Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Jennifer Martin - Director of IR

Fredrick J. Barrett - CEO and Chairman

Robert W. Howard - CFO and Treasurer

Joseph N. Jaggers - President and COO

Analysts

Tom Gardner - Simmons & Company

Michael Hall - Stifel Nicolaus

Brian Singer - Goldman Sachs

David Tameron - Wachovia Securities

Larry Busnardo - Tristone Capital

Leonard Benedetto - Howard Weil

Eric Hagen - Merrill Lynch

Bill Barrett Corporation (BBG) Q2 FY08 Earnings Call August 5, 2008 12:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2008 Bill Barrett Corporation Conference call. My name is Marsha and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Jennifer Martin, Director of Investor Relations. You may proceed.

Jennifer Martin - Director of Investor Relations

Thank you, Marsha. Good morning or afternoon to those of you on the East Coast and welcome to the Bill Barrett Corporation conference call. Today, we will review second quarter 2008 operating and financial results, and provide an update on our current operating activities.

We had a terrific quarter and to talk more about that today we have Fred Barrett, Chairman and Chief Executive Officer, who'll open with an overview; Bob Howard, Chief Financial Officer, who will review financial results; and finally Joe Jaggers, President and Chief Operating Officer, who is joining us from Texas. Joe will review operations and provide an update on our development, delineation, and exploration program, and Fred will follow up with some closing remarks.

I have a few items to mention before we get started. We have prepared a user-controlled slideshow that accompanies our discussion. It is available with the webcast or can be printed from the homepage of the website at billbarrettcorp.com. Look around on the left side of the page and click under Current Events, second quarter 2008 result earnings call slides.

In addition, we filed our 10-Q this morning. It is also available on our website. I would also like to mention that we will be participating in a couple of upcoming conferences. Fred Barrett will present at the EnerCom Conference here in Denver, this Monday, the 11th at 8 Mountain Time, 10 Eastern and Fred will also speak at the Lehman Conference on September 4th at 11:45. So please join us for those events via webcast.

I do need to remind everyone to look at the forward-looking statement and cautionary statement disclosures on slide two of our presentation, which were also included in our press release today.

During our discussion, we make reference to discretionary cash flow, which is a non-GAAP measure. Reconciliation to the appropriate GAAP measure was also provided in the press release today. And we will also discuss 3P or proved profitable and possible resources; please note the disclosure statement on slide seven.

With that, I will turn it over to Fred Barrett to get started. Fred?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Thank you, Jennifer. Welcome everyone and thank you for joining us today. I have some brief introductory highlights. You can see those on slide number three, and we'll expand on those highlights in more detail along with some other highlights in Bob's financial discussion and Joe's operational update.

Our development programs continued to perform exceedingly well. The second quarter results like our first quarter metrics are highlighted by record levels including a 28% increase in production, a 100% increase in cash flow and a 243% increase in our earnings.

Our performance year-to-date has led to the following positive adjustments. First, it has allowed to again increase the upper end of production guidance, which is now 77 to 80 Bcfe for 2008. This equates to 2008 growth of 26 to 31% over 2007.

Secondly, it demonstrates continued improvement in our operational efficiencies, translating to improved margins and as a result, we are lowering our LOE guidance frames to 62 to $0.65 per Mcfe.

And thirdly, as a result of drilling efficiencies of less powder foots [ph] and the addition of a fifth rig later this month in the Piceance, we do expect to increase our well count this year in both of these core areas. As such, we've increased our estimate of capital expenditures for 2008, which we now expect to fall between $625 million and $650 million, a nominal increase of $50 million, again earmarked for further low risk growth in these development areas.

Exploration activities are on track. We are in full swing via the drill-bit. Our excitement does continue to mount here at the company, and with more details to follow from Joe, I would just briefly highlight the following.

We are eagerly awaiting a pullback results on our first horizontal shale gas completion at Yellow Jacket. We continue to move forward on our deep drilling program at Cave Gulch and we continue to see encouraging performance from key Blacktail Ridge wells in the Uinta.

In parallel, we continue to expand our Rocky shale gas exposure through the second quarter having commenced drilling at two new projects; one at the Southwest Montana Circus shale gas program, and the second, at our up shale gas prospect in the Uinta Basin.

Our encouragement continues to build on the exploration front and with the strong likelihood of continued performance at our developments programs; we are very well positioned for an exception year in 2008.

Before I say more on the remainder of 2008, let me pass it over to Bob for added detail on the financial status of Bill Barrett Corporation. Bob?

Robert W. Howard - Chief Financial Officer and Treasurer

Yeah. Thank you, Fred. The summary of our second quarter financial metrics are provided on slide four of the presentation. We enjoyed another strong quarter with record results, due to continued growth in production, Rocky Mountain regional gas sales prices that are well above last year's level and a focus on our operating efficiencies.

Oil and gas production of 19.2 Bcfe for the quarter or approximately 211,000 Mcfe per day, was an increase of 28% over the second quarter of last year, 5% above the first quarter. Year-to-date production results of 37.4 Bcfe have exceeded our expectations from earlier this year, which gives us confidence to raise our 2008 production guidance to 77 to 80 Bcfe, up from what we have previously forecast of 74 to 78 Bcfe.

This increased production along with second quarter average realized gas price of $8.05 per Mcfe were the primary drivers behind discretionary cash flow increasing by 106% compared to the second quarter of 2007 of $113.4 million or $2.50 per diluted share. This discretionary cash flow equates to $5.90 per Mcfe, demonstrates significantly improved margins compared with cash flow of $3.66 per Mcfe in the second quarter of 2007.

These higher production volumes and higher margins along with lower per unit deprecation, depletion and amortization, led to a record quarterly earnings of $34 million or $0.75 per diluted share.

I'd like to take a look at a few more items in detail. On the revenue side, regional natural gas prices were very strong with the average first two month index for CIG being $8.48 per MMBtu for the quarter compared to $3.77 per MMBtu for the second quarter of last year. Our realized natural gas prices were $8.05 per Mcf and our realized oil prices were $80.03 per barrel, both of which are in the payouts on our hedge positions, which equal $1.19 per Mcf on natural gas and $29.67 per barrel for oil. For the quarter, we paid out a total of $26.4 million on our hedges.

In the second quarter, we recorded non-cash unrealized loss of $3.3 million, for ineffectiveness in our hedge instruments and a reclassification of certain hedge instruments that no longer qualify for cash flow hedge accounting. Our hedges continue to effectively reduce our exposure to volatile oil and gas prices and to financial reporting rules, a small portion of our hedge portfolio cannot be reported as cash flow hedges.

On the expense side, our production expenses consisting of lease operating expenses, gathering and transportation costs and production taxes came in at $1.79 per Mcfe, as well LOE compared to last year was offset by increased gathering and transportation costs and increased production taxes. LOE averaged $0.55 per Mcfe for the quarter, which was down $0.40 from the prior year period and up $0.04 from the first quarter. For the first six months, LOE was $0.53 per Mcfe. We are reducing our full year lease operating expense guidance to $0.62 to $0.65 per Mcfe, given the realized efficiencies in our year-to-date operations.

Gathering and transportation charges averaged $0.53 per Mcfe for the second quarter, which is up as expected from the second quarter of 2007, due to higher gas processing charges and a firm transportation commitment in the Rockies expressed by client. This increase is consistent with the first quarter and we continue to expect full year gathering and transportation costs that range between $0.54 and $0.59 per Mcfe.

Production taxes, which are assessed on physical wellhead prices, were $0.71 per Mcfe in the quarter, up from $0.34 per Mcfe in the second quarter of 2007, and up $0.15 per Mcfe sequentially. This year-over-year increase was due primarily to increased wellhead prices for year-over-year and compared to the first quarter, the increase was due to both higher second quarter wellhead prices and a higher weighted average tax rate as a greater percentage of our production was from Wyoming, which has a higher production tax rate.

On a unit basis, depreciation, depletion and amortization of $2.56 per Mcfe was 9% less than the previous quarter and 13% less than the rate in the second quarter of 2007. The current rate reflects the updated relationship of our capitalized cost and our proved reserves.

The second quarter results include a $2.1 million or nickel per share for one-time benefit in deferred income taxes related to a tax laws change in Colorado. On a go-forward basis this change is expected to reduce our effective income tax rate by approximately six-tenths of a percentage.

Capital expenditures for the quarter totaled $118 million. For the six months, our capital expenditures were $327 million. We have increased our full year capital budget to 625 to 650 million, an increase of $50 million. Joe will provide more detail on activities included in our capital budget.

We remain very comfortable that we can fund our capital needs with operating cash flow combined with available funds from our credit facility well into 2009. The outstanding balance on our facility is $154 million, which is unchanged from the end of the quarter, providing $313 million in available capacity. We expect that our mid year reserve estimates will provide increased borrowing base in the third-quarter.

Combining the bank line and convertible notes, our outstanding debt at June 30th was $327 million, and at current borrowing levels the interest rate under our credit facility is LIBOR plus 100 basis points.

Just have a few comments on our hedge positions. Given the recent volatility in commodity prices, would like to remind everybody that it's our policy of layering hedges for up to 70% of our production for a 12-month forward basis to provide certainty for our operating cash flow. At the mid point of our production guidance, we have approximately 70% of production hedged for the remainder of the year, which includes approximately 51% of our production volumes under swap agreements, at an average natural gas index price of $6.86 per MMBtu, and an average WTI oil price of $73.84 per barrel, and 19% of the remaining 2008 volumes under collars that have an upside to an index price of $10.46 per MMBtu and a WTI price of $94.16 per barrel.

In addition, we have 60 Bcfe hedged for 2009 and 44 Bcfe hedged for 2010. All of our gas hedges are for delivery point in the Rockies, or at sales points to which we have firm transportation. Details of the hedge positions can be found in the earnings release in our second quarter Form 10-Q.

As we mentioned earlier, the first half of 2008 has generated very good results and we are well positioned to continue this strength. And now Joe Jaggers will provide an update on our operating activities.

Joseph N. Jaggers - President and Chief Operating Officer

Thanks very much, Bob. I'll begin on slide number five and I'll provide that update to key development in exploration activities, starting in the Uinta Basin, at West Tavaputs.

During the quarter, following the end of the big gain [ph] stipulations, the winter season that we initiated drilling on our second and third shallow rigs. This is our planned level of rig activity for the remainder of the year, and the planning basis for our full year full field shallow development at West Tavaputs. We've enjoyed a relatively smooth start-up and high rig efficiency with average 12 days per well across the field year-to-date. And as a result of the increased rig count and increased efficiency, we've now going to spud some 58 to 63 wells.

We continue to expect the EIS Record of Decision by year end and recently received news that the resource management plan for the area will be completed during August and with the RMP in hand this should simplify the two review periods that are currently included in the timeline, the Governor's consistency review and then speed resolution period. We continue to work for that by year end, and we are currently producing some 63 million cubic feet per day net. We've had to shut in several wells as these rigs have reoccupied existing pads to comply with the Cadex 2 [ph] stipulations. We plan to exit the year at 92 million cubic feet per day at West Tavaputs.

In the Piceance Basin, we are operating four rigs, and expect a fifth purpose built rig to begin operations during August. This will allow us to increase our well count to some 130 to 135 wells for the year. We don't plan or we do plan to operate a further two purpose built rigs beginning in the first quarter of 2009. They're currently producing some 86 million a day, have began operations and our new recently installed compressor stations. And we forecast an exit rate in the Piceance at 100 million cubic feet per day net.

In the Powder, we are operating five rigs, and still plan to drill some 225 to 235 wells. Our production at Cat Creek, while it's grown to 15 to 17 million per day remains constrained as a result of compression capacity. We expect the next tranche of compression by the fourth quarter of this year. Our Pumpkin and Willow Creek areas are expected to begin production during the third quarter and we anticipate to exit the year at 24 million cubic feet per day net in the Powder.

As Fred and Bob both mentioned, we now expect our capital to fall in the 625 to $650 million range for the year compared to previous guidance of 575 to 600. The largest part of this increase as Fred mentioned is associated with higher well counts in the Piceance and in West Tavaputs. Our improving rig efficiency and re-pricing of pumping services have allowed us to absorb some, but not of all of the increases in commodity prices we've experienced this year, particularly steel and cement. The balance of the capital not associated with these increased well counts is this non-offset steel and cement cost increases.

And the positive note on cost is our improving lease operating cost performance. We continue to see dividends from our capital investments and water management systems, allowed us to reduce water hauling, reduce third-party water disposal and reduce water purchase costs.

Turning now to slide number six, I'll highlight the updates in delineation and exploration activity, beginning in the Uinta Basin, which you can see is a large part of our exploration portfolio. At West Tavaputs, we made our first Mancos shale completion. This was done in an idle well bore that was not ideally situated based on drilling ratio [ph] but provided really our only practical way of making the completion without dedicating a well exclusively to the Mancos.

The well was planned to be completed with six frac stages, and the first three stages unfortunately exited pipe shallow and the next stages as a result of this casing leak at shallow levels was pumped at low rates, 15 to 20 barrels per minute versus the planned 50 to 60 barrels per minute. Nonetheless, the well is capable of producing some 200 to 250 Mcf per day, and we will revisit the Mancos level during our 2009 program.

The ultra deep was unsuccessful at both the Weber and Leadville levels. And will be completed up into Navajo, as a deep producer. Our approach to testing the ultra deep was all along to find a location that will allow this bay [ph] in the end portion of that unsuccessful deep exploration.

At Blacktail Ridge/Lake Canyon, we continue to drill with one rig and now have 10 wells producing with four yet to be completed. Our current rates are in the 950 barrels of oil per day range. And notably, we're encouraged by initial results from our first two infill wells, drilling in 160 acre density. Production over the next several months will be important determining the viability of future infill development.

And lastly in the Uinta Basin, at our Hook project, we have spud our first Manning Canyon shale well and plan two to three wells during the year.

In the Paradox Basin, we've completed our first horizontal Gothic shale test. The well was completed last week and is currently in early stages of frac fluid recovery. Both Green Jacket and Hovenweep shale on the Salt Flank project in the Paradox are planned to be spud during August.

In the Wind River Basin, we continue to drill the 31-32 well and expect TD mid-August. We're currently drilling it just over 18,500 feet towards a TD of 18,950. We are also in the process of recompleting the Bullfrog 33-19 well in the Frontier this month. This Frontier is the same interval that produces some 23 million cubic feet per day in the Bullfrog 14-18. And the 33-19 in the same fault block and has similar block characteristics and quality in this Frontier section. So we are very hopeful for that well.

In Montana, in the Circus Cody Shale project, we have completed coring now, just today the third well and plan our initial completions during September. And the final exploration project updates in the Bighorn Basin where we are currently conducting an environmental assessment and plan to drill the first Red Point rock [ph] unit well during the second half of this year to the Fort Union level.

Turning now to slide number 7 and the final operations update concerns our increased 3P resource base. Since year-end 2007, we've increased our 3P resources to 2.8 trillion cubic feet from 2 trillion cubic feet, an increase of some 40%. The largest concentration and the largest increases are at West Tavaputs and in the Piceance. And the result from increased density pilots that we conducted during 2007. We're now confident that in the case of West Tavaputs, 40 acre density across the field is appropriate and we consider this a lower risk and probably resource. We continue to pilot 20 acre density at West Tavaputs in to date, have four successful 20 acres well. We expect to be in a position to make 20 acre bookings at year end.

In the Piceance, we now consider 10 acre development to be the planning basis going forward and include these in our probably category with some 69 successful wells on 10-acre density. Our Powder River Basin resource is the result from continuing development of our leasehold on 80-acres in this widely regional and continuous coal.

So the three development areas, West Tavaputs, Piceance and Powder River Basin, represent some 2.5 of the total 2.8 trillion cubic feet, approximately 90%. In our view, low risk and repeatable opportunities that provide the clear visibility that allows us to double the size of the company over the next few years. The Wind River Basin provides significant production rate opportunity as we have seen from the Bullfrog 14-18 and Blacktail Ridge we are hopeful will become another development project for the company by year end.

All in all, this 3P resource base of 2.8 trillion cubic feet we believe is low risk, repeatable and very likely to be included in the crude category given time and activity in the area.

With that, I will turn tings back to Fred for concluding remarks.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Thank you, Joe. Before I close, some comments on the remainder of 2008. First, a few brief points on natural gas pricing. Although Henry Hub and CIG gas prices have seen downward pressure over the past weeks, the basis has narrowed. At the same time, recent midsummer prices as well as the recent 12 month CIG strip are both comparable to or higher than prior midwinter on prices of 2008. So several factors including increased summer demand, local record heat waves such as we are expensing here in Colorado and historically, low Rocky storage members I think likely support these relatively attractive prices.

With the anticipated rig [ph] capacity disruption in September, forward pricing curves are currently in the 4 to $6 range through the shoulder months and as such, we will monitor daily gas prices accordingly through this period. As Bob pointed out, through sound financial planning, our current hedge positions will provide protection for 70% of our gas production through the shoulder months with an average blended floor of about $6.66 per MMBtu.

On that same token, should commodity prices improve through the remainder of 2008, close to 50% of our production is exposed to prices, $10 per MMBtu and above.

Financially given these hedge positions and our significant borrowing base along with the expected strong development growth, we have more than ample liquidity to execute our 2008 budget. We are poised to well exceed our original 2008 expectations on production, cash flow and potential earnings. And with the substantial growth in our 3P resources over the past 12 months, we believe the company is positioned for very significant low risk value growth going forward.

Additional value optionality continues to emerge as we follow through with the delineation drilling at Lake Canyon, Blacktail Ridge, our Cave Gulch area, and later in 2009 in the West Tavaputs Deep. And as you heard from Joe, some of our biggest upside programs that have the potential to add substantial long-term value are either currently being tested or on the brink of being tested starting with Yellow Jacket over the next several weeks, new shale programs at Hook and Circus through the third quarter as well as exposure to several other new resource plays that Joe talked about, which we expect to talk about in the next conference call in November.

As I mentioned earlier, we are on track for an exceptional year. We are extremely excited here at the company. In fact, this should be our best year-to-date as a premier natural gas company in the Rockies.

With that, thank for your interest in Bill Barrett Corporation and we look forward to answering any questions you may have. With that, I will turn it back over to Jennifer.

Jennifer Martin - Director of Investor Relations

Marsha, if you want to go ahead and open it up for questions please.

Question And Answer

Operator

[Operator Instructions]. The first question comes from the line of Tom Gardner from Simmons & Company. You may proceed.

Tom Gardner - Simmons & Company

Hi everyone. Hey, I have a question on the Yellow Jacket. What have you learned about the Gothic shale by the drilling in this well? And do you have any updates on your expectations for reserves or well costs as a result of the work you have done to date?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, good question. First, I would just bring you back to the vertical wells that we drill. A lot of the information that we have assimilated up to this point came from the vertical well and the core data there. We know this is a shallow play, it's 80 to 150 feet thick in terms of the shale thickness. We see what we believe are attractive gas contents, total organic carbon content and suitable thermal maturities. So as you look at the horizontal well, remember, we are early, very early in initial flow back stages. We applied what we believe is kind of the state-of-art cutting-edge technology in terms of horizontal completion technology. We have set casing was swell packers and stimulation sleeve [ph] technology. We isolated six frac stages, pumped a lot of water, close to 50,000 barrels of water. This type of technology, if you look at the other shale gas plays, takes three to four weeks in terms of flow back time.

And so right now, it's too early in the flow back stage to disclose really much more further [ph] and meaningful information as it relates to this well. But again, we continue to believe that this is a play that we want to continue to look at. We have a vertical well in Green Jacket further to the West that we are going to drill. And as we move through the fourth quarter, we'll continue to optimize our 2009 plans.

Tom Gardner - Simmons & Company

Okay. Jumping over to the Powder River Basin, you mentioned you were currently facility constrained and you are adding compression. Is compression the only limitation there? Are there water handling issues?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, Joe, you want to handle that?

Joseph N. Jaggers - President and Chief Operating Officer

Sure. There are... most of our issues are around the compression side of things. There are some very local water issues from time to time, Tom, but that is... that's not holding us up. We have got discharge permits and water management plans approved for virtually all of our producing areas there.

Tom Gardner - Simmons & Company

Thanks guys.

Operator

And your next question comes from the line of Michael Hall from Stifel Nicolaus. You may proceed.

Michael Hall - Stifel Nicolaus

Thank you. Congrats on a good quarter. Real quick, as it relates to the 3P number... increased 3P number, to what percentage of your acreage are you now applying the 20 acre assumption on West Tavaputs on 10 acres on Piceance?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Joe, go ahead and take that.

Joseph N. Jaggers - President and Chief Operating Officer

Okay, on the Piceance 10 acre, we've got a fairly conservative approach to development there in terms of where we applied it. The far eastern part of that yellow acreage, and I'm not currently looking at one of those maps, but I would say it represents 15 or 20% of the total acreage is not being considered in the probable number.

Michael Hall - Stifel Nicolaus

Okay.

Joseph N. Jaggers - President and Chief Operating Officer

Then on the second part of your question, Michael, is about the West Tavaputs?

Michael Hall - Stifel Nicolaus

Yep, 20 acres.

Joseph N. Jaggers - President and Chief Operating Officer

On 20 acres. So the data that we acquired last year as we piloted for these indicated on the Peter's Point, that Eastern structure 40 acres in density was ideal. So we've not included any 20s over there. And then 20s fairly broadly applied across the productive areas of Prickly Pear. I don't know if, Lynn, you have anything else to add to that?

Michael Hall - Stifel Nicolaus

Is that a no?

Joseph N. Jaggers - President and Chief Operating Officer

I presume so. Can't get to the mike, so [ph]

Jennifer Martin - Director of Investor Relations

She said that's right.

Michael Hall - Stifel Nicolaus

No, that's okay. Thank you. As we look... as I look out to 2009, I can foresee some pretty substantial growth. To what extent would you characterized your growth at risk of being curtailed in the event that the Rockies Express Pipeline fills up faster than kind of current expectations and export capacity became an issue again in the Rockies in 2009? To what extent is your growth at risk?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, Joe or Bob. Joe, you want to handle that or --

Joseph N. Jaggers - President and Chief Operating Officer

Sure, I will not start there Michael. We were planning aggressive growth. We have got a full year's development plan for West Tavaputs 3 rig level and perhaps 5 rigs in the Piceance Basin. We are going to have to closely monitor capacity through this upcoming shoulder seasons and this Rockies Express being shut in for the 23 days of September is going to make that a more difficult endeavor to understanding production during these shoulder periods. And then we are going to also have to monitor the plant projects that are upcoming of the Overland Pipeline into Opal and some of the plant expansions like Chapita from Anadarko's and Utah and the enterprise expansion in Piceance to see how much of the gas production does begin to exit in liquid form. At this stage, we think that... and this is preliminary... that while '09 will be tight in shoulder season, it shouldn't represent a large risk to 2009's production.

Michael Hall - Stifel Nicolaus

Okay. Thanks, that's helpful. And then finally and Ill jump off. If I am looking at proposed rulemaking changes in Colorado, can you maybe provide a little additional color as to what the changes in rulemaking could result in for Bill Barrett and particularly the Piceance Basin?

Joseph N. Jaggers - President and Chief Operating Officer

Well, we are certainly... Fred, you want me to go ahead and handle this one?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, absolutely.

Joseph N. Jaggers - President and Chief Operating Officer

Yeah, we are certainly are very engaged in this process, and particularly since the draft was issued March 31. We are hopeful that reasonable heads will prevail at the end of the day and that activity for ourselves in the Piceance won't be jeopardized. Our operating area in the Piceance is... you could characterize it as sort of a suburban to rural area, large number of small track developments for 5 to 50 acre home sites and quite a bit of agricultural animal husbandry activity, light industry and so on. It's not really winter range habitat in the ideal sense of the word, although it's classified to be on the DOW map.

So regardless of how the rules turn out, we think that the area that we are in doesn't provide a great deal of habitat and wouldn't be affected. But we are also hopeful that through this process and we will know more towards the end of August, the next round of COGCC deliberations and hearings, our schedule for next week. We are hopeful that we will have a reasonable and workable set of rules at the end of the day. And hence, we continue to contract rigs for next year, and as I mentioned those two purpose built rigs that will begin operations in the first quarter in addition to the one that's starting in August.

Fredrick J. Barrett - Chief Executive Officer and Chairman

And regardless of what happens... I would just tail on to Joe's comments there that as part of our strategic, regulatory approach to the Rockies, we have already begun working with the various related state and federal level agencies as it relates to Gibson Gulch and what we're going to do in 2009. So we're well on our way in terms of establishing what we think we might be able to do. We'll get through the rulemaking and go from there.

Michael Hall - Stifel Nicolaus

Appreciate the extra color. And actually finally on the Piceance, would it be seven rigs in total running in 2009 or are those two replacing --

Unidentified Company Representative

The current part of those two would replace on [indiscernible]

Michael Hall - Stifel Nicolaus

Okay. Great. All right, thank you. Congrats again.

Operator

And your next question comes from the line of Brian Singer from Goldman Sachs. Please proceed.

Brian Singer - Goldman Sachs

Thank you. Good morning

Jennifer Martin - Director of Investor Relations

Good morning.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Good morning, Brian.

Brian Singer - Goldman Sachs

On your capital... on your CapEx, it looks like the second half is going to be materially higher than the first half, and actually to some extent would have been even before the increases. And I guess I wonder if when you think about over the next 12 months or kind of through 2009 if the second half rate is a reasonable run rate and some initial expectations for what that could mean to production growth in 2009, since I would think the impact from the increased spending will have a relatively modest effect on growth in 2008.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Well, I will say a few comments. Joe or Bob, you can chime in. But the second half of 2009, you're right. We are more heavily backend loaded this year in terms of capital. In fact, we have added additional wells from... in our core development programs and increased rigs, so on and so forth. So as we move through 2009, we feel extremely good about our production expectations. Yeah, you've got some anticipated capacity issues in September, but nonetheless, we feel very good about a number of programs including the Piceance, West Tavaputs, Wind River, Power River Basin.

I think it sets you up very nicely as you move into 2009. I think to make any comments as it relates to 2009 at this point, would probably be a little bit mature in that we've got a lot of things happening. You've got the EIS that will bring to closure in 2008, at least we anticipate that. We're going to see how this fifth rig works in the Piceance and we've got a lot of exploration results, a number of which I have high hopes will provide positive contingency activity in 2009. We are going to know a lot more by the fourth quarter and as such, will then craft and mold our 2009 budget and begin to get a little bit better feel in terms of production growth as you move though 2009. With that, I would ask Bob or Joe to make any comments.

Robert W. Howard - Chief Financial Officer and Treasurer

Brian, we'll be... we go through our budget making process and try to get our expectations more tied down for 2009 as we get later into the year, our announcements in January. Anything before that would just be a little premature. We certainly are enthusiastic [ph] about a lot of our areas and what we can continue to do. But to come up with anything more than just wild guesses right now would be... we'd just be a little irresponsible [ph].

Brian Singer - Goldman Sachs

Great, thank you.

Operator

And your next question comes from the line of David Tameron from Wachovia. Please proceed.

David Tameron - Wachovia Securities

Hi, good morning everyone.

Unidentified Company Representative

Good morning.

David Tameron - Wachovia Securities

Question. The recompletes, the two opportunities you have left in the Wind River, can you talk a little bit more about those, Joe? What gives you confidence that they can look like the most recent recomplete?

Joseph N. Jaggers - President and Chief Operating Officer

Well, David, the one that we are on right now, the 33-19, unlike a lot of our operations that has gone mechanically very smoothly. We are in the process now of tying back the production string to the surplus. And that's going to be a very simple, straightforward two-zone stimulation. So looking at the geology and the geophysics there and the fact that we are in the same fault block with similar lot quality [ph], Dave, I mean it would be very fortunate if we had a well as good as 14-18. But even at half that rate, it could be material to us. It's... I would say characterize it mechanically fairly low risk at this point and should be on by the end of August. The other one, the one that's drilling, is yet to be logged and so it's far too early to be talking about what potential we might get from that well.

David Tameron - Wachovia Securities

Okay. Can you guys disclose what have you modeled then for your '08 production guidance coming from the Wind?

Joseph N. Jaggers - President and Chief Operating Officer

The production guidance from the Wind has included the current producing wells and has not included the drilling well.

David Tameron - Wachovia Securities

Okay. All right. Go into the Uinta, what exactly were the steps you talked about as far as some of the constraints?

Joseph N. Jaggers - President and Chief Operating Officer

I'm sorry --

David Tameron - Wachovia Securities

I'm sorry, Joe, the current constraints in the Uinta?

Joseph N. Jaggers - President and Chief Operating Officer

In terms of drilling at West Tavaputs?

David Tameron - Wachovia Securities

Yeah, drilling at West Tavaputs.

Joseph N. Jaggers - President and Chief Operating Officer

Okay. Until we have the EIS, the only permits that we are able to receive are the... what are called these categorical exclusions, cat 2s. And the 2s apply to previously disturbed land. So we've got three rigs out in the area now. So they have to occupy existing pads. And when we do that, we end up shutting in the existing producers until we...

David Tameron - Wachovia Securities

Okay.

Joseph N. Jaggers - President and Chief Operating Officer

Just drilled and get back the completion operations. So that's the issues right now. As soon as we have the EIS of course, we'll be able to go to new areas.

David Tameron - Wachovia Securities

All right. And did you guys... what did you learn on the ultra-deep, on that Peter's Point 7-1?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, make a few comments here. David, as we said all along, we knew this was a high risk venture we saw a fairly complex strategic figure [ph] on the 3D, we were 500 feet down dip from the top of the structure. And so, to that end, it was a true wildcat. The zone we are going after have never been before completed or established production in the Uinta Basin. And so first thing we learned that the lever was tight. And we learned that the Mississippi was wet and tight. The good news is we do bailout [ph] in the Navajo. We have... make those potential in this well like the other wells and we have got Nase Bird [ph] in the Wild Satch [ph] behind pipe.

But we'll take this data and information like we always do. We will plug it back into the 3D. We will tie it to the other two old wells that were drilled down to these depths earlier in the 70s and 60s and go from there. We don't have any plans to drill an ultra-deep anytime soon. But it's a data point and we'll utilize it accordingly.

David Tameron - Wachovia Securities

Okay. And any near-term plans to drill another deep test, or you are still evaluating?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Not at this point. As I said, we were 500 feet down dip. It was a little bit of a strap play, looking at the Mississippian. We know we can go 500 feet of dip on the top of the structure. Into the future, possibly foresee one of these more optimal deep locations that are up on top of the structure, maybe you tail on enough to tag into the top of the weaver and see what you've got there. But right now, we don't have definitive plans as to when we would do that. And we'll take all this under consideration as we begin to work on the 2009 budget.

David Tameron - Wachovia Securities

Okay. And one more question. If I look at 2008 year end, your F&D cost last year was sub $2. Just looking at the Piceance alone, if you book any 20s or 10s, it seems like there is plenty significant reserve upside considering last year you only added... well I say only... but you added about 140 Bs on a net basis, maybe a little less than that. Can you... do you care to talk at all about 2008 year-end F&D cost reserve expectations?

Fredrick J. Barrett - Chief Executive Officer and Chairman

We can't disclose anything now, but Joe, any comments?

Joseph N. Jaggers - President and Chief Operating Officer

David, it is early to be talking about year end. We do intend to do this 20-acre work at West Tavaputs. That of course offers some upside opportunity. Unfortunately, with the cat X 2 [ph] two locations being the ones that are available to us, we can't do the ideal patterns and well that we'd like, so there may be a little bit mitigating factor there. The Piceance will continue to develop on 10-acres, but of course just the development is going to give us more opportunities to book 10s at last year end we restricted ourselves to only those handful of areas where physically piloted the 10s. So I would say there's nothing there that would make me think we won't continue to repeat reserve growth like we have, but it is early to say.

David Tameron - Wachovia Securities

All right, that's more than I though I could, so thank you Joe. Nice quarter. Thanks.

Operator

And your next question comes from the line of Larry Busnardo from Tristone Capital. You may proceed.

Larry Busnardo - Tristone Capital

Hey, good morning.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Good morning Larry.

Larry Busnardo - Tristone Capital

Just with all your activity going on and the second half is going to be fairly active for you, could you just lay out a roadmap on when we could expect some definitive results from some of the plays taking into account when some of them may be tested, whether Yellow Jacket, Circus, Hook, Salt Flank those types if it's going to be on the next call, if it's going to be later this year, if it's gong to be pushed into 2009?

Fredrick J. Barrett - Chief Executive Officer and Chairman

I'm going to smartly defer to Joe on that. Joe, you want to take a crack at that?

Joseph N. Jaggers - President and Chief Operating Officer

Yeah, Larry, that's a tough question to answer because these early results do so often give you a mixed bag of things to consider. And I suppose the other thing I would add to this is we did talk about things like the Cody Sale pretty freely as we tested up their last year. One of the results of some of that discussion where we saw significant increased competition and increased land prices. So to some extent I think we'll be more guarded going forward in areas where we may not have exactly the position we like. So that's another factor to consider.

So while the activity will proceed just along the lines of what I laid out there in the update, I think there are a number of other factors that are going to come into play in terms of when we talk about results.

Larry Busnardo - Tristone Capital

Okay. So wait until the next update then, I guess is what you are saying?

Joseph N. Jaggers - President and Chief Operating Officer

Yeah, I think so.

Larry Busnardo - Tristone Capital

All right. And then just one other one. On the 7-1 well, the ultra-deep well, how far away is the closest Navajo production to that well?

Unidentified Company Representative

Well I think it's the 160 offset, isn't it? I think it's a 160 off asset.

Larry Busnardo - Tristone Capital

And how far away is that?

Unidentified Company Representative

Well, so --

Larry Busnardo - Tristone Capital

160 acre offset.

Unidentified Company Representative

Yeah, yeah.

Larry Busnardo - Tristone Capital

Okay, I got you. Okay, great. No, that's all I got. Thanks.

Operator

And your next question comes from the line of Jeff Davies from Waterstone Capital [ph]. Please proceed.

Unidentified Analyst

Good morning everyone.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Good morning.

Unidentified Analyst

Just a couple of quick tax questions. Looks like your income tax rate is a little bit lower than prior quarters and then just looking at production taxes as a percent of just oil and gas sales, looks a bit higher than last several quarters at least. Just curious what's driving those two things.

Robert W. Howard - Chief Financial Officer and Treasurer

Well on the... this is... on the income tax rate, there was a change in Colorado state law that redetermines or determines a different method of how total corporate income tax or income is allocated to the state. And that's applied to all of our deferred tax timing differences at the end of June.

Unidentified Analyst

Okay.

Robert W. Howard - Chief Financial Officer and Treasurer

And so we pulled that all forward, it probably only ends up about a six-tenths of a percent change in overall effective tax rate. In other words, state tax portion of our tax rate goes down by six-tenths of a percent. But we needed to record all of the effect on our timing differences in the second quarter, so it looks like a larger number.

Unidentified Analyst

Okay

Robert W. Howard - Chief Financial Officer and Treasurer

As a result, but I don't feel... one thing, all of our income tax at this point, other than very nominal amount are deferred, and so that will be trued up to actual cash taxes as we become a tax payer in the future.

And with respect to production taxes, we do operate in three different states for all intentional purposes for production; Wyoming, Colorado and Utah and the success for the Bullfrog 14-18 well had a quite a bit of production during the quarter and Wyoming is our highest tax rated state, that's about 13 to 14% production tax rate. And so that additional production blended in with our overall production on a corporate basis led that to increase. And as far as on a go forward basis, it really depends on the mix of our production, but as we ramp up production in Utah and Colorado, we would expect our rates may return to rates that they were similar, where they were in previous quarters, but we have another good successful well and Wyoming and the Cave Gulch area, our Bullfrog area, we may see that rate be a little bit higher.

Unidentified Analyst

Okay that makes sense. And under... already see your debt balances as maybe debt to cap year end '08?

Robert W. Howard - Chief Financial Officer and Treasurer

Yeah, well, I don't have the formal forecast here, but we are looking at throughout the reminder of the year, CapEx for the remainder of the year is probably somewhere in the $400 million range, and if we are able to get same cash flow level, maybe a little more rather we will increase production. We may have an initial financing needed somewhere between... I will just put a range of maybe 150 to $200 million.

Unidentified Analyst

Okay.

Robert W. Howard - Chief Financial Officer and Treasurer

And our borrowing base has capacity before looking at our mid-year reserve report of 303 million. So we maybe see a climbing up, and I don't have the master where those percentages are, but I kind of look at that as the benchmark as I try to compute that number.

Unidentified Analyst

Okay. Last one, you talked about pipeline capacity or constraints through '09, just curious, if you would be willing to see what your crystal balls is going into 2010 before any of these new pipelines come on in 2011. Curious also what the Rockies strip look like for '09 and are you guys just supporting any of the pipelines coming out of the area, the Ruby, the Sunstone, any of that stuff?

Robert W. Howard - Chief Financial Officer and Treasurer

I want to talk about the Rockies strip for '09 based on last week with that 683 CIG price.

Unidentified Analyst

Okay.

Robert W. Howard - Chief Financial Officer and Treasurer

You know we have committed to some of the pipelines, but I will Joe, turn that over to you for more details.

Joseph N. Jaggers - President and Chief Operating Officer

To me, Rob?

Robert W. Howard - Chief Financial Officer and Treasurer

Yeah.

Joseph N. Jaggers - President and Chief Operating Officer

Okay. The projects that we have committed on are Ruby for 50,000 a day and we are just waiting in the Pathfinder open season and hopeful that one will precede as well. Both of those are fourth quarter '10, first quarter '11 projects, we still have that exposure for 2010 that we're concerned about. And I think probably get a higher or well, I know we get a higher proportion of hedging in place for that period than we would otherwise have. Bob, you'll add anything to that?

Robert W. Howard - Chief Financial Officer and Treasurer

No, I think it... that was it.

Unidentified Analyst

Okay, thank you.

Operator

And our next question comes from the line of Larry Benedetto from Howard Weil. You may proceed.

Leonard Benedetto - Howard Weil

Thank you. I see you've had a Red Point to this year's drilling program. I was wondering if you could give us a little bit more detail to play type and potential well cost and reserve potential.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Well, I will make a few comments, Joe will make a few to chime in. But you know this is Larry, if you were to look at our portfolio and say what exploration program is most analogous to for example, the Piceance Basin, tight gas sand basin centered way that would be a... this is a play that we have 170,000 gross acres, little over 70,000 net acres. We are chasing or we are looking at as I mentioned a basin centered concept in the lands, in the ore [ph] in the lands and the main suburb. Right now, we are currently forming a reformed federal unit to kind of hold a series of leases together, we shot a 3D seismic across large, large structure that extends trans-basinally for 50, 60 miles, plunges into the deep part of the basin. We have taken a 3D and shot kind of the interior portion of that structure, that's where our acreage position is. We have several wells committed with a number of partners, we have about four or five partners in here that we're going to be drilling with.

And so, we are currently working through kind of the final phases of an environmental assessment. Once we get that done, we will drill our first well kind of down to 10 or 11,000 feet. We'll work it, at the pore in [ph] and in the lands in of that well, we'll likely follow that up with another well down to the main subvert [ph] in 2009. Again, you're looking for a play similar to what you're having in the Piceance and so it's a concept that's a multi TCF base centered play.

Leonard Benedetto - Howard Weil

Okay. And some of your well partners? Basically, your working interest?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Partner, these are kind of private, some financial entities, the Patriot, Zeno [ph], Sciant Petroleum [ph] Bright and Associates, RCWI. It's kind of a hotchpotch of partners in here.

Leonard Benedetto - Howard Weil

And Fred, your average working interest?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, we'll average about 50% working interest in this play.

Leonard Benedetto - Howard Weil

And well cost for the first test?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Oh, I would... Joe, you want to answer that?

Joseph N. Jaggers - President and Chief Operating Officer

sort of the 9000 foot range and that... if I recall that well cost us about 3.5, $4 million.

Fredrick J. Barrett - Chief Executive Officer and Chairman

That's sound real.

Leonard Benedetto - Howard Weil

Okay. Thanks a lot, that's all I have.

Operator

And your next question comes from the line of Eric Hagen [Merrill Lynch]. Please proceed.

Eric Hagen - Merrill Lynch

Hey, good morning. Just had one quick question on the Cody Shale play. Are those wells going to be vertical wells or horizontals wells, and what's the kind of thought process behind that?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Again take kind of... here. Right now, they are vertical wells. We're drilling down to call it, 55 to 6000 feet. We're targeting about 8... 900 to 1100 feet at Cody Shale. To do extensive core programs and two others wells, we're on our second point program as we speak, we're actually drilling our third well. The well bores are designed to only drill out horizontally. So we'll assess the core data and go from there. I would suspect we should be done with our fourth and final well this year. I would assumed kind of into early September and then go from there as we begin to assess the core data. Joe any...?

Joseph N. Jaggers - President and Chief Operating Officer

Nothing Fred except that with the absent any core material out here, we didn't feel like Eric we really had a basis for plays in the horizontal well given that six week interval, lack of well control and core material and not exactly knowing where to put it, but we did set them up, as Fred mentioned, with case [ph] of program it allows us to cut windows and go horizontal.

Eric Hagen - Merrill Lynch

Great thanks. Great quarter.

Unidentified Company Representative

Thanks.

Operator

And our last question comes from the line of Brian Kushner [ph] from George Weiss. You may proceed.

Unidentified Analyst

Hey, good morning guys.

Unidentified Company Representative

Good morning.

Unidentified Analyst

Are you guys aware of any high cost plays in the Rookies that wouldn't be drilled in like 2010, if prices came down? Are we like kind of destined to go down to like marginal cost of near 4 or $5 at the well head?

Fredrick J. Barrett - Chief Executive Officer and Chairman

You say cost, you mean gas prices, what I guess I don't understand your question.

Unidentified Analyst

Yeah, like I am just curious like do you guys know of any plays that wouldn't be drilled in 2010 because gas prices are too low.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Oh, you mean relatively...

Unidentified Analyst

If we have 5 or $6 gas?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Yeah, relative to our portfolio?

Unidentified Company Representative

Or throughout the entire region?

Fredrick J. Barrett - Chief Executive Officer and Chairman

Just in the region. I think that's a tough question because if prices to the extent, prices go down and stay there, I can assure you that costs will come down in some shape or form, it may lag that timeframe, but costs will eventually come down. And so it's a relative thing. You've got to remember back in the 90s, we were... we had multi-rig drilling programs in Piceance at $2 gas. And so that's a tough question. I would think some operators may perceive their plays that are perhaps more marginal and they wouldn't drill. So to that end, perhaps the answer is yes. But that's a tough question to answer. Our MO is we are very intensely focused on efficiencies. We dry out the maximum returns on our plays. $8 gas, you're seen 80 plus percent type of returns on our plays. We have got a bunch of new plays that will go through the same optimization program that we put everything through. And so that's a tough question to answer. Joe, if you want to add to that.

Joseph N. Jaggers - President and Chief Operating Officer

I think I'll leave it there, Fred.

Unidentified Analyst

But I mean you guys certainly could drill down to 3 or $4 wellhead gas, assuming costs come in as well.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Oh, yeah, absolutely.

Unidentified Analyst

Okay.

Fredrick J. Barrett - Chief Executive Officer and Chairman

Just one other thing to consider there Brian is all these basins vary quite a bit. Even the Piceance is as good as it works for us in our area, you go to the north on the highlands, you can have some issues with costs, 3000 more feet of overburden, there is a lot of access issues, lot of seasonal issues with weather. You go to the south and things begin to thin out. You have less section to work with. So you'd think that in each of those basins, at the continuous low price and an expectation of low prices that there would be marginal operators that would drop off.

Unidentified Analyst

All right, guys. Thanks.

Operator

This concludes the Q&A for today's call and I would now like to turn the call back over to management. Please proceed.

Jennifer Martin - Director of Investor Relations

Thank you all for joining us and that concludes our call today.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Bill Barrett Corp. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts