Executives
T.J. Thom - Investor Relations
Rick Bachmann - Chairman and Chief Executive Officer
Steve Longon - Executive Vice President and Chief Operating Officer
Joe Leary - Executive Vice President and Chief Financial Officer
John Peper - Executive Vice President, General Counsel and Corporate Secretary
Tom Debrock - Senior Vice President of Exploration
Keith Vincent - Senior Vice President of Acquisitions and Divestitures
Analysts
Jason Wagner
Steve Berman - Pritchard Capital
Gary Nuschler - Jefferies & Co
Ron Mills - Johnson Rice & Co.
[Katherine Sabaski]
[Erin Kallimera]
Energy Partners Ltd. (EPL) Q2 2008 Earnings Call August 5, 2008 10:00 AM ET
Operator
Welcome everyone to the Energy Partners second quarter 2008 earnings release conference call. (Operator Instructions) Ms. Thom you may begin your conference.
T.J. Thom
Good morning everyone and welcome to Energy Partners second quarter 2008 earnings conference call. Joining me today from EPL are Rick Bachmann, Chairman and Chief Executive Officer; Steve Longon our newly appointed Executive Vice President and Chief Operating Officer; Joe Leary, our Executive Vice President and Chief Financial Officer and John Peper, Executive Vice President, General Counsel and Corporate Secretary. Tom DeBrock Senior Vice President of Exploration and Keith Vincent, Senior Vice President of Acquisitions and Divestitures are also on the call and will be available to answer questions.
Rick will begin today’s call with some comments including results of the second quarter and first half of the year and Steve Longon will provide a review of some of the operational details from the first half of the year and a preview of our activities in the upcoming quarters. Joe will go into details in our financial results for the second quarter and first half of 2008 and I will provide third quarter and full year 2008 guidance. Rick will then wrap up with some closing comments.
Before we begin, first we need to get the administrative details out of the way with our Safe Harbor statements. This conference call may contain forward-looking information and statements regarding EPL. Any statements included in this conference call that address activities, events or developments that EPL expects, believes or anticipates will or may occur in the future are forward-looking statements.
These include statements regarding reserve and production estimates, oil and natural gas prices, the impact of derivative positions, production expense estimates, cash flow estimates, future financial performance, planned capital expenditures and other matters that are discussed in EPL’s filings with the Securities and Exchange Commission.
These statements are based on current expectations and projections about future events and involve known and unknown risks, uncertainties and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Please refer to EPL’s filings with the SEC, including Form 10-K for the years ended December 31, 2007 and Form 10-Q for the quarter ended June 30, 2008 to be filed for discussion of these risks.
I will now turn the call over to Rick for his comments.
Richard Bachmann
I’d like to start off by congratulating Steve Longon our newly appointed Executive Vice President and Chief Operating Officer.
Steve joined us about a year ago as Senior Vice President of Drilling and Engineering, a role which was later expanded do include responsibility for production operations at the beginning of this year. Steve has 29 years of industry experience and prior to joining us was with Dominion in its New Orleans office serving as General Manager of Production operations with responsibility for their shelf operations, also deep water Gulf of Mexico onshore South Louisiana. Part of that he served in a variety of management roles for Vastar and Arco.
Steve is a great asset to the team. He has a great depth of knowledge on the Shelf deepwater Gulf of Mexico as well as onshore in the Archon Tex area of south Texas mid Texas Gulf coast. We welcome Steve into his new role as COO and a bit later in this call I will tell you about some additional management changes.
I’d like to begin with the brief highlights of our results for the second quarter and the first half of 2008. Starting with our financial results net income for the quarter was $4 million with $0.12 per share. This is in stark contrast to last year’s net loss in the second quarter of $6.3 million or $0.18 per share. More importantly our net income for the second quarter of 2008 has been reduced by pretax noncash unrealized hedging losses of $25.9 million. On an after tax basis our adjusted non-GAAP net income would have been $20.3 million or $0.63 per share beating first call estimates of $0.45.
Revenues were a record high of $125.7 million, as the quarter benefited from strong commodity prices, including record oil prices. Discretionary cash flow totaled $73.6 million and cash flow from operations was $57 million. The key to performance in the quarter was a continued decrease in overall costs which we have seen since the first quarter of this year compared to last year, including decreases in exploration expenses, lease operating expenses and G&A.
Based on our first half of 2008 performance, we are well on our way to meeting our cash cost reduction goal in the range of $20 million year-over-year. Joe will go into more detail on the other income statement components and T.J will provide guidance for the third quarter and full year 2008.
We have intentionally undergone an introspective period in the first half of this year, focusing solely on executing the operational strategy we put in place coming out of our poor performance in 2007. I’m extremely pleased with the progress our staff has made towards meeting our goals this year which include stabilizing production, improving our exploration results and controlling our cost.
Production for the second quarter was 15,789 Boe’s per day, essentially flat for the first quarter of 15,799 Boe’s per day. We have stabilized production and more importantly we are able to meet our production goals in both the first and second quarters despite not yet having contribution from our deepwater Raton well.
Noble, the operator has most recently indicated that the Raton well is now expected to be online late this year. Based on prior delays we would project Raton start up either late ‘08 or possibly early ‘09. Even with Raton’s delay our third quarter production has the potential to be above the first and second quarter averages ranging between 16,000 to 18,000 Boe’s per day for the quarter. We are projecting our annual guidance will also be up from our most recent two quarters ranging from 16,500 to 18,500 Boe’s per day.
Our drillwell performance currently totaling eight successful wells and an 80% success rate is back in line with our historical rate in the mid 70% range. Our development drillwell program in particularly is yielding better than expected results from our oil opportunities being exploited in East Bay and from several projects in South Timbalier 26. I’m also pleased to see our overall expenses for the first half of the year are down significantly.
When we started the year, we endeavored to take a hard look at our exploratory drilling programs and in particular its risk profile in an effort to improve the program’s results. Among other initiatives, we are limiting our dryhole exposure per well in our exploration program to diversify the program over the year. This will also result in more joint operations which leads to validation of our prospects by other participants.
Additionally we have put in place an overall investment approach that takes our capital expenditure program going forward and splits it ideally equally into three investment arms; exploration, exploitation and acquisitions to limit the dependency on any one investment program to meet our desired goals.
We are looking to have an active exploration and exploitation program for the balance of the year, with the possibility of four exploratory wells commencing in the fourth quarter. In addition along with other exploitation projects we will have as many as four more East Bay drilled wells, a rig work hole was performed this year.
Finally as we indicated on the last call we now have a full time dedicated acquisition team in place actively working to find and close transactions. With that I will turn the call over to Steve to provide more details on our operational results and upcoming activities; Steve.
Stephen Longon
Let me begin on the production side of the business. As reported our first quarter average just shy of 15,800 barrels of oil equivalent per day; it was near the midpoint of our guidance range. This was accomplished with good contribution from base production and core assets such as South Tim 41, 46 and 26 and our East Bay field combined with a few of our key western asset producing better than was forecasted.
In addition the West Cameron 252 prior year discovery came online in May and is currently producing at a growth rate of 12 million cubic feet of gas per day. We have a 75% working interest in this well. As Rick mentioned we made our second quarter guidance despite the fact that within the quarter we did not have contribution from our deepwater Raton well that we anticipate would be on late in the quarter.
The well and subsea tieback to the host facility are complete, but we were delayed due to control umbilical issues. The good news is despite this Raton delays, we are expecting third quarter production to be above the average achieved in the first half of the year. This is good contribution expected from some high rate Shelf projects coming online in the quarter at South Marsh Island 79#, East Bay and South Timbalier 26# fields.
While we have been working hard to be in position to increase production in the second half of the year, we have been working just as hard on decreasing our operating cost in a rising cost environment.
Our LOE is down in the second quarter compared to 2007, with some of the reductions based on this ongoing effort. We are on track to reduce LOE in the range of $10 million for the full year of 2008 as compared to 2007. The team has done an outstanding job with reductions achieved in areas such as transportation and labor without sacrificing our production runtime or our leading environmental health and safety performance.
On the drill side of business as Rick indicated we are seeing good results from our drillwell program located in our core areas of South Timbalier, Bay Marchand and East Bay. The three successful wells in Bay Marchand, the CC 14 side track, CC 15 side track and the CC 3 side track in which we have a 27% working interest have been online since early April and are still producing nicely at a combined growth rate of approximately 17,00 barrels of oil equivalent per day.
In our South Timbalier area we have drilled two successful development wells in our South Timb 26 field which are producing nicely at a combined growth rate of approximately 1000 barrel of oil equivalent per day. We currently have one additional drill well underway at South Timb 26, the F32. This well has already successfully drilled development objectives and has an exploratory tail underway and should reach TD in the next four days or so.
The East Bay rig program is turning in better results than expected. Since the rigs arrival in this 100% EPL field in March we have drilled three side tracks, one horizontal well and one work over. The drilling staff has done an excellent job of controlling cost in what is turning out to be an extremely efficient program.
The side track wells in the field have outperformed our predrilled estimates with log all pay totaling over 100 feet net in one well and over 200 feet net in each of the two other side tracks. The East Bay program has expanded from a full well program into at least eight wells totaled this year.
The rig has just completed the State Lease 10, 12, #321 side track and the well is producing at around 740 barrels of oil per day. Since the rig’s arrival we have increased East Bay’s field production by 1900 net barrels of oil per day and one of the drill wells have already paid out its investment.
In the deep water, we are currently participating in an appraisal side track of the Mississippi Canyon 292, #5 Raton South well. The 292, #5 side track operated by Noble, is being sidetracked to appraise the extent of oil pay found in the original well. We have a 20% working interest in this well and we expect to reach TD sometime within the next couple of weeks.
In regards to the March OCS lease sale, we have been awarded all eight leases in which we were a high bidder. Seven of the blocks are located on the Shelf in our core focus area and includes South Timb blocks 25, 83 and 84, West Delta Blocks 101 and 102 and Grand Isle blocks 36 and 38 and a deep water block, Mississippi Canyon 499. Our share of the eight high bids totaled $4.3 million.
It is important to know that these awarded leases have identified prospects and leads on them. Within our core Shelf area we continue to flange up our existing prospect inventory in a divert to generate new prospects with the help of over 1200 square miles of additional and newly processed seismic data that has started coming in-house and would continue to come in stages into 2009.
We are beginning to tee up a few exploration opportunities in the fourth quarter of this year. As Rick indicated with the use of our revised risking process and new investment guidelines limiting our dryhole exposure per well, we could start up to four exploratory wells before the end of the year.
The first well expected in our line up is the East Cameron 111 #2 where we have a 50% working interest. It is a follow up prospect to the East Cameron 111 #1 exploratory success. The East Cameron 111 #1 well and #2 prospect are located within our East Cameron 109, 111 of a million 101 field complex where we have made four discoveries since 2005. We will provide you more details on this well and other wells likely to drill as we get a bit closer.
I will now turn the call over to Joe to give you more details on our finances.
Joe Leary
The company earned net income of $4 million or $0.12 per diluted share for the second quarter of 2008 compared to a net loss of $6.3 million or $0.18 per diluted share for the second quarter of 2007.
This improved performance was primarily a result of higher commodity prices and reduced operating expenses including minimal dryhole cost and lower depreciation depletion and amortization expense or DD&A. These improvements were offset by a decrease in production due to the natural field declines and the sales of assets, as well as realized and unrealized hedging losses.
Results from the second quarter of 2008 included a pretax loss on derivative instruments of $36.5 million which included a $10.6 million pretax realized loss and a $25.9 million pretax non cash unrealized loss. Excluding the after tax impact of this unrealized loss EPL’s adjusted non-GAAP second quarter 2008 net income would have been $20.3 million or $0.63 per diluted share. This is well ahead of the first calls earning estimate of $0.45 per share.
For the first half of this year, net income was $6.3 million or $0.20 per diluted share compared to a net loss of $2.6 million or $0.07 per diluted share the same period in 2007. This was largely due to higher commodity prices and reduced operating expenses, including reduced general and administrative expenses (G&A) and M&A costs incurred in 2007.
Results from the first half of 2008 include a pretax loss on derivative instruments of $44.8 million which included a $15.8 million pretax realized loss and a $29 million pretax non-cash unrealized loss. Excluding the after tax impact of the non cash unrealized loss on derivative instruments EPL’s adjusted non-GAAP first half 2008 net income would have been $24.6 million or $0.77 per diluted share.
Second quarter 2008 production averaged 15,789 barrels of oil Boe per day, stable with the first quarter of 2008, but down 39% from the 26,093 Boe per day in the second quarter of 2007. This decrease in production was due primarily from natural field declines as well as the sale of South Louisiana assets in 2007 representing approximately 2160 Boe’s per day for the second quarter 2007 production.
Second quarter production was made up of 6370 barrels of oil and 56.5 million cubic feet of natural gas per day. Oil represented 40% and gas 60% of total production. Second quarter production was within our guidance range of 15,000 and 17,000 Boe’s per day.
Commodity prices remained strong for the second quarter 2008 at $87.45 per Boe up 71% from $51.20 in the second quarter of 2007. For this period oil was a $116.52 per barrel, 95% over the $59.89 in 2007 and gas was $11.30 per Mcf, 46% over the $7.76 per Mcf in 2007. As mentioned earlier, second quarter 2008 included a $10.6 million realized loss on oil contracts due to an approximate $86 price sealing on crude collars versus an actual price received of $116.52 per barrel.
Commodity prices in the second quarter of 2008 were able to offset production declines resulting in record high revenue of $125.7 million up 3% from $121.7 million in the second quarter of 2007. Cash flow from operating activity in the second quarter 2008 was $57 million compared to $53.5 million in the same quarter of 2007.
Discretionary cash flow; that is cash flow from operations before changes in working capital and before exploration expense was $73.6 million or $2.29 per share in the second quarter of 2008 up from last year’s $70.5 million or $2.04 per share primarily due to improved commodity prices in the quarter. Discretionary cash flow estimate from first call was $2.26 per share.
Now to our expenses for the second quarter; lease operating expense (LOE) for the first quarter was $14.7 million excluding transportation charges, down 16% from the $17.4 million in the second quarter of 2007. This decrease was primarily due to reduced marine transportation expenses as well as the sale of onshore assets. LOE for the quarter was at the low end of the guidance range of $14 million to $16 million.
Exploration expense was $5.3 million for the quarter, significantly lower than the second quarter of 2007 expense of $37.4 million derived primarily from reduced dryhole costs. The majority of the exploration expense in the second quarter of 2008 was made up of seismic, delay rentals and impairments. Exploration expense for the quarter was at the low end of our guidance range of $5 million to $10 million.
DD&A excluding accretion of our abandonment liability was $33.2 million for the quarter, a 25% decrease from $44.1 million incurred in the second quarter a year ago. The decrease was primarily due to decreased production volumes and the sales of our onshore South Louisiana assets. On a dollar per Boe basis DD&A for the quarter was $23.14 which is at the low end of our guidance range of $23 to $26 per Boe.
G&A expense for the quarter was $13.5 million, the same as last year’s second quarter. G&A for the second quarter included an accrual of $1.5 million or 2008 employee performance bonuses which put it slightly above the guidance of $10 million to $12 million.
Net interest expense was $11.4 million for the second quarter compared to $13.2 million for the same period in 2007. This decrease is primarily due to the absence of a $2.3 million financing fee paid in the second quarter of 2007. Net interest expense for the quarter was just below our guidance range of $11.5 million to $12.5 million. Income tax for the second quarter was $2.4 million at a rate of 37%, majority of which was deferred.
Turning to our balance sheet, at quarter end we had current assets of $83.7 million; current liabilities of $151.8 million; a negative working capital of $68.1 million. At quarter end we had $8.6 million in cash, $30 million drawn on our bank facility, $4.5 million remaining on our old senior notes and $450 million in senior unsecured debt.
Currently the amount drawn on our bank credit facility remains at $30 million and we have $120 million of unused capacity. The company had a $112.2 million in share holder’s equity at the end of the second quarter, a 10% increase from the $102 million at the end of 2007.
T.J. Thom
I’ll be taking you through our third quarter and full year guidance. Starting with production volumes we expect to average 15,000 to 18,000 Boe’s a day for the third quarter and between 16,500 and 18,500 Boe’s per day for the full year with the percentage of oil in both cases falling between 35% and 45%.
In the third quarter in addition of ongoing development work at East Bay and South Tim 26 that will add to production we anticipate the start of a prior gas discovery at South Marsh Island in 79. In regard to pricing, going forward we expect our price realizations to continue to be on-par with Henry Hub for natural gas and $1.50 per barrel lower than WTI for oil.
Now turning to expenses; for LOE in the third quarter, we expect our absolute LOE to be in line with the first half of the year at a range from $14 million to $16 million. For the full year we are lowering our prior guidance of $59 million to $67 million to a range of $57 million to $65 million.
For G&A expenses, we expect this line item to range between $10 million to $12 million for the third quarter and we are maintaining our annual guidance at a range between $40 million and $45 million for the full year. Taxes other than on earnings should be within 2 to 3% of our revenues for third quarter and full year 2008.
For exploration expenses, we expect these costs to range between $5 million and $10 million for the third quarter. For full year 2008, we are unchanged from previous guidance range given at $30 million to $40 million.
Turning to DD&A, the guidance for the third quarter is at a rate of $23 to $26 per Boe and for the full year we expect our DD&A rates to remain unchanged from prior guidance of $22 to $26 per Boe. For interest expense, we’d expect that the expense for the third quarter to continue to be in the range of $11.5 million to $12.5 million and for the full year to range between $43 million and $47 million.
Finally, our income tax rate should range between 34% and 37% for the third quarter and full year 2008. As a reminder, we will post the third quarter and full year 2008 guidance we gave you on this call to our website later today.
With that, I’ll turn the call back over to Rick for a few more comments and we’ll be happy to answer any questions you may have in a moment.
Rick Bachmann
We are very happy to build a report to your much improved first half of 2008. We stabilized production and we met our production goals by arresting decline with approximately 4000 barrels of oil equivalent a day of new production. Based on our successful exploitation and exploration programs we are forecasting that the second half of the year production will be up from the first half.
On the expense side we are well on our way to meeting our reduced cash cost. The goal is $20 million year-over-year, we are right on that. We are pleased that our drill well success is back on line with our mid 70% historic success rate. We look forward to execute in the exploratory and exploitation plans we have underway for the second half of the year.
Let me also talk a little bit about some additional organization changes which were made to realign the staff consistent with Steve’s organization following his promotion. With strong confidence in our internal bench strength we have appointed some of our existing staff in the roles with increased responsibility.
Chad Williams has been named Vice President of Production; Steve Sinnamon Vice President of Drilling and Paul Jones Vice President of Exploration, Houston Office. Additionally on the finance side of the company, T.J will continue her role with Investor Relations but is also assuming the Treasurer ship and has become the Vice President of the company; Dennis Legendre, Vice President of Human Resources. This now represents the new executive management team. The Board congratulates these very talented people on their new roles.
We will now take any questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Jason Wagner.
Jason Wagner
Based on obviously how you guys have done first half and spend a little more than half of the CapEx, is there any thought to may be raising the CapEx number a little bit going into the second half obviously with those forced price renewals coming on possibly in the fourth quarter as well?
Rick Bachmann
That’s always a possibility; we have a board meeting coming up. I think as we announced earlier, a CapEx budget of $200 million I think that’s probably still a pretty good number. We are intending to pay our bank debts down to zero in the second half of this year and we’ll probably build cash as we look and evaluate other opportunities.
Jason Wagner
Okay and just one another one; I know in the core areas where you’ve been focused on; is there anything you guys are looking to divest and obviously you guys have plenty of time to look at it, but is there anything so far you guys put out there or anything that you guys have had something looking at to get some extra cash?
Rick Bachmann
At this time we are not actively marketing any properties.
Operator
Your next question comes from Steve Berman – Pritchard Capital.
Steve Berman - Pritchard Capital
The full year production guidance doesn’t seem to be that much of a decline from earlier and I’m assuming there is little or no return in there. So, if that’s the case what’s offsetting that. I mean where is this strength that you might not have seen the last time you gave guidance to more than offset the loss of Raton?
Joseph Leary
We are seeing good results at East Bay and we’re expanding the program there, so that’s going to kind of help us out a little bit on that end to offset some of the Raton not comment on till late in the year.
Rick Bachmann
Steve I would really underline our Steve’s earlier comment about how wells are out performing our pre-drill expectations and we are here in a mature field like this to encounter a 100, 200 feet of stack pay and these wells could come on in the range of 800 to 1000 barrels a day and we own a 100% of the production; that’s pretty compelling.
Steve Berman - Pritchard Capital
Okay and just one more Raton related question. In Raton sales, the 20% working interest numbers if I recall, I thought you had 25%. I know you have 33% of the first Raton wells, so can you sort of tie those in. I guess Samson had dropped that at the first one, but what’s the mix in this well and in any going forward?
Rick Bachmann
We sold down on this specific well specifically because of the very large projected development costs associated with it.
Steve Berman - Pritchard Capital
Which is what Rick; do you have that number?
Joe Leary
It’s going to depend really on how many well we develop, but it’s going to be in the $200 million to $300 million range.
Steve Berman - Pritchard Capital
For the entire program?
Joe Leary
Yes for as wells, completions and the pipelines, giving it to a host.
Steve Berman - Pritchard Capital
Right; getting back to East Bay, Bay Marsh Island etc, Rick I think last year you talked about a possible water flooding opportunity; is that something that’s still on the cards?
Joe Leary
Right now we are not looking at that at East Bay.
Rick Bachmann
I think given that success of our drill off programs we are going to accelerate that. We’re actively looking at adding at least one more team of geologists and an engineer to these Bay fields and as long as we can continue to identify, what we call by pass pay as the magnitude we are talking about, we are going to continue drilling.
Operator
Your next question comes from Gary Nuschler – Jefferies & Co.
Gary Nuschler - Jefferies & Co.
I realize it’s a moving target, but can you give us a sense for what your total drilling inventory is in East Bay and greater Bay of Marsh Island?
Rick Bachmann
Let me start that and we can have other people around the table contribute to it, but one of the things that Tom and Steve have talked about in the past is a very large ongoing project to reprocess seismic and East Bay in particular, that new seismic will be coming in first quarter ‘09 and South Tim 26 is some of that starting to come in.
That’s going to we believe meaningfully impact the number of drilling opportunities, but our drilling opportunities in East Bay in terms of what the type of well we are drilling today are being constrained by the lack of people we have to put on the opportunities. The team that we have is aggressively looking forward in turning out these new opportunities and now we’ve got a rig that will be working throughout the year in East Bay.
Tom Debrock
On both of those fields because they’re all mature fields and you have stacked pay sands, both of these fields have been explored since the probably mid 40’s and 50’s and we continue to find prospects.
As Rick mentioned we are going to highjack as far as whatever new technology is out there to the industry. We will be getting the pre stacked up migrated data over East Bay sometime next year and we are continuing to use the wells we drilled, the new subsurface points we have and the date to cover additional prospects.
I would tell you right now we have prospects in both Bay Marsh Island and East Bay but there is no limit to what else we’ll find. We are continually working on continually finding new prospects. In fact we have a partners meeting with Chevron at Bay Marsh Island tomorrow morning, so those prospects just keep coming and coming so it’s just no end at this point; it’s just a lot of pick and shovel work we call it
Gary Nuschler - Jefferies & Co.
When you’re drilling the appraisal well at Raton South originally as memory serves you were going to develop red rock along with Raton South; is that still in the cards or is red rock still in the table, can you provide some clarity there?
Tom Debrock
Once we get this appraisal done, then we’ll be looking at the whole project and Red Rock would be an option to throw into the system there. That will be necessary to develop just the Raton South field so.
Rick Bachmann
Both of these appear to be heavy in the oil content and as far as the different development plan and volume type up these together.
Gary Nuschler - Jefferies & Co.
You mentioned in the last conference calls you are looking to make some acquisitions within your core areas in Gulf of Mexico. There are a number of packs just available for sale; we haven’t really seen any transactions or many transactions this year. Can you tell us what you’re seeing and the likelihood that you would get a deal done in the next six to twelve months?
Keith Vincent
We are very active in what we call our focus areas which is essentially the eastern portion of the central MMS planning area. We are working with those packages as well as other opportunities which are not generally being publicized but at this moment we don’t have anything to talk about definitively but with the continued work that we are doing we feel that we are going to have something good to talk about in the not too distant future.
Operator
Your next question comes from Ron Mills – Johnson Rice & Co.
Ron Mills - Johnson Rice & Co.
You walked through the success you had at East Bay in particular and even South Tim, helping the production despite the Raton delays, but with your full year guidance and your third quarter guidance, that would imply your fourth quarter averaging 21 plus 1000 barrels equivalent a day; what are some of the major contributors from the third quarter to the fourth quarter to be able to get to that level of production?
T.J Thom
Yes and its really going to be our reliance in the fourth quarter with the East Bay wells coming in better than we expected and as well as South Marsh Island 179 which we have currently in the planning at a very moderate level, that could easily double in the rate that we would projected at this point. So we’ve got a lot of moving parts, we feel comfortable that we really only have an impact from Raton on the other side of the guidance of about 500 Boe’s a day for the annual average.
Ron Mills - Johnson Rice & Co.
So at Raton you’re factoring in 500 Boe’s per day?
T.J Thom
No, no without Raton; so Raton is about 1000 Boe’s per day if it were to come online in the second quarter in the latter half of the year which again is still a possibility; we are just cautious that it could be into the first half part of ‘09.
Ron Mills - Johnson Rice & Co.
And is that 1000 a day that shows net that you would expect to bring that production on in?
T.J Thom
Yes annual.
Ron Mills - Johnson Rice & Co.
Okay and then at South Marsh Island 79 can you refresh our memory as to what kind of rig you’re expecting at that well?
T.J Thom
Just about six and it could be as high as 15 to 20 Boe’s a day.
Ron Mills - Johnson Rice & Co.
Okay and are you expecting a meaningful ramp as well in the East Bay well, so it’s not only hoping that the recent success continues at the better than expected levels but also a more actively spread program to build that fourth quarter production?
Rick Bachmann
Yes I mean I think somewhat embedded in Steve’s dialogue was we just brought in a new well on over the weekend and we still cleaning up a little bit but its right around 800 barrels a day and we said we are going to drill four more wells. So start adding those puppies together and they get significant.
Ron Mills - Johnson Rice & Co.
And is it just a one rig program out there so you’re just going from well to well?
Rick Bachmann
Yes sir.
Ron Mills - Johnson Rice & Co.
Okay and then finally on the debt pay down you said you have $30 million of debt out on your revolver right now; it looks like based on just cash flows that are out there that you should be able to pay that down during the third quarter?
Rick Bachmann
We’ll get very close, may be not down to zero, it will go down by the end of the third quarter, but as an acquisition it will certainly be down by the end of the fourth quarter. It could be very close with cash building, again absent an acquisition.
Ron Mills - Johnson Rice & Co.
You mean cash building in the fourth quarter absent an acquisition.
Rick Bachmann
Correct.
Ron Mills - Johnson Rice & Co.
Okay and just to cleanup may be for you T.J, on the deferred taxes from your guidance standpoint what level of your reported taxes you expect deferred?
T.J Thom
The vast majority.
Ron Mills - Johnson Rice & Co.
Okay with the second quarter level be pretty good?
T.J Thom
Yes.
Operator
Your next question comes from [Katherine Sabaski].
[Katherine Sabaski]
I was hoping you could discuss the umbilical issues with Raton in greater detail and is there any incremental cost associated with them?
Rick Bachmann
Yes, what we had is the host platform that we’re operating from and we’re using an old umbilical that was in place between our well and that host platform. This umbilical also serves other wells for other operators and when we try to bring our well on, there was what they call cross talk. It just basically was interference between our control system and the other control systems out there that wouldn’t allow our control system to talk to our subsea well.
So the fix to that is we are laying a separate control umbilical just for our well and it’s probably an $8 million to $9 million gross type of project when installed.
[Katherine Sabaski]
Okay great and then looking forward to the fourth quarter that’s for exploratory prospects do you have an estimate for planned gross CapEx exposure for those four prospects?
T.J Thom
It’s a little premature at this point but it’s something that we’ll be talking about as we get a little bit closer.
Rick Bachmann
Along with identifying the wells that we’ll be drilling there is some potential deep water wells in addition to a pretty high potential on shore well there. We talked about four wells and we intend to put four wells in there.
[Katherine Sabaski]
Do you have an estimate for the East Cameron 111 #2?
Rick Bachmann
Yes, net up it’s probably about $9 million.
Operator
Your next question comes as a follow-up from Ron Mills – Johnson Rice & Co.
Ron Mills - Johnson Rice & Co.
Just to follow on to that last question, any pre-drill targets in terms of size at East Cameron 111 you are targeting?
T.J Thom
Yes, our upside potential there is about 40 bcsc on a gross basis.
Ron Mills - Johnson Rice & Co.
And is that targeting multiple sands?
T.J Thom
Yes.
Ron Mills - Johnson Rice & Co.
And Rick just for clarification what is your per well dryhole exposure limit that you’re now using as a governor on exposure?
Rick Bachmann
Right now it’s $10 million.
Operator
Your next question comes from [Erin Kallimera].
[Erin Kallimera]
A question on South Marsh Island 79; what’s the rate that’s expected there?
T.J Thom
It’s about as low as about $6 million a day up to about $20 million a day.
[Erin Kallimera]
Okay and then on South Tim 26; what does that look like?
T.J Thom
We have 32; its going to depend on which stand we wind up with, so it’s a little premature to talk about that one as well. Keep in mind we are doing exploratory tail and then we’ll be able to reveal the results of the well, but we do have a success in the development section already so it’s just a matter of which sand.
[Erin Kallimera]
And when do you expect to be able to announce something?
T.J Thom
That one should be up in the next week.
Operator
And you have a follow up question from Ron Mills – Johnson Rice & Co.
Ron Mills - Johnson Rice & Co.
T.J. on your G&A guidance, the $10 million to $12 million, is that also inclusive of your non cash comp and if so what level of that G&A is cash versus non-cash?
T.J Thom
Non-cash is around about $1.2 million average for the quarter and I’ll have to get back to you on the cash piece of that as we look at that average, but I guess more important to you is about the $1.2 million for the non-cash piece.
Ron Mills - Johnson Rice & Co.
On the G&A?
T.J Thom
On the G&A.
Operator
There are no further questions.
Rick Bachmann
Thank you very much for everybody who has joined us. As we have talked extensively about, we have really pretty much done what we said we were going to do. We are excited about going into the second half of the year, continuing with the programs that we started in the first quarter and the second quarter, but also carrying it now back into the exploratory phase.
We thank our team; our team has done an exceptional job of performing under some pretty adverse situations and again we are excited and we hope you are in terms of looking forward. Thank you for joining.
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