about in terms of what he sees [inaudible].

Keith A. Hutton - President

Sure. Ken, if we look at Haynesville I mean there really are definitely wells. Most of them are in one particular area, in Louisiana that's fairly, tightly held. Yes you can see it on [inaudible]. That doesn't mean it will come to fruition, I would go to the Barnett Shale and think about the heights that originally surround the Barnett Shale, and it was 5 million acres and 10 counties. If we go back and look at it, it's three counties.

Most of the production is out of Johnson, Tarrant, Denton and Wise. The rest of it is just okay. It does not really add a lot volume, almost all the volume production out of that particular area and that's where most of the reserves are going to from, probably 90% of it out of those three counties, and I think that's probably what Haynes [ph] is doing that if you're going to have some really hot spots, obviously, I think some of these guys have found a couple of them. But, they are talking about 3.5 million to 4 million acres did not be perspective. Yes, that might be true but I don't think it's going to all the highly economic and I don't think it's going to swamp the U.S. gas market and i.e. not shifted.

It's an odd thing to watch people throwing that much firepower out there when they really don't have that much data. You can kind of dream up cases like that, but you need product... well production data to figure it out. You saw that in the Barnett, really Erath, Palo Pinto, Jack, most of that stuff is really not pretty good. Okay, what you here and everybody is [inaudible] and no one is really drilling much out there and there is a lot of acreage that was originally calculated and how big the Barnett was going to be. So just take with a grain of salt for what you are going to see from that field.

Kent Green - Boston American Asset Management

Kind of a follow-up question, we've seen a lot of midstream assets sort of staked it at the market with the MLPs were up to 12 months now. Yet you compared about all of these potentials of these shales for the gathering systems, processing plants, et al, capacity in the Barnett is starting to outstrip... the production capacity outstripped the take away. Why is there a such a big disconnect here? Is it because U.S. E&P companies just expect these MLPs to expand and they are having an hard time with capital and all of that kind of stuff, or will you guys have to continue to go and keep yourselves in the midstream business, just kind of monetizing it?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

You know, I think our plan is... we've looked at the MLPs, our assets, and basically in a growth company, in a growth area MLPs are in need of capital not a source of dividend. And so I think that's kind of a... part of the problem is that they are a yield vehicle in a dramatically growth areas is kind of rough. That means you have to issue equity all the time to still have the dividend, and I don't know. I just like to add sort of a... all I know is that in our situation, our midstream assets under sits [ph] growth capital, and these, for example, in our budget next year $700 million, that's not a dividend vehicle, and so not ready to be one, not ready to tell the world that's one.

And so we pass on... playing like it's one. And again, Kent, I don't know what that means to your question but that's our view point of midstream is that it's a tremendous growth asset, it's not... doesn't have a lot of cash to be thrown around as dividend, and so the ... but maybe it means I mean it obviously has growth potential. I think it's just probably... we are sort of in a world of, I call it, a video game era where people want to push a button and, viola, you've got results. Now, it's just a little more difficult on the ground out there. I mean you've got to through neighborhood and get permit.

There [inaudible] and that's going to go on all over the world, as far as that is not in my backyard, you don't. And that's not... it's going to happen and you clear everything else. And so the magic worksheet answers, spreadsheet answers are not that simplistic out there. And so I think that's part of the... you can build a spreadsheet that we've got... we're drilling in natural gas, particularly to start something silly... silly estimates that are out there. Yes, just [inaudible] now, we've gone from... we've got a five-year deficit in natural gas and the feeling of a block [inaudible], we're still in the five-year average. So I don't know. Things out there now are... move quickly on psychological change in trading. We're just trying to build a company in the middle of it.

Kent Green - Boston American Asset Management

Thank you.

Operator

Your next question comes from the line of Eric Hagen with Merrill Lynch. Please proceed.

Eric Hagen - Merrill Lynch

Hey, good morning gentlemen.

Keith A. Hutton - President

Hey, Eric.

Eric Hagen - Merrill Lynch

Just a quick question, two quick questions. One on the Marcellus, maybe if Keith could comment on some of the issues we've been hearing around water sourcing and disposal and how that might impact the pace of development, also infrastructure constraints? And the second one was on the direction of finding costs and DD&A rates, given that you're acquiring more undeveloped acreage?

Keith A. Hutton - President

Well, let's talk about Marcellus first. Yes, there are going to be some issues with water handling and disposal and so forth. I think the industry obviously with the potential of Marcellus figure that out. Maybe it will take some time and you will have to get the people in Pennsylvania and West Virginia used to what you're doing. In addition, for take-away capacity out of there, sure that's going to be an issue, but again it has more wells that are completed. I think you'll get people lend big pipe and take away. It will take some time, it's really spread out. It's 3 million acres is where Marcellus resides, so it's a really big area. The hot spots will probably be kind of in different areas and so we'll take a single pipeline like it does out of Barnett Shale to actually unload the gas.

And so it's going to be a... it's a longer-term process. Marcellus is a five-year-type gain, before you really see it start running [inaudible]. And so that's fine, we've got ourselves in a good position for relatively cheap number. And so you know us, we'll be able to gain Marcellus acreage as we see the core areas. Now if you look finding cost, obviously it goes up slightly with some of these things we've bought, but rates of return are phenomenal. I don't think you see a big change. It's not like we're spending a lot of money the Hunt prospects and Headington, between the two maybe there are 4 or $500 million next year, maybe 500 million of our total budget, so it's not going to change your numbers a lot from finding cost. We'll go up, I mean just because you got a lot of acreage.

Eric Hagen - Merrill Lynch

Just to expand on that a bit for modeling purposes, just going out a few more years. Right now, I think you're running around a 210, 220 DD&A rate. If we factor in what you've acquired just say 10 billion and I think the total sort of 2P, 3P about 90s and assume about $2 in them just as a conversion cost. You back in the [inaudible] that's around a 260 kind of full cycle development cost, is that reasonable to think it will go towards that direction or not or is that being too aggressive?

Louis G. Baldwin - Executive Vice President & Chief Financial Officer

I think there is a lot of moving pieces and clearly we're guiding towards the fourth quarter up around 240 in terms of overall development, in terms of overall depreciation. Really if you look at a successful efforts company, you've got to look at it differently than approval cost company. But I think going back on a non-accounting basis, if you look at how we look at the world, we see our drilled and finding costs kind of in the $1.60 to $2.00. We can't tell you what inflation is going to run in the next four or five years. So those prospects are very consistent in terms of the economics. And to the extent that you are creating your inventory of upsides, either with proved acquisitions much like the Hunt that are coming in at great rates of return whether we are paying a $1 per Mcf or $4 per Mcf as we talked about on the previous conference call, the Hunt-Headington acquisitions were among the highest rates of return going in that we see.

However, that you are funding these upsides with undeveloped acreage, you are still going to have great economics going forward in terms of how they look. So, it's going to be difficult to project DD&A rates looking out couple of years, but certainly to the extent that you are in a higher commodity price environment and we used to buy reserves for $0.80 an Mcf, now you are paying $3 to $4 an Mcf, your DD&A rates are going to go up. But I think you've got the benefit of higher rates of return on your acquisitions and higher rates of return on your undeveloped acreage that you are doing. If you don't have a lot of write-offs and we are very careful about where we are buying this acreage and don't anticipate substantial write-offs related to that.

Eric Hagen - Merrill Lynch

Great. That's very helpful. Thanks again.

Operator

[Operator Instructions]. Your next question is a follow-up question from the line of Joe Allman with JPMorgan. Please proceed.

Joseph Allman - JP Morgan

Yes. Thank you. Hi, again, everybody.

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Hi, Joe.

Joseph Allman - JP Morgan

Keith, on the Haynesville, I understand you may not as big as everyone is saying, but it appears you guys have a pretty good acreage position. I think you guided, what is it now, 100,000 net acres prospective at Haynesville, could you talk about your plans for testing it?

Keith A. Hutton - President

Sure. We continue to acquire and what we believe is the core, so really want to tell you where that might be. I think you will see us pick up additional acres, and we will probably drill three to four horizontal wells in Haynesville by the end of the year. That is kind of our plan. We are out actually testing some vertical in some of our acreage position. I again don't really want to talk about where that it is, but I think we are getting a picture of where we think the core may be. And it may be slightly different than the rest of the industry, but I think we are all holding over for next year or so.

Joseph Allman - JP Morgan

Actually your acreage now is about 100,000 prospective?

Keith A. Hutton - President

Yes.

Joseph Allman - JP Morgan

And then the Cotton Valley lime, what does your inventory look like for those prospects?

Keith A. Hutton - President

Those deep horizontals?

Joseph Allman - JP Morgan

Yes.

Keith A. Hutton - President

We have about 100 in inventory and we probably added 30 or 40 with the Hunt acquisition. So, you've probably got 150 wells [inaudible] deep horizontal.

Joseph Allman - JP Morgan

Got you. And then if in fact these wells does ramp up pretty meaningfully, what are you folks doing in terms of your pricing, say you don't get negatively impacted with your Barnett Shale production, you are locking in some firm transportation, what can you do to avoid prices dropping a whole lot for your Barnett... for the Barnett Shale production and your production around that?

Keith A. Hutton - President

We actually anchored a bunch of those [inaudible] and by doing that we signed a firm transport. So I think we are in a pretty good shape as far as being able to deliver the Pierre well and try to stay out ahead of that. I think the industry is also going to be laying some lines further East to try and get out of Pierre will be the big draft, and your seeing all that go on right now. So I think by the time Haynesville gets up to really running pretty hard and you have new pipe in the ground to stretch it over to the east [inaudible] I don't think it will be as bad as people may think it's going to be.

Joseph Allman - JP Morgan

Got you. And then lastly, Bob, you know you mentioned earlier the BP accusation of Chesapeake's Woodford Assets, I mean what do you think are the implications of that? I mean do you think it's is there now a race to capture resource and you guys making all these acquisitions you are doing pretty well in that regard?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Yeah, I think the race has been on in the Barnett Shale for a few years of which we were one of the earlier leaders in recognizing and expanding. Obviously to the extent the shale plays will work, it is a tremendous way of the future here in the U.S. One of the things back at the Haynesville, talked about a while ago, what I was hard on was the aggregate estimates. There will be some excellent Haynesville, all right. So, I think one of the things that we've learned and we would like to communicate with The Street is that in every shale play that is core and there will be new core, and the value difference for example between a core acre in the Barnett shale and the Erath county is probably 10 to 20 to 1 and may be higher and certainly higher at low gas prices.

It'll go from rate of return to no rate of return. And so...so ...and so while we won't caution people about and certainly people are always tempted to do this, when something gets to be glamorous or sexy, I call it there is the tendency of the phase that every play goes through in our business is high. And so its... so people are saying, well, I hadn't drilled anything and my stock tripled and that, I need to say I got more acres. And so that... and so, well, what we try to communicate, as we approach every shale play trying to avoid what it just hype type of acreage person's economic sounds fundamental valuable acreage and that I'm sure the Haynesville has the 10 to 20 to 1 example coming. I'm sure Marcellus does, I know Fayetteville does, I know Woodford does, and have already seen it, and so well we will continue to communicate is our focus will be to translate and proving that.

We will add to the Haynesville, but we will... we will be within what we perceive is the core, and of course we are not going to share that with the world because that's proprietary, and certainly with our experience, we have a better what a lot of people sounds core, I will take that over someone else every time because I know these people are good and so you know what they are doing, and I have lot of expertise in the Shale and know what a core looks like. So when someone says okay, that was a great well [inaudible]. What I don't want is us to lose our reputation with the Street, with the public over that silly stuff because lot of money to be lost and I'll get a black eye [inaudible] credibility in this industry developed over 30 years, I hate these risks and throw it around recklessly when it was built on the backs of a lot of great men, and that's the way I will look at it as an insider. I mean it's integrity and credibility, and not just high [inaudible].

So it bothers me when I see the hype artists come in and trade off of our reputation with the public. And so that's one. If you want to know what I'm screaming about, that's this. So, I see that being done very much right now by some of these people, they have done it before if we go check their history. And so I'm going to go around saying it. I don't want to be caught up and I have spent 30 years making my reputation, I'm not toeing the line with these guys. And you're going to hear me speaking what I judge to be true, and if we kick some shin, it's just us.

Joseph Allman - JP Morgan

That's very helpful, thanks.

Operator

Your next question comes from the line of Stephen Beck with Jeffries & Company. Please proceed.

Stephen Beck - Jefferies & Company

Hi. I was wondering if you talked about the Bakken well that you just finished drilling, taking that course. I was wondering if you could talk a little more about your plans going forward, timing of your next well and so forth?

Keith A. Hutton - President

As far as the Sanish/Three Forks goes?

Stephen Beck - Jefferies & Company

Yes.

Keith A. Hutton - President

You know, we will drill this first one. We've got a couple more planned, I think, that we will try before the end of the year. Obviously since April we are drilling wells that are 650 barrel down in the middle of Bakken, you are not going to quit that to go to Sanish/Three Forks. But I do think we have a large acreage position that has that potential, and you are seeing another people make them. So, I would guess you'd see us drill two or three by the end of the year as our test cases and then as those play out and we see what other people are doing then we'll add to that next year.

Stephen Beck - Jefferies & Company

Okay. And Woodford, can you give us a little bit more color on your drilling and the progress there?

Keith A. Hutton - President

Everything is going kind of according to plan. We are working on facilities and infrastructure to get takeaway out of the Woodford. We are involved in the major pipelines that are in there. Well costs are still in the $4.5 million to $5 million range and reserve is still 3 to 3.5 Bcf type range per well. I think nothing has really changed from that standpoint, it is interesting to see BP come in, which should tell you that the Woodford is actually pretty good even though some people think it's not. That's a good point and we have a nice core acreage position, so looks better and better, Woodford.

Stephen Beck - Jefferies & Company

Okay, great. Thanks very much.

Keith A. Hutton - President

You bet.

Operator

Your next question comes from the line of David Heikkinen with Tudor, Pickering, Holt.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities

Morning guys. Just one big picture question. When you think about doubling the resource potential of the company, can you talk at all about a range of where your share count would be? I know you are generating free cash flow, but just trying to think about in different commodity price environments, what's your sensitivity to equity versus hitting the doubling target?

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Yes, the question of equity within the overall will be a small investment in equity relative to the goal, but it's not an ongoing investment. I don't enjoy issuing equity routinely through the years. We didn't create value doing that. I think they called it [inaudible] but we are not going to that model.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities

Okay.

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

And I appreciate the question because it is an aggressive concept to see that many Ts, but we're trying to give sense of what we own, not a sense of ... we've shifted [inaudible].

David Heikkinen - Tudor, Pickering, Holt & Co. Securities

Okay, thanks guys.

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

You bet.

Operator

We are currently showing no more audio questions in queue. I would like to turn the call over to the management for closing remarks.

Keith A. Hutton - President

We would like to thank everyone for listening in. Again, a good solid quarter, beat estimates and it was great to have an opportunity this year, our thoughts about the new company that we handcrafted $10.6 billion in value and how that affects the ongoing ability of the company to both double production and reserves by the end of 2011. Thank you very much.

Bob R. Simpson - Chairman of the Board & Chief Executive Officer

Thank everybody.

Operator

Thank you for your participation in today's conference. This concludes our presentation, you may now disconnect. Have a good day.

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Source: XTO Energy, Inc. Q2 2008 Earnings Call Transcript
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