EXCO Resources Q1 2009 Earnings Call Transcript

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EXCO Resources, Inc. (NYSE:XCO) Q1 2009 Earnings Call May 6, 2009 10:00 AM ET

Executives

Douglas H. Miller - Chairman and Chief Executive Officer

J. Douglas Ramsey, Ph.D. - Vice President, Chief Financial Officer and Treasurer

Stephen F. Smith - Vice Chairman, President and Secretary

William L. Lanny Boeing - Vice President and Chief Operating Officer

Paul B. Rudnicki - Vice President of Financial Planning and Analysis

Harold L. Hickey - Vice President and Chief Operating Officer

Analysts

Ellen Hannan - Weeden & Co.

David Heikkinen - Tudor Pickering

Irene Hass - Canaccord Adams

Derek Whitfield - Canaccord Adams

Jack Aydin - KeyBanc Capital Markets

Howard Flinker - Flinker and Company

Robert Albert - Atlas capital

Operator

Good morning. My name is Leslie and I will be your conference operator today. At this time I would like to welcome everyone to the EXCO's First Quarter 2009 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions) Thank you. Mr. Miller, you may begin your conference.

Douglas H. Miller

Thank you, Leslie. I like to welcome everybody to our first quarter conference call. My name is Doug Miller, I am Chairman and I will head up this meeting today. With me today I have Steve Smith, our President and Vice Chairman and four - five other titles, I forgot, Paul Rudnicki, Mark Wilson, Doug Ramsey Hal Hickey and our two lawyers Justin Clark and Lanny Boeing.

We will get started here in a minute, who did I miss? Oh! I missed John Jacobi, small guy over in the corner.

So, before I get started I think Doug has to read off our disclaimer statement. Go ahead Doug.

J. Douglas Ramsey, Ph.D.

Thanks. I would like remind everyone that you can go to www.excoresource.com and click on the Investor Relations tab on the left hand side of our home page to access today's presentation slides. The first page that will come up after you hit the Investor Relations tab have the presentation slides link, just double click on the link and it will launch the slide presentation that you can follow along with. The statements that may be made on this conference call regarding our future financial operating performance, structure and results, business strategies, market prices and future commodity price risk management activities, plans and forecasts, and other statements that are not historical facts are forward-looking statements as defined in Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934.

Please refer to pages three and four of the slide presentation for the complete text regarding our forward-looking statements.

In addition, please refer to our website for the earnings release, which contains additional information regarding our forward-looking statements and the preparation of our financial disclosures, including reconciliations and other statements regarding non-GAAP financial numbers, which will be discussed on today's call. Doug?

Douglas H. Miller

Thank you. First thing I'd like to do before we get into our slide shows is kind of go over where we are and it's been quite an exciting nine months. And I'd like to go back and tell everybody last July we had a Board meeting, and we won over all of our assets. And this company had 33,000 development locations.

We are looking at an AD&A price deck and that was going to be about an 83 year development drilling program with 33 rigs running. Since that time the commodities had caved in, unprecedented, something that we hadn't forecast. And we've seen oil in the front month go from a 147 to 50 and the forward curve growth from a 140 back down to 70. But most importantly for us gas, which was 15 in the front month, and $11 long-term has gone to under 350 and that forward curve probably is closer to $7 in the out months.

So it's been challenging times. But I think what you are going to learn is the company and I've never been so excited. A lot of things have happened as we've gone through this process. We have 890 people, we have hired some super people, and they have done a spectacular job. Everybody in the company is a shareholder, and everybody has been pulling on the rope the same way.

We have cut our capital budget from a $1 billion last year to roughly $500 million this year. The scientists, the geologists, the engineers, the geophysicists have in my mind figured out the Haynesville. When we first started back at that Board meeting we were looking at the Hayneville as the 3 to 5 Bcf per well, with marginal economics at $5. I think today we are very comfortable saying and at least in DeSoto Parish it's 6 to 8 and potentially higher. We have a slide here that will give you some higher on. We've had some spectacular results, I mean they're doing an unbelievable job -- in the people.

You as shareholders should be very proud of what these guys have accomplished, and I'd say other then the volatility and the commodities and the stock, our guys have done a just a special-special job this year. We have shut rigs down across the portfolio. Both all of the shallow drill... conventional drilling, lost its economics when gas went below 650. The only asset we have in this portfolio that shows over 20% rate of return at 350 gas is the Haynesville shale, which is where Hal will go over in a minute. That's where we are concentrating.

We are in an economy that is tough to read, and if you read the New York Times it's one lane. If you read the Dallas Morning News it's another. So we try to keep up with everything. But most importantly, oil and gas, especially gas in our mind is based on supply and demand, and we're now getting we try to get all the information we can. And the same investment bankers were... they were out telling everybody gas was going to 20, nine months ago, it's now going to two, so that's good.

But we've had to react a lot, we continue to react. I think more importantly, right now we're looking at cost more than we ever have. We're cutting cost across the portfolio both in drilling and just straight operating costs.

I think one of the things that we're going to talk about here later on is margin in oil and gas. And I remember this back in the 80s as gas went from $10 down to $0.90 cents, again very apparent by the mid 80s that the margin was the most important product. And I remember that's when I met Boone and he had the Hogan & Barmen (ph) and had low operating cost and ended up being the best gas reserves in U.S. during that time.

We actually had gas back then that had $1 operating cost and when gas went below $1 we just plugged the wells. So I think analysts are more than ever here in the near future, if gas doesn't rebound pretty quickly, going to start looking at margin. Now margin and it's way different... a margin in the Rockies where you're getting $2 and your operating cost is $0.50, you still got $1.50 margin.

In some areas in West Texas and in the Mid-Continent where you're getting 250, you have some operating cost of $1.50, $2. There is gas today being produced for free where there's no margin.

The thing that we've -- up in the Marcellus, there seems to be a fairly large margin. We're not an aggressive driller up there but the best margin gas we have right now is going to be the Haynesville. We're getting close to NYMEX for it and the direct operating costs are seemingly in the $0.10 range. And so that still has a great margin for us.

With that, I'm going to turn it over to, who's next? Steve Smith, and we're going to start through this. And then we'll open it up to questions later on and we'll stick with you as long as you need us. Thanks.

Stephen F. Smith

Okay. Let's flip over to page six of the slide show that we put up on the website. In spite of the continuing declines in prices, we had a pretty solid quarter. We had revenues accounting our cash settlements of 271 million, compared to 328 in the first quarter of '08 and compared to 297 in the fourth quarter of '08.

Actually compared to the fourth quarter, the prices, again, were dropping but our overall decline in revenues is just about 9%. So we are holding our own, thanks to an aggressive hedging program that we started and continue even now.

Adjusted EBITDA, almost $200 million, we're guiding toward an $800 million with a $4 price for the average for the year, we look forward to something. So we are... again we are holding our own. One important note that we actually had record daily production of 404 million roughly per Mcfe in the first quarter and that's despite dropping the 8 rigs running.

Our Haynesville shale is becoming more and more of the factor obviously, and it's offsetting natural declines in areas where we've cut back on the drilling. We were almost at a 100 million a day gross in Haynesville, and we'll get into the details on that later.

We will also discuss all of the operational activity in the Haynesville but suffice to say that we, in spite of bad economics on an industry wide basis, we had a pretty good quarter.

Page 7 is just a result -- a few results of what we've done. Again in the Haynesville we had one our most recent well is at about 25 million a day, the second most recent is about 26 million a day. So these are monster wells, and obviously we're very excited.

Also in the quarter, we did get our borrowing base reaffirmed, and Doug Ramsey will touch on that. We started -- the very first part of our asset divestiture program, we're just getting organized, getting the data rooms open. But we did cost (ph) about $21 million of deals in the first quarter and are working on another one of equal magnitude right now. So we should - we're starting to see that, the results of those sales but -- and there are not enough focused areas obviously, they're in other areas that and which have higher operating costs, certainly than the Haynesville there.

Obviously, we had a full cost steel write-down this quarter, as did virtually every, if not every full cost steel company. The price at the end of last year was $5.71, now it's $3.63 at the end of -- on March 31, '09. We weren't sure '08 to avoid that. Again we don't like to take those kind of write-downs but on the other hand, they don't impact our loan covenants, it doesn't affect our liquidity, it does might be debt-to-equity ratio look a little strange to the ENUM issue. But that just kind of price you pay for, for the full cost --

We don't and we can't include the impact of our derivatives in that calculation, so obviously -- quite a bit less, as we've been able to improve the hedges.

Page eight is a margin slide, it's kind of interesting obviously in a price environment like we've been and the margin is slipping, the cash margin but on the other hand it's not slipping near as far as we would be if we didn't have hedges in place.

The $5.90 margin in the first quarter compares to about 630 at the end of the fourth quarter of 08. We -- the build up to that average cash margin was $4.74 average price that's about 110 for operating cost before production taxes, $0.34 for production taxes $0.11 for gathering. It's kind of the impressive thing I think, the thing that we're pleased with our op cost was about $1.10 for the quarter that's down from about a $1.20 and these are direct operating costs in the fourth quarter of 08. So the training in the right direction and based upon all the evidence we see we think that that will continue on at least throughout the year probably, but certainly in the second and third quarter.

So, there again, I think we're in good shape, we got a lot of cash flow. We cut back on our budget and moving forward. I'm going to turn it over to Doug Ramsey and let him talk about the liquidity and financial position slides and we will get on in to the other detail.

J. Douglas Ramsey, Ph.D.

Hi. Thanks, Steve. On page nine, it's got a quarter end liquidity position and then we look forward to May 1; we'll take a look at that --. As of May 1, we had $75 million of cash, doesn't include our hedge settlements that are coming in they settle starting yesterday and that's going to total another $45 million that will get added to the cash balance.

Our total debt outstanding just over $3 billion consists of bank debt, which is just under 2.3 billion and we have the bonds at 445 million and then the unsecured term loan at 300 million. As Steve mentioned, our bank group in April reaffirmed our borrowing base at $2.475 billion, the only change now here with regard to that is that our applicable margin on the interest rate went up by 75 basis points across the grid.

Our unused borrowing base as of May of 1 is at 173 million and that gives us when you add the cash in about 250 million of capacity. And that excludes the hedge settlements that I mentioned, so that would add another 45 million to that number.

Our interest rate swaps bottom of the page 2.66% on 700 million of the debt and that's it on the liquidity position.

I'll turn it over to Paul Rudnicki who's going to cover our hedge management positions and also on the guidance.

Thanks Doug. Talking about on slide10, slide that you've all seen before, just highlighting where we are in terms of our derivatives focusing on the commodities and where we're hedged for the rest of this year. We have just to point out, we have added a little bit of hedging in 2010 as well as 11, 12 and 13. So we're pushing nearly 50% in 2010 at a average per equivalent of 884.

Continue to be well hedged for the rest of this year over 70% for each quarter at over $8.60. And we'll continue to evaluate the positions in light of the potential asset sales that Hal will talk about, and the commodities as they move.

Moving on to slide 11, just to run through the detail on the actual versus the guidance that we put out. Let me talk about production for a second, our guidance was 400 to 450 million a day. We came in right at 404 million. The big thing I like there is we did spend about 10% less in the quarter than we had initially anticipated, which was a direct result on the current production, but production was still up as a result of the success in Haynesville.

The differentials to NYMEX, just to the oil, just want to point that out as an anomalous number for the quarter. That will be back to the 350 to 375 range for the rest of this year. Gas came in a little bit to the low end of our guidance, 94% of NYMEX as a lot of our competitors have realized during the quarter, the differentials did widen out in many of the areas, specifically in Mid-Continent and the Permian for us. We are seeing those tightening up and should be well within the range for rest of the year.

We saw operating expenses came in right in line just under the high end. We've been forecasting a decrease in LOE and we still see that coming in. And I think Q1 was just the beginning of it, and we'll see a more dramatic decrease going forward.

The only other thing to really point out on the page is the depletion rate for the quarter, came in at 206. The depreciation of $0.19 on a per Mcf basis. The main reason for the improvement there is just the effect of the Haynesville on our proved reserves.

Last thing to point out again is the capital of our budgeted original 582 million which as we'll discuss in a second. We're now forecasting about 500 million, we spent 152 million of that in the quarter, with the guidance of 160 to 180.

Slide 12, our quarterly guidance for the rest of the year. Just want to highlight that we have adjusted our production guidance to reflect some of the asset sales and as well as the reduction in the drilling and the other on the unconventional areas as Doug mentioned.

LOE, we are showing the decrease in LOE through the year, as we start expecting to see these cost savings coming in. And the other main thing to point out is the depletion rate going forward down to $1.30 to $1.45 per Mcf as a reflection of the ceiling test in the first quarter, and the interest expense up a bit as we raised the grid by 75 basis points as Doug Ramsey mentioned.

And last thing to highlight is again our new forecast for the remainder of the year, again we think that number is going to come in at around 500 million.

With that I'll hand it over to Mr. Boeing.

William L. Lanny Boeing

Thanks Paul. Operationally our focus in Haynesville (ph) will continue to be to manage our spending in this low commodity price environment, that's both on the capital expenditure and the expense front.

We got to protect our earning surge in our reserve position. We're going to meet our commitments. Then and the organization has pulled together really well during these times and you can see that in some of our results as we've focused a lot on the Haynesville shale, it's providing growth for us and strong returns, even at the slow price and its -- the Haynesville is coming in with finding and development costs well below a dollar on the wells we're drilling in DeSoto Parish and our returns are definitely exceeding our internal 20% before tax rate of return hurdle.

We are spending a lot of time in the Marcellus high grading the program in preparation for 2010 development, I'll talk about that in some more detail in a few minutes. We're limiting our non-shale drilling to satisfy our drilling and acreage commitments. You might recall at the end of the third quarter last year we had about 32 to 33 rigs drilling, we're down to 8 today.

Several of those we expect mostly in Haynesville shale area. And we're going to have a lot of focus on expanding our midstream this year and I'll talk about that a little bit more as we go into the discussion this morning. Like Steve and Doug said, we've initiated asset divestiture program, it's going to touch all of our divisions. And what we're going to do look at some non-strategic properties for sale. We are going to sell some 350 Bcf of proved reserves in the current target of land and that production is about 65 million a day. So it's pretty substantial percentage about 15 or 16% of our assets we're looking selling. We're working with third -- four different third party brokers to manage this process. And like Steve said, we have sold some assets in the first quarter. We're in some discussions on selling some additional assets, and we have four data rooms open today with a number of that to grow more in our near future.

On slide 15, our capital program is significant on the basis of last year where we spent nearly $1 billion. The Board approved the budget earlier this year, later last year of $582 million, which includes some $326 million for drilling. Our current forecast is we're going to go down to about $500 million and 266 million of that is for drilling and completion.

You'll see that East Texas/North Louisiana, which is the basin which is driven predominantly by our Haynesville shale drilling, it's going to be flat, Appalachia is going to go down slightly and then we have some significant reductions in our Mid-Continent Rockies divisions, as the economics for drilling there just are supported by $3.25, $3.50 gas.

Now in the Midstream, you see that the cost is there and the total budget is down about some 23 million. We're going to maintain the exact same level of activity we had originally forecasted. The steel costs have come down, construction costs have come down, we'll be able to accomplish our same goals and targets without to reduce cost.

Slide 15, start with Haynesville shale, these results have been outstanding to date. We've got six operated and two non-operated horizontal wells produced in the shale. We've achieved an average operated IP rate of nearly 24 million a day in DeSoto Parish whose rate is as high as 26 and in Caddo Parish, our IP which was nearly 9 million a day is right on target with our original forecast for what we expected out to play. DeSoto Parish has just been better.

The total gross production is pushing to 100 million. We've got strong net volumes nearly 50 million a day. And to be at this level after being in this play for only 14 or 15 months is just an outstanding compliment to our organization and why we've been able to work in the shale play. I'm just really proud what our people have been able to do.

We're continuing to realize some significant efficiencies in our drilling and our costs, our Powder River release (ph) time some of our early wells of 70 to 75 days, and we have two recent wells we've been up 50 days on. Drilling completion costs are trending down. In fact, our costs on the first two wells were in excess of 2 million, now we are down around 9. And we think we will be able to further reduce that. While that's happening, we're seeing a 25% reduction in our cost for frac stage.

We currently have four operated horizontal rigs, one spud rig and non-operated rig. In this play, we are going to have three additional operated horizontal rigs starting next month. And our 2009 plans entail spudding 34 horizontal wells, 27 operated. We'll complete about 18 or 19 of those, I'll show you that detail in a minute in this calendar year.

We've identified nearly a thousand locations in the play, and we think this potential is going 4 or 5 Bcf.

Slide 17 gives you a little more detail on where our activities have occurred. The darker green: the Odem, the Lattin, and the Sammo are wells that we had announced publicly earlier. The Cook, the Moran, and the Sharp are new wells that we're announcing with the press release yesterday and this discussion this morning.

So, the Cook and the Moran, two best IPs, you can see how they're located in DeSoto Parish, and Holly, Kingston, Caspiana area. Outstanding, outstanding results; the Sharp is a goodwill for us as far as coming in right on target with what we initially saw.

I'll note, one more data point, up in Caddo Parish and for those of you, who can see this in color, the larger pink circle there is the non-operated well that we have a working interest in and that well is in excess of 10 million a day IP. So, the results there are coming in like forecast.

Douglas H. Miller

Tell him who is the operator. We can't? Okay, sorry. I thought it was good.

Paul B. Rudnicki

Slide 18, an excellent slide. I really like what our guys have pulled together to show -- show this color this morning.

You can see in sort of the middle of the red dash line is our original type curve that we forecast for the play, 6 to 8 Bcf. You can see if you look at the blue line up above that, that shows the average production from our first four EXCO DeSoto Parish horizontals that we operate and that's a 10 to 12 Bcf type curve. And the line below shows how we are averaging the wells.

So, the first part of the curve, you can see this solid line near the bottom of the graph that shows in the early part of the blue curve we've got four wells we are averaging. Then there is a long line that goes out past 60 days, where we got three wells we're averaging. From 60 to about 75 days, we've got average of two wells and then finally we're showing the Oden well out beyond 75 days out to nearly 140.

So, outstanding results 10 to 12 Bcf and that's leading us to a below F&D cost with an excellent returns.

So Huron shale, slide 19, you can see that our productions from DeSoto Parish wells is exceeding our forecast. One thing we're really proud of organization is our production guys and our midstream guys that are working in concert and we've been able to flow all of our operating wells directly to shale. We aren't seeing any problems with getting our gas to market. Our costs are improving, the fuel prices have been strong, our laterals, we've been able to drill these things like we have anticipated, most of them are reporting 4300 feet or longer. We've been using a program that's used 9 to12 frac stages as we completed our wells and continue to use profit for our completion.

Slide 20 shows you our schedule for completions. This is DeSoto Parish, our activity is focused in DeSoto for some reasons including all the units there, we're locking up acreage. So our infrastructure exists and frankly it's the most terrific area of the play. So it's where we get the strong return with low gas prices.

So, we expect to complete, beyond the ones we have completed today some 16 more operated wells and some of the wells that we've talked about spudding and drilling in '09 will carry over into early '10 for the completion that's why the numbers are a little off.

Midstream activity, I've talked about a little bit on slide 21 is some more color on that. We're seeing record throughput volume with first quarter average revenue volumes of 580 million a day. We've recently committed to an additional 300 million a day of firm transportation. And speaking with Jacobi and our marketing guys, I think we actually have 500 million or so of firm in our hip pocket and ready to go.

We're personally installing a 36 inch pipeline catering trading facilities that will connect at least four major third party systems, mid 30 (ph) that well that's going to command the bulk of our spending on our midstream this year, is going to have initial capacity of 500 million a day expandable to grow roughly 1.2 billion a day by adding compression and changing a lot of pressure. And like I mentioned earlier, we're realizing some significant cost savings on the projects here as economy driven steel costs have come down and lower constructions prices being realized and we've been on our work.

Shifting now to slide 22, the Marcellus shale, there was huge, huge opportunity for us. We believe that it contains 7 to 12 Tcf of resources, we're going to continue to grow well this year and by year end, we'll have some 14 to 15 wells in our portfolio that we will be able to use to make our plant on where and how we're going to best develop the play. We're going to have new build rig later for us in 2009. 2010, we're going to start running with this play. So, our focus drove the wells, gather seismic and continue to understand the play and start running.

Slide 23, you've seen effectively before and it shows where our wells are located and the big message there is that we continue to -- they're located across the play, wherever the play works, we're going to have an opportunity to so it so, be a participant and exploit our position.

Last slide, I'll talk about is shown on page 24. While we have significantly ramped down our activity in our more conventional plays, we really did have some excellent results early on. East Texas, North Louisiana in particular Vernon, we have one of our best wells IP wise that we've had since we bought this thing two and half or so years ago, IP in excess of 10 million a day and 2 IPs of 7 million a day.

Danville, which is in Gregg and Ross county, which we acquired back in mid '08, two of our better wells there, IP rates in excess of 3 million a day. And in the Mid-Continent and the Permian. Mid-Continent, very strong, been able to maintain average production of 64-65 million a day despite significant cutbacks in drilling activity, we'll probably continue for the company (ph), and in the Permian, we continued to add to our acreage position in this Canyon Sand field, which we believe will be a tremendous opportunity for us as gas prices are down.

With that I will turn the call back to Mr. Doug.

Douglas H. Miller

I think one of the things that I forgot to talk about earlier was gas and -- but we're kind of the debate on supply. Demand is clearly down; industrial demand was down 20-25% in the first quarter. So, I notice that residential was actually down slightly too, but looks like it might have picked up last month.

And I see that just the supply was down towards the 58 Bcf a day in December-January, one of them. And I think the debate is not, is supply coming down, it's just a question of how hard. And in my mind, with rig count, gas rig count going to 800, we were kind of I was kind of forecasting going down to 55 Bcf a day, but we crashed through that with the price.

And I'll talked in jack-eye in here a week ago, and I think we're both kind of on board if rig count, which is I think the gas rig count 740 today, which is down again last week. It looks like it's heading towards 600. And right now, the debate is, are we going to 54, 55 Bcf a day by the end of the year or 50? And if we get down to 650 or 600 rigs, which is where I think it's going, if gas stays where it is, I think we could get down to 50 Bcf a day.

And if that happens, I think we get an increase in gas price by the end of '09 or early '10. If that doesn't happen I think we probably end up in 2011. So we're not debating on whether price is going up, we're just debating on when and we're structurally setup to handle either one of them. I think that's the challenge with a company like this and everybody's working towards that. So, we have run more models in the last nine months, I promise you than we have in the previous 30 years. If anybody needs that we have a $2 flat gas price and we have a $10 flat gas price and everything right in the middle. By the way $2 doesn't look very good.

With that I'm going to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ellen Hannan of Weeden & Co. Your line is open.

Ellen Hannan - Weeden & Co.

Good morning.

Douglas Miller

Hi Ellen.

Ellen Hannan - Weeden & Co.

Just a couple of questions. One kind of strategically in terms of the balance sheet, you've announced a package or several packages here of asset sales. So I'm curious, is that either a substitution for or in conjunction with the potential for a joint venture in either your midstream or your upstream that you've talked about before? What are your goals for the balance sheet kind of by the end of 2009?

Douglas Miller

Okay, I forgot to talk about that. One of the main focuses here is our three main focuses are production, reserve growth, cost and most importantly the balance sheet. Again going back to that Board meeting in July, we thought we had 16-$18 billion worth of assets and $3 billion that didn't seem that bad. But everything has been cut in half and so 3 billion is a big number for us. We are looking at asset sales; we continue to have discussions on joint ventures -- both in the Haynesville and the Marcellus and pipeline. Those talks continue and we'll report back and we're trying to do them as fast as we can. But the debate is with the explosiveness in these potential plays. The question is, should we even do them? So we are talking about them, remindful of the balance sheet and it is probably at the top of our list of things to deal with right now.

Ellen Hannan - Weeden & Co.

Thank you, and just one other question if I may. On the Marcellus, it looks like, despite the significant success that you and others have had in the Haynesville, from a return on investment dollar perspective, the Marcellus really seems to be a standout. What in your mind does it take to begin to justify an increased investment on your part there? Is it completion of the science? Is there something else in the operating environment? What are your thoughts there?

Douglas Miller

Well first of all I don't quite agree with you that it is as good as the Haynesville. It is clearly a big asset, it clearly has the big potential, there are still challenges. We are -- we have a significant acreage position that is 90% held by production. The services aren't quite up to where they are in North Texas, I mean East Texas and North Louisiana. For sure the takeaway capacity and most important, we're just getting our arms around finally on the permits, we still have water disposition issues. And we do not like producing gas without a pipeline. So, we're dealing with everything, we think it's good. But right now it would be a challenge for us even with our best models to say the rates of return or the F&D costs will be as good as DeSoto Parish assets.

Ellen Hannan - Weeden & Co.

Great. Fair enough. Thank you.

Douglas Miller

All right. Thank you.

Operator

Thank you. Our next question comes form the line of David Heikkinen of Tudor Pickering Holt. Your line is open.

David Heikkinen - Tudor Pickering

Good morning guys.

Douglas Miller

Hi, David.

David Heikkinen - Tudor Pickering

Just looking at your cost guidance and kind of thinking about the swap of higher cost asset sales kind of costs on those assets and then replacing them with Haynesville production. How can you think about or can you talk about what that 65 million a day is selling with the costs or on a per unit basis? And then what you're seeing as far as costs in the Haynesville that would drive down the guidance?

Douglas Miller

That is a great question. And I'm going to turn that one over to Hal.

Harold Hickey

Okay. I would say on the assets that we're selling, some price say it's $1.15 to $2 type of LOE cost, nothing that's horribly bad, but it's higher than what we're going to see in the Haynesville is going to be an extremely, extremely low cost opportunity for us. There is not a lot of incremental people we have to add, the cost of getting the gas to market is just minimal but we have volumes at unit costs are outstanding. So, I would say on a unit cost basis we continue to focus on the Haynesville and as we continue to sell some certain assets that have some higher costs, you're going to see some significant improvements in our unit cost as we go forward.

Douglas Miller

I think David, depending on, I think we'll do this throughout the year as we drill and complete these wells. One of the variables here is what exactly what our interest is as we drill these things and you can see we've got estimates on that one slide. As we drill these things and complete them we'll get our net interest, we'll report that to you.

David Heikkinen - Tudor Pickering

Okay.

Douglas Miller

And it's going to be, you nailed it. We're selling $1.20, $1.50 and replacing it with $0.10, it sure should be impactful for the company.

David Heikkinen - Tudor Pickering

And as you think about guidance, you mentioned that some of the sales are included. Are those just the announced sales in the PSA, so not the total on --

Douglas Miller

Ones that are included are just the ones that have closed, right?

David Heikkinen - Tudor Pickering

Okay.

Douglas Miller

Yeah.

David Heikkinen - Tudor Pickering

So not the total volume, just making sure. So, as you think about your guidance, production will come down but costs should come down even more as we try to anticipate those sales are rolling when the sales happen?

Douglas Miller

Yes.

David Heikkinen - Tudor Pickering

Okay, the other question I'm trying to understand and think about of them, I'm not a pipeline guy but, have to act like one. The value of the midstream business and then third party volumes on that, how should we think about how much third party gas is going to be out there and tie in and then how does that grow over time and then what's the revenue or EBITDA associated with third party volumes?

Douglas Miller

That's going to be, okay Paul. It's about half as the volume.

Paul Rudnicki

Yeah, we are somewhere between 50 to 40% of the volume as third party.

David Heikkinen - Tudor Pickering

So the 300 million is of third party, that's your capacity to get out?

Paul Rudnicki

No, no.

David Heikkinen - Tudor Pickering

So that's your capacity and then you have a total capacity on the system?

Paul Rudnicki

Hey David hold on a second.

David Heikkinen - Tudor Pickering

Okay, so what's your answer?

Paul Rudnicki

We're talking about current -- our current 580 million a day, about 50 to 40% of that is third party. So when you're looking at our current EBITDA, 7 million for the quarter you could try to say that 40% of that 50% of that is third party. But the reality of it is, expenses are expenses, you don't have expenses for your gas and other gas, you got expenses of the system. When you think about the value of that asset, you got to keep in mind that it is an asset that we can separate from the business and it is a standalone business.

Harold Hickey

Some of our or almost all of our customers have their own firm transportation and they have asked us to gather and transport that gas to these major markets. So most of the ones we are hooking up, that we call third party -- do have additional takeaway capacity.

David Heikkinen - Tudor Pickering

Okay, so beyond the 300 that you have they got their own firm as well. Okay.

Paul Rudnicki

That 300 is for our gas.

Harold Hickey

The 300 is definitely for our equity gas.

David Heikkinen - Tudor Pickering

Okay and then as it grows to 1.2 Bs, trying to get the splits or any indication of splits of third party versus yours?

Douglas Miller

We're hoping that the majority of that's ours. You know that the thing about it is we've got it, it's there. We know what the cost is to double the capacity and as the Haynesville grows we are trying to get in some other deals in the Haynesville. And right now there is limited ways out. And so we're not even forecasting when we would double that capacity.

Paul Rudnicki

The way to think about the expansion that we're doing is predominantly, the predominant gas is going to go through there on this first phase that we're spending money is going to be our own gas.

Douglas Miller

Correct.

Paul Rudnicki

There is going to be some third party going through there.

Douglas Miller

Mostly our partners.

Paul Rudnicki

It's going to be mostly our partners. There are a couple of true third parties that we are looking up to. But we have a lot of opportunity for that system over time. And we're looking maybe over the next 18 months to 2 years to triple that thing and a lot of that would be third party.

David Heikkinen - Tudor Pickering

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Joe Allman of JPMorgan. Your line is open.

Unidentified Analyst

Hi guys, this is actually Ronnie. I had a question on Haynesville, are you seeing -- what are you seeing in terms of the geology of the rock that makes DeSoto so much better than what you were drilling in Caddo?

Douglas Miller

Caddo.

Unidentified Analyst

Caddo. Sorry.

Douglas Miller

Thank you. Hal, our correct geologist is at the end of the table. You've stumped me. Let me give you one answer and then I'm going to let Hal follow it up. We initially did quarrying in both areas and we did vertical testing and initially I'd say 8 months ago the thickness of the shale was actually greater in Caddo, and the total organics looks similar.

Unidentified Analyst

Not quite as good.

Douglas Miller

But not quite as good. And so, we've seen some results up there. Now, let me tell you some -- we think there is going to be some improvements, but we -- and from a rock quality standpoint, are you seeing anything different?

Harold Hickey

There is a little bit of difference. But we don't look at just one thing Ronny, we look at multiple things, we look at the maturity of the rock, we look at the thickness, we look at the total organic content, we look at the -- reflectance, we look at -- we look at multiple things. And we look at obviously porosity, permeability.

And the way these things played out, if you look at what the scientist said a lot of the best stuff still looks to be in Harrison and Caddo. That said we've got really good depth, really good pressure down in DeSoto Parish, our guys have really focused on where the best land in the zones there.

And we're just seeing some really good results and the scientists have done their thing, they've done a good job but I will say the Harrison county still -- and Caddo Parish still look to be promising. I don't think -- pressures are making a big difference.

Douglas Miller

Don't be surprised if our rig I mean utilization and our well results get a little better than they have been. I think we're expecting them to get better than where they are.

Unidentified Analyst

All right. Thank you guys.

Douglas Miller

Okay.

Operator

Thank you. Our next question comes from the line of Irene Hass of Canaccord Adams your line is open.

Irene Hass - Canaccord Adams

Yeah, hello everybody. I'm just stepping back and taking a look at Haynesville versus Marcellus, I think some point made earlier is that Haynesville has so much more concentration of infrastructure as such? So I kind of want to go through in general check list as you go through, there is really, really large trend in Marcellus. So what are you looking for, should we -- while you have drilled quite number of wells across the trend, when it comes down to development, would you concentrate in the few core areas or would you have sort of bigger program, and sort of distance to the consuming region, would that sort of play out -- play a role in your selection or the way that you will high grade this play?

Douglas Miller

There are two things. Number one, we are drilling across the play, we do have acreage, we've divided it into six different areas and we are looking to try to high grade that, we're actually shooting some 3D. We had a meeting last week on evaluating that. We do have acreage. And we do have some concentrated acreage in certain areas where we think there's going to be an opportunity. But the biggest problem right now is we're in negotiations on some pipeline and gathering system joint ventures, we want to make sure those are put in, those are six month to year projects.

We're in discussions right now, we want to make sure that the lines are there, and we can sell the gas. The opportunity is there, the interstates have capacity, we're ready to do that. And I think you'd be surprised on what the consuming regions of the U.S. are. Even though there's a lot of population up in the Northeast, they are not a large gas user, they're only 15% of the U.S. gas production. We did learn that one last week too. So there's a huge opportunity, and we do not have to be in a hurry. The other thing that's going on up there is there's a lot acreage that's available right now.

There is literally two million acres that we can buy right now. And we've got 400,000 acres in the play. So we've got a lot that's held by production. If gas price stays under 350 for the next three years, we are not under the gun to drill and spend capital on that. We're just watching and playing and we're watching some other people be quite successful. We're very interested in what Range is doing and down the Southwest and we're very interested and exited what Cactus (ph) has done up in the Northeast, we have acreage in both spots. So, we're written for it. But it's for us, if it's not the play today it's going to be the play the end of this year or next year.

Irene Hass - Canaccord Adams

Now, that's great. What is the seismic going to tell you I'm just curious.

Douglas Miller

Well, couple of our first horizontal wells instead of getting that 4500 feet we got a 600 feet on one and 1800 feet on another running in defaults. It seems like it's a lot more faulted up there. And we have seen some on the 3D, and we do have some good acreage without significant faults. So, we're preparing locations as we speak.

Irene Hass - Canaccord Adams

Great. Thanks.

Operator

And our next question comes from the line of Derek Whitfield of Canaccord Adams. Your line is open.

Derek Whitfield - Canaccord Adams

Hey, good morning guys.

Douglas Miller

Hi Derek.

Derek Whitfield - Canaccord Adams

Couple of Haynesville questions for you, then one Permian. What's your net acreage in the DeSoto?

Unidentified Analyst

In excess of 25,000 acres.

Derek Whitfield - Canaccord Adams

Okay. And in terms of sort of a follow-on the previous geology question, and the Caddo and Harrison areas, is the burial depth there a little deeper, is it, I'm sorry it's actually little shallower?

Douglas Miller

Little shallower.

Derek Whitfield - Canaccord Adams

And these places into AFE will be a little bit lower, as well correct?

Douglas Miller

Correct.

Derek Whitfield - Canaccord Adams

All right. What is your latest AFE in the DeSoto?

Unidentified Analyst

$9 million.

Douglas Miller

You should be here, we're having an AFE meeting this afternoon. I bet it's going to be 9 million though.

Derek Whitfield - Canaccord Adams

Okay. And in the Permian, with the increased acreage you guys picked up, what does that mean in terms of potential 3P location?

Douglas Miller

I think last year at that Board meeting that I was talking about, we had 2500 potential locations proved probable and possible up there. I think that's the right answer. But right now, with gas where it is, those locations aren't worth much. They are in our hip pocket right now.

Now, what we have found is a couple of those areas are oily and we're reviewing some of those plays right now, and the shallow oil and we may drill some shallow oil wells later in the year. But as of right now, we're shut down over there.

Derek Whitfield - Canaccord Adams

Okay.

Douglas Miller

Even though we have a lot of locations they are in our hip pocket.

Derek Whitfield - Canaccord Adams

Yeah. Thanks guys. That's great.

Douglas Miller

Okay. Thank you.

Operator

(Operator Instructions). Our next question comes from the line of PJ Saul (ph) of RBC Capital. Your line is open.

Unidentified Analyst

Hey guys, you covered most everything we had, maybe just a couple of timing questions here. First on the Marcellus, two wells that are completing now, do you have a timeframe for the results there? When they will be done or announced?

Unidentified Analyst

We'll have results from the first frac later this month, and the second frac should also start immediately after we finish this first one, so late this month, early June.

Unidentified Analyst

But we will announce it at the second quarter conference call.

Douglas Miller

We are not going to announce to everywhere we have a drill. We are going to do it every quarter boys.

Unidentified Analyst

Understood. Okay, just maybe moving over just briefly on the timing for some of the asset sales. I know you said you have one pending process to similar degree of the one those just announced and for data rooms to open. Just trying to get a feel for some of these data rooms that are open, is that looking to be a Q2 event for some of these to get wrapped up or just --

Douglas Miller

I think the best thing to say is, we are planning on completing it this year. We do have some, where bids are coming in and right now and some of them are open, some are not open. But I wouldn't say all of them be done in Q2. Q2-Q3 and even Q4 we may lag into.

Unidentified Analyst

Okay guys, thanks a lot.

Douglas Miller

And by the way your guys are handling some of them. All right sorry.

Operator

Thank you. Our next question comes from the line of Jack Aydin of KeyBanc Capital Markets. Your line is open.

Jack Aydin - KeyBanc Capital Markets

Hey guys.

Douglas Miller

Leslie, that's Jack Aydin.

Jack Aydin - KeyBanc Capital Markets

Okay. Doug, on your capital expenditures. On East Texas you're talking about 284 million forecast and then in the press release you're using 189 million for Haynesville shale activities. What - there is a 95 million? Where is that allocated to or what is involved?

Harold Hickey

Hey Jack this is Hal. Some of the costs were for the Vernon and Danville drilling that we announced in the slide. There is continuing to be an exploitation program as we look at opportunities to work on behind pipes and as you know those are some of our best returns -- for low cost and pretty easy technically to do. So that's a big part of what our organization is focused on. We also have some dollars allocated for some land spending as we continue to fill in the blanks in some of our key areas. So that really covers most of it, some additional drilling, land and exploitation.

Jack Aydin - KeyBanc Capital Markets

Thanks a lot.

Operator

Thank you. Our next question comes from the line of Howard Flinker of Flinker and Company. Your line is open.

Howard Flinker - Flinker and Company

Hi Doug.

Douglas Miller

Hey Howey.

Howard Flinker - Flinker and Company

You mentioned that, your gas -- daily production of gas is 58 Bs. Did you get that from the EIA or from Wall Street?

Douglas Miller

I think we got that from the EIA, I think that was an adjusted January number.

Howard Flinker - Flinker and Company

I thought I had seen --

Douglas Miller

I think it was like 59 and they adjusted it down two weeks ago to 58.

Howard Flinker - Flinker and Company

Oh I didn't see that. Okay, that's I thought it was a little higher than that.

Douglas Miller

Howey, call Jack Aydin. I think I got that one from him.

Howard Flinker - Flinker and Company

Oh Okay.

Douglas Miller

Okay

Howard Flinker - Flinker and Company

Thanks guys

Douglas Miller

All right, see you.

Operator

Thank you (Operator Instructions) Our next question comes from the line of Robert Albert of Atlas capital. Your line is open.

Robert Albert - Atlas capital

Hi. Did you guys, I'm sorry I have got in late. Did you guys mention what you expect for the proceeds from the asset sales to be for the 350 Bcf?

Douglas Miller

Well, we didn't. But I think we've said it in the past, we expect somewhere between 800 million and 1 billion.

Robert Albert - Atlas capital

Okay.

Douglas Miller

And I'd say we're right on target with the bids that we're seeing so far.

Robert Albert - Atlas capital

Great. Thanks.

Douglas Miller

Okay.

Operator

Thank you (Operator Instructions) We have no additional questions. I will turn it back to Mr. Miller for any additional or closing remarks.

Douglas Miller

Okay. Well, thanks, thanks everybody for attending. As you can tell and as you can imagine with the volatility in the market it's been a challenge. And I think you should be proud and the Board is for sure of the people and the performance. It's been a challenge for the last nine months and we can expect that will be for the next nine months. But I think everybody is doing their job, everybody is here 24/7 working what they have to do. And we will continue to manage the company appropriately. Thanks everybody.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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