Amplify Energy Corp (AMPY) 2014 Q2 法說會逐字稿

Good morning. My name is Kathy and I will be your conference operator today. At this time, I would like to welcome everyone to the Midstates second quarter 2014 earnings call.

(Operator Instructions)

Thank you. I will now turn the call over to Al Petrie, Investor Relations Coordinator. Please go ahead, sir.

Thank you, Kathy. Good morning, everyone, and welcome to Midstates Petroleum second quarter 2014 earnings conference call. Joining me today as speakers on our call are Peter Hill, Interim President and CEO and Nelson Haight, our Senior VP and CFO.

Peter will begin today's call with an overview of quarter and operational highlights. Nelson will following with additional financial details and provide guidance for the third quarter and full year 2014. Peter will then wrap up with some brief closing comments.

Before we begin, let's get the administrative details out of the way with our Safe Harbor statement. This conference call may contain forward-looking information and statements regarding Midstates. Any statements included in this conference call, or in our press release, that address activities, events or developments that Midstates expects, believes, plans, projects, estimates or anticipates will or may occur in the future are forward-looking statements.

These include statements regarding reserve and production estimates, oil and natural gas prices, the impact of derivative positions, production expense estimates, cash flow estimates, future financial performance, planned capital expenditures, future potential drilling locations, resource potential, and other matters that are discussed in Midstates' filings with the SEC. These statements are based on current expectations and projections about future events, involve known and unknown risks, uncertainties, and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Please refer to Midstates filings with the SEC and the second quarter form 10-Q that will be filed shortly for discussions of these risks.

Also please note that any non-GAAP financial measures discussed in this call are defined and reconciled to the most directly comparable GAAP measure in the tables in yesterday's earnings release. I will now turn the call over to Peter for his comments.

Good morning. And thank you again for joining us today.

In the second quarter of 2014, we generated record adjusted EBITDA of $122 million with production averaging just under 32,000 BOE per day. We continue to focus on value growth and our increase in production, lower cash costs, and strong margins led to this EBITDA performance.

Our operating costs were well below our guidance at $6.79 of BOE and this was driven by the continued efficiencies in Miss Lime where we saw costs fall to $4.50 of BOE. This best in class performance in our operating metrics in the Miss Lime is driven by the focus on the capital efficiency and we will continue to reap the benefits of these efficiencies as we move forward.

So to me, this was a very solid, clean quarter overall, and we're building a momentum of value growth based on our operating performance. As an example, July production is at another record of 33,300 barrels of equivalent a day, with the Miss Lime contributing some 23,000 BOE per day of that performance. And we believe we are well on our way to meeting our full-year EBITDA operating CapEx and production guidance, which we are reconfirming today at between $500 million and $550 million and 32,000 to 35,000 BOE per day respectively.

Since starting this interim role in early April, the first thing we all did is sort of lay out and reenergize the Midstates strategic agenda. I think we have made meaningful progress towards improving the balance sheet. And with the closing of the Pine Prairie sale and the Fleetwood exploration agreement, these provided upfront cash as well as capital carry that will enable us to test this exciting area of organic growth. We're also on track to deliver on our overarching 2014 goal of having our operating capital spend equal EBITDA within the range of $500 million to $550 million.

We believe while exercising rigorous capital discipline and balancing our cash flow is a significant first step forward in delivering financial stability, allowing us to minimize the draining on our borrowing base, protect our liquidity position, and bring more stability to our balance sheet. We're confident we can deliver sufficient liquidity through 2015 and are targeting cash flow breakeven by early 2016.

We're well into our process to evaluate all our strategic options to improve our balance sheet and lock-in value that we know exists within the asset base. Those additional opportunities include further non-core sales, joint ventures, farm outs, salt water disposal monetization, and merger or sale of the Company. We will look at all the alternatives and have the time and ability to be thoughtful and considerate in how we proceed.

This is an ongoing process. And while we're going through this process, we remain very carefully focused on operational excellence. We have demonstrated these operating cost efficiencies and capital discipline and we will continue to look for further ways to both improve or operations and financial performance.

So if we turn to our focus areas, the Anadarko well results are still to us very encouraging. In the Cleveland we have got a consistent peak 30 day results of just under 400 BOE per day. In the Cottage Grove we have two wells with 30 day peak rates of 679 and 711 BOE per day. And I've seen our average rates increase.

In the Tonkawa, we have a well that produced 850 BOE per day on our 30 day IP, and are completing the offsets to this well as we speak. In the Marmaton, we have seen consistent results just above 300 BOE per day. And with our latest well out there achieving over 440 BOE per day on this 30 day average.

Nonetheless, we believe we need time to study the results so we can optimize our well design and our completion techniques and select the best locations that will allow us to lower D&C costs and increase our returns. Let me remind you, that we were in a similar situation and process in the first year or so after acquiring the Miss Lime. And our results today to us demonstrate our ability to make these improvements.

Analysis has shown us that we spend a little over $50 million more than we needed to have done in the early days in that learning on the Miss Lime. We want to take the benefit of that learning.

With this in mind, we need to ensure that we're spending every dollar as efficiently as possible. And pursuant to our strategy of capital discipline we want to be certain that we have a better understanding of the Anadarko area before we embark on a heavier drilling program. We want to grow production value not just grow for growth stake.

So taking this into account, at the end of the second quarter we shifted another rig from the Anadarko area to the Miss Lime. And that now results in 7 rigs in the Miss Lime area. We believe this will continue to build on our EBITDA and margin growth and improve our returns while giving us time to better delineate the Anadarko and incorporate learnings into our program.

In the Miss Lime we have a wealth of drilling opportunities that allow to us be able to relocate rigs and capitalize to maximize returns on EBITDA. As indicated in the updated Miss Lime slide that's in that deck that we just put on our website, we now have 169 wells online with a consistent 30 day peak production rate of 565 BOE per day. Our results are continuously improving, as nearly 50% now of our wells drilled have peak rates greater than 500 BOE per day with indicative rates of returns greater than 100%.

As we further refine the use of our 3D, we have over the entire acreage position, and our integrated team approach we are able to choose the right locations and the best intervals in real time resulting in increasing EURs and reconfirming our position our premier position within the play. We have additional detail on well results and guidance in the supplemental information pack that was included on our website today.

We're in the midst of our rigorous internal review to high grade and value our entire contingent resource base and we have seen a significant increase in gross well locations in both the Miss and the Anadarko acreage. In the Miss Lime, at the time of the acquisition we believed we had 400 locations on three wells per section. As we continue processing our seismic and evaluating our results, we increased our count to 600 locations based on four wells per section. Our latest analysis and data supports over 900 gross upper Miss potential locations, with an estimated resource potential of approximately 225 million BOE, which includes additional down spacing which we're currently testing in multiple sites.

Additionally, we believe that other horizons within our Miss Lime acreage offer incremental value that not currently reflected in our net asset value. This we have, we believe, is an additional 700 locations that are being further evaluated with an estimated net resource potential of approximately 125 million barrels of equivalent.

Similarly, in the Anadarko we have 850 gross locations identified in our four primarily target horizons, with an estimated resource potential of approximately 90 million barrels of equivalent. The Anadarko is a prolific multi-state basin with several other perspective horizons that we believe add an additional 700 locations that are being further evaluated with an estimated net resource potential of approximately 125 million.

You add all this up and we have 111 millions of barrels of equivalent of program reserves today, with an R to P of over nine years. We have a resource potential here of some 650 million barrels of equivalent, with over 3,200 locations available for high grading, high ranking, and risk reduction. Pretty impressive portfolio in my mind.

So in summary, I'm pleased with our second quarter results and believe we have now shown solid growth and we have solid growth ahead of us in our core areas. Our focus is on operational execution and that will allow us to grow EBITDA, production, and, importantly, value, in a fiscally responsible manner.

We believe this will allow us to achieve cash flow break even in 2016, strengthen the balance sheet, and deliver value to our shareholders. If we continue to focus on our strategy and execute on our plans, I believe investors will develop more confidence in our story and that should be reflected in an improving share price.

With that summary, I now turn this over to Nelson, the CFO here, and he will give you some more financial detail on the 2Q performance. Thanks.

Thanks, Peter. First off, I am pleased with the financial results we announced yesterday afternoon.

Our record high adjusted EBITDA of $122.1 million before $2.5 million of transaction costs, was above expectations and was up 88% from $64.9 million in the second quarter of 2013, and up 10% from $111.4 million in the first quarter of 2014. Our results benefited from the growth in production volumes which were up 63% from the second quarter of the prior year. And even after the sale of the Pine Prairie assets, which closed on May 1st, we're up 10% from the first quarter of this year. Significantly lower cash operating costs and, in particular, lower LOE, also contributed to the growth in adjusted EBITDA.

We believe we remain on track with our estimated 2014 adjusted EBITDA range of between $500 million and $550 million. As both Peter and I have said many times over the last several months in presentations and discussions with investors and analysts, we plan to balance our full-year 2014 capital program with our expected EBITDA and will adjust that capital spend if our EBITDA expectations change.

Keep in mind that when we talk about CapEx, we're referring to cash CapEx for drilling and completions, seismic, and land acquisition. It does not include capitalized interest, G&A and asset retirement obligations.

Our cash capital investment in operations in the second quarter was roughly $141 million, with about $93 million in the Mississippian Lime properties, $45 million in our Anadarko Basin properties and $2 million in the Gulf Coast. Which in total, was consistent with the high end of our guidance. The CapEx for the Mississippian Lime includes about $10 million in spending related to the fracture stimulation of ten wells that had initially been produced as open hole completions. We have now reentered and fractured stimulated all the open hole wells that plan to for the year.

We are closely monitoring our spending for the balance of the year to keep it within the range of $500 million to $550 million. In the third quarter, we expect to invest $125 million to $135 million with roughly $90 million to $95 million in the Mississippian Lime, roughly $32 million to $35 million in the Anadarko Basin and the balance in the Gulf Coast. These estimates reflect the movement since the first quarter of two rigs from the Anadarko Basin to the Miss Lime. Additional detail is available in our supplemental information packet posted to our website this morning.

Adjusted net income for the second quarter was also a record high at $14.4 million, or $0.22 per share, as compared with a loss $4.2 million in the same period a year ago and net income of $8.3 million in the first quarter of 2014. This excludes the impact of unrealized gains and losses on derivatives in the Pine Prairie transaction costs along with the related tax impact.

Our reported second quarter 2014 GAAP net loss of $2.1 million before $4.8 million in preferred dividends compares with net income of $3.3 million in the same period of 2013, and a loss of $83.6 million in the first quarter of 2014.

Production in the second quarter grew to 31,912 BOE per day, essentially at the lower end of guidance. 65% of first quarter volumes came from our Mississippian Lime properties, 28% from our Anadarko Basin assets, and balance from the Gulf Coast area. Pine Prairie volumes averaged 1,782 BOE per day in April and were removed as of the May 1st closing date of that sale. The balance of the Gulf Coast production was from our Dequincy properties and averaged about 1,700 BOE per day for the quarter.

Our current production has continued to rise, and in the month of July, as Peter pointed out, grew to 33,300 BOE per day, with about 23,000 per day from the Miss Lime, 8,900 per day from the Anadarko Basin, and 1,600 per day our Louisiana Dequincy properties.

Looking ahead to the third quarter we expect our production to be in the range of 34,000 to 35,000 BOE per day. We expect our Mississippian Lime properties to grow to 23,500 to 24,200 BOE per day, our Anadarko Basin properties to average 8,800 to 9,100 BOE per day, with the balance coming from our Gulf Coast properties.

Our full year 2014 guidance remains unchanged at 32,000 to 35,000 BOE per day. Additional details on the product mix of this volume guidance, along with price and transportation differentials are included in the supplemental information that was posted to our website this morning. As expected during the second quarter we did realize a lower differential from WTI on a portion of our Mississippian Lime production as a result of the new crude oil purchase contract that improved our realization in the area.

Turning to hedging. During July, we increased our 2015 oil hedge position by about 20%. We have not added any new gas hedges, but are pleased with the ones that we put in place previously.

A summary of our current hedge positions is included in the release and is posted on our website along with all of the guidance I'm providing today. Our hedging strategy remains to be as aggressive as possible to protect our operating cash flow in order to fund our development programs going forward. It also assists us in our semi-annual borrowing base redetermination and next scheduled redetermination at the end of September.

I will now review our second quarter expenses and provide guidance for the third quarter and full year 2014. Second quarter cash operating expenses, which include LOE, production taxes, and cash G&A, but excludes acquisition and transaction costs, total $39.6 million, as compared with $40.8 million in the first quarter of 2014. Costs fell roughly $1 million on an absolute basis, but more importantly, fell significantly on a BOE basis.

In the second quarter cash operating expenses totaled $13.63 per barrel of oil equivalent, down 13% from $15.62 per BOE in the first quarter of 2014, and down 35% from $21.07 per BOE in the same period of the prior year. The improvement was primarily due to increased production volumes and lower overall lease operating severance and other tax expense.

Our lease operating work over expenses totaled $19.7 million, down slightly from $20.1 million in the first quarter. Second quarter LOE at $6.79 per BOE was well below the guidance range of $7.00 to $7.50 of barrel of oil equivalent and our actual first quarter rate of $7.71 per BOE, and significantly below $9.83 per BOE in the second quarter of 2013. The reduction in rate came primarily from the Mississippian Lime, where our LOE fell to $4.51 per BOE a new all-time low for us, as we continue to benefit from the operating leverage provided by past investments in electrical and salt water disposal infrastructure.

The sale of Pine Prairie, where LOE rates per BOE were relatively higher versus our other operating areas, contributed about $0.30 per barrel of oil equivalent to the reduction. For the third quarter and the full year we expect our LOE and work over expenses to be in the range of $6.75 to $7.25 per BOE.

Gathering and transportation expenses associated with the main gas processing arrangement in the Mississippian Lime totaled $2.9 million, which was essentially flat with our first quarter costs of $2.8 million. For the third quarter and full year 2014, we expect those costs to continue to range between $2.5 million and $3 million per quarter. Severance and other taxes declined to $5.6 million, or about 3% of our total revenue before derivatives, which was significantly below our guidance range of 5% to 6%.

We are continuing to experience the benefit of higher production volumes in the mid-continent region where effective severance and ad valorem tax rates are at lower rates than in Louisiana. And the sale of Pine Prairie also contributed to the reduction. For the third quarter and balance of 2014, we are lowering our guidance to 4% to 5% of revenue to reflect the lower effective tax rates.

Second quarter general and administrative expense was $13.4 million, compared with our guidance range of $10 million to $12 million. We incurred higher employee and severance related costs during the period. Non-cash G&A totaled $2.1 million during the second quarter, and we expect G&A in the third quarter of 2014 to be in the range of $10 million to $12 million, with about $1 million to $2 million being non-cash. For the full year 2014, we anticipate G&A to range from $44 million to $50 million, with about $6 million to $8 million non-cash.

Our DB&A rate in the quarter of $24.47 per BOE was below our guidance of $25 to $27 per BOE. For the third quarter and full year 2014 we continue to expect a range of $25 to $27 per BOE. There were no impairment charges during the second quarter.

Total interest expense incurred in the second quarter was $37.2 million, of which we capitalized about $3.3 million. We expect to capitalize about $4 million to $6 million per quarter for the balance of 2014.

As we discussed in detail in the last call, we are now utilizing a much lower tax rate in our financial statements, which in the second quarter was a benefit of about 2%. We continue to have about $76 million of net operating loss carry forwards that have not been recorded in income statement, but available to offset future taxable expense. To the extent that we generate taxable income in future quarters we will recognize a portion of these carry forwards to offset the related tax expense. As a result, for the foreseeable future our tax rate will be between 0% and 5% with all being non-cash.

As we previously disclosed, the sale of Pine Prairie closed on May 1st. We used $131 million of the net proceeds of approximately $150 million to reduce the outstanding balance on our revolver and retain the balance as working capital. Our borrowing base is $475 million and the next regular redetermination date for our revolver is at the end of September. As of June 30, our liquidity totaled approximately $150 million comprised of $120 million in undrawn capacity on the revolver and roughly $30 million in cash on hand.

For the balance of 2014 we expect our EBITDA to grow at a faster pace than CapEx due to increasing production volumes and relatively stable oil pricing environment and operating cost controls. Our growing cash flow, along with available capacity and our existing credit facility give us confidence that we have the financial resources we need to execute our planned capital budgets and service our debt through at least the end of 2015. We continue to believe that we are not required to execute any further transactions or raise additional debt or equity in the foreseeable future. Nonetheless, we continue to look at other options that add cushion to our balance sheet and enhance our liquidity position.

With that, I will turn the call back over to Peter.

Thank you, Nelson. I think we have had a very solid second quarter. Clean numbers, and I think we're delivering well on our strategic objectives. We're sustaining that momentum with further growth in production and continue our focus on capital investment, discipline, careful managing our liquidity and operating costs.

We plan to host an analyst day in November, after our third quarter earnings, to fully demonstrate the potential and value growth we see in the acreage portfolio. It will be a very much soup to nuts approach and we will keep you advised on the progress and timing of that meeting.

With that, I would like to now turn it back to Al. And let's get started on some questions.

Okay. Kathy, we're ready for questions. Please limit your questions to one and a follow-up.

(Operator Instructions)

Your first question comes from Neal Dingmann with SunTrust.

Peter, nice job turning things around. Say, first question. Peter, just on the you Anadarko -- the Tonkawa well you mentioned -- great well, 850 plus well. Wondering around that -- when you look at that is there something different that you all did around the drilling completion there? Or is it just where that one is located? Or how the rocks turned out there?

It was -- it was drilled by Newborn and we farmed into the original well, the Mesko well. And the key criteria really is some very careful mapping. Taking a good look at the Tonkawa sand system. And it happened to be A, where it's pretty thick, and B, where we were getting porosities that were in excess of 8%.

So all in all, the rocks were pretty good and the well was drilled very carefully, very well. And it got the result it got. As a result of that, the follow-up was pretty instant. We have got two wells now right juxtaposed next to it, the Monty wells that are cleaning up as we speak. We've got a number of other wells planned. And it has opened up a fairway of opportunity -- 40, 50 maybe more locations that become readily available for us to test in similar circumstance. So let's see what we do.

Got it.

Very encouraging. Very encouraging.

It sounds like it. And then just -- my last one. Just obviously on the Mississippi -- over on the Miss, it looks like this open hole completion is really starting to work. You talked about continuing to map that out.

Your thoughts -- I know you will probably discuss this more at the analyst day later this year, but it does sound like this seems to be working. I'm trying to get a sense in -- or do you have a sense yet, of how much of your acreage -- or what kind of percent you might be able to do this? And is this something that you will be able to bring the cost down a little bit more in those open hole completions?

I think there were about eight questions in there, Neal. (laughter) I'll see what I can get through. Let me step back and sort of take it to a high level. Open hole completions are but one tool that we're looking at to help us with the process of enhancing the value and what we're doing.

It's all wrapped up with down spacing. It's all wrapped up with better understanding the rock system. It's all wrapped up with trying to complete these wells in a fundamentally efficient way. And open hole completions are but one tool.

Yes, they allow you to bring on a well very quickly. They allow you initially very low costs. But they do decline. And then what you have to go back in is re-complete them, set casings, set cement and then go through a conventional 25-stage frac job. That then brings it back on and in certain instances -- in a good many instances we've seen that we appear to be accessing additional volumes of oil in place that we wouldn't otherwise accessing through that well.

We then compare that with wells which we have now got right alongside each other, where we have an open hole together with a cased hole, and we compare those two. And we can see a -- gain a lot of benefits from doing the conventional cased hole. And it's not always apparent that you get significant benefit.

If you look at that from a longer term perspective, then you say to yourself, okay, I've got tools now to use and apply as best I can. Where do I best apply it? And that's what we're doing.

We have then got this whole business of bilaterals and trilaterals. We're doing work with those, to see if they can lower our costs further and give us more oil out of conventional reservoir, and in a way that is cheaper, better and more efficient. So, again, we're looking at those elements of the whole program.

So I wouldn't want to just say that we're just saying we get great results on open hole completions and then follow it with a further up cased hole. It's all part of the balance, Neal, and it's part of the business of us trying to get more efficient, as best we can, and use the dollars as best we can with the completions that we have at our disposal.

That's great color. Thanks, Peter.

Your next question comes from the line of Chad Mabry with MLV and Company.

Had a follow-up to the previous question. Looking at the average 30 day IP of 565 -- looks like that's unchanged from your last update. I guess we were expecting that average to maybe improve with some of the enhancements and completions that you were talking about, Peter. Can you expand on that a little bit? Should we expect that to improve?

Yes. (multiple speakers) Again, it's -- Chad, it's all part of the process that we're going through. It was a simplification of us to put out initially just one EUR for the Miss Lime. And what we're finding now as we go on into it and understand it a lot, lot better we're seeing a whole variation of play types and a whole variation in terms of their performance.

I do also caution that EURs are to us a very clumsy tool. All you're doing is joining up with dots of your initial production, fundamentally solving it for a regression analysis, and then drawing a straight line to it saying this is the volumes you're going to get out of this well over 20 or 30 years. That to us doesn't truly take into account what is the value of the oil and gas being produced here, particularly in the early years. And we need better tools and better ways of being able to do that. And we're trying to develop those.

We think 30 day, 60 day, 90 day are very good surrogates for giving you value, given that these wells pay out in six, nine months, maybe a year. So, it's that sort of front-end stuff that we're spending a lot of time and effort on. And with that in mind, when we get to this analyst day, we will show you that we have now got a family of curves for what we're calling our grain stone.

If you recall when you came in to see us, that rock system has got a much higher porosity and has got a much better deliverable of oil volume in it. We have altered rock, which is rock that has been altered by the cast seen -- or the cast, as some conformity was exposed in time way back in the carbon efflorescent Devonian, and that has given you porosities. And then you've got what we call the enhanced area, where you again get this cast effect whereas you -- to its performance.

We're seeing variable EURs. We're seeing variable performance. And we will show you the decline curves and the work that we're doing with that and how we are then best attacking it with our completion philosophy and techniques. Does that help?

That's very helpful. I appreciate it. Just one follow-up, if I could. On LOE in the Miss Lime. Real impressive there, around 450 of BOE last quarter. Should we expect that to improve on a unit basis with growth in production? Or is that a floor level to expect there?

Hey, we're always seeking to get better. But when you're getting down to those sorts of numbers it gets tougher and tougher to start lowering it. It's already pretty impressive.

With those sorts of margins, your game is to try to sustain them and continue to deliver them. Yes, you try and get better. Of course you do.

But we're getting down to pretty low numbers here. And what's to say we won't improve, because we will. They're not going to come in dollar increments anymore, because that's not the way it is, as you well know. It's all part of the program here of just trying to be much more efficient with the dollar we spend and how we spend it.

Understood. Thanks. (multiple speakers)

I would just add that yes, we are seeing much more consistent approach now. And the numbers we're getting out of our 30 days at this 565 is now based on 169 wells, which we think is a pretty large population of sample size that shows you that we're getting pretty consistent and we know what we're doing. And getting solid delivery from those well bores. Very solid.

Great. Thank you.

The next question comes from the line of Pearce Hammond from Simmons and Company.

Congratulations on a great quarter.

Thank you.

Peter, as you -- (multiple speakers)

Buy shares. Buy shares. (laughter)

Peter, as you peer into 2015, do you think that the activity levels that you have right now as far as the split on the rigs between the Anadarko Basin and the Miss Lime Basin will be maintained into 2015?

Good question. The jury is still out as far as I'm concerned and the guys are concerned. We know the rules. We've got dollars in our hand. They're very scarce dollars and we're going to spend them as wisely and as best we can to get the best return on that dollar that we think is possible.

We will balance that with a bit of strategic thinking, such that we bring on our other play systems and the Anadarko -- there's no question has a ways to go to get itself to perform to the level that we've got the Miss Lime performing today. That's not to say it can't do it. It can.

If we do start to see those improvements, then we will put capital to them. And there is always going to be a need to make sure that are developing our portfolio in a way that is consistent with our investment requirements. Nelson is going to beat me up every time we try and to spend dollars because he wants to see as solid a return as he can, such that our balance sheet and our planning and thoughts go to sustaining and growing the value.

Thank you for that. And then my follow-up, on a potential monetization of your salt water disposal assets, what do you see as the challenges of getting something like that done?

Several. First is that I'm delighted that the guys -- we have all worked together to isolate it and show that there is a business and tremendous value in this particular space and other things we do. We should never forget we produce a lot, lot more water than we do oil, and we're primarily in the water business and the water management business than we are in the oil and gas business. So it becomes hugely important.

Regrettably, we have ignored it a bit -- the industry has ignored it a bit. And now what we're starting to do is address that. We have spent very wisely in getting those LOE costs down, such that what we have now got is over a hundred miles of pipe work all linked up. We've got six very solid water disposal wells with another two that can be linked in easily. And that gives us a huge capacity -- 340 odd thousand barrels of water a day of handling.

And today we run through about 140,000 to 170,000 barrels of water a day. That is a pretty chunky piece of business. And if you consider that if someone landed from Mars in the middle of our Miss Lime position and had to pay a bill for produced water, he would be paying somewhere between $0.50 and $1.00 for the pleasure of doing it. Well, you rank that through the numbers, you get to some pretty chunky sizable valuations here that are available to us.

You then look at that and we have done those sums and we know what it's worth. What we then do is say, okay, what structure impediments have we got in terms of ownership, in terms of ability to be tax efficient, and the ability to bring in sustainable partners that know what they're doing and know this business.

We're in the process of doing that and we're speaking to savvy folk, that know this business and we're working with them to put a collective efficient structure together that makes sense and works. It's a very important part of our realization of value.

And it's part and parcel of our business.

Well, thank you very much, Peter.

Watch this space, I think is the answer.

Your next question comes from John Herrlin of Societe Generale.

Yes. Hi. With respect to value creation, I was wondering if you have data rooms open on the Anadarko, or your water system and how you're dual tracking all of these processes?

We have processes in place for all of those. Yes, we have made information available under confidentiality terms to a number of parties to look at water, to look at particular assets, and to look at particular ways in which we combine to bring our business forward. Normal course of business, it's what everyone does. And we're no different. And we've gone about it in a very sophisticated, orchestrated, organized way.

Okay. With respect to Anadarko Basins, the rate source potential seemed a little light. Is that because he have to do more G&G work?

I wouldn't call it light. But it's lower relative to the Miss Lime because we understand the Miss Lime a lot better. And it's further on. We will get better at it. There's no question. And when you start seeing the other parties that are out there chasing around, the Cleveland, the Marmaton, Cottage Grove, Tonkawa, and others, the Anadarko has been a very prolific basin and will continue to do so. Our numbers will grow as we understand it better and we start to fill out our position and develop our programs.

Great. Thank you.

Your next question comes from Kyle Rhodes with RBC.

Hello. I'm wondering what kind of EBITDA your salt water disposal (technical difficulties) would have if you broke it out separately in 2014?

Very good question. If you get $0.50 to a $1.00 on a produced barrel and you've got 170,000 barrels of your own and you've got capacity for third party of another 200,000 odd, I think you can do that sum yourself. You can work it out. Maintenance capital is a small number and it shows what you this thing generates and what it is potentially worth. We're talking to a number of players and it would be inappropriate for me to say anything further than that.

Got it. Is it important for you to maintain control of this asset? Or is it something that you would consider selling outright?

There's a price for everything. But in our mind this is such an important part of our business, and water management is huge because it's -- 80% of our production is water. It's very important if we're going to retain our identity that we maintain control and influence over it. And we will do that.

That makes sense. Thanks.

Your next question comes from Sean Sneeden with Oppenheimer.

Hi. Good morning. Thank you for taking -- (multiple speakers)

Good morning.

Nelson, maybe for you, on the LOE side. Obviously, you highlighted the great progress that you made in the Miss. Can you help me understand, is that mainly due to increasing volumes there? Or is that -- have you been able to take out actual costs in that at all, especially on a sequential basis?

Hi, Sean. It's a combination of the two. It is partly due to the production growth and the big uptick that we had quarter-over-quarter. We've also continued to benefit from the savings in the electricity by tying into the local grid, as opposed to generating it ourselves, and we are continuing to realize some benefit from that.

Okay. That's helpful. And then maybe along the same lines, can you just remind me what the Anadarko LOEs are? Is it still in the 8 to 8.5 a barrel range?

Yes, that would be a good proxy for it. It's in that range.

Okay. And then maybe just one quick follow-up there. On your cash flow neutrality by 2016, should I interpret that as a delay from the second half that we had spoken about last time? Second half of 2015, that is?

No. I wouldn't interpret it like that. We have tried to -- the goal has been to reach that point in early 2016, which would mean that we would be coalescing to that break even point by the end of next year. I think that is pretty consistent with the message we have tried to give to everybody. And it is consistent with the notion that we have the liquidity through the end of next year, which is really the benchmark through which we need to maintain it.

Okay. So if I'm hearing you correctly, you're still anticipating out spending cash flow within the first half of 2015, but you should see some amount of improvement within the second half, right?

Right. Those gaps will continue to close based on what we believe will occur throughout this year and the remainder -- and next year as well.

Okay. And that doesn't include any sort of asset sales or additional JVs from what you have already announced, right?

That's correct.

Great. Thank you very much.

You're welcome.

Your next question come from the Don Crist with Johnson Rice.

Peter, it's been a while since a lot of us looked at the Fleetwood. And this deal caught us all by a positive surprise. Can you walk us through -- I know you have identified 12 different prospects in the Fleetwood survey, over the 200 square miles. Can you walk us through how much more upside that may be? I know you quit working on it early in the process.

Sure. No. We're very happy. PetroQuest has come in and very excited -- a very proficient operator. Well renowned. Know the area well. We saw these maps, and Greg and his guys mapped a bunch of prospectivity here when we were the operator. And they took them on and have embraced them.

The whole issue is one of preference and allocation of capital. That doesn't diminish the potential of the Fleetwood. Far from it. So the reason for doing the deal made huge sense. And it doesn't take away from any of it.

They're going to drill two wells in the next couple of months, October, November. It will be their first wells added and they will learn an awful lot. One of them is predominantly a major oil test. And the other one is to go down to the Wilcox and look a good look at this gas condensate.

There are follow-up structures to that which are really quite large. You're talking half a TCF here, 500 BCF stuff, which, if they can be made to work, which they have shown to work as you go into the off-shore, then there's no reason that they shouldn't work well in the on-shore. They come on at prolific rates.

They're expensive wells but nevertheless, they are wells that can be hugely prolific in the event that they can be brought on, and tamed, and brought online. We're excited by the whole thing and we can see a goodly number,10, 12 prospects that are worthy of attention and will be hugely de-risked in the event of any success in those early wells that PetroQuest are going to drill.

Okay. Just a follow-up to that. How much more acreage is available in and around that -- the prospects that you have identified to maybe grow this position?

It's pretty well leased up, as far as I understand it. We've got some, we think what is the headline and the highlight of the leased area. So we're very comfortable -- of the structures that we have identified from the regional seismic, that we have got it pretty well licked.

Okay. Everything else has been asked. Thanks, Peter.

Pleasure.

(Operator Instructions)

Our next question comes from Jamaal Dardar of Tudor Pickering Holt & Company Securities.

Good morning.

Good morning.

Just wanted to ask about the production history you are seeing on the down space Mississippi Lime wells? And the prospectivity of that throughout your position?

Yep. Good question.

The premise starts out with -- if you lay out every well we have drilled and the time frame and start with every well and then just work through time to today, you see no drop in reservoir or well performance. That's telling you something, because a lot of the wells are second, third, even fourth wells in a section. So that starts to make you think.

You then go to the three wells that we initially looked at and those sections that had three wells. And you look at every single one of those wells in terms of their production history, both from a pressure point of view and a production point of view. And through their ESPs and relative histories. And you find that every well that we drilled, whenever we drilled into it, was virgin pressure, 2,300 to 2,500 PSI. That tells you something as well.

And it didn't matter whether you were drilling second well, third well or even fourth well. So we were saying to ourselves there is something going on here. So what we did, we start doing some real principal elements and analysis that looked at our geology and geophysics, looked petro-phyiscs, looked at our cap pressure data, looked at our static reservoir modeling, dynamic modeling and looked at our field surveillance and the overall performance. And how ever we did this, we could not see any reason to believe anything other than the 1320 spacing that we have currently got would not support a down spacing to 660.

That's the program we're on right now. And we've got four or five sections that we've got wells that are testing that downspacing philosophy. Our early results are very encouraging and we're seeing no interference whatsoever from a pressure point of view or production point of view in the wells that we have drilled to-date. Which means we've got a lot of learning to do and a lot of understanding to do on how these reservoirs and the Miss Lime is performing.

And a bit like you see in the Bakken, and a bit like you've seen in the Eagle Ford, and in the Permian we're starting to see that these unconventional reservoirs, as they are called, although the Miss Lime actually is a conventional reservoir, is made up of many, many complex traps that's we're finding better ways to drain. The major drive mechanism is solution gas drive. And that means that then you're starting to see efficiencies of perhaps 20% maybe even 30% recovery factor potential. And we're not seeing any pressure or production interference with a result of the wells we have drilled to-date, working from 1320 down to 660.

Okay. Great. Thanks. (multiple speakers)

Very encouraging stuff.

Your next question comes from Sean Sneeden with Oppenheimer.

Thanks for taking the follow-up. Peter, just one question on the opportunities that you discussed in your prepared remarks. I want to make sure I understand what you are exactly referring to on the 900 Miss locations. Is that only from one zone, or can you talk a little about what that all incorporates?

It's what we call the upper Miss. If you go to our presentation materials -- I don't know what page it is, but it's one of them -- it shows you that idealized cross section that looks at 3D seismic and talks about grain stone, it talks about enhanced, it talks about altered. What we're talking about is that whole upper Miss interval where we can see potential. That includes down spacing, it includes multiple layers of higher porosities. It includes the enhanced porosities as a result of the weathering of the unconformity surface. And it includes the highly altered, where subsequent events, diogenetics, the rest of it have given enhanced porosities. And that combination, we think we can see 900 locations across our acreage suite.

Okay. That's helpful. If I'm understanding correctly, it doesn't include the lower Miss or the middle Miss -- (multiple speakers)

No.

-- to the extent that is available, right?

Correct.

Okay. And then same thing in the Anadarko, is that just from one zone or is that across -- (multiple speakers)

That's a bit different. The Tonkawa is a sand system that we can see being pretty thickly developed. Same with the Cottage Grove. The Marmaton changes its name to Hepler in places. They are more discrete, solid sand bodies that you have to map around in a more regional sense to get where the rock systems are and where the porosities are better developed. Somewhat different. It's not limestones. You're talking sandstones in the Anadarko.

Okay. I might follow up with you later on that.

Sure. And that's what it's there for. And that for the work we've done is to go through that to that enhancement process. The benefit of having 3D, vertical well histories, very solid geo-science and geo-physics integrated with drilling engineers, completions, and the way we then geo-steer, give us a lot more potential and a lot more consistency and allow us to tack that first 80 to 100 feet underneath the Miss unconformity, in particular, that allow us to start seeing an awful lot of rock storage and an awful lot of oil that is held in place in that rock system. Pretty exciting stuff.

At this time, there are no questions. I will now turn the question over to Al Petrie for further remarks.

Thank you, Kathy. And thank you everyone for joining us. We look forward to seeing you at several conferences during this quarter. And feel free to call us with any follow up questions.

Thanks very much.

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