Callon Petroleum Co (CPE) 2007 Q4 法說會逐字稿

Welcome to the Callon Petroleum Company fourth quarter and year end 2007 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Friday, March 7th, 2008.

I will now like to turn the conference over to Mr. Fred Callon, Chairman and CEO, of Callon Petroleum Company. Please go ahead, sir.

Thank you and good morning. We appreciate you dialing in for our year end conference call. Before we begin the formal portion of our presentation, I'd like to ask Terry Trovato, who heads our Investor Relations, to make his comments. Terry?

Thank you, Fred. We'd like to remind everyone that the some of the comments made during this call will be considered forward-looking statements. As such, no assurances can be given that these events will occur or that the projections will be attained. Please refer to the cautionary language included in our news release and of the risk factors described in our SEC filings. We undertake no obligation to publicly update or revise such forward-looking statements. It is also important to note that the SEC permits us in our filings with them to disclose only proved reserves that we have demonstrated by actual production or conclusive formation tests to be economically and legally produceable under existing economic and operating conditions. During today's discussion, we may use terms like reserve potential or probable reserves that the SEC's guidelines strictly prohibit us from using in their filings with them. These estimates by their very nature are more speculative than estimates of proved reserves, and accordingly, are subject to a substantially greater risk of being actually realized by the Company.

Finally, today we will be discussing 2007 cash flow, which is considered a nonGAAP financial measure. Reconciliation and calculation schedules for the nonGAAP financial measure were stated in our fourth quarter 2007 results news release and can be referenced there on our website at www.callon.com for subsequent review. Fred?

Thank you, Terry. As most of you know, we recently announced that CIECO Energy has signed an agreement with us to participate in the development of our Entrada field and we'll discuss that in a few minutes as well as an operations update. But first Bob Weatherly will review our results of operations for the fourth quarter and for the full year of 2007. Bob?

Thank you, Fred. December 31, 2007, our estimated net proved reserves were 264 billion cubic feet of natural gas equivalent which was an 81% increase over December 31, 2006 reserves of 146 billion cubic feet of natural gas equivalent. The pre-tax PV10 value of these reserves was $1.6 billion and $535 million, at December 31, 2007, and 2006 respectively. For the year ended December 31, 2007, we reported net income of $15.2 million or $0.71 per share, this exceeded the consensus estimate of $0.67 per share by $0.04. This is compared to $40 million or $1.90 per share for 2006. The decrease in 2007 earnings is primarily due to a significant increase in interest expense resulting from the financing associated with our acquisition of BP's interest in the Entrada field in April of 2007 and lower oil production at the Medusa field. Net income for the quarter ended December 31, 2007, was $4.5 million or $0.21 per share. This also exceeds analyst expectations by $0.03 per share. All share amounts are on a diluted basis.

For the year ended December 31, 2007, we reported oil and gas sales of $170.8 million which was down by 6% from the 2006 sales of $182.3 million. Average production for 2007 was within the range we previously issued at 51.3 million cubic feet of natural gas equivalent per day and was comprised of 12.3 billion cubic feet of natural gas and 1.63 million barrels of oil. This compares to 2006 production of 11 billion cubic feet of gas and 1.634 million barrels of oil or an equivalent 56.9 million cubic feet of natural gas per day. The increase in gas volume is due to production from 2005 and 2006 discoveries. These increases were offset by the loss in production from the divestiture of our Mobile Bay blocks 952, 953 and 955 in the second quarter of 2007, and early water production at North Padre Island 913 and High Island 73 fields. The decrease in oil production is primarily due to previously reported mechanical problems at the Medusa field A1 well which occurred in the fourth quarter of 2006 and when this was corrected by remedial work, resulted in oil production being restored at a lower rate. There was no impact on reserves from this.

Oil and gas sales for the fourth quarter of 2007 were $43.9 million compared to $44.8 million in the fourth quarter of 2006. Production for the fourth quarter of 2007 was 45.6 million cubic feet of natural gas equivalent per day and included 2.5 billion cubic feet of natural gas and 289,000 barrels of oil. Production was 3.7 billion cubic feet of natural gas and 294,000 barrels of oil during the fourth quarter of 2006. The average realized oil price for the fourth quarter of 2007 was $82.47 per barrel, which was significantly higher than the realized oil price in the same quarter last year, of $52.77. Oil hedging positions decreased our average realized price by $1.95 per barrel in the quarter. The benchmark oil price for the period measured by the average closing price of NYMEX contracts for delivery of WTI averaged $90.68 per barrel.

For the year, the average realized oil price was $67.63 per barrel, which was $15.31 higher than the realized oil price in 2006 of $52.32 per barrel. Oil hedging positions increased our average realized price by $0.53 per barrel. The benchmark oil price for the period measured by the average closing price of NYMEX contracts or delivery of WTI averaged $72.33 per barrel. Just a reminder that the spread between the benchmark oil price and our averaged realized oil price is primarily due to quality adjustments incurred in the sale of our production from our Medusa and Habanero field, which account for approximately 85% of our fourth quarter oil production. Please refer to our news release for a reconciliation of our realized oil price to the NYMEX price.

Natural gas realizations averaged $8.18 per Mcf for the fourth quarter of 2007. This was up from $7.82 per Mcf for the fourth quarter of 2006. Natural gas hedging positions increased our average price by $0.70 per Mcf for the three month period ended December 31, 2007. For the year, natural gas price realization was $8.01 per Mcf, which is down slightly from the 2006 price of $8.07. Natural gas hedging positions increased our average realized price by $0.61 per Mcf for 2007.

On the expense side, LOE for the fourth quarter was $7.2 million. For the year ended December 31, 2007, LOE was $27.8 million or $1.48 per equivalent Mcf of production. This was within our guidance range of $27.5 million to $28.5 million. G&A expense was $2.8 million and $9.9 million for the fourth quarter and full year 2007 respectively. Interest expense for the quarter was $10.4 million which was a significant increase over the fourth quarter 2006 amount of $4.2 million. This increase is due to the interest cost associated with the $200 million debt instrument that Callon placed in connection with the acquisition of BP's 80% working interest in the Entrada field. For the full year 2007, interest expense was $34.4 million and in the middle of our guidance range of $33.9 million to $35 million.

Depletion, depreciation and amortization for the fourth quarter of 2007 totaled 6.-- $16.2 million, which was a 25% decrease in the fourth quarter of 2006 amount of $21.7 million. For the full year 2007 DD&A was $72.8 million which was below the guidance range of $74 billion-- $74 million to $78 million. The decrease in 2007 was a result of lower production.

Discretionary cash flow is a nonGAAP measure and in our news release we have provided a reconciliation to cash provided by operating activities. Discretionary cash flow in the fourth quarter totaled $25.1 million or $1.17 per share. Discretionary cash flow for the full year totaled $104.6 million or $4.91 per share. Available cash and cash flow funded our capital expenditure and abandonment obligations for 2007.

It is important to note that following the acquisition of BP 's interest in the Entrada field, in April of 2007, our focus shifted to insuring our ability to fund the development plan for this significant property. We decided to limit our 2007 exploration program to just previously committed projects and then later sold our noncore, nonoperated royalty in mineral interest (inaudible) and closed that in December of 2007 for $61.5 million. As a result, we accumulated a cash balance of $53.3 million and have no borrowings under our senior Credit Facility at year-end. We did have a letter of credit outstanding for $35 million at year end which reduced our borrowing base to $35 million. Overall, this gives us an $88.3 million liquidity at year end. Now, Fred will give you an update on operations.

Thank you, Bob. Let me begin with a review of the status of our major fields , our Medusa field is currently producing 13 thousand barrels of oil and 12.8 million cubic feet of gas a day, as a result of several work overs performed in the fourth quarter of 2007 and early this year, production increased approximately 3500 barrels of oil and 2.5 million cubic feet of natural gas a day. In addition the development well has spud and is targeting undrained fault block, production from this well is expected to be approximately 8,000 barrels of oil a day, beginning in June. We own a 15% working interest in the Medusa field and Murphy is the operator.

Current production from our Habanero field is 7700 barrel of oil and 12.8 million cubic feet of natural gas per day from our two wells there. Both producing from the Hob 52 oil reservoir, the number 2 well produces 2700 barrels of oil and 4.5 million cubic feet of natural gas. During the fourth quarter of last year the number one well was sidetracked up depth of the number 2 well, current production from the number one well is 5,000 barrels of oil and 8.3 million cubic feet of gas per day. We own 11.25% working interest in the number 2 well and a 25 % interest in the number one well, and Shell is the operator.

The West Cameron Block 295 field is currently producing at a rate of 29 million cubic feet of natural gas and 180 barrels of oil per day. We recompleted the number 4 well in December of 2007. It is currently producing 6 million cubic feet of gas a day. Later this year early-- or early in 2009 we expect to recomplete the number 3 well, which is currently producing 7.3 million cubic feet a day from a secondary sand below the main pay zone. At that time production from the number 3 well should increase to approximately 20 million cubic feet of gas a day. We have been anticipating this work over for some time now, but have not been able to perform this work over because of better than expected production from the secondary completion. Additionally another well may be drilled in 2008, depending on well performance, and the number 2 and number 4 wells are operated by Mariner Energy while the number 3 well is operated by Cimarex and we have a 20.5% working interest in the field.

Production from the High Island Block 165 field is currently 17 million cubic feet of gas a day, and 150 barrels of oil per day, from the High Island 130 number 2 well which produces from the Gyro K2 sand. During the fourth quarter of last year, we drilled a fourth well in the field targeting deeper sands, but the well was unsuccessful. During the second quarter we planned to recomplete the number 1 well to a Rob L sand which we expect to have initial production rate of approximately 10 million cubic feet of gas a day. Callon owns a 16.7% interest in the Gyro K1 and the Rob L and 11.7% interest in the deeper sands. The field is operated by Mariner Energy who acquired the interest from StatoilHydro.

Our High Island Block A540 number 1 well is producing at a rate of 7.8 million feet of natural gas and 520 barrels of oil per day, Callon owns a 60% working interest and Walter Oil and Gas is the operator on this block. Our East Cameron 109 number 5 well is producing at a rate of 3.6 million cubic feet of gas a day and 55 barrels of oil, EPL operates and we own a 25% working interest. We have drilled and are in the process of completing our North Pronghorn prospect, first production is expected in the second quarter of 2008 at a rate of 10 million cubic feet of gas and 300 barrels of oil per day, we operate and have a 50% working interest. The Bob North number 3 well located in Mississippi Canyon Block 860 as you know was drilled in the second half of 2007 , after finally drilling the well successfully, we had noncommercial shows encountered and the well was deemed uneconomical and had been plugged and abandoned.

With respect to 2008 drilling the Board has approved an initial capital budget of $180 million, which will fund our Entrada development, several development wells, as well as lease hold and seismic per exploration program. We currently have 23 prospects in inventory and are continuing to add to that inventory the bidding on additional blocks at the upcoming lease sale. After closing our agreement with CIECO, the Board plans to review the Company's financial position and consider increasing the Company's drilling capital budget.

Now let's talk about Entrada. As most of you know, in September of last year, we retained Merrill Lynch [P Tree] divestiture advisors to assist us in identifying a partner for our Entrada field development. On February 11th of this year, we signed a purchase and sale agreement with CIECO Energy, a subsidiary of Tokyo based Itochu Corporation, this agreement provides for the following: CIECO will pay Callon total cash consideration of $175 million including $155 million payment at closing and $20 million of the $40 million contingent payment we owe to BP, after meeting certain cumulative field production milestones. We plan to utilize the $155 million initial cash proceeds plus existing cash balances to repay the $200 million senior revolver credit facility which we put in place with the acquisition of BP's interest last year. At closing, CIECO will also reimburse us for 50% of Entrada capital expenditures which we've incurred to date. We estimate that to be approximately $18 million.

CIECO will pay Callon an additional $2.50 per barrel of oil equivalent for every barrel of oil equivalent produced after cumulative gross production in the field is 30 million barrels through the year 2018. Also as part of the transaction, CIECO will provide a nonrecourse loan of $150 million to Callon for the financing of Callon's 50% of the $300 million estimated cost to develop the field. The loan will bear interest at LIBOR plus 375 basis points and will mature within five years from the date of first production. We're obviously very excited about the CIECO transaction. We feel like we've gained a very strong an important strategic partner with CIECO. Their parent company, Itochu Corporation is one of the oldest most highly respected international trading houses in Japan, with a global enterprise which includes significant long-term investments in the energy industry throughout most of the major basins in the world. As a result of this agreement we now have a fully funded development plan for the Entrada field, which represents our final major step in the goals that we had set fourth for achieving first production in early 2009.

After acquiring BP's interest and taking over as operator in April of last year, our focus was on several major milestones, which we accomplished during 2007, beginning with the completion of the engineering design work for the project, followed by the negotiation and signing the production and handling agreement with ConocoPhillips and Devon to progress our production through the Magnolia TLP. And then finally contracting with Diamond Offshore for their Ocean Victory drilling rig which drilled the initial wells at Entrada and we will use to drill and complete the development wells for Entrada beginning in July/August of this year. The closing was targeted for our February 29th, however this turned out to be a somewhat aggressive timetable to complete all of the necessary documentation and consent. We now expect to close in approximately two weeks. Now, Bob will give you an update on

Thanks, Fred. I'll give you a summary of the guidance for the first quarter and full year of 2008 that was provided in our news release. For the first quarter we're projecting 40 to 43 million cubic feet equivalent per day of production and for the year, 41 to 45 million cubic feet equivalent per day. Approximately 53% of the projected production will be natural gas. Lease operating expense will be approximately $5 million to $5.5 million and $21.7 million to $24.5 million for the first quarter and full year 2008 respectively. G&A should be within $2.6 million to $3 million and $10.5 million to $11.7 million, for the first quarter and full year of 2008. Interest expense should range between $20.8 million to $23 million and $34.2 million to $37.7 million, for the first quarter and full year of 2008 respectively. With regard to DD&A, we are projecting ranges of $14 million to $16 million and $57 million to $65 million for the quarter and the year 2008.

For the first quarter we have 450 million cubic feet of natural gas hedged in the form of collars with a $9.94 ceiling, $7.61 floor. For the year, 2.9 billion cubic feet of gas is hedged with collars with an average ceiling of $10.10 and an average floor of $7.66. Most of our production is sold in the general area of Henry Hub which is comparable to NYMEX. We have 150 thousand barrels of oil hedged for the first quarter, 60,000 barrels at swaps, 90,000 at collars, the average swap price is $91.91. The collars have average ceiling price of $81.50 and floor of $65. For the year, we have 555,000 barrels of oil hedged, 195 that is swap, 360 is collars. The average swap price is $91.23, with regard to the collars, the ceiling price is $81.50, average floor price is $65.

Just a reminder that realized oil prices will continue to be effected by quality differentials and transportation cost. We anticipate transportation cost should average about $1.15 to $1.20 per barrel. With that I guess we're now ready to take questions, Fred?

Yes. We're ready for questions.

Thank you. (OPERATOR INSTRUCTIONS). And our first question comes from the line of Ron Mills of Johnson Rice. Please proceed with your question.

Good morning, guys.

Good morning, Ron.

Hi, Ron.

Just for you, Bob, a couple of just mop ups. Can you go over the reserves again? I don't know if you broke it down between gas and oil?

Just a second, Ron. Let me see here. Okay, total reserves is 264-- 264 million cubic feet equivalent, I think that's 24,500 barrels of oil and 116,000--454 million cubic feet. Sorry, 24 million barrels of oil and 116 million cubic feet. Sorry.

Okay, and then if you look at a pro forma for the sale of the 50% interest in Entrada, as I recall, it's roughly a 15 million barrel equivalent decrease as we look ahead to factor in 2008 reserves?

Yes. I think that's right, yes.

Okay. And then one more for you. On the first quarter interest expense, can you walk through why that first quarter interest expense is so high relative to say even the fourth quarter? Are there some charges in there for extinguishing the Merrill Lynch debt?

Absolutely. That is the difference, Ron, as we've anticipated closing as Fred said in the first quarter, and the difference between the kind of normal run rate that we've had for interest in the first quarter are the early extinguishment-related costs.

And what are those costs and are those buried both in the cash and noncash component?

They're cash and noncash. I think the noncash is about $6 million and I think the early, the cash part is $7.5 million or so.

Okay, great. Then of your $180 million capital budget, how much, can you walk through Entrada, Habanero, Medusa and shelf in terms of how much you plan to spend in each of those areas?

I think the easy shelf-- first kind of the macro split, if you take the 180, sorry, the 180 I think that Fred gave you, round numbers Entrada is 120 to be spent in '08, remember we'll have some spend in '09 as you complete it. $60 million of difference and about of that $60 million, probably about 40%, 45% of that is for shelf related drilling and development costs. The balance is allocated for the lease sale and normal capitalized interest and overhead.

So no real expenditures planned then at Medusa a or Habanero?

Sorry, with the Medusa, we have one well and I think we've got about $10 million or so scheduled for that Medusa, the number 5 well at Medusa.

And that would be included in that 55% to 60%?

Yes.

Okay, and then in terms of the Entrada timeline, are we still on track in terms of the-- with the Ocean Victory, has the work been completed in Pascagula, and everything hooks like it's on track at least for as you have today for July/August spud of the initial, of the next well?

Yes, Ron, and in fact, the Ocean Victory is out and Ocean Victory is on location at Medusa drilling our well there, so and right now we're on schedule for sort of July/August timeframe for receiving the rig. So at this point, everything continues to be on schedule.

Okay, great. Let me let split, someone else jump on and I'll get back in line.

Thanks.

Our next question comes from the line of Philip Dodge of Stanford Group. Please proceed with your question.

Good morning, thanks for the comments. Ron got my questions there, but let me just confirm the Entrada portion of the total reserves stayed the same as Entrada had been in the past which I think would be about 192 Bcfe equivalent?

Yes.

Thank you.

Do we have additional questions?

Yes, our next question comes from the line of Neal Dingmann of Dahlman Rose. Please proceed with your question.

Good morning, guys.

Good morning. Neal.

Say Fred, was wondering on the 23 prospects you mentioned, or that Bob mentioned in inventory, what-- how do those layout? Are those, is part of those in Entrada or how does that stack up?

No. The-- I was really kind of speaking of, yes, those do not include Entrada. And this is, just prospect inventory that we've-- we continue to build and these are prospects that we have generated. Again going into the lease sale, we mentioned before we've got a fairly significant 3D seismic coverage and continue to over the last several years invest in reprocessing some free stack time and depth migration, using AVO analysis on quite a bit of what we're doing there on the shelf. So this is just kind of a sort of a summary of the prospects, and I say shelf and there are some in deepwater, mostly shelf but some in deepwater as well. And certainly, we're anticipating as cash flow comes in from Entrada next year, we'll be able to ramp up our drilling activity. And as I mentioned earlier, the Board has just been very careful to be sure that we are in a position to finance Entrada and so after we close CIECO, then we'll take a look at the CapEx again for this year in terms of looking at what the we might want to do in terms of additional drilling for the rest of the year, and certainly anticipate we'll be revising the CapEx upward here after we close the CIECO transaction probably at the May Board meeting.

I got you, Fred. So of that, of those 23 prospects, Bob mentioned the 45% of the $60 million, spent on the shelf, none of those necessarily at least initially would be geared towards that, geared towards those 23-- any of those 23 prospects?

Not really. Maybe one, but no. For the most part, no.

Okay, okay, and then a couple more questions. On-- moving over to Entrada, what did you mention as far as what CIECO pays per barrel of oil and how-- will that go for the life or how does that play out? Does that continue through I guess all the play?

I'm sorry, in terms of the additional pay---

You mentioned I think what CIECO pays per, I think you said per barrel of oil, what the payment is?

Yes. And the agreement that we have negotiated provides obviously they pay the $175 million, $155 million up front, they'll-- remember we have a $40 million payment due to BP after we produced I think 12.5 million barrels, and they will pay their $20 million share of that. And in addition, we negotiated a payment whereby CIECO's agreed to pay us $2.50 a barrel, for every barrel equivalent for every barrel of oil equivalent produced, in excess of 30 million barrels in the field, and that will continue through December 31 of 2018, and was just an incentive payment that we negotiated in the transaction.

Okay. And then Entrada, I know you've laid out real well I think between that and your analyst day as far as sort of your plans of Entrada. How much could that change, Fred, if the first few wells, obviously you've got the rig already lined up, if the first few wells look better or worse or different than you're expecting. Will the plans necessarily-- do you still have a lot of factors that you could change the timing behind that as you look to mid-to-late 09?

You're talking about with respect to Entrada?

Correct. Just wonder how--- basically I guess what I'm asking is how long are the plans laid out and are those obviously continuing to change depending on what you see both on that. sort of on how prolific the wells and obviously what the commodity prices are at that time?

Yes. Well a couple things. We have sort of laid out a plan here with-- to drill the initial two wells and based on the well performance of the number 3 well, we do have scheduled out I think in 2011 an additional well out there which will be dependent on well performance. We hope that the well will perform such that we may feel the need to drill an additional well and we do have that in the schedule. We also have drilling, if you'll recall, we have a small prospect called Little Jim that lies on the block, on our block as well as on ConocoPhillips and Devon, and we plan to drill a well there and I think we currently have that scheduled in 2010, I believe, subject to negotiating the appropriate agreements with ConocoPhillips and Devon. But we do have plans there and beyond that, we do have a couple other opportunities, maybe on the block that we are evaluating now that we-- that again, we hope to add into the schedule over the next couple years.

Okay and then obviously after this pay down, Fred, you're going to have a lot of dry powder. Fred, just wonder what your personally, I guess what your thoughts are as far as I think you or Bob mentioned potential lease block sales, obviously there's properties out there for sale, just wondering what your view of the market is and now Fred, what you think is more attractive? When you look at sort of '09 or maybe even for the latter part of this year, with the type of dry powder that you all have, where do you anticipate maybe being most active? Would it be that acquisition market, the lease market? Just wonder what type of area?

Yes, and I think the answer is both. I mean, we've got, we've been in some ways fortunate, had some time here with the focus on Entrada, and our guys here in the Houston office I think have done a great job and had the time and we've been investing the money in some of the technical work. Yet I mentioned just kind of-- a lot of, it's often reprocessing of data and so I think we've generated some excellent opportunities. At the same time, I'll also say that we have our-- have seen some acquisition opportunities where I guess the last couple years, we weren't as interested but we are perhaps seeing some acquisition opportunities that we think may make some sense. And so we may very well be looking at some opportunities like that, particularly opportunities that are in areas where we've have been doing some work and see some additional potential, and so I think we are probably looking at acquisition opportunities more so now than we have in the last couple of years. But I think you'll continue to see that acquisition opportunities, you certainly can't count on them from quarter-to-quarter or year-to-year, so I think we'll be looking at some opportunities like that and hopefully kind of something that kind of makes sense for us. But in the meantime, I think we do have a good inventory of shelf projects that we can execute on and we control the timing of.

All right, guys, look forward to all of the activity.

Thank you.

Our next question comes from the line of Chris Pikul of Morgan Keegan. Please proceed with your question.

Yes, hi, Fred.

Hi, Chris, how are you?

Doing great. Hey, wanted to touch base on I guess I was a little surprised by the production guidance, being, kind of seems like definitely guiding lower, maybe I wasn't reading between the lines before but was there something that happened between kind of the last conference call and is there anything incremental to the production side of the story that we haven't touched on yet? Could you just give me a little background on that?

Well, I think I mean I guess a couple things, and Bob can add here. Is the-- we're-- we kind of set out and I guess we were around about $51 million a day last year, is that right? And we were certainly trying to hold production sort of flat before we bring Entrada on, and I think it's-- as we've been talking about the fact that from the standpoint of the Board kind of, and we've talked about this, wanted to pull back on terms of new drilling. And so obviously we're continuing to see just sort of natural declines and I think the, and we're kind of aware of that but I think the sale last year, I mean as a result of the sale of these mineral interest, while it's not major but if you add that with the Mobile properties that we sold, which again, it was-- we felt like it was an excellent transaction for us in terms of the P&A liability we were able to reduce. But in total, it was about $5 million a day from just pure property sales. So and hopefully, I mean we felt like we need to provide a guidance range that we feel like we can certainly achieve. And I would like to think as we go through the year and the Board hopefully increases our CapEx budget that we'll have an opportunity to increase that guidance later in the year.

Okay, given that let me touch on Habanero again real quick. I know some of those, the activity you did in the fourth quarter maybe didn't come on line at rates that you might have initially expected. Did I hear Bob say that there was no reserve impact from those wells?

Yes.

I think that was Medusa.

Is that--

Chris, that-- what I said was that I think I was referring, at that moment I might have not been clear, but we were talking about the Medusa well that came back online in '07.

Oh, okay.

Lower than where it was in '06 and it was merely a rate, it didn't have any impact on the ultimate reserves.

Well if that's the case, were there any negative revisions associated with Habanero then for year end '07?

Yes. And it was, you know the number? I'm sorry, Chris. I'm going to get it for you.

That's all right And could you be able to give us your PV10 number or should we just wait for the K?

No, you're-- we've got that.

Yes, I think we gave, well earlier, Chris, I'd given the year end PV10.

Oh, you did? I must have missed that, Bob, sorry.

That's fine. It was $1.6 billion pre-tax.

That's a good number.

I like it.

So it would seem.

While you're looking for that other-- just remind us how many shelf wells you drilled in '07?

Seven.

It was seven?

That does include the developed wells?

Yes, like I said, that was included several --

Two deepwater.

I'm sorry, yes, two were deepwater, obviously with Bob North and I guess Habanero, and so I guess it would be five on shelf, two deepwater.

And so really until this deal closes you're not going to be able to give us a good sense of what you're going to be drilling this year?

Yes, that's exactly right. And that's-- we've kind of been saying that, I mean--

And I think--

More has just been, rightfully so, just being very cautious to be sure that Entrada is covered but certainly based on getting this closed, I would certainly think that we're going to have some dry powder to use, even later this year.

Right. In respect to I think we've said that in respect of '07 is that with Entrada development lending at us in '08 that we did a combination of consciously, particularly in the last half of the year, not pursuing some exploration prospects that we had, just to be sure that we didn't burn cash. And as we said, we sold the minerals, got a very nice price for the minerals, but both of those things, as you're aware, if you kind of dial back your activity for whatever reason, then in the next year or two, you see the impact of that. Plus the fact that the so combination of the minerals, the volumes in the mineral sale plus the Mobile Bay sale was about-- hurt us by about 5. So I mean, we wish it was going the other way of course, but the first things first. We need to focus on liquidity and I think as we've said, we've got strong liquidity at year end which we needed and now that once we get the financing transaction with CIECO through the detailed process, and are really able to assess that, which we think is very good to our cash flow, going forward, the Board has said that we'll go back and revisit kind of what our exploration and acquisition strategy is. And as Fred said earlier, you're not going to go out here today and promise anything you don't have your arms around, but hopefully, hopefully we'll be able to improve it.

All right, thanks.

Sure.

Our next question comes from the line of Scott Lewis of Lewis Capital Management. Please go ahead, sir.

Hey, good morning, guys.

Good morning.

Hey, Fred, I was wondering if you could just take a minute or two and kind of discuss the returns that you guys have seen in the last three or four years on your exploration kind of spend? Because it's a little hard with all of the moving pieces, with Entrada and what's been going on with Habanero and Medusa, to kind of really see how that is played out. And then kind of relatedly, do you guys think at all about what the cash flow you're going to be receiving from Entrada and you look at your current share price and your PV10, does it make some sense to put some of that cash flow into stock repurchases?

Okay, well-- take them in different orders. First, just in terms of stock repurchase, the-- I think the Board has, it's kind of talked about it from time-to-time and I guess just in general, we have felt like that we do continue to have opportunities that make sense to pursue and particularly obviously right now with Entrada and the prospect inventory that we put together. And just, and feel like even though kind of going back over last year or two, obviously with Entrada trying to develop Entrada, the stock price certainly moved down a point where it was very tempting, but at the same time, we felt like that it was critical that we maintain a capital structure so that we can be sure we get if fact to get Entrada developed and that was kind of upper most in our mind. So and again, we continue to see opportunities we-- that we think generate returns that we think will, that will help grow obviously grow the reserve basin and a good economical basis.

It-- if you look back over the last couple of years, we have had some mixed success. We have had some as we saw over the last year or two with shelf drilling cost going up significantly, we have had some smaller shelf discoveries where the economics get strained and your F&D cost goes up significantly. But we think sort of on a going forward basis we've had some relief there in terms of cost. I mean, we came out of Katrina where costs went up fairly significantly. We've at least seen sort of a leveling out of those costs and actually seen jack up rates coming down fairly significantly. So that-- I think that will help the economics on the shelf which I think on a smaller projects, the same time certainly we have kind of focused more where several years ago we were perhaps looking at some opportunities that were smaller which maybe had good economics, but I think it's cost moved up, put strain on those projects I think we're probably looking at targets that are a little larger size than targets.

And I think as we've had time, we think we've identified a number of opportunities and we certainly just from a drilling standpoint have been able to drill with a success rate certainly over 50% in terms of identifying hydrocarbons out here. And so the answer is yes, we think the prospect inventory we've got put together and kind of going forward, we think we've got quite a few opportunities both on the shelf and some in deepwater. Which is kind of part of the bigger strategy as I mentioned earlier, we certainly are monitoring and looking at the some acquisition opportunities that we kind of feel like perhaps the price of some of those acquisition opportunities are I think better now than they have been in a couple years and certainly, on a I guess opportunistic basis we certainly claim to be looking at some of those as well.

But do you think in, I know in '07 you dialed back your exploration program because of Entrada, but say on '04, '05, '06, do you think you got a good return on your exploration budget?

I think, no I would say it's mixed. I think we did on some of the deepwater things, we did on some of the larger shelf prospects and certainly on where we were utilizing AVO processing. Like I said, we were able to generate I think a "drilling success rate" kind of over 50%, and I think the-- when we had projects like High Island 165 and West Cam 295, which-- where we've had excellent results, we've had follow-up with drilling of three or four wells on each of those and continue to have upside potential. On the other hand, we've had some smaller prospects that we drilled where we found hydrocarbons but in fact it watered out early and have hurt finding costs. And certainly going forward like I said, I think you won't see us pursuing projects kind of those size anymore.

Okay, so then just last comment, on the stock repurchase, I understand why the Board didn't do it this year because of Entrada but once Entrada is flowing, you won't have those issues, right?

That's true. It's not to say if you have a very strong balance sheet, I think that option is one you can certainly take a look at. As I said, I think that given where we were and particularly given the critical importance of getting Entrada developed and for a small Company our size, we've just felt like it's been best to keep our capital to be sure we can fund Entrada.

Okay, great. Thanks a lot, Fred.

Our next question comes from the line of Richard Tullis of Capital One. Please proceed with your question.

Good morning.

Good morning.

Just a couple of questions, following up on what the some of the other folks had asked. Fred, what's the overall base decline rate right now?

Base decline rate right now would be 30%. I mean, if you ask me for-- and that (inaudible) is simply when you have several properties at that are fairly significant, it can vary but I mean if you ask me, I'd say 30%.

Okay. On the 23 prospects you'd mentioned a little bit earlier, what are you looking at on net risked reserves on those?

I'm sorry, I just don't have the number. We can certainly get it for you, we'll be glad to and we'll--

Okay.

We'll get that to you.

Sure.

I just didn't happen to bring it with me.

That's fine. If you could, I know you touched on this a good bit already, but could you recap for me again what your '08 drilling is going to be?

Well, and again, I described it as initial capital budget which kind of, which right now is roughly $180 million, so it's $180 million. And that is to fund primarily Entrada and Entrada I think we're saying $120 million and the remaining $60 million basically fund the-- well capitalized overhead interest, but is included in that. But also seismic and lease hold for the lease sales this year and from a drilling standpoint. By now it would include our Medusa well that we're currently drilling and I think we've got maybe three shelf wells like West Cam and I guess our [Budro], is that right, well that we actually have already drilled and is down and we're in the process of completing. So we don't have any new drilling in the CapEx in the $180 million and that's as we mentioned a couple times the Board felt like that we need to close CIECO and then take a look at it at the next Board meeting and consider increasing our CapEx budget for the remainder of the year.

Okay, so beyond Entrada, Medusa, and three shelf wells, that's going to be it, as far as your budgeted right now?

That is correct.

Okay, and let's see. I guess the Entrada cost pretty much holding at 150, $150 million?

Our share.

Yes. And just if you could, recap again what you're expecting for initial production at this point from Entrada and when?

The initial production, we're currently again still looking at February of 2009.

Okay.

And we're looking at initial production of 22,500 barrels of oil a day and 35-- 37 million cubic feet of gas a day.

Okay, and you see no problem pushing this through Magnolia? They should have plenty of capacity?

They have, yes. In our last report, their oil production I think is less than 10,000 barrels a day and they got 50,000 barrel a day capacity.

Okay, good.

And we have firm capacity to-- with them to produce the rates we're talking about.

Okay, and how long do you think you'll hold at that, around that rate?

I think it's probably, I think we're looking at about six months. And again, I want to say 22,000-- 22,500 barrels of oil a day, we don't have, not all of that is firm capacity but again there's plenty of excess capacity.

Okay.

At the facility, that shouldn't be a problem.

Okay, I think that's all I had, Fred and Bob, thanks a bunch.

Yes, sir.

Sure.

Our next question comes from the line of Joseph Bachmann of Howard Weil. Please proceed with your question. Hello, Mr. Bachmann your line is now open.

Hi. Good morning, guys.

Hi, Joe, how are you?

Hi, Joe.

Can you update us on the main pass 243 prospect that you're drilling with Helix?

Yes, we're not drilling it.

Okay, so you decided not to spud that well?

Correct, yes, right.

Okay, thank you.

Yes, no problem.

We have a follow-up question from the line of Ron Mills of Johnson Rice. Please proceed with your question.

Can you walk through just what your fourth quarter capitalized interest and G&A numbers were?

Fourth quarter capitalized G&A, I think, okay $2.9 million of G&A and $1.9 million of interest, total $4.8 million.

And then if you look ahead to 2008, how do those two split?

It's about the same. You mean --

So basically you have about $8 million of interest and about $12 million of G&A for the full year?

Just a second, Ron. Let me find my note on that. I think that's right. I remember it being around $17 million to $18 million total and I would think that it will be about the same.

Okay. And then in terms of your PV10, can you tell us what gas and oil prices you use?

Year end --

$7.59 on gas and $90.92 on oil.

Okay, and then in terms of that PV10, can-- do you know how much was associated with Entrada? Once again I'm trying to fast forward to '08 because you sold half of those reserves.

Entrada, let's see I think was about $1.1 million.

So $1.6 billion is total PV10 and $1.1 million is Entrada?

Correct.

That's right.

Okay, great. Thank you, guys.

Sorry, Ron. I said million, I meant billion.

No problem.

(Inaudible) these numbers all that well.

Too many commas.

Too many commas, right, sorry.

Thanks.

Our next question comes from the line of Philip Dodge, Stanford Group. Please proceed with your question.

Yes, Ron, got ahead of me again there on Entrada, but I (inaudible) you're too quick, Ron. I got one other question on the 250 extra payment having a sunset in 2018. Is the reason for that that you expect the field will be depleted by then?

No. I have to say it is nothing more than just a negotiated incentive payment and the idea that it should end at some point in time, and so there's-- quite frankly there's nothing magic about that day.

Hopefully it's because CIECO expects the production to last a lot longer than that.

Correct.

As we do to.

As we do as well. Right.

All right good work. Thanks a lot.

Thank you.

Thanks, Phil.

And we have no further questions at this time.

All right well, again, we thank everyone for taking time to call in and as always please feel free to give any of us here a call at any time. Thank you so much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.