W&T Offshore Q4 2007 Earnings Call Transcript

| About: W&T Offshore, (WTI)
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W&T Offshore, Inc. (NYSE:WTI) Q4 2007 Earnings Call February 28, 2008 10:30 AM ET


Manuel Mondragon - Vice President of Finance

Tracy W. Krohn - Founder, Chairman, Chief Executive Officer and President

J. Daniel Gibbons - Senior Vice President and Chief Financial Officer

Stephen L. Schroeder - Senior Vice President and Chief Operating Officer

Clifford J. Williams - Vice President, Reservoir Engineering

Jeffrey M. Durrant - Senior Vice President Exploration and Senior Vice President Geoscience


Gary Nuschler - Jefferies & Company

Jason Winkler – Wells Fargo

Richard Tullis - Capital One Southcoast

Brian Kuzma - JP Morgan

Phil McPherson - Global Hunter Securities


Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Manny Mondragon, VP of Finance. Please go ahead, sir.

Manuel Mondragon

Thank you, operator and good morning to everyone. We appreciate you joining us for W&T Offshore’s conference call to review the fourth quarter and full year 2007 results. Before I turn the call over, I have a few items to go over.

If you would like to be on the company’s email distribution list to receive future news releases or you experienced a technical problem and didn’t receive yours, please call DRG&E’s office at 713-529-6600 and someone will be glad to help you there. If you wish to listen to today’s replay call, it will be available in a few hours via webcast by going to investor relations section of the company’s website at www.WTOffshore.com or via a recorded replay until March 6, 2008. To use the replay feature call 303-590-3000 and dial the passcode 11109032.

Information recorded on this call speaks only as of today, February 28, 2008 and therefore time-sensitive information may no longer be accurate as of the date of any replay.

Today management is going to discuss certain topics that contain forward-looking information which is based on management’s beliefs as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production and expenses for full year 2008.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions including, among other things, market conditions; oil and gas price volatility; uncertainties inherent in oil and gas production operations and estimated reserves; unexpected future capital expenditures; competition; the success of risk management activities; governmental regulations; and other factors described in the company’s most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected.

Please also note that this conference call contains references to non-GAAP financial measures. You can find a reconciliation of those non-GAAP financial measures to GAAP financial measures in the Form 8-K filed by the company earlier today as well as in this morning’s press release.

Now, I’d like to turn over the call to Mr. Tracy Krohn.

Tracy W. Krohn

Thanks Manny, and good morning, everyone. Thanks again for joining us for our fourth quarter and full year 2007 conference call. This morning, I’d like to review key events that took place in the fourth quarter and for the full year 2007 and expand on what’s going to happen in 2008.

With me today is Danny Gibbons, our CFO. Danny is going to review financial results for the fourth quarter and 2007. Steve Schroeder, our Chief Operating Officer, is going to talk about our 2007 operations and discuss our plans for 2008. Cliff Williams, our VP of Reservoir Engineering, will review reserves and production guidance. Jeff Durrant, Senior VP of Exploration and Geoscience, is going to update you on our 2007 drilling successes and preview our 2008 drilling program. Following our formal presentation, we will also have a Q&A session.

I will talk a little about earnings per share and cash flow per share versus consensus. As you saw in this morning’s press release, we had earnings per share of $0.65 per share for the fourth quarter of 2007 and $1.90 per share for the full year 2007. Our adjusted earnings per share were $0.80 per diluted share for the fourth quarter and $2.26 for the full year 2007. The reason for the large difference reported between earnings per share and adjusted earnings per share is the unrealized loss of $37.8 million for our commodity and interest rate derivatives, which we outlined in the tables in press release. The Wall Street consensus earning per share was for $0.67 per share for the fourth quarter and $2.04 for the full year.

We continue to feel the best way to judge our performance is on cash flow per share. We define cash flow as net income plus DD&A, accretion, capitalized interest, deferred taxes and the non-cash component of derivative expense. For the fourth quarter, we had cash flow per share of $2.99 and for the year $9.20 per share versus Wall Street consensus of $2.45 per share and $8.94 per share for the full year. This is a 5% increase over 2006 cash flow per share of $8.78.

I think this is really very significant considering the pull back in drilling and the production delays we had in the first half of 2007. You’ve heard me say repeatedly we manage for cash, period. Our cash flow is why I am in the Gulf of Mexico and hopefully why you’ve probably invested or might consider investing in W&T Offshore.

2007 was our first full year of operations over properties we acquired in the Kerr-McGee transaction and it help us to achieve several new records including production, revenue, cash provided by operating activities and adjusted EBITDA. Year-over-year production increased 28%, revenue grew 39%, cash flow from operating activities increased 20% and adjusted EBITDA grew 28%.

In 2007 we didn’t drill as many wells as we have historically. However, we did drilled nine total wells and in historic fashion we had excellent success with the drill bit. We were six out of seven for exploration wells. These included four on the Continental Shelf, one in the Deep Shelf and one in the deepwater. We also had a 100% success from the two development wells drilled on conventional shelf.

Let’s talk a little about CapEx. We announced in early January of 2008 CapEx budget of $800 million, this is an increase of more than 120% over 2007 CapEx. We plan to drill 50 wells in 2008, our most ambitious year ever. 44 of these wells are exploration wells and six are development wells. Steve Schroeder and Jeff Durrant will expand on our 2008 drilling plans later in the call.

Reserve replacement, we drilled fewer wells in 2007 and this resulted in a reserve replacement rate of 24% including revisions. Approved reserves base now stands at 639 Bcfe or as previously reported, a 13% decline in overall reserves. We think on a per well basis we had good success. We hope we can have this same type of per well success now that we have a 50-well program. We believe we made the right choices in 2007 to help us achieve our corporate goals of production and reserve growth in 2008 and beyond. Cliff Williams, our VP of Reservoir Engineering will go over reserves and production in a little more detail.

I’ll talk a little about acquisitions. We have also recently announced the closing of the acquisition for the remaining interest in the Ship Shoal 349 field Mahogany from Apache. Mahogany is the first commercially successful development in the subsalt Gulf of Mexico. We especially like this acquisition in light of the current oil price environment. Remember that this field is 83% oil and we added approximately 10 million barrels oil equivalent of reserves from this acquisition. The crude is currently trading at a $100 per barrel versus our sub $12 acquisition cost per barrel; these are the types of deals that make this company and our investors lots of cash. This transaction not only added to our corporate goal of adding reserves, but also of adding reserves at a attractive price. These reserves were added on January 1, 2008 and put us well on our way to replacing reserves this year.

With that I’ll turn it over to Danny Gibbons. He will further expand on the financials.

J. Daniel Gibbons

Thank you, Tracy. As Tracy mentioned, we had record revenues in 2007. Revenue increased $313 million to $1.1 billion. For the fourth quarter of 2007, our average realized price was $7.28 per Mcfe for natural gas and $84.62 per barrel for crude oil and natural gas liquids. This resulted in an all-in realized price of $9.88 per Mcfe compared to an average realize price of $7.38 per Mcfe in the fourth quarter last year.

For the full year of 2007, our average realized price for natural gas was $7.20 per Mcfe and crude oil and natural gas liquids averaged $67.58 per barrel resulting in an all-in average realized price of $8.80 per Mcfe. This compares to an average realized price of $8.07 per Mcfe for the year 2006.

Moving on to net income, net income for the fourth quarter of 2007 was $49 million or $0.65 per diluted share on revenue of $349 million. This compares to net income of $38 million or $0.50 per share on revenue of $264 million for the fourth quarter of 2006. Net income for the year 2007 was $144 million or $1.90 per share on revenue of $1.1 billion compared to net income of $199 million or $2.84 per share on revenue of $800 million for 2006.

Net income was affected in the fourth quarter and full year 2007 with overall higher operating expenses, increased DD&A expense and the large unrealized loss on our commodity derivative position. Included in the fourth quarter and full year 2007 results are unrealized commodity derivative losses of $14 million and $34 million respectively. We also incurred an unrealized loss of $3.5 million related to our open interest rates swap that was de-designated as a cash flow hedge.

In 2006 we had an unrealized derivative gain of $13.5 million related to our then opened commodity derivative contracts. If you’ll recall, these derivative positions were established in connection with the Kerr-McGee transaction in 2006. We have not entered into any additional positions since that time.

Adjusted net income or net income adjusted to exclude the after tax effect of gains and losses on derivatives and the loss on extinguishment of debt was $60.7 million or $0.80 per share for the fourth quarter 2007. This compares to adjusted net income of $39.2 million or $0.52 per share for the same period in 2006. For the year 2007, adjusted net income was $171 million or $2.26 per share compared to a $190 million or $2.71 per share in 2006.

Moving on to lease operating expense, lease operating expense for the fourth quarter of 2007 was $66 million compared to $45 million in the fourth quarter of 2006. Lease operating expenses per Mcfe in the fourth quarter was a $1.91 compared to $1.26 in the fourth quarter of 2006. Lease operating expenses for the full year 2007 was $235 million or $1.86 per Mcfe compared to $114 million or a $1.15 per Mcfe in 2006.

Included for the fourth quarter of 2007 are hurricane repairs of $3.7 million and for all of 2007 they were $18.5 million. If you will recall for 2006 all of our hurricane remediation repairs were covered by insurance and therefore did not impact LOE. The increases in LOE for both the quarter and the year-to-date period are primarily attributable to an overall increase in service and supply costs at our existing properties and a substantial increase in insurance premiums as a result of 2005 hurricanes.

Moving on DD&A, depreciation, depletion, amortization and accretion which we referred to as D&A was $160 million or $4.65 per Mcfe in the fourth quarter of 2007. That’s an increase of $24 million over the comparable 2006 period. For the full year 2007 the D&A was $543 million or $4.21 per Mcfe compared to $338 million and $3.40 per Mcfe for 2006. The factors leading to the D&A increase were capital expenditures; an increase in future developed costs of $156 million; an the increase in our estimated asset retirement obligations of $158 million; higher production volumes and a decrease in our total proved reserves of 13%.

Now moving on to cash flow, net cash provided by operating activities was $216 million for the fourth quarter of 2007. Fourth quarter adjusted EBITDA was $252 million, up 22% over the comparable period of 2006. For the full year 2007 net cash provided by operating activities increased 20% to $689 million and adjusted EBITDA was $820 million, up 28%. These are all records and show our ability to generate significant amounts of cash.

Our adjusted EBITDA margin for 2007 was 74% which is generally in line with our historical average. Now, let me discuss G&A. For the fourth quarter of 2007 general and administrative expenses were $9.6 million and that is no change from the fourth quarter of 2006. For all of 2007, G&A increased slightly to $38.9 million from $37.8 million in 2006 but on a per Mcfe basis G&A expense was $0.31 in 2007 compared to $0.38 in 2006. This represents a decrease of 20% and this is due to a production increase of 28% over the same timeframe.

Let me talk about interest. Net interest incurred decrease $5.5 million in the fourth quarter of 2007 compared to the same period in 2006 due to debt repayment and refinancings. For the year, net interest expense increased $19.9 million due to debt incurred in August 2006 in connection with the financing of the Kerr-McGee transaction.

Income taxes, income expense was $22.5 million in the fourth quarter of 2007 and $71.5 million for the year. Our effective tax rate for 2007 was approximately 33.1%, and we expect that rate for 2008 to be around 34%. Our effective tax rate benefited from the utilization of the deduction attributable to qualified domestic production activities under Section 199 of the Internal Revenue Code. I expect that we will also receive a Section 199 benefit in 2008 and we expect to defer approximately 60% of booked taxes in 2008 as well.

As it relates to capital expenditures for 2007, our capital expenditures were $361 million, including $171 million for development activities, $129 million for exploration, $40 million for seismic, and $21 million for other leasehold costs and other capital items.

Let me conclude with a few balance sheet items. We ended 2007 with $314 million in cash and cash equivalents, which is an increase of $275 million over year end 2006. Debt stood at $655 million, a decrease of $38 million. Even with the closing of Ship Shoal 349 Mahogany acquisition for $116 million and the special cash dividend of $30 million we are still in a very strong liquidity position. At year end, our debt to total booked capitalization ratio stood at 46% and net debt to booked capitalization ratio was 22.9%.

Our 2007 adjusted EBITDA, the interest coverage was over 14 times interest expense. Total asset were $2.8 billion. Each year we review and to the extent necessary revise our estimated asset retirement obligation. As a result of our 2007 review, we revised our estimated cost to plug and abandon wells and the cost to remove our platforms, pipelines and provide site clearance by $158 million. As discussed earlier, this increase in our ARM estimate resulted in an increase in our DD&A expense.

Finally, we will be filing our Form 10-K at the close of business today. Obviously that will give you a lot more details over and above that provide to-date.

With that I’ll turn the call over to Steve Schroeder.

Stephen L. Schroeder

Thanks, Danny. As Tracy discussed earlier, 2008 is projected to be a busy year with 50 wells plans. With such a large drilling plan, you can expect the number of rigs running at any certain time to fluctuate; some months may be as high as six to eight rigs while other months will be three to four. We currently have five active rigs.

In our Ship Shoal 300 area program, we have two rigs running; a platform rig and an independent leg jack-up. At Highland 38, we have a mat cantilever rig drilling a deep test and an independent leg jack-up rig is drilling deep targets at Ship Shoal 224. In the main pass area a platform rig is being mobilized to begin a program of between three and five wells. Last week we completed our work on the Cypress well and release the semi-submersible rig we had under contract.

In addition to the aforementioned, we anticipate mobilizing three to five additional operated rigs to the Central and Eastern Gulf of Mexico within the next month or two. We also project to have an operated rig or two in the Western Gulf.

Finally, we have approved three wells by outsides operators and expect to have a couple more rigs working shortly. As you can tell, we have a lot of irons in the fire or in this case, bits in the ground, but I believe our team is up to the challenge.

With respect to rig availability with our drilling program focused on the conventional shelf and deep shelf, we are not experiencing issues with respect to obtaining rigs. In fact, with our high activity level we are beginning to have discounts offered by contracting multiple rigs with a single vendor.

With respect to our recent activity, we have completed three wells at Ship Shoal 300 area drilling program. Per production from the wells is 12.4 Mcfe per day gross, or 8.7 Mcfe per day net. At South Timbalier 217, we completed the A-3 well and it is producing 12 Mcfe per day gross or 5 Mcfe per day net. Later in the discussion, Jeff will provide additional details on the results of our drilling program.

As I mentioned earlier, we have finished our recomplete of the Cypress well that flows back to our Mahogany platform. Sales from this well are 1,750 barrels of oil per day and 2.3 million cubic feet per day gross or about 11 Mcfe per day net.

One other recent operation to note the East Cameron 321A-22 well was recompleted from the [angbe] 3 sands to the [angbe] 2 sands using inexpensive wireline techniques. Production from the well is 700 barrels of oil per day, and 0.3 million cubic feet per day gross or 3.8 Mcfe per day net.

During the fourth quarter of 2007 we began two stimulation programs. Occasionally, a well’s productivity may decrease with time due to a number of different factors. A remedy for some of these factors is to pump various assets into the well. At Mahogany, we stimulated the A-4 well and experienced an increase in production of approximately 200 barrels of oil per day gross. Based on the information obtained from this pilot test, we are fine-tuning our procedure and expect to stimulate additional wells on the platform.

At Green Canyon 18, five wells have been stimulated. The combined build up from the five wells is approximately 600 barrels of oil per day gross. With the success of these two programs, we continue to evaluate our active wells, looking at potential candidates to add to this program.

We have completed all major repairs related to Hurricane Katrina and Rita. As Danny previously mentioned, we spent $18.5 million in hurricane repairs in 2007. During the past three years, we have spent a total of $24 million for repairs not covered by insurance. Any remaining hurricane costs, which we anticipate to be minor, will be included in base LOE.

To expand on 2008 expenses, as shown in our press release the midpoint of our projected lease operating and gathering transportation and production taxes expense guidance is less than the 2007 expenses. The reduction in costs associated with hurricane remediation repairs is the primary driver in lower cost in 2008. With hurricane expenses excluded, we project a slight increase in lease operating expenses. Facility expenses are estimated to increase due to the high number of underwater inspections that are required by the minerals management services regulations offset by an anticipated lowering of insurance premiums. As usual, we trend workover expense based on 2007. Gathering transportation and production taxes expense is projected to increase due to a full year production from the Highland 24L field which is in the Texas State waters and thus subject to state severance taxes.

For the first quarter of 2008 we estimate expenses to be back on our historic trend. Fourth quarter expenses for 2007 were high due to some non-recurring items such as a buyout out of a lease on a mobile offshore production unit and a third party operated field and replacing of a number of well heads which had served their useful life at a field where the production had high quantities of hydrogen sulfide in the natural gas.

Work over expense was also high due to the extensive stimulation programs previously discussed as well as three major tubing replacements in wells on platforms operated by third parties.

Let me discuss our operated capital program. Jeff will be discussing the exploration capital expenditures in a moment. Our 2008 development budget is $450 million which includes the drilling of six development wells and the anticipated capital for completion and facility work associated with our robust exploration program. Nearly half of the development budget is a function of our exploration success. The other half of the budget is associated with the six development wells and several larger development projects including two deepwater projects.

Also, the completion of the Cypress well at [Dewely] 989 was included in the development budget. No, that was in the budget, we have allocated some upfront engineering costs for Healey and [Daniel Boon]. A majority of the development drilling will occur in the second and third quarter. In the second half of 2008, we plan on drilling a development well at Mahogany in addition to the previously discussed well stimulation project that is ongoing. Also, we plan on mobilizing a workover rig in March to recomplete a well into the main field pay. Finally, Jeff and his team are working on additional exploration opportunities at Mahogany.

Now, I will turn the call over to Cliff Williams to discuss our reserves and production guidance.

Clifford J. Williams

Thanks, Steve. First, I’d like to report on 2007 production. Our fourth quarter production of 34.3 Bcfe and full year 2007 production of 126.5 Bcfe both approach the upper limit of our most recent guidance. The breakdown of annual 2007 production was about 40% oil and NGL and 60% natural gas.

Next I’d like to discuss production guidance for the first quarter and full year of 2008. For the first quarter 2008 the company anticipates production to be between 2 and 2.1 million barrels of oil and 17.5 and 18.4 billion cubic feet of natural gas for a total of between 29.2 and 30.7 billion cubic feet of gas equivalent. For the entire year, we anticipate production to be between 7.4 and 9.4 million barrels of oil and 65.9 and 83.8 billion cubic feet of natural gas or a total of between 110 and 140 billion cubic feet of gas equivalent.

In the absence of additional acquisitions, we expect production to decline through the first half of the year then ramp up in the second half as we realize build-up from our active exploration program. As Tracy stated earlier, we are gearing up to drill 50 wells in 2008 and have a rig schedule that includes all these wells. Production contributed by the exploration program will have a cumulative effect and so will increase as the year progresses, with the largest contribution being in the fourth quarter of ‘08 and into 2009.

Some of the wells drilled in 2008 will not contribute to this year’s production simply because they will be completed late in the year or because more extensive facility construction is required to bring them on line.

Moving on to reserves, at December 31, 2007 the company’s proved reserves were 638.8 Bcfe compared to 735.2 Bcfe at December 31, 2006 a net reduction of 13% or 96.4 Bcfe. This reflects an overall reserve replacement of 24%. 48% of our year end 2007 proved reserves is oil and natural gas liquid and 52% is natural gas. Our proved producing reserves remained relatively flat year-over-year from 225.3 to 224.1 Bcfe, a reduction of less than 1%. This is the hallmark of W&T, turning reserves in the cash and 2007 was no exception.

During 2007, we reduced the proved non-producing reserves category by 32% and the proved undeveloped category by 5%, moving reserves from these categories into cash generating producing reserves.

Through discoveries and extensions, we added in excess of 48 Bcfe. This reserve add is primarily the result of the 2007 drilling program which as Tracy stated included six successful explorations and two successful development wells. Also contributing to this add is the deepening operation completed in early 2007 of the Green Canyon 82 no. 3 well. You may recall this was a successful 2006 exploration well that we chose to rig down after taking off several productive intervals due to existing eddy currents.

The present value of our total proved reserves is $3.1 billion. This value includes estimated asset retirement obligations, no income taxes and a discount factor of 10%. Netherland, Sewell & Associates is our third-party consultant and they evaluate our proved reserves from the ground up. This means they perform an independent engineering and geologic assessment of all our proved reserves.

Next here is Jeff Durrant to discuss our 2007 drilling successes and preview our ‘08 program.

Jeffrey M. Durrant

Thanks Cliff and good morning, everyone. As you’ve already heard the ‘07 drilling program activity was lower than W&T’s historical drilling wells. However, our success rate was very much in line with our prior year success rate at 89% for the overall program. For the year, we successfully drilled six of seven exploratory wells and both of our development wells. In the total 2007 program then we were eight of nine with successes in all three areas including one deepwater discovery in Healey, a deep shelf success at South Timbalier 41 and then we drilled five of six successful wells on the conventional shelf including our substantial discovery in High Island 24.

Additionally, we’ve successfully deepened the Healey Number 3 early in the year. This was not included in the ‘07 well count, due to prior year successes in the shallower oil and gas and we counted this well in 2006.

Specifically in the fourth quarter, we drilled two successful horizontal wells, the A1 Sidetrack and A3 Sidetrack in Ship Shoal 300. The 76% W&T working interest wells each founded objectives their at about 2,300 feet through vertical depth and lay out from 500 to 700 feet of horizontal section. Both wells are now online and producing at a combined gross rate of about 3.8 million cubic feet of gas per day, which is about 2.4 Mcfe per day, net to W&T. As you’ll see, these wells are only the beginning of a substantial Ship Shoal area drilling plan that we have scheduled for 2008.

Our other fourth quarter drilling success was in the deepwater at out Healy project in Green Canyon 82. Going in you might recall the no. 4 well had four independent amplitude based exploration targets. The first two shallower objectives were non-commercial, finding low gas saturation wet sands. The two deepest objectives however were successful. We found 20 feet of high quality gas condensate sand at the base in the 11,200 foot sand and 50 feet of high quality oil sand on the base in the 12,250 foot sand.

Also these reservoirs successfully tested the most down deep portion of the Healey geological structure. Because the 12,250 foot oil sand was found on the base, proved booked oil reserves will be limited and were not booked in 2007. Perhaps more importantly though the 12,250 foot sand is our deepest discovery to date in the field and sets up as many as four additional prospects higher on a structure.

Our fourth well in the quarter was the previously announced non-commercial 67% W&T A3 well in Main Pass 162 with a financial exposure of approximately $7 million.

Turning to 2008, we’ve already announced an aggressive $330 million exploration budget. As you have already heard, we anticipate drilling 50 total wells, 44 exploratory and six development. Neither of these wells are Deep Shelf prospects with their objectives below 15,000 feet. The total unrisked net exploratory potential for the entire program is over 500 Bcfe. This program is the result of a year-and-a-half of geological and engineering valuation of the properties. About half of the 2008 drilling budget is planned in former [Karinki] fields. Of course this means though that the other half is in W&T heritage fields and primary term acreage which are still providing excellent drilling opportunities for the company.

So far in 2008 we’re off to an excellent start, with four successful wells drilled to date. We completed drilling the 50% working interest of Timbalier 217 A3 well in January. This non-operated well found 110 feet of net gas in two sands. The well is now flowing at a gross rate of 12 million cubic feet gas per day, plus about 90 barrels condensate, which is 5 Mcfe per day net to W&T.

Additionally we’ve completed the 100% working interest A-3 sidetrack well in Ship Shoal 315 to about 25 feet of gas condensate and you know currently flowing at a gross rate of 6.4 million cubic feet gas per day along with 374 barrels a condensate which equates to 6.3 million equivalent per day net to W&T.

Also in the Ship Shoal 300/315 area, we’ve had success drilling in the shallow objectives in a 100% working interest Ship Shoal 300 A-2 sidetrack. We’ve found about 100 feet of oil and two A and [BH] sands and are currently setting casing with plans to explore for deeper gas condensate sand objectives.

Our most recent exploration discovery also in this Ship Shoal 300/315 focus area. As of this morning we drill 53 feet of two vertical depth very high quality oil sand in the 100% working interest Ship Shoal 314 A-4 sidetrack and we’re still in high quality well sand. Plans are to finish drilling through these reservoir and complete the well with first production expected in about two weeks. Following this well we’ll move the rig over to the Ship Shoal 315 A-2 side track in then on to an open water location in Ship Shoal 370.

Besides these conventional shelf wells we’re actively drilling two deep shelf wells the 53% working interest Highland 30 no. 2 which has a proposed depth of about 15,700 feet and the 47% working interest Ship Shoal 224-E18 with a proposed total depth of over 18,000 feet.

Other areas where we expect to start drilling soon includes a platform drilling program at South Timbalier 320 and the Main Pass area where we have up to ten wells planned in 2008, in both open water and platform drilling locations.

In the Western Gulf we also expect to begin drilling soon at Highland 110, 111, Highland A-376 and Eugene Island 175.

Overall the 2008 drilling program is focused strongly on the Shelf, both conventional and deep shelf, with majority of the wells being drilled either from or near existing infrastructure. As we’ve seen from our success so far this year just allows for the exploration discoveries to be brought online quickly and cost effectively.

Now with that, we turn it back to Tracy for closing remarks.

Tracy W. Krohn

While we are looking forward to 2008, we managed this company for the long term. We put a plan in place after the Kerr-McGee transaction to evaluate in 2007 in preparation for a substantial 2008 and beyond. We felt this would be the most efficient way to create several multiple well drilling programs in several areas instead of drilling single wells immediately. This plan should help us achieve the best returns from the Kerr-McGee and W&T heritage properties and help us reach our goals of production result growth, as well as cost management.

That concludes our prepared remarks and we’re ready to take your questions. Operator, would you please open the phones for Q&A.

Question-and-Answer Session


Our first question comes from Gary Nuschler - Jefferies & Company.

Gary Nuschler - Jefferies & Company

Can you give us an update on the development plan at [Daniel Boon]?

Jeffrey M. Durrant

We’re still working on that development. I expect that we’ll have some announcements here fairly quickly about full development but we’re proceeding full steam ahead.

Gary Nuschler - Jefferies & Company

And will that be a ‘08 startup or more likely an ‘09?

Jeffrey M. Durrant

More likely ‘09.

Gary Nuschler - Jefferies & Company

Could you elaborate a little bit on what your exploration plans are in the deep water?

Jeffrey M. Durrant

Well, we don’t have any other wells right now that we’ve got booked for the deep water. Currently we are working at Green Canyon 82 to further evaluate the field seismic but we don’t have any plans for drilling other wells at Healey this year.

Gary Nuschler - Jefferies & Company

I thought you have one exploratory well outlined for 2008.

Jeffrey M. Durrant

Earlier in the year we put that on there as a contingency well for us. Currently, with rigs schedules we’re not going to drill that well.


Your next question comes from Jason Winkler – Wells Fargo. Please go ahead.

Jason Winkler – Wells Fargo

Just curious on LOE, it looks like it’s kind of reduced a little bit. Is that just basically, Kerr-McGee assets are pretty much accounted for for workovers or is there anything else that relates to that?

Tracy W. Krohn

I think there are several things. We are getting a better handle on the properties but cost of goods and services have came down somewhat as a function of the market; how long that hangs there will be a function also of commodity prices.

Jason Winkler – Wells Fargo

Obviously, Tracy you are staying offshore the whole time, but is there a situation which you would look onshore or is it just basically staying out there with the cash flow you guys are receiving?

Tracy W. Krohn

We’ve looked not only onshore but all over the world. The conclusion I keep coming back to is that Gulf of Mexico is a pretty good place to be if you want to make a bunch of cash. That don’t prevents us from going onshore and we certainly look onshore at areas around the Gulf of Mexico, and I consider anywhere from South Texas over to Alabama to be Gulf Coast onshore; that’s pretty similar to what we already do. That’s certainly a possibility. It’s not necessary a focus.


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

Richard Tullis - Capital One Southcoast

A couple of questions. Going back to the Healy discovery, what are we looking at in terms of at least early thoughts on reserve bookings for this year? Any ideas of a range yet?

Jeffrey M. Durrant

The reality is that we didn’t book a whole lot of proved reserves there. What we did was we firmed up our probable and possible. We will be releasing that pretty soon. I’ll go ahead and tell you the 3P reserves there are now about 270 Bcf equivalent.

Richard Tullis - Capital One Southcoast

What about the no. 4, what are your thoughts on that thus far?

Jeffrey M. Durrant

It’s going well. The good news is that it’s going to generate a whole bunch of cash. There was one sand up the hole that we though might have a little more gas in it, but it was wet. So that was a little bit of the disappointment, but the other side of it was we found another oil sand that we hadn’t anticipated. It does show up quite nicely on what we’re looking for. We though it was another sand, but it turns out to be a different oil sand that sets up some other prospects in the field. That’s our deepest sands. So that was quite a nice surprise for us and a very pleasant discovery.

We’re moving forward with what we think will be a reasonable way to produce this field and quite frankly I’m leaning at this point without enough information to make a definitive statement, but I’m kind of leaning towards a float in production system.

Richard Tullis - Capital One Southcoast

When do you think you would have it on initial production?

Jeffrey M. Durrant

That’s going to be a function of what kind of production system we put into it, so I’m not quite prepared to give you that estimate. But I don’t think it’s going to be one of these things that will be out there for years and years. I think it will be relatively quick.

Richard Tullis - Capital One Southcoast

What are your reserves associated with the three successful wells in 4Q and the four wells in 1Q of this year?

Jeffrey M. Durrant

I don’t have that answer.

Richard Tullis - Capital One Southcoast


Your next question comes from Brian Kuzma - JP Morgan.

Brian Kuzma - JP Morgan

When you look at your production guidance for the full year what type of exploration success is baked into those numbers? Its just kind of back end loaded so I guess it wouldn’t required too much?

Tracy W. Krohn

I am not sure I can give you an answer of production of absolute success there. I think, it’s a collage based on existing production and performance and also development well drilling and then exploration success as well. So I don’t necessarily have a number for you about exploration success. I think we’ve had pretty good success and we’ve given you a pretty good range from 110 to 140. I would be reticent to give you a number on that.

Brian Kuzma - JP Morgan

I just wanted to compliment you guys on your reserve disclosure, it’s actually one of the best that I’ve seen. If you can talk a little bit about the negative performance provision, just elaborate on what your guys saw?

Tracy W. Krohn

Sure. In fact, we thought we might get that question so I am going to turn that over to Cliff Williams to address that.

Clifford J. Williams

I’ll address that. The negative revision you see is the minus 18.7 Bcfe but that’s a result of also a positive revision due to pricing. So really, the revision we are talking about is 38.5 Bcfe, the majority of it being performance related. There are several individual completions that contributed to this. Actually we had some positive ones as well, but some of the key ones, for example, would be our Cyprus completion late in the year unexpectedly and that’s the well that Steve also talked to you about. Currently we’ve completely that re-complete and its producing the 1,750 barrels a day growth right now.

We also had another completion at Eugene Island 205 that watered out unexpectedly. Then there was a series of other completions similar to that. We also had some positive revision at East Camp 321, that was new completions that we put online last year and there was some positive revisions in that field.


Your next question comes from Phil McPherson - Global Hunter Securities.

Phil McPherson - Global Hunter Securities

I was wondering if I could just talk a little bit more about the Healey, even if you don’t have any intention of drilling anything out in the deep, does that preclude you from booking reserves out there at the end of this year?

Tracy W. Krohn

If we don’t drill anything else does that preclude us from booking reserves? We haven’t booked the reserves, but we didn’t book reserves for 2007. We booked some reserves in 2008 – not a whole bunch -- on the proved side. What we did do is we firmed up the probable and possible reserves of about 270 Bs. Proved reserves are around 60 Bs now.

Phil McPherson - Global Hunter Securities

That is included in your year end number that you published?

Tracy W. Krohn

It is. No, I’m sorry no -- not for 2007. No.

Phil McPherson - Global Hunter Securities

So then that 60 Bs will be posted in next year’s reserve report?

Tracy W. Krohn

No, no. We had about 50 Bs or so for 2007, is that right? 60, around 60. We included the deepening so those reserves are not booked, the additional reserves are not booked for 2007.

Phil McPherson - Global Hunter Securities

I was under the assumption that the year end reserve didn’t have anything in it for – so it did have at least 50 to 60 Bs in it?

Tracy W. Krohn

That’s about right. At 12/31/07 we had roughly 60 Bs equivalent.

Phil McPherson - Global Hunter Securities

At what point will you guys gives us little more color on as I guess it’s an ‘09 event as far as developing it or bringing up another well there?

Tracy W. Krohn

As soon I have more color on that I will give it to you. I really don’t have that yet, we’ve still got some more valuations to do on the PBT side of it as well and how we think is the most efficient way to produce it. As I said earlier, I’m leaning toward some sort of floating production system on top of the reservoir because I think intuitively we’ll get more reserves that way.

I don’t have all those answers yet and again I’m not sitting here warranting that that’s exactly the way we’re going to do it. It could be a combination of an FPS and sub sea completion. We’ll just have to run some numbers and figure out what is the most efficient way to do that. But we’re working on it hard.


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

Richard Tullis - Capital One Southcoast

Could you talk about any additional hedges you’ve layered on for oil and/or gas?

Tracy W. Krohn

No. We didn’t talk about any additional hedges because we don’t have any. We haven’t laid any on at this point in time.

Richard Tullis - Capital One Southcoast

But are you looking at with the high commodity prices?

Tracy W. Krohn

Not necessarily. The concern with hedges is again the basic philosophy is we hedge to assist us in some sort of financing situation, maybe an acquisition or something like that. I would hedge to protect the budget. I see no reason to protect the budget; we are operating within cash flow on the budget. So unless there was a precipitous drop in the price of oil then I wouldn’t really be concerned. If I thought that we’d see something that would threaten that budget than we would consider that.

Richard Tullis - Capital One Southcoast

Any plans for the March lease sale?

Tracy W. Krohn

We’ll probably have some things to look at in March, you bet.

Richard Tullis - Capital One Southcoast



Management as there are no further questions, I’ll turn it back to you for closing comments.

Tracy W. Krohn

I thank all of you for joining us today. I think this is an excellent quarter for us. I am looking forward to 2008 and beyond. This project Kerr-McGee has taken on all the characteristics that we hoped for originally and we are looking forward to drilling that and drilling the rest of our properties for this year and beyond. Thanks so much.

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