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Energy XXI (Bermuda) Limited, (EXXI)

F4Q08 Earnings Call

September 10, 2008 10:00 am ET

Executives

Stewart Lawrence - Vice President of Investors Relations

John Schiller - Chairman and Chief Executive Officer

Steven Weyel - President, Chief Operating Officer and Director

West Griffin - Chief Financial Officer and Director

Analyst

Biju Perincheril - Jefferies

David Duong - Pali Capital

Duane Grubert - CRT Capital Group

Dan McSpirit - BMO Capital Markets

Jason Wangler - Dahlman Rose & Company

Michael Mortensen - New Bridge Security

Evan Templeton - Jefferies

Michael Bodino - Coker & Palmer Inc.

Larry Busnardo - Tristone Capital

Richard Tullis - Capital One Southcoast

Van Shaw - Credit Suisse

Michael Folken - Unidentified Company

Jeff Miller - JMG Capital

Joan Lappin - Gramercy Capital

Mike Keenan - Orix

Duane Grubert - CRT Capital Group

Duane Grubert - CRT Capital Group

Operator

Welcome to the Energy XXI fourth quarter and fiscal year end 2008 earnings conference call. (Operator Instructions) I would like to turn the call over to Energy XXI’s Vice President of Investors Relations, Mr. Stewart Lawrence.

Stewart Lawrence

Presenting today is, John Schiller, our Chairman and CEO; also Steve Weyel, President and Chief Operating Officer and West Griffin, Chief Financial Officer. We also have with us in the room today several operations and financial executives, who can help answer questions at the end of the call.

Before we get started, I need to remind everyone that our remarks today including answers to your questions, includes statements that we believe to be forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially difference from those currently anticipated. Those risks include among others matters that we’ve described in our earnings release issued yesterday and in our public filings.

We disclaim any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable they are subject to factors such as commodity prices, competition technology and environmental and regulatory compliance. Our drilling schedules, capital plans and other factors may cause our results to differ materially. I urge you to read our 10-K and 10-Qs to be better familiar with these risks and with our company and now I’ll turn the call over to John.

John Schiller

Its my law that we get to do any earnings call the day after what was probably one of the worst days the energy market’s ever seen, but we are going to go through it, take it as well we’re up to and see if we can start reversing that trend. As tough it was for some of us to comprehend that fiscal year 2008 was only our second full-year in operation. Steve, West and I of course again are working on the plan to start the company in January 2005 and we raised our initial capital three years ago actually.

October 20 will be the third anniversary of the company’s IPO. We closed our first acquisition in April 2006. So, this is our eight full quarter of operations that we’re reporting and we though it’ll be interesting to look all the way back to the beginning to help put our current position and future plans in perspective. Since, our IPO in 2005 Energy XXI is growing production on a 65% annualized clip to more than 26,000 barrels oil equivalent a day.

Higher commodity prices have leveraged our growth even more with revenues and EBITDA growing at better than 80% annualized face. This growth was largely generated through acquisitions, which was the gain plan from day one, but the development side of our requirements and strategy also has contributed not just by incrementing reserves, but also by accelerating the production of those reserves and creating higher net present value, but there are many significant acquisitions during the fiscal 2008 production volumes plateau; a couple of observations on that point.

Don’t get the impression that we’re out of the M&A market, the fact is we put a lot of effort into several initiatives and actually walked away from a couple of competitive opportunities we felt were marginal based on the current commodity price volatility. With our previous complicated capital structure and our share price that was too low to use as currency, our primary focus was on enhancing our capital structure and maximizing the value of our acquisitions.

The one tender that we completed in June cleaned-up the capital structure, so moving forward we’re in a good shape from that standpoint. Our share prices and other issue; the overall market downturn certainly hasn’t helped and the lack of news flows running our key high impact exploration puts some juice out of our story. We are one news release away from turning the whole situation around. Steve will give you an update on where our joint programs stands in a few minutes but the issue of weighting the expiration results brings me to the next point.

Our high impact exploration program is just now beginning to mature and it’s expected to deliver material growth moving forward. The volume graph on this slide includes less than 10% contributions from our high impact exploration, that’s essentially by design not action.

As we said from day one at the core we’re an (inaudible) company; while we always had the intention of augmenting our growth profile through high impact exploration, building a gleeful exploration program takes time and a lot of up front effort. This is not a part of business that can easily be bolted on through acquisitions.

Today we are excited about the high impact portfolio we build. We have three wells that are in or very near the target objectives and any one of those three could completely change the complex of our reserve replacement and volume growth profile.

Steve will highlight these and additional prospects that are now the new drilling program which should continue to lay on organic growth opportunities. We are not a one or two or three well store, we expect high impact exploration to be a permanent feature of our business moving forward along with acquisitions. This way we get a final point on this subject with the maturation of the exploration program, we will hope to begin enhancing the company’s replacement costs profile.

To-date the more traditional analysis of finding the development costs have not been a good gauge to the success of our drilling program. Since the reserves were primarily added through acquisitions rather than pre drilling, the economic analysis needs to include full cycle costs rather than a single years drilling program.

Our depreciated oil and gas property portfolio at year-end was on the book of just above $1.5 billion. This represents a current full cycle cost of acquiring and developing our reserves today. That $1.5 billion costs compares with our proved only year-end net present value at about $3.3 billion. More appropriately, however we added the value of our probable reserves ignoring the value of other unproved properties, our year-end present date 10% discount it was $4.3 billion.

As on the slide, we can find all of this data on our website in the AIM reserves filing made earlier this morning. As a London AIM company, we are required to supply full 3P data that is fully engineered, not just audited, but fully engineered by respected third-party firms. Part of this value creation was currently driven by higher commodity prices, but you can discount prices back a long way and still realize excellent returns. Also remember that there are significant costs already baked into this equation for exploration activities that have yet to come to fruition.

Energy XXI has seen all the costs and felt the rewards our exploration effort so far, we are optimistic that Cote de Mer will begin balancing that equation. On that note, let me quickly expand on what we said about Cote de Mer in the earnings release. On the old outages in our business as the dry holes are drilled cheaply and quickly and discovery wells are the tough ones to drill. If that quote stays true we are going to have a hell of a discovery Cote de Mer.

Just to remind everyone, we started this well on February 2007, we drill within 400 feet of the target renewal within our AFE before taking a kick and loosing the hole. Eventually, we were able to side track the well from 13,000 feet and get back to drilling.

Drilling the same hole a second time from 13,000 feet we managed to spend more money that we did drill in the original hole, but the fun was just starting. We logged a very nice peg of sand above the objective interval and then the LWD went out as we continue to drill ahead. Based on our mud log we have entered the main objective and are seeing significant amounts of sands.

The decisions was made to stop drilling while it’s still in the sand and pull out a whole logged well, but then the key things fun by the nature of the rig it certainly had in the form of Hurricane Gustav. Needing just 24 hours to obtain a water line log the contractor on the rig decided he needed to prepare to move his rig to safety on the Tuesday before the eventual Monday land fall of Gustav in Louisiana

This is the biggest story already if it ended here, but we are not through yet. On Friday of last week we moved the rig back to location only to have Hurricane Ike continue to turn to the West and show that it did intended to enter the Gulf of Mexico. So, once again we moved the rig back to Safe Harbor and wait for Hurricane Ike to clear the Louisiana coast and then we go back to work.

So, how do I summarize all this; we quit drilling on August 22 and have been waiting on a log for almost three weeks and it all likely it is still close to two more weeks before we have the expected logs, but we believe that it will be the worth the wait. I’ve seen a lot of mud logs in my time and we all know that mud logs are invented to be proven wrong by water line logs. With that said all preliminary indications for this well are positive and we were still drilling sand when we quit drilling.

With that I’m going to turn it over to West to review the financials and then Steve will provide you more detail on our operation programs.

West Griffin

We included all the financial data in the earnings release, so let’s look at just a few of the line items. Energy XXI generated $451 million of EBITDA during it’s year ended June 30, an 87% increase relative to the previous year. Operationally, these results were driven by 62% increase in daily production volumes from 16,200 barrels a day to 26,200 barrels a day, coupled with a higher crude oil mix, which went from 48% to 52% of total production reflecting our oil exploitation strategy.

The higher oil mix helped pre-hedging revenues for BOE increase 44% from $52.23 per BOE to $75.40 BOE. In the fourth quarter production reached record level of 26,400 barrels a day with the oil mix climbing to 57.2%, helping generate record pre-hedging revenue of $98.95 per BOE. Higher oil and gas prices also drive up many of our operating expenses, such as the chemicals needed to treat, produce water. So an increase in the direct LOE was not unexpected. Work over and insurance expenses were generally inline with recent quarters.

The DD&A rate was adjusted, reflect the 2008 capital program an updated reserves base, which as John mentioned we are affected by exploration spending without the benefit of reserve adds from many of the large exploration prospects that we are still drilling. We will continue to adjust DD&A each quarter based on estimates when a new reserved report isn’t available. So a discovery could have a near term impact.

G&A rose, as it has the tendency to do in the fourth quarter because of year ended accruals. You’ll note that we’ve actually been trending down and in fact we are lower the last year’s fourth quarter. So, we would expect the first quarter growth rate to comeback inline.

The production taxes in other line items include $1.42 per BOE, of losses on derivative financial instruments related to our active risk management program, and of course hedges had an impact in the quarter. Dropping to the bottom-line, EBITDA per BOE was nearly $50 a barrel, a new record for us and amongst the best in the industry. These metrics generated record EBITDA more than a $119 million in the fourth quarter, which represents strong coverage metrics in terms of servicing our debt.

Let’s take a look at the cash flow and liquidity in a little more detail. On the year, cash flow from operations $388 million, comfortably exceeded our total investing of $370 million, contributing about $18 million to debt reduction in cash build up.

The warrant tender brought in nearly $238 million of cash. $75 million was used to reduce the amount drawn against the revolver. The net result is that the total debt declined by $99 million during the year and cash increased by $149 million year-over-year. Those figures were, as of the June 30, year-end. Subsequently we put some of our cash to work. We have spent $59 million to buyback, $68 million of our bonds on the open market an average cost of about 87. We will realize the pretax gain of about $8.7 million over the remaining life of the bonds as we currently intend to keep the bonds outstanding.

We intend to keep some cash Bermuda level, so we are able to take advantage of whatever opportunities the markets provide, weather that’s to buyback more bonds, buy equity or maybe even warrants. Don’t mean that we are making a commitment to buy any of it back, but we do want to have the flexibility to do so if we chose.

Our cash balance also gives the Board comfort in its decision to initiate a quarterly cash dividend as announced yesterday or you could think of it in these terms, the interest payments on the bonds we repurchased are more than sufficient to pay the dividends. Given the hurricane shut-ins there is great interest in our liquidity. Total unused availability under the corporate revolver is currently $253 million, which when add to the cash balance of the $77 million yields $330 million of total liquidity available to the company and keep in mind that if push came to shove the bonds we bought back could be sold back into the market. So, total liquidity is something closer to $385 million.

As for balance sheet items, our current total debt net of cash and net of the repurchase bonds is down to $791 million, that’s a 24% reduction from June 2007. Now, looking at market capitalization, with the warrant tender that we completed on June 20, we issued $61 million new shares, retired $64 million warrants and brought in almost $238 million of cash. So today we have a $145 million shares outstanding and a relatively insignificant $13 million warrants relating. These are major accomplishments simplifying the capital structure and significantly strengthening the balance sheet.

Now I’ll turn it over to Steve for the operations discussion.

Steven Weyel

Let’s start with a quick review of recent hurricane impacts before going into the capital program. Hurricane Gustav came through the Central Gulf last week and our South Timbalier fields took a direct hit in the Northern out wall.

Initial inspections have revealed limited damage to company facilities. However, the threat of Hurricane Ike is hampering our efforts to completely evaluate the full extent of damage incurred. Here is what we know today, early damage assessments indicate the company's total clean-up and repaired costs will be caped at a $7.5 million insurance deductible. There were no injuries to personal and no environmental impacts. We currently maintain a $175 million of wind storm coverage.

The company’s production ramped back up to about 10,000 barrels of oil equivalent prior to shutting in for Ike as of this morning or approximately 38% of pre-storm levels. With the third-party pipeline analysis we see it could be mid October before we get back to full way, it’s difficult to say right now. September production will average less than 10,000 barrels a day due to the effects of Hurricane Gustav and anticipated down-time for Hurricane Ike.

Our partners are having the same challenges bringing their production back online and up the full way. As of today our outside operated properties have returned to an estimated 3,900 barrels of oil per day, our production with an estimated 4800 barrels of oil production per day left to bring back online. We have talk to our partners and believe production will be fully restored within the next several weeks.

Wide spread electrical power outages and extensive road and waterway closures in South Louisiana restricted access to shore bases and facilities making it tougher to repair damage to third-party flow lines and accelerating our evacuation in advance of Ike.

We did lose one tripod structure in its two wells at South Timbalier 21 during the storm. The rest of South Timbalier and all key Main Pass, South Pass, East Cameron and Eugene Island facilities were determined safe and placed back into operations and will resume production once takeaway pipeline and processing services are available.

Today lost-rig time expenses are estimated to be $4 million net to the company. That number is growing everyday the rigs remain shut-down with the threat of Ike. All together the damage caused from Gustav was not very steep. The cost of delayed production and delayed drilling efforts are more difficult to gauge as we anticipated ours and the industries much improved assert infrastructure opposed to Rita and Katrina whether the direct hit from a category three hurricane with minimal damage and production impact.

One thing that has certainly being frustrating for us is the further delay our exploration effort, while we are on the subject lets look at the reserve table.

We end this year at $51.5 million barrels of oil equivalent down from the prior year. We anticipate having the result on Cote de Mer in the coming weeks and announce these along with their aught to do reserves shortly thereafter. Of the reserves we booked for fiscal year ’08, we benefited from the fact we are targeting conventional reservoirs, which tend to deliver significant probables in addition to bookable proved reserves.

So in addition to the $3.8 million barrels of proved additions, our program also delivered another 4.5 million barrels of probables. These tend to be low risk reserves, below the lowest known penetration which will be produced at no additional costs to existing wellbores. Our Laphroaig discovery is a perfect example of this. In its first year of production the well made 13 BCF and we moved 11 BCF from the probable reserves category, where reserves below the lowest penetration were assigned.

John did touch on the key reasons fiscal year ’08 wasn’t a stellar year for reserve replacement, chief among them is the fact our big exploration wells carried over in the fiscal year ’09. Our exploration efforts for this past year especially our high impact prospects were always waited towards year-end results as we focused on rehabilitation and optimization of our total acquisition, which has exceeded our expectations.

The ultimate outcome of our significant exploration efforts is still pending. It is important to note that out of a 115 million of exploration spend for last year, we have only seen the results of $63 million prior to year-end or roughly half of the spend. The level of our frustration were particular is an indication that we expect the results of these efforts by our fiscal year-end. The good news is this should be a timing issue.

We remain very position on the potential for not just cared to move, but also Kaplan and Blackbeard. John mentioned earlier that our exploration program has matured, let me elaborate. We began a transition this past year from a relatively low risk, lower reward exploration program to a focused, high quality balanced drilling program with significant high impact potential.

Kaplan and Blackbeard are perfect examples of high impact prospects that have the potential of materially moving our dollar in the immediate future. The timelines associated with these types of projects tend to be longer, they are deeper and more challenging to drill. In the case of Blackbeard the world’s deepest oil and gas well we are in the cutting edge of technology, but the ultimate rewards far outwait the challenges.

Blackbeard is working, with three distinct indications of hydrocarbon bearing potential to day the serum of ultra-deep shelf deposits is proven. We continue with wellbore challenges at this depth and temperature and are unable to report definitive results and cannot speculate as to ultimate economics as this wellbore or the play, but we in conjunction with McMoRan and his operator and our partners did not sign the two year contract with the River Mississippi to continue proceed of the ultra-deep opportunity without encouraging results.

We continue in our efforts to pursue the targeted depth of 35,000 feet and hope to resume drilling and evaluation post to Hurricane threat. As communicated by McMoRan the River Mississippi recently contracted will initially drill the conventional deep test prior to pursuing the next ultra-deep prospect. There are numerous opportunistic factors in determining our next ultra-deep prospect and we will continue to evaluate the opportunities with our partners and expect it to start, the next ultra-deep well is scheduled for spring of 2009.

Specific to our planned capital program for this year based on undetermined Hurricane impact, current commodity price volatility our significant opportunity is that intending near-term results. We are currently reassessing our planned capital budget for this year. In any case our spend will remain below internally generated cash flows. We will update you with specifics after final Hurricane impact is determined and the near-term results of our exploration efforts.

As our strategy and execution reaches full stride for this young company, we are confident in our ability to maximize shareholder value with capital commitments going forward. That wraps up the formal presentation for today I’ll turn it back over to John for the closing.

John Schiller

As a quick ramp up, we would have the say fiscal 2008 was a transformational year for Energy XXI, aside for the operating results we also accomplishing a lot just getting Energy XXI to looks like a proper company. We are starting the year with three main objectives that we wanted to achieve regarding our corporate structure. Increasing liquidity in our stock, reduce our leverage and reduce the overhang associated with the warrant.

To say these were distractions for both management and investors as an understatement, so there is no small deal that in the past several months we’ve been able eliminate all of these issues. Our trading volumes have gone from 30,000 shares today to $1.3 million shares today. We’ve reduced net debt by almost $250 million or 24% and as a result of our successful warrant tender, we reduced our warrant overhang from 48% to 8%. Now we just have one clear focus for the future, to deliver operating results including delivering on the promise of the high impact exploration program that we build over the past year. We intend to do exactly that in the coming year.

Let’s go ahead and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dan McSpirit with BMO Capital Markets.

Dan McSpirit - BMO Capital Markets

Can you review for us or for me at least the dry hole exposure or the CapEx boggy for Cote de Mer, Kaplan and Blackbeard as well as the reserve upside net to the company?

John Schiller

Somewhere in the neighborhood, as we said today about $75 million on those wells, remember that we are full cost so it will go into our full cost pool as opposed to successful efforts.

Reserve potential, Cote de Mer at 500 BCF grows net to the company, we net that out somewhere around 20 million barrels. Kaplan when you net it out is in the neighborhood of seven million or eight million barrels and I’m sorry five or six and then you have Blackbeard, which quite honest, we never really talk about how big that could be, but take a number of Tcf on up and do the math on our 20% working interest, 16% net.

Dan McSpirit - BMO Capital Markets

Is it fair or accurate to conclude that this year’s joint program based on your current asset base, a greater emphasize will be placed on that success in terms of replacing reserves or replacing production lowering F&D costs for us what we’ve observed this year versus say acquisitions given your somewhat depressed share price, maybe your inability to low down more debt to the balance sheet that is less stress on acquisitions going forward in more organic growth?

John Schiller

I think it’s fair to say a couple of thing. We are obviously not looked to do the acquisitions with the share price where it is today, you’re correct there. One of the thing Steve mentioned, where we are looking at Hurricane impact we are looking at commodity prices, we are hedged about 77% for our expected volumes for our fiscal year ’09.

So we’re in pretty good shape with regards to commodities, but still that has some impact on our cash flow, we are clearly going to line within cash flows so, I think what you’ll see us do as we revaluated things or a couple of things. Some of our gas projects will probably be delayed in favor of our oil platform at Main Pass and South Pass and South Timbalier.

Two; Cote de Mer, Blackbeard we are working through all of those numbers right now. If you heard me speak over the last couple of months one other things we continue to hit on is that we feel very good on our (Inaudible) and that we have full success at Cote de Mer and we’ve drilled the full extent of the Mississippi rigs schedule with even of 20% ownership.

If you go through and do the math, we actually go net negative cash flow about $37 million, $38 million and that’s our max exposure net to the company before we start turn around and generating cash flow at the Cote de Mer, so those are some of the things we have look at, we had some coverage in our budget and that we had stated to our Board a $380 million budget included in there was almost $50 million on allocated to build a deal with some of these things and we’ll be looking at that and probably retching it down some.

Operator

Your next question comes from the line of David Duong with Pali Capital.

David Duong - Pali Capital

Good morning. You currently have a lot of liquidity on the balance sheet. Can you share with us your thoughts in terms of order or priority and how you would deploy some of this liquidity to acquisition or debt reduction including buying back bonds?

John Schiller

Yes, I think West covered on the fact that we’ve already bought back $68 million of face value of bonds. We think that was a good use of our capital, its yielding an excess of 13% return to us. We’d looked at anything from small pack on bills, within our existing fields or within our existing property base even where we can pay cash, and we had something we thought was overwhelming. We might use some of the cash for that.

Right now though I think as Dan asked while ago, we’d stayed pretty focused on how we get the best bank for a buck and that’s going to be probably doing some continued up drilling successful exploration, looking at some deals as our stock price rise that make sense on an overall corporate level, but you will see us put that money to pay down debt where we can.

David Duong - Pali Capital

My second question is regarding the CapEx budget for fiscal ’09, the 380 number. What type of production growth did you guys forecasts using your models for this year?

John Schiller

No, we were looking at 5% to 6%.

David Duong - Pali Capital

Okay and most of that is organic?

John Schiller

Yes, that’s organic.

Operator

Your next question comes from Duane Grubert with CRT Capital Group.

Duane Grubert - CRT Capital Group

Yes guys, kind of a longer-term question; you’ve just been hit with hurricane, production curtailment and so forth, as you look at deals, you mentioned you past on a couple of deals; are you at all considering diversifying more into an onshore and I know you have some aspiration for foreign, which may be a little premature, but can you talk about your bias of diversifying away from some of the standard Gulf risks that way?

John Schiller

Yes, Duane, I don’t think onshore is something we’d look at very hard other than Louisiana Gulf coast. I think our thoughts on diversification are more Gulf of Mexico fields spread further apart from the hurricane impact. We do look at foreign stuff, we reviewed a couple of different things with our board over the last couple of quarters, but I think it just continues to be where the best opportunities present themselves.

We looked at the Salana deal, what was it Steve? Latin American deal that just go down $661 million, the combined company’s got about $1.3 billion and they got $12 million of reserves, 12 million barrels approved reserves between them. Those probably aren’t acquisition metrics that worked for us.

Duane Grubert - CRT Capital Group

And then certainly you must feel pretty good about the cash position you’ve got now. I know you’ve talked about the flexibility going forward of what you do with that cash, but can you talk a little bit about when you manage your metric of debt per BOE, certainly you want to fix us up on the BOE side and you’re working on the debt side, but you think in the future you will see it sit on some cash as well as the tactic?

Steven Weyel

It’s always what I look at as in terms of maintenance of the balance sheet as making sure that we have sufficient liquidity and flexibility. So, we don’t necessarily target a certain amount of cash versus availability under revolver, but we do want to make sure that we have enough flexibility, especially going into the start of the each hurricane season, so that to the extent there we have an active season, we have liquidity to deal with it.

Currently we got real good value so to say with bonds; whether we continue to do that, a little bit more of that and that is sort of an open question, but what we are convinced off, there are a lot of different folks in the financial industry that are there and a lot of other companies are having issues with their lenders etc, we have a very strong group banks, but this is a current environment where it’s good to have a little extra liquidity to deal with things.

John Schiller

I might add maybe one thing that’s a little confusing, we didn’t touch on keeping the money in Bermuda. We actually paid down the revolver to the lowest level; we’ve made it to in terms of interest, so we’re paying it LIBOR plus 1.25 there. When you compare that to the rates we get tax free in Bermuda basically our cash is a loss. So we can turn around and pay down the revolver and it looks like we have less cash in the bank and more debt pay down, but we’re looking at it from a net debt level, we think it makes a lot of sense to do what West has been doing with the cash.

Operator

Your next question comes from Biju Perincheril with Jefferies.

Biju Perincheril – Jefferies

Just a couple of quick questions; first, can you provide us some additional color on your upcoming exploration beyond the three wells that are currently drilling, sort of just timing and reserve potential and significance?

John Schiller

Sure, we’ve spouted Blackbeard which is a McMoRan operated well; that’s another deep chest and cash tax and Jim Bobber in together, that prospect unfortunately is also hurricane barged rig, so it’s been impacted by the storm, but we’re drilling ahead there you should know something probably in the next 90 to 120 days, then we’re going have, a couple of more to big prospects, our flat prospects which is one we took from Jim Bob and the McMoRan guys and we should get that spurted in the second quarter of fiscal year ’09.

Then there is a shadow facts well that’s Walter’s operated that we like a lot and that ones going to spud this fall, I’m sorry November this year. One thing about their combined storms, you may push everything back two or three or four weeks dependant on who is waiting for rigs coming from who, but those are the planned target date as of now.

Then there is a ban prospects which is prospects very similar to the Laphroaig well that we drill with McMoRan and had so much success on and we’re looking to spud that light this fiscal year. We really like that prospect, but we basically had to go back to square one and get all the leases fixed there so we could go about drilling.

Biju Perincheril – Jefferies

And then the 5% to 6% production growth that you just mentioned for fiscal ’09 is that including the curtailments or was that pre..?

John Schiller

That was where we were with the $380 million capital budget. So we literally guys are going to have get back here and say where we see the capital budget at and where we see production. I mean obviously we’ve given you guidance for September which is going to tell you that overall first quarter is going to be down versus last quarter. I would probably expect our second quarter to still be light to the quarter we just reported and then we got to be catching wind and moving up from there once we get through the Hurricane deferred production and all. So, David has already deferred. Yes, we’ve deferred about 250,000 barrels a day equivalent production as a result of the storms.

Biju Perincheril – Jefferies

And then lastly, can you review for us I mean where you are on Blackbeard and what are the next steps there?

John Schiller

Sure, Blackbeard we’ve drilled that about 600 plus feet from where we started casing. We took several kicks and lost circulation of zones in there and the result is we’ve lost over 20,000 barrels of fluid into the hole. We tried to log it with an LWD and our batteries burned up with the same LWD that we successfully logged with before, so we made the decision to try and go into the wire line. We logged about the first 100 feet out of casing and then we started getting hung up in this first zone where we started taking the fluid losses we think its just a mud cake which is what we’ve experienced before.

What we have done prior to the storms is pump C-MET through the canyons and try to squeeze off all of those loss circulation zones and we’re hopping both the amount of time the Siemens went in there and the amount of time the holes had to heal itself while we’ve been out, which is basically three plus weeks, that when we go back in there we are going to attempt to drill with the lock bit and get through the Siemens and get us some cuttings and then probably attempt to log again or go about some other way of assessing what we have there.

Operator

Your next question comes from Jason Wangler with Dahlman Rose & Co.

Jason WanglerDahlman Rose & Company

I just had a question as far as production performance obviously this quarter. Are you going to cite anything as far your hedges; I know you guys have quite a few just because of the debt and everything else. Is there any plan around that or are those going to be affected at all?

Steven Weyel

This is Steve Jason. One of the things we do is obviously adjust any kind of positions for seasonality around wind storm risk, so we keep very low volumes of contracts during the hurricane months. We actually took October as an example down to about 10 million at various as far as the hedge position as in fiscal delivery risk associated with it. So we don’t see any material impact other than the negative mark-to-market that we had on some of our positions. Well obviously we realize that as we would have without hurricanes.

Operator

Your next question comes from Michael Mortensen with New Bridge Security.

Michael Mortensen - New Bridge Security

I just wanted to first of all say it was a good job as far as the revenue growth and of course the debt buyback, everything that’s going on, it looks very, very promising. One question in regards to your future goal of acquisitions; you guys instituted a divided which is always good, but of course obviously the amount of the dividend being very less impacted over here why are we not of course focusing on acquiring some of the common stock outstanding at these current levels?

John Schiller

Michael we’ve looked at it, we talked about it with the board. As Wes said we are keeping cash to keep all our options opened. Remember that as its falling out, we’ve been in a black out period and it’s a little weird, but our fiscal year, the way it falls and all, but essentially since early June and with the warrant we’ve been unable to do anything, so that’s an easy answer why we haven’t done anything to date. We continue to look at that we consider that versus any other acquisition and where we’ll be and price that and we’ll move if we think it’s the right thing to do.

Michael Mortensen - New Bridge Security

Well that would be good. Acquiring yourself certainly of course at these levels I think would be much better than acquiring anything else, although that one you talked about in the Gulf of Mexico is at least what took place and is very strong. Other than that of course my question I guess at this stage of the game; looking like it’s going to Texas, Corpus Christy; of course nobody knows that, but they are talking hitting Friday or Saturday; can you give me a date or an approximate of where we expect to see the Cote de Mer rig up and running again?

John Schiller

If wish. If it was me, it would be there already, but I’m a cowboy. We are actually evaluating everything as of noon today; we’ll have all our people out. Some of that’s probably a little premature, but as Steve said its because of how the infrastructure has been damaged throughout Louisiana, I think its what a lot of people missed last week when they acted like everybody was going to have their production back up on Friday; is that the Storm actually went through right in the heart of our infrastructure on a shore basis, so we’ve had a hard time getting boats, helicopters and people to where those boats and helicopters are.

We talked hard about this yesterday, but the issue is yes we all believe the forecast we won’t tell you to reuse, but these guys have been pretty much dead on with everything they’ve been given us this hurricane season and last. With that said until it actually gets in the gulf and makes that western turn away from Louisiana.

If we keep people out there right now and it turns north and the front weakens and it turns to the north, we can’t get everybody out quick enough and I think the evidence of what you’re seeing at key rush right now, how much water they are getting over there is a good example of that. So it’s going to probably have to be Friday, Saturday landfall, we might be back out Sunday, Monday. So we’re looking at another five days of shredding production and then we’ll get back to doing our work and hopefully the season will be behind us.

Michael Mortensen - New Bridge Security

Okay, just one last question and maybe this is kind of a future looking; unfortunate to understand the fact that there is a Blackbeard East, you guys are currently in Blackbeard West, correct?

John Schiller

Correct.

Michael Mortensen - New Bridge Security

With the realm and of course Mississippi I guess being acquired for the East based on that marine’s news, why are we not seeing anything from the company in regards to the potential of that new well?

John Schiller

I think if you listen to what Steve said, there has been no determination on which well we are going to drill next; whether it’s an offshore well at Blackbeard West, whether it’s Blackbeard East, whether it’s one of the one and a half dozen of the prospects we have that we like a lot in the ultra deep.

One of the things as Steve mentioned we are going to do is actually Macmillan is going to take the rig in November and drill a more conventional 25,000 foot well prospect that they have prior to (a) they want to get the king side of the rigs (b) they got a nice prospect and (c) it’s going to give the partnership time to figure out exactly where we want to go and what’s the best bank for the buck in terms of which well we drill next.

With that said, they have files a rig right?

Steven Weyel

(Inaudible) it was already filed for Blackbeard.

John Schiller

I know you’re not going to hear that, but on Blackbeard East, Megran has files a plan of expiration with the MMS and then on Blackbeard West they filed a plan of development for evaluating and all set well there. So, per many wise we’ve got those prospects moving forward.

Operator

Your next question is from Evan Templeton with Jefferies.

Evan Templeton - Jefferies

I guess a couple of questions; first of all I guess a little clarification. The 5% to 6% production growth estimate, what exactly is included in that; I guess namely are there any risk adjusted figures for our Cote de Mer or Kaplan or any of the other high impact wells?

John Schiller

I think, we’re getting some confusion like that. The question was with a $380 million budget what did we think of and uncurtailed for the hurricane where do we think production is going to be and we said 5% growth. That had restricted risk rates, mainly at Kaplan. Cote de Mer actually we don’t think the way the current operator sees it, they don’t see it having a production impact in fiscal year ’09, so really it was more Kaplan and a few other wells that we kind of held back in terms of potential because if they hit they are going to be high rated wells at $40 million and $50 million a day.

So, it’s kind of hard to convince yourself the budget of 5,000 barrel a day net impact well and say you’re going to have it for sure, even with the risk you put on it. So Evan that was pre hurricane curtailment; so we’re going to have to work back through, look at our cash flow, how much budget we want to commit and the impact.

Once high clears we have a better idea of how long our production would shut in and also our repairs. Right now, we think most of our repairs are done in two to three weeks; we just need two or three weeks of clean weather. So then we can fully assess and tell you guys a more realistic future number.

Evan Templeton - Jefferies

That’s great and I guess that partially answered the second question just regarding the Cote de Mer. What our current estimates assuming you can get back into the whirl well shortly. When do you think that might have an impact to production, if successful; early ’09, mid-’09, late ’09?

John Schiller

Yes, I’m going to part on that just because us and the operator have a different view on that right now and what it comes down to Evan is 20,000 pounds freeze and tubing and packers and how soon you can get them. I would tell you that we believe we can have it on in six to nine months very much like what we did with which we logged in February and brought on in August and so we have some production impact at the very tail end of this year. If we get back out there, our current best guess is two weeks once a rig is out there I guess. We are giving ourselves more or less two weeks, so we assume the rig gets out there and Monday we start rigging out and maybe within a couple of weeks from there we’ll have a lot.

Evan Templeton - Jefferies

Okay and then I guess just the last question is, can you just talk a little bit about your exploration success rate? In the fourth quarter it was 12%, can you just shed a little light on with the flavor of those wells do we regard them as high risk, mild risk and low risk and kind of a dollar exposure?

John Schiller

Yes, they give you the dollar numbers. I’ll tell you that majority of it was non-operated. We operated one well with some partners on our prospect; they want to drill in our block, nice looking amplitude, the sands were pretty ratty, we attempted a completion and we made a little bit of something we thought was commercial. We had one well that may impact on the (Inaudible) We actually thought we could get up dip and what we were getting is down dip, so that tells you a little bit about playing seismic and then I’m looking at the other well. So that’s the main big ones. The successes were over at the [Germakie] well that we talked about in Lake Salvador, we had a gasket no well that’s a non operated, came with us and to Cote de Mer and was already in motion and that’s kind of it.

Evan Templeton - Jefferies

Okay and do you have the dollar exposure or you want to give that to me later?

John Schiller

Yes, hold on a minute. It’s about $45 million.

Operator

Your next question comes from Michael Bodino with Coker & Palmer Incorporated.

Michael Bodino – Coker & Palmer Inc.

Hey I had a hand full of questions, hopefully you can talk some sense to me here. On Cote de Mer I know you were talking about two weeks after you get the rig on location, it also said in the press release that you may continue drilling; do you need to set a liner first after you log this continued drilling and if you do take it down to your projected double debt, what do you think the timeline is for that?

John Schiller

Well, in no particular order, we need to drill I think at lease another 500 fleet. If we log as much pay as we think we have you might argue for a liner, but when you start worrying about where you’re over lapping and everything else within your price end, I think the bigger answer Michael and what we got to look at is we think we got a pressure regression going on there, we actually have had reverse drill breaks; in other words we’ll be drilling for the sand and our penetration rate slows down rather than increase.

So if we get this log and we look at all the data and we convince ourselves that we’ve had a severe special regression and we’ll be better off running our liner in order to drill and have the last 500 feet quicker, maybe we’ll look at doing something like that, but we’ll probably running our liner on top of this pace so that we can still keep it protected for a high rate completion.

Michael Bodino – Coker & Palmer Inc.

Okay. Has there been any discussion in the partners about proposing a second well there?

John Schiller

Not really; what we’ve done is we’ve filled in the completion team, we look at how to go about the completion and we are more focused on getting this well down and getting the log. Like I said, it’s encouraging but you got to have the logs and show you the porosity, we don’t have that right now.

Michael Bodino – Coker & Palmer Inc.

Moving through the rest of the expiration program one thing we haven’t talked about and you mentioned it ends later in the year. I know that sits north over it, but can you give us some details in terms of working interest size of formation that you’re targeting?

John Schiller

Yes, somebody talked in. Engineering is a 50% working interest, it’s about an $18 million drill well, yes we think we got potential of about 20 bcf; we were actually offsetting the well drilled by another operator who had a hell of a sand in it and they had highway completions for a very limited period of time and they can never keep it on and we think that had completion problems and casing integrity, they were bringing water behind pipe, that’s why we like the prospects and we are about 12,000 feet and trying to get back to where we were and coming back from the hurricane.

Michael Bodino – Coker & Palmer Inc.

Can you give us any better sense of -- I know you talked about production being down fiscal Q1, fiscal Q2 a little bit better; can you give us any broad range of numbers that give us a little bit better indication of where you were in July and August and in Q1, I know you put some numbers out that we expect September production to come in?

John Schiller

Yes, I mean this is a ballpark guys okay, because we don’t know how long we are going to be shutting in September and everything else but if we make the number we talked about of less than 10,000 for September, then we are probably looking somewhere close to 18,000 barrels a day for this quarter.

Michael Bodino – Coker & Palmer Inc.

That helps and moving forward a couple of other items; G&A seems higher for the fourth quarter, I assume part of that was because of the foreign exchange or was there something else in that number that set out?

John Schiller

Two things; I mean we do our bonuses in the fourth quarter obviously, so there is a bonus impact for all employees to the extent that if we accrued it at the target level and to the extent we paid above that; second is the stock had a nice run at the end of the quarter and all of our restricted share units get priced and ended the G&A on a quarterly basis. I took those words all out of Wes’s mouth by the way.

Michael Bodino – Coker & Palmer Inc.

Given the hurricane impacts any great guidance on what you expect LOE’s to look like for Q1, Q2?

John Schiller

Not really. I’ve got Philip in here; we had you guys on a platform for what a day and a half. Two days max is all that we’ve had people out there, so it’s really hard; I mean obviously we’ve got some fixed cost, but obviously things like helicopters and boats on zero lake force or reduced rates, so they are going to have some impact, but I don’t think it’s going to be 40%, I think it will be probably 10% to 15% sort of number for the quarter.

Michael Bodino – Coker & Palmer Inc.

And something when you go back and do a reassessment of budget, you probably at that point will be able to give us a little more clarity on those rigs?

John Schiller

You got it. It’s just that we got a lot going on and it’s hard to make this up to it when you still don’t know what the next hurricane is doing, so.

Michael Bodino – Coker & Palmer Inc.

I understand, a couple of more quick questions; capital budget, just out of curiosity I know you detailed $150 million or $200 million of the $308 million budget, can you give us a little bit better sense on kind of offshore versus onshore? I know the stuff with Casex has really kind of matured, it sounded like through previous conversations there’s going to be quite a few amplitudes drilled in the home area?

John Schiller

Yes, start with the $45 million that’s unallocated, okay; assume most of that goes Gulf Coast, Gulf of Mexico and then we got South Tim, East Cameron, Main Pass 61 all of those, that’s about…

Michael Bodino – Coker & Palmer Inc.

150’s?

John Schiller

Yes, some were in that neighborhood it sounds right, and then you’ve got some big South Louisiana wells, the Emsing that you mentioned, the plat that’s 30 Kaplan and 40, the pass 50, so you got about $60 million or $70 million, $80 million even in the Gulf Coast, those are the big projects.

Michael Bodino – Coker & Palmer Inc.

Okay, that consisted about 280 and…

John Schiller

We got some seismic land and facilities and all the different things in there.

Michael Bodino – Coker & Palmer Inc.

And my last question and I’ll jump off and I know this is more probably for Wes or anybody else; on the purchase of the notes that you repurchased here, I assume that that’s going to sit on your balance sheet as a long-term asset and dividends will run through cash flow from investing?

West Griffin

Actually, the way it works is that on our balance sheet in September, which will be the next one obviously we report, you’ll see debt on the balance sheet says $750 million, it will be $750 million less $67.5 million of the face amount bonds that we repurchased. The gain that we realized being the difference between the $67.5 million face amount and what we paid, which was about $58 million that will be treated as a deferred gain and recognized over the remaining life associated with the bonds and obviously, the interest expense will be net interest expense, so it will be interest expense on the 7.50 less the 67.5, so we’ll have a little lower interest expense.

Operator

Your next question comes from Larry Busnardo with Tristone Capital.

Larry Busnardo – Tristone Capital

Just a couple of quick follow-ups; one, prior to the storms what was your current production capacity?

John Schiller

It was on the 27 range.

Larry Busnardo – Tristone Capital

Okay, so it’s up a little bit from where that quarter averaged and then secondly just on Blackbeard, did you say that once you get back on location, you’re going to go back to drilling the well is that…?

John Schiller

We squeezed Siemens at the bottom, they’re trying to control our fluid losses so we got to go drill out that Siemat and then depending on how the drilling is going, we’re going over the rock pit, the drill to Seimen rather than a turbine diamond which is what we have been drilling with. So, if I just drill out the Siement and then make a trip and I think depending on how the hole is acting, we may attempt to get a log write down or we may go ahead and drill ahead. We got a bunch of different option, but we really need to see how the hole acts right now and we slowdown the fluid loss.

Larry Busnardo – Tristone Capital

Okay and then just lastly on the expiration dollars in ’09, the $184 million I don’t know if you gave this, but how much of those dollars are associated with the three high potential wells you are drilling out Cote de Mer, Kaplan and Blackbeard?

John Schiller

We going to give you that answer and your questions to just relative to how much in last year’s spend was relative to this year’s budget?

Larry Busnardo – Tristone Capital

Yes, I’m sorry, in ’09 how much of that $184 million is associated with those three wells?

Steven Weyel

We got about $7.5 million of net as to go on Cote de Mer with current estimates. Blackbeard’s running it about…

John Schiller

About $25 million total.

Operator

Your next question comes from Richard Tullis with Capital One Southcoast.

Richard Tullis - Capital One Southcoast

A lot of my questions have already been answered I just want to hit on a couple of more things. John, what do you expect Energy XXI’s portion of Mississippi to the contract to ultimately be?

John Schiller

That’s a really tough question. I can tell you when we’ve had West run liquidity and all that, we’ve assumed 20%. The way our partnership works if everybody else disappears on a well basically it’s 55% McMoRan, 35% Plains and 20% us correct. So I think the reality is we’ll probably have less in there in several of these prospects because remember there’s some of them where we only have 3%; maybe not all the partners go in because they don’t have the data we have. So, maybe we go up a little bit from there, but if I was guessing that probably put the spend rate somewhere in the12.5%, 15% sort of range and I’d be guessing by the way.

Richard Tullis - Capital One Southcoast

Come back to Cote de Mer, I know we talked about a little bit already, but what are you looking at as the timeline for actually releasing some info on it once you did the log on?

John Schiller

Yes, I think when we have a log, we’ll go pretty quickly. I mean clearly if what we’re looking at is correct, it’s a material impact on the company. We don’t really want the guys out there having a log and there’s a lot of partners in it, mostly private, so I think we’d move within 24 to 48 hours.

Richard Tullis - Capital One Southcoast

Okay and that’s about three weeks off perhaps given two weeks to get back to drilling?

John Schiller

Yes, I mean and to be honest for us it all depends on how things go. We’ve got 1500 for the open hole, it’s oil based mud, it’s a lot of sands, so we assume the hole will still be in good shape when we get back into it. That said, the down side of the storm was that we’ve had hell getting back in one of our wells. One of our wells offshore we’ve actually side tracked a couple of thousand feet from TD because the hole got ratty on us from being sitting there for 10 days without us drilling. So, that’s another part of our business and we don’t talk about that much, but you to assume you just go back out the way you were drilling, go right back in and start drilling and that really doesn’t work in the Gulf of Mexico and Gulf Coast.

Richard Tullis - Capital One Southcoast

One final question for you John; when you guys look at your internal production forecast in the Gulf Coast, Gulf of Mexico area how may production shut-in days do you typically build into the forecast?

John Schiller

We had for September and October 5%.

Steven Weyel

5 days for October and September, 3 for July and August.

John Schiller

To get that, so we assume three days, so basically three out of 30 in July and August and then 5 days in September and October.

Richard Tullis - Capital One Southcoast

A day is each month.

John Schiller

Each month.

Operator

Your next question comes from the line of [Van Shaw with Credit Suisse].

Van Shaw - Credit Suisse

I jumped on a little late, but can you just go through your balance sheet again. I know you brought back $15 million of the barns, does that mean you have 700 outstanding?

John Schiller

Actually Van, 68 million back.

Steven Weyel

About $6 million to $7.5 million, so total outstanding in terms of the high yield is 682.5; its all outstanding but on a net debt basis net of what we’ve repurchased, we’re 682.5 and our corporate revolver just to add that piece for you, as of September 9 we had outstanding $197 million associated with that and then we had $89 million of cash on our balance sheet of different entities, some of Bermuda, some of that down below that for a total net debt of $108 million.

Van Shaw - Credit Suisse

Also did you guys go through sort of Timbalier capital and Blackbeard and what your possible payouts might be and what you are expecting interest on; that stuff was not on your website?

John Schiller

As we went through it, it uploads on our website Van. Actually even in this presentation we show you all the wells and working interest etc.

Operator

Your next question comes from [Michael Folken] with (inaudible).

Michael Folken – Unidentified Company

I just wanted to ask you about the press release. I was bit confused what the writing about the Blackbeard was in terms of what you actually can disclose; can you elaborate a little bit on that because as far as I understand, if there is any material info you would have to disclose it or not.

John Schiller

No, what that’s about is the London AIM market per our Nomad build like we should have to disclose what sand we were in and things like that. The confidentiality agreement of Blackbeards partners won’t allow us to do that and that’s what that disclaimer is about. If we have something material yes, we will disclose it, but we are not to that point right now, so that was mainly something that the lawyers in London insisted on and it strictly deals with some of the AIM requirements with regards to talking about drill wells.

Michael Folken – Unidentified Company

And then in terms with Blackbeard West, if you are continuing drilling and so forth when do you actually expect to be able to talk about any potential find or not?

John Schiller

What I have told people quite frankly is, there was A&I and Shale and Chevron drilling this well and nobody would know anything right, they will keep it totally confidential. Us and McMoRan have a materiality impact and so if its material we need to talk about it. We announced the first 54 foot interval and no one seem the care very much one way or the other, so we established a 50 foot falling out material in that for you all and what I will tell you is we’re going to drill to where we think TD is and then summarize results for you. Now that said, if we going in and log and there is a 200 foot continuous sand that becomes material in and of itself and like Cote de Mer, we would announce that pretty quickly.

Michael Folken – Unidentified Company

Okay, great and then just on Blackbeard East, I was a bit surprised on the drilling with safety, that’s not going to drill Blackbeard East first because just couple of weeks back or a week back I believe in conference Rowan announced that McMoRan planned to take it to Blackbeard East on November 1, first thing.

John Schiller

I like Danny a lot, but I don’t know if he’s a partner on our well. What I think we’ve tried to relate to you is we go a lot of prospects, we got four partners in the wells plus some of those prospects have other partners and we’re going to work through over the next couple of months, which wells make the most sense to drill and it may very well end up being the Blackbeard East, I’ll just tell you it’s my cast and stone yet, but if you were listening we have part of plan of exploration of Blackbeard East. So, from a permitting standpoint that wells were furthest along, but again because Jim Bob’s going to drill another well in November that will probably take to February, March, we are going to have some more time in that to fully evaluate, which well we want drill next and get all permitting done.

Operator

Your next question comes from Jeff Miller with JMG Capital.

Jeff Miller - JMG Capital

Just a couple of follow-ups; you said that prior to the hurricane, that production just were actually in the 27,000 range?

John Schiller

Right.

Jeff Miller - JMG Capital

Can you just talk about the roll off of your hedges. I know that started in June and can you talked about net realized prices throughout the same time as well?

John Schiller

Yes. Steve and Todd is going to give you an update.

Steven Weyel

Basically I’ll give you an update on where we are as far as fiscal year ’09 going forward on natural gas. As of September 8, market prices we have an average effective hedge price of $8.51 and an average projected realized price of $8.41. On the crude side again as of September 9, commodity prices we have an average effective of hedge price of $89.67 and our average projected realized price of $94.96.

John Schiller

One thing I may add to that, somebody actually asked late last night or early this morning, I forgot when, but our realized price on our crude versus WTI looked to be a little bit differential, a different lower differential than what we’ve been seeing in the past. One of the things that’s going on within our volumes is that we’ve been taking more gas to get process as the margins been there for us to make more money of that. So, consequentially our NGL’s, if you went back to the third quarter we’re about 2%, this quarter NGL’s made up an excess of 10% of our volumes and so they’ve had kind of a material impact on that realized price on a per barrel basis and that’s why we’ve seen a little switch versus our WTI.

Operator

Your next question comes from Joan Lappin with Gramercy Capital.

Joan Lappin - Gramercy Capital

I want to go back to Blackbeard, because I want to make sure I understood correctly what you’ve said. I know that once you did the 600 feet below the casing and you started to have problems and vanishing mud and then you lost one logging effort and are now so where are you, are you trying to log it now, are you trying to figure out where the mud is going; you made a reference to “we think we have a mud cake,” I don’t know what that means, so could you just explain, so I can get it.

What exactly is going on there, how much deeper you plan to take this because at various times we’ve heard 35 and we’ve heard 40 and we want to see what we’ve got and I don’t know if the assumption is valid, but it would seem to me you wouldn’t make a commitment to Rowan for some humongous, almost $200 million over a period of time for a rig in an area if you didn’t think you had some?

John Schiller

Now that is a correct statement, the last part, you’re right. In terms of the well itself, but I get overly complicated. One of the things that’s interesting about drilling in the dessert is let’s just ballparks some numbers, but let’s say we’re drilling with the 17.7 pound per gallon mud. When we’re actually drilling you have an estimated circulated density or ECD that because of your frictions and your pipe and everything else adds a pound to 1.3 pound.

So, for instance we drill out and we drill into what we assume to be a sand because our drilling rate went up; when we did, all our fluid went south, because basically that formation was seeing a 19 pound equivalent pressure. When we stop drilling, all of a sudden it’s in a 177 and it comes the other way and that’s not…?

Joan Lappin - Gramercy Capital

But, what was that?

John Schiller

But, because that 1.3 pound difference in pressure, that debt, that’s like 1700 PSI difference that you had against the formation when you were drilling that you don’t have once you quit drilling and we deal with this all the time in the Gulf of Mexico. I mean, that’s not something different in Germany or anywhere else; it’s just that this depth is a lot bigger impact and so we’ve worked our way through these zones with inflowing and in taking fluid loss, obviously to take fluid loss you got to have something down there taking the fluid barrels.

So when we talked about the mud cake, what we meant was all that fluid disappearing into whatever it is; lets assume for this discussion it’s the sand, although we can’t guarantee it, but lets assume it’s a sand. Then as that mud goes in there and builds up a filter cake and so when you try and run a long tool through it, you start hanging up on what’s essentially a ledge or you start sticking because of differential pressure; in our case we think it’s probably just a ledge. So, that’s why the wire line tools wouldn’t get all the way to bottom no matter how much weight we put on. From a pressure, temperature and everything else the tool was working fine, we just couldn’t get it at the bottom.

We had also made on around with an LWD and the same LWD, same company, same everything that we previously logged in the 32,000 feet, this time, we were on successful. Now, it could be the batteries, we got a different set of batteries, a bad set whatever, the reason the same temperature or same things we tried to log, but this time we weren’t successful.

What we have physically done right now is pump C-MET to that bottom 630 feet, trying to get some of it into those formations that appear to be taking the fluid, so that we can go back in there, drill out which is what we’re going to do when we come back from the storm, drill it out and see if we’ve cut some of these problems out. In other words, we’re not losing so much mud to the hole and the hole behaves itself better.

Once we see how the hole acts, then we can tell what our next step is, that’s why you’re probably a little confused. We might drill ahead, we might log, we might do some other things that I don’t want to talk about right now, but we really got to see, if sitting there for three weeks and pumping C-MET has helped us in terms of drilling with a loss circulation. Is that any clear?

Joan Lappin - Gramercy Capital

Somewhat; so I’m not sure what the difference is if you were to put down more casing and foreign cement in there.

John Schiller

One case is showing left, maybe two, but we don’t really want it case it off right now, especially not without knowing what we have. So we’ve got 600 foot of open hole. When one talks about loss circulation, one assumes you have something permutable down there, so we’d like to log and see what it is before we could pipe in hole.

We don’t think we’re at that point where we have to put pipe. You’re thinking everybody talking about cement is abandoning a hole or seeming to put a case in place, both of which we use cement for, but we also use it in this situation where we’re trying to get the fluid loss to stop.

Joan Lappin - Gramercy Capital

Okay. So and then would you elaborate on the implication of signing up this rig or well, I guess maybe you can’t answer until you have a log and see what you’ve got down there and how it compares with JimBob’s geology from all of the other holes that he’s drilled in and what exactly you’re looking for down there. I mean do you think your near it or...?

John Schiller

I thank you said it right. JimBob wouldn’t have gone and committed that our rig if we didn’t see something that made him feel good about the other prospects okay, so lets leave it at that.

Operator

Your next question comes from [Mike Keenan with Orix].

Mike Keenan - Orix

Just a couple of follow-ups; I thought there was a slight negative revision on the natural gas on your approved reserve base. Is that just a delay in some of the development projects you’re into look or what’s that look like?

Steven Weyel

Mike, this is Steve. Basically we had about 12 bcf of negative revision on the gas side, a 90% of those negative revisions were related to Gulf Coast proprieties that we acquired. We had heading to negative revisions seeing that we drilled on the gas side. As a matter of fact on the LaFord well, we had a positive gas revision there 1.5 bcf and then it may pass 74 with a positive gas revision there of 4.5 bcf.

Mike Keenan - Orix

Is that from the proprieties, you guys bought initially back in ’06?

Steven Weyel

That’s correct. The same reserved engineers that Gulfs were when we bought it.

Mike Keenan - Orix

On the hedge percentage I know earlier, I think John said it was 77% of expected production for ’09. Given the hurricane impact, does that mean that’s going to be actually higher?

Steven Weyel

That actually we’ve already adjusted that number of for the estimated hurricane impact.

John Schiller

So, everybody out there capable of doing reserve engineering got to figure out where we think the number is right now.

Steven Weyel

Yes and the other thing I’ll tell you about our hedge positions, it’s always important to note that a big portion of our hedge positions don’t have a physical risk associated with them and we’ve retained the outside if to the extent, there is upside in the marketplace.

Operator

Your final question comes from Duane Grubert with CRT Capital Group.

Duane Grubert - CRT Capital Group

Just a couple of small follow-ups; one of them, the production platform at South Timbalier that was toppled, can you tell us how much production was coming from that and whether you are intending to get it back?

John Schiller

Yes, it was less than 300 barrels a day and about 100,000 barrels of reserves; it was probably a little bit early to say whether we’ll really get it back or what we do there, we’re still evaluating all that.

Duane Grubert - CRT Capital Group

Okay and the comment about being exposed to a cap on cost relative to your deductible, is that to imply that you don’t think damage is going to be higher than net deductible or just that your policy is going to cover you and you’re only on the hook for your deductible?

John Schiller

I think, we have a $7.5 million deductible and the general repairs will probably push us slightly above that, it really comes back to what you just asked about on those two wells that we lost. The wells are $12 million to $15 million a piece and so it depends on how we handle that client and there maybe more there.

Duane Grubert - CRT Capital Group

And finally, we’ve been very focused on the number of the money that you bought bonds as of June 30th; can you tell us have you purchased any additional bonds since June 30th?

Steven Weyel

Actually what we’ve according Duane is what we purchased after June 30th, we just barely got the warrant tender closed and we paid down revolver for June 30th, but none of the bond repurchasing is in the June 30 numbers.

John Schiller

Yes. I think that closes it off ladies and gentlemen. I thank everybody for joining us and we’ll see you again probably early November to tell you about this quarter. Thanks.

Operator

This does conclude the Energy XXI’s fourth quarter and fiscal year end 2008 earnings conference call.

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Source: Energy XXI (Bermuda) Limited F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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