Amplify Energy Corp (AMPY) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

Mr. Al Petrie, Investor Relations Coordinator, sir, you may begin your conference.

Thank you, Brandy. Good morning, everyone, and welcome to Midstates Petroleum's third-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 Vice President and CFO. Peter will begin today's call with an overview of the quarter and operational highlights. Nelson will following with additional financial details and provide guidance for the fourth quarter. Peter will then wrap up with some closing comments. Because of our analyst meetings next Monday and Tuesday, which will be webcast, we are keeping our prepared remarks today fairly brief and will go into more detail at that time about operations and our look ahead for 2015.

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 in the third quarter form 10-Q that will be filed shortly for a discussions of those 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 table in yesterday's earnings release.

I will now turn the call over to Peter for his comments.

Thank you. Good morning, everyone, and thank you for joining us today, November 5. In my own country that's Guy Fawkes Day, which is a day where we burn people -- a person to the stake and we will have fireworks. Hopefully neither will happen today.

This was another very solid clean quarter overall. We are continuing to execute on the strategy we laid out earlier this year, which was to deliver financial stability, exercise ruthless capital discipline and review all strategic alternatives. Through operational performance we are positioning ourselves for improved liquidity and value growth despite the difficult commodity environment. In the third quarter of 2014 we broke three records with adjusted EBITDA of $132 million, production averaging 34,000 barrels of oil equivalent per day and adjusted net income of $19.3 million. The increase in production, coupled with lower cash costs and strong margins, led to this record EBITDA.

Our operating costs were well below our guidance of $5.46 of BOE. And this was driven primarily by the improving efficiencies in the [Miss Lime] where we saw absolute cost decreased by 13% and production increase by 15% quarter-over-quarter leading to operating cost of $3.36 of BOE. The production increasing of Miss Lime can be attributed to the continuing strong performance from new wells and, by example, we added for wells this quarter with 30 day peak rates greater than 1,000 barrels of equivalent per day. We believe that these differentiating results further demonstrate the value of our premier Miss Lime position and we are very excited and pleased with it.

We continue to make meaningful progress improving our debt metrics and creating liquidity with the recent announcement of the Dequincy sale for a total consideration of $90 million and the recent expansion of our borrowing base from four $475 million to $525 million.

In the third quarter we also added to our oil hedges for 2015 allowing us to lock in a majority of our revenue at favorable prices through to the first half of 2015 and protect a significant portion of our revenue in the second half of 2015. These events, coupled with the closing of the Pine Prairie sale and the Fleetwood exploration agreement in the second quarter, are providing additional liquidity, security and flexibility through 2015 that are vital in the current price environment. We will discuss 2015 plans and a optionality in greater detail as Al said next week during our analyst meeting. And that will reinforce our focus on rigorous capital discipline, margin expansion and value growth to protect that liquidity position and bring stability to our balance sheet.

Turning to our focus areas, the recent Miss Lime well performance, together with significantly lower operating costs, demonstrate the value and potential that our exceptional acreage position possesses out there. As indicated in the updated Miss Lime slide on our website, we now have 189 wells online with an impressive 30 day peak average production rate of 575 BOE per day, which we believe is the best of all operators in the entire play. Our results are continuously improving as nearly 50% of our wells drilled had peak 30 day rates greater than 500 barrels of equivalent a day. These wells offer compelling rates of return at $80 oil at strip of about 80% rates of return and offer cash margins over $40 a barrel.

As we refine the use of our 3D that we have over in [entirely good] position in the Miss and applying our integrated geoscience, our drilling completion and reservoir engineering approach, we are able to choose optimal locations and drill the best intervals. This results in increasing [EURs], significant down spacing opportunities and growing the reserves and resource base, reconfirming the longevity and leadership position within the play. Our concentrated acreage position and strong salt water disposal and electrical infrastructure allow us to drive operating costs a [little lower], efficiently develop our acreage and enhance margins further. We believe that these results, coupled with our hedges, will allow us to predict our EBITDA in an uncertain near-term price environment.

Turning to the Anadarko Basin, well results there remain encouraging and we are beginning to realize lower costs in our Cleveland program and believe we have stabilized our completion technique. Our recent well results in the Cleveland continue to be consistent with our past peak 30 day results of just under 400 barrels of equivalent per day. In the Cottage Grove we have another well with a 30 day peak over 600 barrels of equivalent a day. And I've seen our average rates in that formation come in at the same range as the Cleveland.

In the Tonkawa we want to see more data from our competitors but continue to be encouraged from the early results. In the Marmaton we too have seen consistent results near 300 barrels of equivalent per day. We do need time to further study these formations and focus on ways to drive cost lower to maximize returns and we continue to be encouraged with the potential to develop the Anadarko with further improvements to come. I'll remind you that we only took over operatorship of the play in early 2014. The margins and rates of return in the Anadarko, while attractive, are more sensitive to price and cost movements and are currently not as robust as those that we enjoy at the Miss Lime. Given our strategic focus and our operational emphasis, in the near-term remains with the Miss Lime.

Looking ahead to the balance of 2014, given the current macro environment, we must continue to ensure that we are spending every dollar as efficiently as possible. [Pursuant] to our strategy of capital discipline, we are going slowdown our activity modestly in this fourth quarter. We have reduced our rig count in the Anadarko to a single Cleveland rig and have temporary lowered our rig count in the Miss from 7 rigs to 6 rigs, due largely to a backlog of completions. We intend to pick up a rig back up in the Miss early in the first quarter. And in the Anadarko, we will further study our results and those of our competitors and, with acceptable commodity prices or improvements in our D&C cost, we would expect to ramp up activity in the Anadarko as we move into midyear 2015. As we have said repeatedly, we want grow production unit value and not just grow for growth sake. This is especially in particularly important, given the current uncertainty in prices.

So in summary, our excellent third-quarter results, our prime Miss Lime position, our low costs and strong hedges over the next months provide a very firm foundation to weather the current uncertainty in pricing. Our focus is on improving our operational execution and that will allow us to maximize profitability and grow production in a fiscally responsible manner. Our short-term contracting allows us time and flexibility through 2015 but we will continue to act quickly in the current environment, allocating correct amount of capital to the best projects that will allow us to predict our liquidity and allow us to seek ways to reduce debt and strengthen our balance sheet.

With that summary, I will turn it now over to Nelson and he can give you a lot more financial detail of our 3Q performance and the plans that we have to the fourth quarter. Nelson?

Thanks, Peter. Our financial results for the third quarter were clearly very attractive reflect the success we have had in managing both our operating costs and are overhead while continuing to grow production. A record high adjusted EBITDA of $131.7 million, before $1.3 million of transaction costs, was above expectations and was up 29% from $102 million in the third quarter of 2013 and up 7% from roughly $123 million in the second quarter of 2014. Our results benefited from growth in production volumes, which were up 19% from the third quarter of 2013 and up 6% from the second quarter of this year. For the third quarter in a row, significantly lower cash operating costs and, in particular, lower LOE and G&A contributed to the growth in adjusted EBITDA.

Our operational capital spending in the third quarter was within our guidance and totaled $134.5 million with about $98 million in our Miss Lime properties and $37 million expended in our Anadarko Basin properties. For the fourth quarter we expect our operational CapEx to be approximately $110 million to $120 million with $108 million in the Miss Lime and the balance of $10 million to $12 million in the Anadarko Basin. These estimates reflect the plan that Peter described with 6 rigs operating in the Miss Lime and 1 rig in the Anadarko Basin during the fourth quarter.

Using the midpoints of the production range and expense guidance I will provide shortly, and taking into account our existing hedges for the fourth quarter and current strip pricing, we expect our adjusted EBITDA to equal or exceed our operational capital in the fourth quarter, which would be a significant milestone for the Company. This will bring our full-year 2014 operational capital investment to $520 million to $530 million, well within our full-year guidance of $500 million to $550 million, which we have consistently provided since earlier this year. Additional details available on our supplemental information packet posted to our website this morning.

Adjusted net income for the third quarter was also a record high at $19.3 million, or $0.29 per share, compared to a net loss of roughly $0.8 million in the period a year ago and net income of $14.4 million in the second quarter of 2014. This excludes the impact of unrealized gains and losses on derivatives and some remaining Pine Prairie transaction costs along with the related tax impact. Our third-quarter reported GAAP net income of $74.6 million, before $1.9 million in preferred dividends, was a record high and compares very favorably with a net loss of $23.6 million in the same period in 2013, a loss of $2.1 million in the second quarter of this year.

Production in the third quarter grew to 33,799 BOE per day, which included the negative impact of 220 BOE per day due to a prior period adjustment to our Anadarko Basin production. Excluding that adjustment, our production was roughly 34,000 BOE per day at the lower end of our guidance. 71% of our first-quarter volumes came from our Miss Lime properties, 25% from Anadarko Basin assets and 4% from our Dequincy area properties in the Gulf Coast. We will continue to benefit from the production at Dequincy through the closing date of the sale, which is anticipated to occur in November.

In light of the current commodity prices and our desire to maximize cash flow in value from our production stream, we began rejecting ethane from our Miss Lime production as of October 1. That will result in lower NGL volumes by about 500 barrels per day but will increase our annual net revenue by roughly $1.5 million to $2 million per year. After taking that into account as well as the removal of the Dequincy volumes in mid-November, we expect our Q4 production to be in the range of 33,000 to 34,000 BOE per day. We expect our Miss Lime properties to average from 24,000 to 25,000 BOE per day and our Anadarko Basin properties to average 8,000 to 8,500 BOE per day. Even after the impact of the Dequincy sale and ethane rejection in the fourth quarter, this guidance will result in us still being within the lower end of the full-year guidance range we had provided in the past 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 pack that was posted to our website this morning.

Turning to hedging, during the quarter we further increased our 2015 oil hedge position. We have not added any new gas hedges but are pleased with the ones we previously put in place with average prices in excess of $4 per Mcf. For the fourth quarter of 2014 we now have about 80% of our projected oil production hedged at roughly $89 and about [60%] of our natural gas production hedged at $4.17. For the first half of 2015 we now have 12,000 barrels of oil per day hedged at an average price of about $90 per barrel and 50,000 Mcf per day of gas hedged at $4.13. In the second half of 2015 we have 6,000 barrels of oil per day hedged at about $85 and 50,000 cubic feet of gas hedged at $4.13.

A detailed summary of our current hedge positions by quarters included in the release and is posted on a website along with all the guidance I am 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 and to protect our liquidity.

I'll now review our third-quarter expenses and provide guidance for the fourth quarter. Third-quarter cash operating expenses, which include LOE production taxes and cash G&A that excludes acquisition and transaction costs, totaled $34.8 million, down 12% from $39.6 million in the second quarter of this year. Cost fell $4.8 million on an absolute basis but fell even more significantly on a BOE basis. In the third quarter, cash operating expenses totaled $11.21 per BOE, which was down 18% from $13.63 per BOE in the second quarter this year and down 34% from [$16.98] per BOE in the third quarter of last year. The improvement was primarily due to increased production volumes and lower LOE and G&A.

Our lease operating work over expenses totaled $17 million, down almost 14%, from $19.7 million in the second quarter, even though our volumes grew 6%. Third-quarter LOE of $5.46 per BOE was significantly below our guidance range of $6.75 to $7.25 per BOE as well as actual second-quarter rate of $6.79 per BOE and $8.32 per BOE in the third quarter of 2013. The reduction in rate came primarily from the Mississippian Lime where LOE fell to $3.36 per BOE, which was a new all-time low for us as we continue to benefit from the operating leverage provided by past investments in electrical and saltwater disposal infrastructure and lower work over expenses.

Overall, we also benefited during the third quarter from the removal of the Pine Prairie properties where average LOE rates were higher. That transaction closed in May of the second quarter. For the fourth quarter, we expect our LOE and work over expenses to be in the range of $5.50 to $6 per BOE, up just a bit as we expect more work over expense in the fourth quarter, partially offset by the removal of the higher rate LOE associated with the Dequincy properties in November. Gathering and transportation expenses associated with our main gas processing arrangement in the Miss Lime totaled $3.9 million, up $1 million from the second quarter primarily due to higher production volumes. For the fourth quarter, we expect those costs to range between $3.5 million and $4 million.

Severance and other taxes totaled $5.8 million, or about 3.3% of total revenue before derivatives, which was slightly below our guidance range of 4% to 5%. We continue to see the benefit from higher production volumes in the [mid-continent] region where severance and ad valorem taxes are at lower effective rates than in Louisiana. The sale of Pine Prairie also contributed to this reduction. In the fourth quarter, we are lowering our guidance range to 3% to 4% of revenue to reflect these lower tax rates. Third-quarter total cash and non-cash general administrative expense was $9.9 million, well below our guidance range of $11 million to $13 million and 26% lower than our second-quarter figure of $13.4 million. The decline was related to the favorable resolution of an outstanding state franchise tax matter as well as lower employee related cost due to lower headcount.

Non-cash G&A totaled $1.7 million during the quarter and we expect total G&A in the fourth quarter to be in the range of $10 million to $12 million with about $1 million to $2 million being non-cash. Our DD&A rate in the quarter of [$23.52] per BOE was below guidance of $25 to $27 per BOE. For the fourth quarter, we have lowering our expected rate to $24 to $26 per BOE. There was no impairment charges during the third quarter.

You may have noticed that we had $2.4 million of other expense this past quarter on our income statement. And that was a non-cash, nonrecurring write-down of inventory and equipment related to our Louisiana properties that we are in the process of selling.

Total interest expense incurred in the second quarter was $36.9 million, of which we capitalized $2.6 million dollars. We expect to capitalize about $2 million to $4 million in the fourth quarter. As we've discussed in the past, we are now utilizing a much lower tax rate in our financial statements, which in the third quarter was about 3%, or an expense of roughly $2.2 million. We utilized a portion of our previously unrecognized net operating loss carry-forwards to offset the taxable income generated during the quarter. To the extent we generate financial taxable income in future quarters, we will continue to recognize a portion of our unrecorded net operating loss 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.

Turning to our capital structure, in September we disclosed that as a result of our [lender] semiannual review, the borrowing base under our revolving credit facility had been increased by $50 million to $525 million. The borrowing base is supported solely by our mid-continent assets so the sale of our remaining Louisiana producing properties at Dequincy will not affect our borrowing base. We plan to use the net proceeds from the sale to pay down our revolver and the next regular redetermination days is at the end of March. As of September 30, our total -- our liquidity totaled approximately $180 million comprised of $155 million of undrawn capacity on our revolver and roughly $26 million in cash. And upon the closing of the sale of Dequincy, we anticipate year-end liquidity of between $160 million to $180 million.

Our debt to adjusted EBITDA multiple at September 30, 2014 the 3.6 times, down from about 4 times at June 30, as we continue to make headway in reducing our cash outspend and achieving our expectation that adjusted EBITDA will exceed our operational CapEx in the fourth quarter will be a significant accomplishment. And going forward, we will continue to focus on growing adjusted EBITDA at a faster pace than our CapEx to further improve our debt metrics and pave the way for us to come cash flow neutral. We will discuss our 2015 plans as well as our sensitivities to commodity prices during our analyst meetings next week but our growing cash flow with support from our hedging program, together with available capacity under 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 the end of 2015.

And with that, I'll now turn the call back over to Peter.

Good job, Nelson. In closing this off, I think it is appropriate that we discussed the results today of our strategic options review and set the stage for the analyst meetings next week.

As you've now seen from these quarterly results, we're sustaining positive momentum with excellent growth in production and value in the Miss Lime, maintaining the focus on capital investment discipline in both the Miss Lime and the Anadarko, as well as carefully managing our liquidity and [controlling] our operating costs. We will have monetized all of our legacy Louisiana producing properties by year-end, expanded the borrowing base and entered an attractive exploration agreement over our Fleetwood acreage that can provide organic growth but no cost to the Company.

Just as importantly, the strategic options process has uncovered considerable upside value that we've shared with you throughout the last six months. We've identified a large 650 million barrel of equivalent contingent resource base across our entire acreage position with over 3,000 gross well locations in both the Miss and the Anadarko. We're currently moving forward on ways to extract maximum value from, and potentially monetize, our saltwater disposal infrastructure in the Miss. We're still in discussions with third parties to maximize the value across the portfolio, similar to our Fleetwood exploration agreement and the sales of Pine Prairie and Dequincy. And while we've had in-depth discussion with a variety of very interested third parties for all or a portion of our asset base, that process has resulted in our belief that the highest current value proposition to our stakeholders is to continue as a standalone Company. Will look at alternatives and have the time and ability to be both thoughtful and considerate on how we best proceed.

So let me make it clear. We are keenly focused on building upon the momentum we've created these past three quarters as we continue to execute on our standalone strategy. We've decided to consolidate our corporate mid-continent operational offices in Tulsa by early 2015 and will accelerate our search for a Tulsa-based CEO who will lead our operational execution plan. This consolidation will result in additional G&A costs in fourth quarter 2014 of between $5 million and $7 million. But we will ultimately reduce our G&A on a going forward basis by a similar amount. We were right-size our organization and that will position us to be a low-cost leader in the mid-continental region.

Now during our analyst meetings next week, we plan to, one, provide additional details of our standalone strategy; two, discuss the resource potential in location camp by both formation in the Miss Lime and the Anadarko; we'll dive into the recent well results and innovations in the Miss Lime and the Anadarko areas and show you what we've learned of both the geology drilling completions and our reservoir engineering. We will provide well-level economics, the different ranges for oil price and we will outline various scenarios for 2015 based on commodity pricing and reiterate our strategic direction and outline our forward plans and pathway into 2015 and beyond.

And with that, Al, we're ready for some questions.

Thank you, Peter. As a reminder, please limit your questions to one and a follow up. And also I want to make sure that if anyone has not received and invitation to our analyst meeting next week, please let Chris or I know and we'd be happy to send that to you. Brandy, we're now ready to take questions.

As a reminder, today's call will available for a replay to listen to two hours after the conference has ended. The replay ID number will be available as 21484206. You can dial in on 1-855-859-2056 or 1-404-537-3406 and simply input the ID number 21484206 to listen to the replay again.

(Operator Instructions)

Your first question is from Neal Dingmann with SunTrust.

Peter, just your thoughts -- and I know a lot of these will obviously be hit next week on the analyst day -- but just your thoughts, first of all -- and I know you haven't broken out 2015 yet -- but just generally thinking your thoughts on spending. I guess is it fair to say you still want to stay at least within that cash flow level? And given the efficiencies and lower cost you are seeing, could you potentially see -- I'm just wondering on the magnitude of how much more activity you could see even with the same potential spending?

Yes. Good morning, Neal. How are you doing? Let me start by saying let's just touch on a couple of things. You recall what we've been saying all this year that what we are looking to do is to become cash flow neutral by the end of 2015 going into 2016 where we would hope to have been cash flow -- free cash flow positive. That, of course, has changed now given the circumstances of the past few months. But we have been saying that for some time and I think it's very salutary that this quarter we were within $2 million, as Nelson pointed out, between our EBITDA and our capital spend -- [$134 million, played $132 million]. So we were certainly making real progress to get to that point. And we always said that we would be spending less in 2015 than we would spend in 2014. We've indicated numbers something around 450 -- plus a little bit perhaps. And I see no reason to change that. We will give you a lot more detail as we go into next week. And I don't want to go into any breakout and do any of that detailed right now.

The one thing I would say is that we are well hedged. We've got a low-cost environment. We, ourselves, have worked very hard at getting to low-cost across our board. And I think we've shown that this quarter. And that gives us flexibility too and time to be very thoughtful about how we would go about that program in 2015. So it's nice to have a few options. And we're thinking about it constantly. And we will be there ready to talk about it come next week when we talk about the onward program and its strategic content.

Good. I love the optionality there. And secondly, looking at, obviously, the number of locations in the Miss, you've had, obviously, a lot of success here recently with the open hole completions. I guess your thoughts -- and I know you will break much more in into this, I'm sure, next week but the thoughts on using that on more of the open hole on a go-forward basis. Do you see that continuing to be more prevalent? And does that, just on the existing type locations, or would that work on the -- potentially the [uppers] as well?

We will keep all of those in our quiver as we go forward. We've done a lot of open hole. We've learned a lot of lessons. We've done one or two other things. We've got other completion techniques that we've been applying and using. We've run with this thing called the divert and surge. And we're looking at the results of that. But as well, we'll go back over our ground of plug and perf and [forted] systems, sliding sleeves and look at all of those. And the underlying premise here is that we're going use the lowest possible cost to give us the highest possible unit returns. And what will prevail will be those techniques and completions that work to that satisfaction. We're not going to go heavy into experimentation. We're in this now -- particularly in this environment -- to make as much money as we can on a unit of production. And whatever the completion technique or drilling technique that gives us those results will be the ones we're going use and apply.

Very good. Look forward to all the details next week. Thanks, Peter.

The next question is from John Herrlin with Societe Generale.

Following up on that question, you are basically saying with the Miss Lime wells that you haven't changed your completions at all this quarter versus prior ones?

We have. We've done a fair amount of trial. We've done a fair amount of varying our techniques. We've done open hole. We've done divert and serge. We done plug in perf and we've done some slide in sleeves. And we just go back to a very active program at looking at all of those results, drilling our wells as best we can. The key to this thing is, John, is to drill horizontals that give you access to as much rock storage as possible. Which means we have to apply everything, whether it be 3D to give us the identification of where these intervals are, staying in that section and then completing our wells in the most optimum way that accesses that rock storage and gives us direct access into the well bore in a sustainable way.

It's an ongoing process. We've got a number of tools that we apply in a dynamic and very real-time way. And we're tweaking it, tuning it as we go along. But beyond the Lime thing, particularly now, I go back to it again, is that it's the highest cost return for the lowest cost outcome. So that's what we're looking to do and we're using all those tools at our disposal.

Okay thanks. And any sense of timing with the saltwater disposal system?

Hi, John. This is Nelson. We've been working on that over the last couple months and I think we've got a series of steps that we will take. It looks like the first step we'll take will be charging our joint venture -- our working interest partners at more market-based rate for saltwater disposals. As a you know, we've been charging them as part of just the LOE cost structure. We hope to do that sometime between now and the first quarter.

The second step is there's a couple of issues as far as the full monetization with an outside third party. There's some issues that I think need to be resolved with the Oklahoma Corporations Commission. We feel like others who are looking at the same thing we are, with respect to their saltwater disposal systems, have the same issues that remain to be resolved. We think that will happen, based on our conversations with Oklahoma Council, maybe sometime late in the second quarter of next year. So that's kind of the update today. First step charging market base a more market appropriate rate to our working interest owners and then follow on with the resolution of these issues that are before the OCC.

Okay thanks, Nelson. Last one for me on the data room. How crowded was it in terms of did you have a lot of companies through and were they more private than public? If you could say that.

It was standing room only. We had a process that went on for two or three weeks and we had four parties for at least 2.5 of those weeks. So that's a number of folk we in, not to mention those that didn't come in for the presentation or to look at paper reports an estimate those that worked on the virtual data room. And there were many more visitors and lookers at that. So we had a pretty thorough process. A fair mix between private and public. One or two [wakes] and strays but generally high-quality people that were coming through looking at this thing. And conversations we've had with four or five -- maybe six or seven that got very real, both from the asset point of view, joint venture point of view and other innovative ways of looking at trying to do some business. But at the end of it, it all came down to the fact of having finished all the work ourselves in those 3,000 locations and 650 million barrels of equivalent of resource potential. None of them gave us the confidence or comfort that it was in the best interest of stakeholders to entertain those discussions. And we thought going on our own was by far and away the best thing to do at the time. Still is.

Great. Thank you.

The door is not closed. We're still talking to one or two folk. So we keep this thing under constant review and dialogue and just see where it goes.

Okay. Thanks.

The next question is from Pearce Hammond with Simmons & Company.

Good morning.

Hi. Good morning.

What level of flexibility do you have regarding your oil services contracts, whether it be with rigs or completion services, to adjust activity in the lower oil price environment?

Quite a lot. we consciously built it in to the way we go about doing it. I think we each one of our rigs is on a three month contract. And they are laddered so they don't all fall due at the same time. So it gives us a huge amount of flexibility to pick up on both drop rigs. Frac spreads are more complicated. There's been a lot of competition for frac spreads, particularly with the Permian and keeping those in our area has been a bit of a challenge. But nevertheless we've managed to do that.

As time goes by then the service companies are starting to realize the situation with regard to the price environment. And we're starting to see some loosening up but it's not been very apparent thus far. But we're going to see it for sure going forward. And that will give us further opportunities. And that takes care of most of it. We would point out that what we do in the Miss Lime we don't use a lot of proppant. In fact, we don't use any. We use acid. And acid has become somewhat scarce. And given that we're one of the major uses in the US -- the entire US -- of acid, then we have to be mindful of keeping well supplied with that. But those are the major headlines. Anything else?

Yes. Pearce, I was just going to add that currently, with respect to drilling contracts, we don't have any commitments beyond February of next year. So we have the flexibility to extend these on three-month terms or whatever we can negotiate. But we have no two year commitments under rigs. So we have the flexibility to take advantage of pricing improvements in that area.

Thank you, guys. That's all for me.

Your next question is from Chad Mabry with MLB & Company.

Thank you. Just a follow-up to the prior question, looking at the declining activity in the Anadarko basin, just curious if there are any lease expirations at risk there. And then if you do go to a no rig activity level into 2015, what you're modeling in for your declines next year.

I mean it's all part and past through the process, Chad. You can't do anything here without there being some sort of consequence and some sort of management requirement that is upon us on a daily basis. We don't see anything in terms of Anadarko position that is onerous. We have a goodly amount of it held by production. There are pieces in places where it's not and we will have to adapt and manage our way through that. If we do see that we don't or are unable because of the environment to see some of these wells drilled, then leases will lapse. They will be ones in lower priorities, as far as we're concerned, and that they will be attractively available for us to go and renew, which we would commonly do.

So it's a competitive environment but it's not that competitive out there. And in many instances, it actually -- it works to our favorite to do that because we can then release these acres at a lower price. It all part of parcel of the program and the process. And if we do let that thing happen, we're letting it happen for very good reason given the price environment and what we're looking at. And the primary driver here, I keep saying this, is ruthless capital efficiency. And that's the name of the game.

Sorry, Chad. I was just going to say that we've said in the past we're going to manager our expirations with the idea of preserving or limiting cash out of the Company. So we've high [grated] our acreage. And as Peter said, we will be letting where we think we have the opportunity and we're not giving up anything in the near term we will selectively let things expire.

And that's good color. And I guess a follow-up to that on the cost side, another impressive performance in driving down those operating costs. Just curious looking at the Miss driving that down to 336 of BOE, is that something that you can continue to leverage your existing infrastructure there to drive that cost down towards that 300, 350 level on your LOE?

Chad, it never ends. It's blocking and tackling. We've taken all the big things in this. But every day -- I'm going up there again next -- in the next week or so and we will go out in the field again and we'll go through it [soup to nuts]. And there are plenty of little areas, little things you can do that will make a difference, both consistency, the amount of tanks, the way you pump, the way you off take. All of those things are hugely important and our guys are very conscious of all of this and they're always being innovative and finding ways in which you can drive down those costs. There is an [irreducible] low -- of course there is. But I don't think we are there at this stage. And such is the quality of the rock and the reservoir system. It is now up to us to both be -- continue to be prudent and just keep looking for ways to improve.

Thanks. Good quarter.

Thank you.

(Operator Instructions)

Your next question is from Gregg Brody with Bank of America.

Good morning, guys. Just on the borrowing base, congrats on getting the borrowing base increased this past quarter. Just looking forward to the spring redetermination. Have you had any conversations with your bankers as to what may happen to the price dex? And that's [Marielle] given today's prevailing prices -- and perhaps how that may impact your borrowing base?

Hi, Gregg. This is Nelson. We have talked to our banks. I don't know what decks they're going to run. They haven't given us a preview of that yet. I think last time they were running a $75 deck so you can kind of interpolate from there. I don't -- I haven't had any clear guidance on what it would do to the base. I think it makes, obviously, an increase more difficult in this environment. But the hedges do help that we have in place -- the hedges to help preserve the existing level.

We don't need them. We'd like it, but we do need them.

Do need the hedges, you are saying.

The increase.

(inaudible - multiple speakers) We will manager our business appropriately. Of course Nelson will be out there working with the banks as best he can to see what is available and if we've got an increase in reserve base and all those of the good things, then that will go into the mix. Price would be a major driver, of course. But we will be about our business doing what we can to see what is available to us.

That's very helpful. Thank you.

You next question is from Sean Sneeden with Oppenheimer.

Hi. Good morning. Thank you for taking the question. Peter, can you remind me of -- at this point what your PDP decline rate is in the Miss?

I want to be a bit careful here because it varies. But if you want to a round number, 40 -- 40% would be a [solid] number. What are you trying to get at? You trying to get the B factor or are you trying to get at the decline or what are you after?

Yes, just the general decline. If we were to completely shut CapEx off today, what would that base decline look like.

40%.

Okay. Great.

We've done the sums. And we're pretty robust at fairly low prices, let me tell you. At very low prices.

Sure. That's helpful. Maybe --

And it's a lot lower than the Wall Street Journal.

(laughter) Nelson or Peter, maybe for you guys at least on the balance sheet, can you -- in high level and I appreciate you're going to talk about this on the analyst day next week. But maybe on a high level, can you talk about how you're going to weigh or balance the desire to grow production next year with your liquidity in leverage profile? How do you go about really allocating capital? And what kind of like the minimum amount of liquidity that you want to have at the Company as you exit 2015.

Hi, Sean. This is Nelson. I'll answer the last part of your question first. I think our target would be between 8 -- 60 -- $75 million to $100 million of liquidity would be the ideal amount we'd like to exit the year with. As far as managing growth, has Peter talked about, we're going to try to reduce our absolute capital spend next year versus what we have incurred this year. So we're targeting initially I think it was a $450 million range. We think with some of the techniques we've done and the completions, which Peter is more versed in, we should be able to achieve some savings on the capital side and still manage a reasonable amount of growth.

Clearly, the commodity price environment that we're in today makes that a flexible target. But certainly we are maintaining our goal to try to grow the EBITDA in excess of our capital spend. Similar to what we did this quarter and what we hope to do in the fourth quarter.

That's absolutely true. It's going to be a game for everyone going forward. How long is this price environment going to remain? What is that price environment going to be? How can you adapt you program to meet all your requirements? And it's a juggling act, isn't it? Because there are consequences of what you do. If you spend less, you don't get as much EBITDA. If you lower cost base you get more for your invested dollar. All of those things play into that equation.

Where we are fortunate is that what we've done has been very ruthless with our capital and the guys have done a great job in the field in terms of lowering that cost base to give us that margin and give us that flexibility. And more so than many others out there. And if the environment stays in a very lower price regime, there's going to be blood on the floor and you know it. Hopefully that won't be much of our blood. And our flexibility is that we can stay pretty active in a very low price environment. But there comes a point, given these resource plays, that you are better off leaving that barrel in the ground because it's more valuable there than it is on the surface. And on that basis, you just wait out and [tap] out. And there are consequences as a result of doing that.

So it's very much an environment whereby you just want to make plans as best you can but certainly be as flexible as you can so you can take advantage or react to the marketplace as it opens up in front of you. And that's what we are planning to do. And you get a lot more of that next week when we go into some of that in some detail.

Yes, I certainly appreciate the comments there. I think that make sense. And then if I could just ask one more follow-up there. When you look at the strip and assume it actually plays out as it lies here, how do you guys think about layering hedges for the second half of next year on the oil side? What kind of would be the strike price? Or what is the impetus to make that happen or not?

That's a good question. We try to target hedges over $80 just kind of our benchmark today to try to achieve that. Clearly the strip is not cooperating there. It is relatively flat versus where we are on the front month. So I think we're just going to look at it and try to be opportunistic with it and see what we can do as far as adding to that position. We felt pretty good about our hedges 75 days ago. In retrospect, I wish we put more in. But it's the benefit of hindsight. I think that's kind of our approach would just to be to opportunistically study that. We are looking at gas hedges. When they get above four they become pretty attractive to us. And that's probably 15%, 20% of our revenue base. So it's a pretty heavy focus in the Company right now. So I think to answer your original question, it's anything above -- $80 or above becomes attractive to us and we will continue to look at it like that.

Exactly but depending on what the environment's like and where you think the momentum is. You would look foolish if you put in hedges at $80 and oil went to $100 or $120. If you could predict that then, A, I'll be a very rich man. But you've got to cut your cloth accordingly. And as Nelson says, that's what we're going to try and do. We're okay for the first quarter or the first half of this next year. And we feel pretty good about where we are and we're pretty well hedged. As time unfolds, as we start to look at the back end of 2015, we will have a sense of the environment. We'll have a sense of the momentum and where the market is sort of heading. And we will take our position at that time.

Great. No, I think that makes sense. Appreciate it, guys. Thank you.

Your next question is from Jamaal Dardar with Tudor, Pickering, Holt and Company.

Good morning, guys.

Good morning.

Just looking at the Anadarko Basin, I understand that activity is flowing there. But it seems that even with the prior period adjustment, production would've been below the low end of guidance for the quarter. And I was just wondering, is that more well count driven or is it performance driven?

It's primarily well count and it comes down to the thing that I insist on with these guys is that -- and we run out all the list of all the well locations that we could drill and things that we could do. And we look at the cost of the well. We look at the EUR. We look at the pace of return -- a number of criteria. And we just say, hey, we've got an incremental dollar in our hand, where would we best spend it? And every time we do it, Miss Lime is doubled the performer that the Anadarko is, which is no shame to the Anadarko. It just is the fact that we're sat on a prime play called the Miss Lime in a very sweet area. We've got hundreds of locations that we can continue to drill for a number of years yet. And on that basis, the Anadarko falls by the wayside to a degree, which doesn't denigrate the Anadarko, quite the opposite. It just shows that it's got to deliver more attractive returns. And while we've still got this Miss Lime in this current environment, that's what we're obliged to do given the situation we find ourselves in with our balance sheet. And that we will continue. And as long as it doesn't causes great grief in terms of our leases, our held by production and we're not losing out on good opportunity, it will be challenged whilst this environment remains.

Okay. Thanks for the color.

And there's plenty of other guys out there that are doing good jobs. You go and look at Jones and the stuff they are doing with their cemented liners and sliding sleeves and their techniques and technologies. The returns they are getting are pretty healthy. And there's others out there doing the same thing. And we will look, listen and learn.

Okay that makes sense. And looking at the Miss, it seems that rates continue to improve in 2014. Is this driven by seismic and are you confident that this is repeatable going forward?

Repeatable for sure. The seismic is but one part of it. It's a whole integrated approach to the whole concept and process. I go back to what I said earlier. This is all about unlocking rock storage, identifying that rock storage. These rock types have a lot of variation on a very variability and you see [imperosities] and storage capacities that are an order of magnitude better than the conventional Miss Lime. And where we can see that, identify it in terms of interval, both in the 3D and then staying in zone when we drill those wells horizontally and then how we complete those wells -- all add to the equation of being able to deliver that rock storage to the well [bore].

Okay. Great. Thanks for the color. Look forward to seeing you guys next week.

Thank you very much.

(Operator Instructions) The next question is from Richard Vidal with Wells Fargo security.

Hi. Good morning.

Good morning.

A quick question. It looks like the Mississippi Lime is doing pretty well in terms of production. Is there anything we can should take into consideration for fourth-quarter production of this year? Just looking at the numbers -- anything we should factor into our analysis or any operational -- any kind of operational stuff that you guys are working on in the fourth quarter that we should keep in mind?

We're just carrying on doing what we are doing. We've got plenty of things to do. We've got plenty of locations. We've got plenty of rigs. And we've got business ahead of us. We'll be down spacing. We'll be looking at other -- we'll be following up with our original techniques. We'll be just doing what we've done this last quarter.

Okay. So nothing that's out of the ordinary. Nothing that's on unplanned for. Any unplanned maintenance or anything like that?

No.

Okay and a quick follow-up. I must've missed the reason why we're dropping one rig the Mississippi Lime. Can you comment on that a little bit?

It is to do with completions. Frac spreads are hard to come by. As we finish off drilling wells, we just build up inventory. And to avoid that, we can just drop a rig for a quarter. And we can then get through the completions, bring them online, see efficiency in the investment you've made and then bring the rig back and start over when the frac spreads are available to us and we can take advantage for quick cycle time.

Great. Thanks a lot. Appreciate it.

And there are currently no additional questions. I'd now like to turn the conference back to our presenters for closing remarks.

Nothing really to add. Thank you very much for your time and attention. We're very pleased with the quarter. It -- I can assure you that we won't be [sang women] sitting on our laurels. We will continue to do all the things that we've laid out here. We look forward to seeing you guys -- those that are coming -- to our analyst day. We will give you a lot more detail and I just thank you for your time and attention. Thanks very much.

Thank you. Ladies and Gentlemen, this does conclude today's conference call. You may now disconnect your line.