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Executives

John Walker - Executive Chairman

Mark Houser - President & Chief Executive Officer

Michael Mercer - Senior Vice President & Chief Financial Officer

Ronald Gajdica - Senior Vice President, Acquisitions

Analysts

Kevin Smith - Raymond James

Ethan Bellamy - Robert W. Baird

Miller Lerner - Unidentified Company

Tony Langan - Unidentified Company

Praneeth Satish - Wells Fargo

John Ragozzino - RBC Capital Markets

Brett Reilly - Credit Suisse

Daniel Guffey - Stifel Nicolaus

EV Energy Partners, L.P. (EVEP) Q3 2012 Earnings Call November 9, 2012 10:00 AM ET

Operator

Good morning ladies and gentlemen and thank you for standing by, and welcome to the EV Energy Partners, third quarter earnings conference call. During today’s presentation all parties will be in a listen-only mode and following the presentation the conference will be opened for questions and instructions will be given at that time.

At this time I would now like to turn the conference over to John Walker, Executive Chairman. Please go ahead, sir.

John Walker

Thank you Craig and good morning everyone. I’m in New Orleans at the Independent Petroleum Association of America’s annual meeting and I’ll be addressing them beginning at 10:30 on several industry topics.

Before I start my prepared remarks I wanted to briefly touch on this. Now I’ll touch on it in more detail at the latter part of my prepared remarks. On our unit transaction, this is a very large and sizable transaction, which I want to remind you of and we’ve had several bids and I feel very comfortable that we are going to reach agreement, but I’ll talk more about that in just a little bit.

EVEP had another consistent quarter, meeting expectation pretty much across the board. Driven by good growth in the Barnett Shale assets, our production was well within our guidance range. We’ve driven our unit LOE and G&A costs down in each quarter this year, as well as choosing lower drilling and completion costs.

Like everyone else, weak natural gas and NGL prices continue to affect revenues and our large hedge position, particularly for NGL really helped this quarter, and Mike Mercer will discuss our financials for the quarter a little bit later in more detail.

Production targets for us are really not as important as achieving acceptable rights for return on our capital, which I discussed with you on many occasions. That being said, our production and cost results over the past few quarters are particularly pleasing and we’ve actually slowed down our capital spending in upstream activity, to stay true to our targeted 20% risk adjusted return. But we have not drilled a gas well in quite a while, therefore we will likely spend $135 million on upstream capital spending this year versus the original goal of $160 million, because in many instances we were not able to achieve that 20% rate of return, so we cut capital.

As a result and factoring in some weather related downtime from Sandy, we anticipate that fourth quarter production will increase only slightly from the current quarter. Our field personnel are doing a very good job of driving down costs and the large predominant positions that we strategically achieved over the last several years in several basins also helps a lot. As Mark Houser will discuss, we are establishing new production records weekly in the Barnett, led by our exposure in the oil combo play.

The company as you’re aware continued to report great wells in the Utica and the midstream infrastructure continues to be developed. As you are also aware, we are in the midst of selling our operated assets in the quarter defined. The data room has had excellent attendance and we have had several offers as I’ve mentioned before.

The reality is we are making good progress, but until we have the definitive agreements signed, I really can’t go into more details about it. I’m very comfortable that we are going to achieve our goal of closing the transaction by year end and I’ll explain that and that we’ll be able to close if it’s primarily a land transaction, there’s not a lot of environmental due diligence, there’s title of due diligence, so we can close the transaction and allow the buying party to do the land due diligence post back up.

So during the period of a few months after closing, I can do their due diligence, so that’s the way we are able to choose that and I think that, I’ve noticed that some people that already they don’t understand the difference between an oil gas asset transaction and a land transaction. They don’t understand our ability to do post closing due diligence. So again, this is complex and our goal remains to close by year-end.

Now I will turn this discussion over to Mike Mercer.

Mike Mercer

Thank you John. For the third quarter of 2012 our adjusted EBITDAX was $67.3 million, which is a 29% increase over last year’s third quarter, and that’s primarily due to the Barnett Shale acquisitions we completed during the fourth quarter of last year and it’s a 2% sequential increase over the second quarter of this year.

Distributable cash flow for the third quarter was $35.3 million, that’s a 15% increase over last year’s third quarter and a 2% increase sequentially over the second quarter of this year. Distributions for the third quarter, which will be payable on November 14 to holders of record as of November 7 close will be approximately $33 million.

For the third quarter production was 10.8 Bcf of natural gas, 266,000 barrels of crude and 440,000 barrels of natural gas liquids or 15 Bcfe. That’s a 49% increase from life shares third quarter production of 10.1 Bcfe, once again primarily due to the Barnett Shale acquisitions that we closed in the fourth quarter of last year and a 1% increase sequentially over the second quarter’s production of this year, 14.8 Bcfe.

Our third quarter net loss was $50 million or $1.15 per basic and diluted weighted unit outstanding, but we need to clearly note in there that that included $65.9 million of unrealized losses on commodity and interest rate derivatives. This was primarily due to the increase that occurred from June 30 to Sep 30 during the quarter in the future strip prices for oil and natural gas and NGLs during the duration of our hedge portfolio and the effects such price changes had on the mark-to-market evaluation of our outstanding commodity derivatives.

We also had $1.4 million of non-cash realized losses related to derivatives acquired in our December 2010 acquisition, $1.8 million of dry hole and exploration costs, $0.9 million of impairment costs, a $200,000 non-cash deferred income tax benefit and $4.3 million of non-cash compensation related cost contained in G&A. I would also like to note that during October we completed our semi annual borrowing base review and our borrowing base was reaffirmed at $750 million.

I would now like to turn it over to Mark Houser for a review of our operations.

Mark Houser

Thanks Mike and good morning everyone. First I’ll start out with our base business, which performed very well last quarter. Our operating cost continued to be well managed across the board and our Barnett asset is performing particularly well with lower operating costs and good production growth again this quarter.

Net equivalent production for EVEP grew slightly quarter-over-quarter to $163.1 million equivalent per day. With production growth in the Barnett Shale offset by natural declines in other assets, as well as some downtime in the Permian and San Juan, due primarily to mechanical issues at Southern Union gas plant.

Lease operating expenses were down 1.3% on a per unit basis quarter-over-quarter and flat on an absolute basis due to a combination of good will surveillance, labor reductions and continued management of our service providers. Our unhedged realized gas prices were up 27% quarter-over-quarter which was good news, with crude basically flat and our NGLs down 7%.

As John mentioned we’ve reduced our overall drilling plans for the year, particularly in the dry gas areas of our portfolio. Our drilling capital spending for the quarter was about $38 million below our March 2012 guidance, which was closer to $50 million. Most of this reduction was a result of slowing activity or reduced activity in the mid continent Appalachia areas. We spent about $100 million in upstream capital activity during the third quarter and plan to invest around $35 million for the fourth, so we expect to end the year below the low end of our guidance range slightly.

Just putting into perspective, we plan on drilling about 112 wells now versus 182 wells that we had originally planned for, including our non-op activity. So based on this reduction in capital and some weather related issues tied to tropical storm Sandy, we anticipate only a slight increase in production quarter-over-quarter.

Speaking to the Barnett Shale, which accounts for over 40% of EVEPs production, it’s starting to really develop some momentum. Production grew 7% quarter-over-quarter. In the past two weeks we’ve achieved the highest production rate since we took over the properties at approximately $234 million equivalent per day or about $82 million equivalent net to EVEPs interest. The team has done a fantastic job of continuing to lower per unit cost, operating cost every quarter this year. We are seeing continued reductions in things like water hauling and increases in drilling and completion efficiencies.

During the third quarter we spudded 20 gross wells and turned in line 11. This brings our total year-to-date to 57 wells drilled. We are still putting emphasis in the Northern areas as they are typically more liquids rich. They are also a bit deeper and more expensive than the shallow dry gas wells which are much more economic.

Overall we plan to have about 76 gross wells drilled by year end versus our original target of about 90; however, we are getting production rates about 14% better than our AFEs and are starting to leverage down our costs. For example, since our horizontal lengths and depth vary, we focus on our cost per foot to drill in complete wells.

Overall drilling and completion costs per foot have been reduced 11% just this past quarter. In addition to these internal improvements, we are now negotiating further reductions in service costs such as pressure pumping and are having good result doing that.

As John mentioned, we are not at liberty currently to discuss much on our unit activity due to the ongoing process. Our joint venture with Chesapeake and Total continued moving forward in the wet gas window. Chesapeake remains very active and is currently operating 13 rigs in the area. They have indicated they have planned on 15 rigs running for 2013 inside the joint venture and planned on drilling over 200 wells next year that continued to see more increases and efficiencies as they move up the learning curve.

Utica wet gas is currently being processed through Dominion’s Hastings plant and has actually been somewhat bottlenecked by increased liquids production throughout the region. Additional processing capacity will be available this December when the first train of the Dominion plant, located in Natrium, West Virginia, becomes operational. This will be followed in 2013 with the commissioning of several other Ohio gas plants, including those operated by Momentum and MarkWest.

EVEP is active in mid stream and per structure development with momentum in the Utica play. As I mentioned last quarter, EVEP is participating in two Utica midstream companies. We have a 9% interest in Cardinal Gas Services, a company that provides low-pressure gathering in the Chesapeake, EnerVest and Total JV area. Investment in the gallery infrastructure continues and we are now generating operating cash flow from the system, small so far, but it’s growing.

EVEP also has an 8% interest in the Utica East Ohio Midstream, a company that was formed with momentum that will provide gas processing, NGL fractionation and the pipeline connects for the JV wet gas production, as well as other production in the area. The first phase of the UEO development, which includes the first train contingent in gas plant with $200 million a day gas capacity, the NGL pipeline to Harrison and the first phase of the Harrison fractionation plant will all come online in June 2013 on schedule.

In October we signed an agreement whereby we an EnerVest will dedicated certain operated acres in Ohio to the UEO facilities, in exchange for the right for EVEP to increase its ownership in UEO from 8% to 21%, subject to certain conditions, which must be met on or prior to March 2013. Assuming a 21% interest in UEO, EVEP anticipates investing about $320 million in UEO and Cardinal combined over the next four years.

So in summary, our base operations are generally performing nicely and we are overall on track on our Utica activity. We will provide more information regarding the process as we are able.

So with that John, I’ll turn it back to you.

John Walker

Okay, thanks Mark. Craig, we will open it to questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). And our first question does come from the line of Kevin Smith with Raymond James.

Kevin Smith - Raymond James

Hi, good morning gentlemen. Great quarterly results. John, thank you for your commentary on asset yields or the slowing yields. I think that’s helpful. So I guess my question is, how much time do you need to close a land deal and basically how much time on the clock do we have at this point before year-end?

Mark Houser

Kevin. John you can jump in too. John’s not here, I’m not sure he’s actually – he’s part of this, but I think that depends on who we are negotiating with a little bit in terms of that. John, do you want to comment on that as well?

John Walker

Yes, I still believe that our purchase and sale agreement, which all commented that its down the fairway, so we are not trying to create a difficult negotiating process here. It’s fairly a simple transaction in terms of the document itself.

The complexity is because we’ve had so many different bids, its sort of like putting a quote together to maximize what we are getting out of it and so it doesn’t make sense for us to try to spend a lot of time talking about it until we get our definitive agreement signed and I know that doesn’t make a lot of you guys feel comfortable, but as Jeffries have told us, we’ve had more interest in our package that any Shale deal that they’ve ever done, and of course they’ve done 80% to 85% of all the deals.

And so I’m telling you that I believe that we will achieve our goal by year end to have the transactions, but it is complex, so I don’t want to guarantee something that I can’t guarantee until everything’s fine.

Kevin Smith - Raymond James

Okay, fair enough. And I think I can pull this from your comments, but would you mid confirming I think bids were due several weeks ago, is that fair?

John Walker

They were due in October, yes.

Kevin Smith - Raymond James

Okay, and you still plan to monetize the 100,000 net acres or is there any change of breaking that up any is that still negotiated?

John Walker

Yes, it’s on the word of 100,000 and so I think we’ll achieve that. I do think that the non-operative package we will not close this year.

Kevin Smith - Raymond James

Okay. Alright, thank you very much.

John Walker

Sure.

Operator

And our next question does come from the line of Ethan Bellamy with Baird.

Ethan Bellamy - Robert W. Baird

Hey guys, good morning. Just one housekeeping question. I assume that that corresponds with the SEC is a non-event.

John Walker

Mike, do you want to comment on that.

Michael Mercer

Yes, periodically companies will get questions regarding the SEC filings from the SEC. The last time we got any was three years ago, back I believe in May of 2009. From what we understand that they typically will occur every two or three or four years.

We did receive that comment this year. In fact if you want to, I know you guys can go on to the SEC website and see those correspondents. They had a question for us about our reserves and our strategy. We responded in a letter to that, which also is available on the website and they responded back that they had no further comments at this time.

John Walker

So I think it’s a fairly standard thing. I think there may have been a report in Bloomberg yesterday that may have implied that it was something out of the ordinary, but we didn’t view it that way.

Ethan Bellamy - Robert W. Baird

Okay thanks, I just wanted to double-check that. With respect to the midstream investment, that looks actually pretty attractive and sizable. Do you plan to break that out and/or break out the cash flow from the royalty override and then could you talk about the ultimate disposition of both those interests. I know you extend the path; you want to keep the royalty and perhaps monetize the midstream.

John Walker

I don’t know if we wanted to monetize the Midstream, but you can…(Cross Talk) perhaps we will report it.

Mark Houser

I can go though that. As far as reporting, you can already see on a cash flow statement that there is a breakout on capital, between based their drilling capital and then our investment in the midstream. So you will be able to continue to see that capital. Once we start receiving income off of that, we will make sure both that and then once we start receiving override income, we will make sure that investors will be able to follow those cash flows.

As a matter of fact, Ethan I will be at a board meeting as soon as we are done here and that plan is coming together nicely and we will start to shed more light on that as we get a little bit more information here over the next month of so.

Ethan Bellamy - Robert W. Baird

I’m sorry, Mike and John overlapped a little but, what’s the ultimate goal for disposition, or is it a keep or…

Mark Houser

Yes, let me talk about that Ethan. Obviously any asset that we have we could dispose off but the opportunity for us to go from 8% to 21%, we were able to negotiate based upon acreage outside the NGO window.

We like that investment, we believe that its going to be rapidly growing, high rate of return and its going to be steady predictable. A lot of the counsel comes up for us, so very little capital, except for maintenance will come later on and yet there’s always the option of selling it for a very high multiple. There is always some chance of selling the royalties for a PV 4 or PV 5, but within EVEP its rapidly growing, a very low capital intensive and good earnings. So I think the unit is very attractive.

Ethan Bellamy - Robert W. Baird

Okay, thanks guys. I’ll let somebody else jump on.

Operator

And our next question does come from the line of Miller Lerner with (Inaudible).

Miller Lerner – Unidentified Company

Good afternoon everybody. I guess my first question, John for your uninitiated here, you mentioned that land transaction, there is post closed due diligence. Can you explain that a little bit more? It’s just really what the buyer is getting is an option and they can back out if they don’t like what they see. What kind of caveats, what kind of price reduction limits, just in general, not specific any deal, I don’t want you to give away anything. But just for again, for us laymen here, what are we talking about a little bit more.

Mark Houser

No, it’s not an option. Either we own the land or we don’t own the land and so the buyer is fair. They want to come in and make sure that we have clear title on this very large acreage position that we have and there will be some baskets and fresh holds and things of that sort, but once the transaction is signed, it will be done.

It’s possible that they will find that we don’t have title to their comfort, then we have do some further title work to get titled to their satisfaction. It’s usually the minimums. We’ve had this land as you might imagine, because we’ve been going through so many transactions with it, we feel very comfortable with it. But we have to give the buyer an accurate amount of time to do their own due diligence.

Miller Lerner – Unidentified Company

Okay, so it’s more of a title, not that they could check logs or any of that stuff?

Mark Houser

No, well there’s no logs. This is either we own the land and the debts that allow them. We are carving out the Utica. We are keeping the Clinton, we are keeping the (inaudible), so it allows them to make sure that they have clean title to what they are paying for.

John Walker

Now, just to clear up one thing, I mean they have all had access to all the data, all the well production information, all that stuff, they’ve seen the logs and all that. What John is referring to in terms of no log, that’s not something at that point that is due diligence related later. This is clearly verifying title in areas and there is adjustments done as you move along and then there is a post closing adjustment one way or the other and that’s actually pretty standard on land deal.

Miller Lerner – Unidentified Company

Okay, great, thanks. I guess the other question.

Mark Houser

Yes, let me point out one thing, one thing. In several instances we’ve had people offer cash and some people have offered properties in addition to cash and they did that earlier in the bid dates, so that we’d have a chance to do our own work on it, but in several instances we are having to negotiate within one transaction, really two, because they are buying our land and we are picking up their property. So there is due diligence that we’d have to be doing post fact I would say.

Miller Lerner – Unidentified Company

Okay, but those types of transactions that you just mentioned would be handled with a swap or would it be handled as two separate buys themselves for tax purposes.

Mark Houser

It would be a tax-free transaction, 10-31.

Miller Lerner – Unidentified Company

Okay, great. Okay and then I just the other question I have is you mentioned that the non-operating packages will not close this year, which is understandable. But just curious, are we talking early in the first quarter next year to late – is there any kind of color on the timing of that package, the transaction related to that package that you might be able to share with us at this time.

Mark Houser

It would be in the first half of next year, but that package has lagged as we focus on the operated, so I don’t have a precise date. We do have interest in it though.

John Walker

We have interest and we actually have data room activity relative to that as well, but John’s right, we’ve been honed in more on the operated side.

Miller Lerner – Unidentified Company

No, that’s actually good. Just trying to put a stock in the horse out there, that’s all for a timeline, that’s all. Alright, great. Mark I just have one question, maybe I misunderstood. Did you say something about Sandy having an affect on the third quarter in your comments?

John Walker

No, in the fourth quarter.

Miller Lerner – Unidentified Company

In the fourth quarter, and what would that affect actually be since it really hit for the most part the North East and a little bit on the north of Carolina.

John Walker

It will not be a huge affect, but again Ohio and certainly West Virginia, I’ve got a picture from Ken Mariani our Head of our Operating Company from his house in West Virginia, just covered in snow, and there was a good snow type activity that has some impact on production operations in West Virginia and a bit in Ohio, its that sort of thing though.

Miller Lerner – Unidentified Company

Well okay, great. Thanks. Appreciate the information.

John Walker

We have had maybe the biggest effect and Mark addressed this, because the Hastings plant has not operated. They had a high level of utilization in the past quarter and right now all our debt was higher than the weather (ph) BTUs. Both the conventional gas as well as the Utica gas is trying to get through one plant. And until nitrium comes up in December that is going to restrain what happens in the Utica, because most of this is liquids rich. And so we need nitrium to come up and then I think the next plant to come up will be the UEO, which will be May or June.

Operator

Thank you. And our next question does come from the line of Tony Langan with (inaudible).

Tony Langan – Unidentified Company

Yes, I have a couple of questions. There is obviously going to be more than one transaction involved here. So will you announce each transaction as a disclosed or would you like to announce them at one time.

Mark Houser

I don’t know the answer to that yet Tony. Probably we will wait until we’ve had all of them done, because I think it creates a distorted view if we announce one transaction for one county.

Tony Langan – Unidentified Company

Alright secondly, you mentioned I think on the last conference call, the potential of dropdown from EnerVest, could something if you choose its dropdowns be done around time of closing or what might be the timeframe for any drop-outs.

Mark Houser

We have a good period of time; about actually I believe its three months after we…

John Walker

No, let me correct that Mark. We have 45 days to identify and we have six months to close.

Mark Houser

Six months sorry. Yes, we have six months to close a transaction and certainly we’ve gotten some potential drop-down evaluated here within the company and have some flexibility around doing that within a timeframe.

Tony Langan – Unidentified Company

Great, thank you. And finally a question I always ask, John you’ve said on more than one occasion that you felt the wet gas portion of Utica would get something more than $15,000 an acre and that the oil portion would get quite a bit more than that. Do you still feel comfortable with those estimates?

John Walker

I just can’t comment on that Tony, sorry.

Tony Langan – Unidentified Company

Alright, I’m done.

Operator

And our next question does come from the line of Praneeth Satish with Wells Fargo.

Praneeth Satish - Wells Fargo

Hi, good morning. Just two quick questions from me. In terms of the processing joint venture, could you maybe break out the contract mix in terms of percentage that’s top, versus keyhole, verses fee base.

Mark Houser

Ron Gajdica will comment to that.

Ron Gajdica

Which of the contracts are you referring to, Cardinal Gas Services or Utica East Ohio?

Praneeth Satish - Wells Fargo

Utica East Ohio. I’m just trying to gadget EVEPs overall exposure.

Ron Gajdica

Yes, the revenue that Utica East Ohio received is all going to be fee-based unit of production rates. That will include rates for processing, rates for fractionation of ethane, and fractionation of C3-plus. Rates for transporting wide raid out of the gas plant to the processing plant and rates for using and gathering response. So there are various rates for all of those types of fees and that’s what generates the revenue for UEO.

Praneeth Satish - Wells Fargo

Okay, so there’s minimal commodity exposure there.

Ron Gajdica

Right.

Praneeth Satish - Wells Fargo

Okay and just one more question, could you provide any more detail around the $83 million acquisition that you closed in August?

Mark Houser

Actually I think John mentioned at the time, that for strategic reasons we would have to provide more information on that at a later date and we are definitely – nothings changed relative to that at this point. We’ll provide information on that when competitively, when it’s appropriate.

Praneeth Satish - Wells Fargo

Okay, fair enough, thank you.

Operator

And our next question does come from the line of John Ragozzino with RBC Capital Markets.

John Ragozzino - RBC Capital Markets

Good morning gentlemen.

Mark Houser

Good morning John.

John Ragozzino - RBC Capital Markets

With 51 days to the year end, can you comment on the difficult sides or the minimum sides I guess, the amount of time that it would take to close a transaction of this size and how that weighs into your targeted close of the four year end.

John Walker

Well, I’d say that our goal continues to be year-end, and so I guess that’s all I can say, is that I feel like its still achievable. So I guess 51 days is the answer.

John Ragozzino - RBC Capital Markets

Alright, and just to clarify on someone else’s question before, did you mentioned that you are going to wait until multiple deals are going to be closed before you make an announcement. So effectively that may mean that you’re potentially already in position of a PSA and the time to close has already began.

John Walker

Yes.

Mark Houser

Of course as things are material, there’s competitive and strategic reasons and also materiality levels and if things are deemed to be material then it won’t be disclosed as appropriate.

John Ragozzino - RBC Capital Markets

Alright, that’s fair. And then seeing more, I guess in November you are unable to actually get deal closed before the year-end. Can you discuss the key motivating factors that would leave you on the trail to get it done as soon as possible and have you had any thoughts or the possibility of waiting until, call it sometime later next year, if not maybe even 2014, so that there is additional time for the play to be de-risked.

John Walker

Our objective was to go ahead and get this transaction closed and we continue to believe that we will be able to do that. So that is not something that we are giving consideration to.

John Ragozzino - RBC Capital Markets

Alright, thanks very much gentlemen.

Operator

And our next question does come from the line of Brett Reilly with Credit Suisse.

Brett Reilly - Credit Suisse

Good morning everyone. I understand that you can’t provide too many details on the $80 million acquisition, but is it possible to break out how much that contributed during the quarter?

Mark Houser

It did not contribute any revenues during the quarter. Normally we anticipate that it will in the fourth quarter.

Brett Reilly - Credit Suisse

Okay, and then on LOEs, a nice down pitch and those are the back few quarters. How should we think about trending LOEs moving forward and maybe into 2013?

Mark Houser

I think we are having good progress as I mentioned. We are certainly seeing some pushdown on service related costs, especially is some of the lesser active overall basin. Right now as we see it, we are about to sit down and look at our budgets for next year, but we haven’t done that yet.

I think everybody is focused in on continuing to push those costs down, but we tend to – there is some natural cost and license that just comes through labor and other things as you have year-end adjustments and that sort of things. So we typically pushed forward flat and declining. I wouldn’t say any major increase, nor would I see any huge significant decrease at this point.

Brett Reilly - Credit Suisse

Got it and any color on the level of gas prices you guys would be comfortable with to re-accelerate for drilling in some of those areas that you saw.

John Walker

Let me take this. I think that part of this seems simple, but it’s a very complex question. What you have to do is look at your cost of recovery basin-by-basin and well-by-well, and so when we do an individual AFE, we have a price of gas that we are using at that point in time; we never use our hedges to look at, and so some basins its going to take 650 to hit our 20% risk adjusted rate of return, some basin its 450, will be able to do it.

And so I’m more optimistic about gas prices and have been a very long time, but we can spend a lot of time talking about coated gas, LNG exports, CNG use in transportation, and that’s going to hold very little relevance if we have another warm winter.

So its very important, its overwhelmingly important to have a reasonably normal winter or we will again enter 2013 with too much gas, which will have an impact in the 2014 in my opinion.

Brett Reilly - Credit Suisse

That makes sense. And then I appreciate that you guys can’t give too much color on the Utica, but are you able to discuss the forms of the first few wells there and maybe any update on the Habrun if you have it.

Mark Houser

We are not commenting a lot of our production from our wells right now, just due to our process. Let say on the Habrun we are actually about 120 days I believe or so into dissipation.

We really looked hard at our volatile window in terms of the amount of dissipation time and we fell like somewhere in the 120 to a little bit longer days is something we at least want to be testing to see how that works and so that’s where we are on that well at this point.

Brett Reilly - Credit Suisse

Okay, that’s helpful, that’s all from me. Thank you.

Operator

And our next question does come from the line of Dan Guffey with Stifel Nicolaus.

Daniel Guffey - Stifel Nicolaus

Good morning guys. Jut a follow up on the last question, can you guys give how many PUDs in the Barnett are located up north in the more liquid rich area.

Mark Houser

I don’t have those numbers in front of me. We can get that to you in terms of – generally we know we have a lot of PUD potential in that area and we’ve actually added a good bit. We actually have drilled a number of probable locations in the northern area this year for the few lease requirements we had, lease holds we had and those wells have worked out and actually added PUD. So I think generally in the north we are looking at PUD additions this coming year, but we’ll give more information on that a little bit later.

Daniel Guffey - Stifel Nicolaus

Well, Ron might be able to help, because I know that no one will be drilling probables, but possibles also with those locations. Can you add any color there Ron.

Ronald Gajdica

Well, just repeating what Mark just commented on, in the northern area, Montage, NY county area of the Barnett, we are drilling non-approved locations and we had good results and of course when you have a new producer and a new area that creates off set PUDs automatically and so we had quite a few PUD additions as a result of that successful drilling of non-approved locations.

Daniel Guffey - Stifel Nicolaus

Okay, great and at what price would guys need to put a rig back in? I mean you said until the gas well in a while. Would that just be on their Barnett acreage or is that other acreage. I mean do you have…

Mark Houser

This is actually – well, generally the driest areas of the Barnett is the only area of the Barnett that we’ve slowed down and the numbers are making a lot of sense in terms of reoccurrence there.

What John was referring to, some of the other areas where the MLP has some assets, such as some of our mid content acreage, certainly in the San Juan we’ve slowed activity down there in the drier parts there. In the Clinton and some of the Knox are areas where we have slowed down because of pricing, so really not in the Barnett, that expect for the dryer gas areas of the Barnett.

That’s all held by production, and as drilling costs continue to come down, which we have made pretty good progress there, at a $3.50, $4 gas price, you are looking at pretty attractive returns, so we would kind of reevaluate that. But again, we’ve got other options right now.

Daniel Guffey - Stifel Nicolaus

Okay, and how many rigs are you guys are running currently and is there any preliminary estimates on how many you may run next year third quarter.

Mark Houser

Right now I believe we are running three. If I understand it right now – sorry, I should know this and I don’t have it right on the top of my head, but its three, thanks for verifying that, and we are anticipating a similar level, three to four for next year, but again, we are moving through that process right now.

Daniel Guffey - Stifel Nicolaus

Okay, thanks guys. Good luck.

Operator

(Operator Instructions). And at this time I’m not showing any further questions in the queue. I would like to turn the call back over to management for any closing comments.

John Walker

Okay, thank you Crag. We enjoyed this morning. Please call any of us if you do have questions; we’d be happy to respond, and we look forward to having some good news to report as I said on the Utica in reaching our goal of a transaction or transactions by year end. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.

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