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Operator
Attention all participants, please stand by, the conference is about to begin.
Welcome to the Unocal teleconference, hosted by Robert Wright and Tim Ling.
All participants will be on listen-only until the question and answer session.
At that time instructions will (audio dropout), being recorded at the request of Unocal.
If you have any objections you may disconnect at this time.
I would now like to turn the meeting over to Mr. Wright.
Sir you may begin.
- Vice President Investor Relations
Thanks Maggie.
Good day, and welcome to the Unocal first quarter conference call.
As Maggie said, my name is Robert Wright.
I'm the Vice President Investor Relations.
Joining me today is Tim Ling, our President and Chief Operating Officer.
Chuck Williamson and Terry Dallas are out of the office today.
Chuck is in Thailand, at a
ceremony, extending the
contract, which he is signing probably as we speak.
A replay of the other broadcasts will be available through our Internet Website until May 31st, 2002.
An audio replay is also available over the telephone.
Please call Investor Relations in either El Segundo or New York for more information.
We also have some slides available for you to view as you listen to the call.
You can view the slides through the Unocal Website at www.unocal.com.
As I go through the call, we will reference the slides by number.
By the
today, we will include certain projections and estimates, which are obviously forward looking statements.
Actual results could be significantly different, depending on many factors.
If you are unsure what the various risks are in this business, please review in more detail, on pages 51 through 55 of Unocal's 2001 SEC form 10K.
If you have not yet reviewed Unocal's first quarter earnings package, the news release, and detailed tables of financial information are available on our company Website.
Again, www.unocal.com.
Go to the data warehouse section of the Website and look for the quarterly fact book.
The Website also contains first quarter earnings news release, and all the company's news releases from 1996 to the present.
They can be found in the News From Unocal section.
Now I'll cover the major earnings factors for the first quarter, if you go to slide number one.
Unocal's first quarter adjusted earnings were 43 million, or 17 cents per basic and diluted share.
These earnings results are down 15 million from the fourth quarter.
The largest factor in this sequential decline was
corporate and other expenses.
This
27 million of
.
As we predicted earlier, lower 48 production decreased 11 percent, which amounted to a negative variance from the fourth quarter of $12 million.
The lower 48 gas production decline, is 114 million cubic feet per day, or 19,000
due to steeper declines in the Gulf of Mexico, including further declines in the
on
295.
Gulf gas production has now turned around and we expect modest growth throughout the rest of the year.
activities were responsible for $10 million higher sequential earnings for the first quarter, verses the fourth.
Other variance factors can be seen on slide one.
Adjusted discretionary cash flow was $335 million, or $1.37 per share in the first quarter, down from $439 million in the fourth quarter, or $1.79 per share.
Total debt at the end of the first quarter stood at $3.183 billion, including nine million in current portion, up $277 million from the end of the fourth quarter, but that less cash increased by a lower amount of $129 million.
The cash balance increased $148 million for the quarter to $338 million.
The ratio of debt to
capitalization was 47 percent at the end of March.
Capital spending for the first quarter was $390 million, compared with $470 million, excluding major acquisitions in the fourth quarter.
The first quarter reported net earnings were $22 million and nine cents per share.
Negative
environmental and litigational calls, with the primary
and those special items reduced earnings by $21 million.
The
call
were the major factors affecting the segments for first quarter adjusted after-tax earnings, verses the fourth quarter.
That is again, earnings excluding special items.
Before I discuss the
results,
should be aware that Unocal's
in the way it reports
.
Prior to this earnings report, those expenses were included in DD&A members for the various segments of Unocal's E&P operations.
Beginning with the first quarter 2002 figures, these amounts are now included in
.
This change brings Unocal in line with most other successful
E&P companies, and will accurately reflect
expiration efforts.
The reclassification of these expenses has been conformed in Unocal's quarterly fact book for all prior quarters.
If you have more questions about this change, please contact the Investor Relations Department.
Moving now to slide two, Unocal's lower 48 business recorded earnings of one million, down nine million from the prior quarter.
I've already discussed most of the factors, but to recap, lower production
were responsible for 12 million of the decrease.
And lower prices and other factors were responsible for another four million decrease.
Partially offsetting those negative factors, was lower
expense, which added seven million dollars for the quarter.
Lower 48
states gas production, we had 13 percent in the first quarter.
This decline is a combined result of much higher than anticipated declines in new fields such as
, and the
impact of lower capital spending and rig counts in the last half of 2001.
Unocal did not start adding new rigs until well into the first quarter.
As I mentioned earlier, the Gulf of Mexico production declines have bottomed, and we're expecting to grow beginning in the second quarter.
Tim will have more to say about lower 48 gas production in his remarks, as well.
Moving on to slide three, results from Unocal, the Alaska E&P operations, were down 12 million from the fourth quarter, chiefly due to eight million in higher dry hole expenses.
The dry holes occurred on
prospects on the south Kenai Peninsula, but separate from the
discovery field.
The
the NNA number one,
number one, and
number one, have had operations suspended with no plans for further evaluation, due to encountering nine commercial quantities of natural gas.
Lower
prices and timing of lifting gas up into the
Alaska.
Moving onto slide four, results from Canada improved by seven million.
Lower
expenses,
accounted for four million improves results verses the fourth quarter.
In addition, high liquids prices of
cents per barrel, accounted for two million in higher earnings.
Moving on now to slide five, our international E&P operations earned $102 million, or
percent of total E&P earnings.
The quarterly amount was up $16 million from the previous quarter.
Contributing to the increase, was lower expiration expenses in the
segment of eight million, and lower operating expense at
international of seven million.
Higher oil prices of $1.06 per barrel, added five million to sequential earnings, and higher
production of 30 million
cubic feet per day, was responsible for three million in higher results.
partially offset these positive factors in the amount of a negative seven million dollars.
Moving on now to non-E&P operations, which are commodity trading, midstream and geothermal,
in the aggregate were higher by 10 million,
to improved pipeline and
results, and the timing of a provision for receivables from
that was booked in the fourth quarter.
Moving on to slide six,
corporate and other expenses was $75 million, accounting for a $27 million earnings decrease from the fourth quarter, due chiefly to lower results from
operations, higher pension expense, the premium paid on Canadian debt retirement, and the timing of the
on agricultural products operations recorded in the fourth quarter.
Partially offsetting these negative variances was higher
results of six million.
After-tax, corporate and other expenses are expected to
$70 million per quarter in 2002.
Looking forward, Unocal's estimate of second quarter earnings is between 45 and 55 cents per share, depending on commodity prices and other factors.
This second quarter earnings forecast assumes benchmark commodity prices of $26.35 per unit of
crude, and $3.55 for a unit of North American
natural gas.
Second quarter productions forecasted between
per day.
The midpoint of this range is a two percent increase over the first quarter figure of 470,000 per day.
The second quarter earnings estimate also includes estimated dry holes, of between $20 and $30 million dollars pre-tax.
For the purposes of your own estimate analysis, Unocal's quarterly earnings sensitivity is four cents per share, for each one dollar change in worldwide oil prices, and two cents per share for each 10 cent change in
natural gas prices.
The full year 2002 earnings estimate is between $1.70 and $1.90 per share.
This estimate is predicated on benchmark commodity prices of $24.80 per unit of
crude, and $3.35 per unit of
natural gas.
with a different price expectation, Unocal's earnings sensitivity is 16 cents per share, each
worldwide oil prices, and eight cents per share for each 10 cent change of full year at North American natural gas prices.
Unocal's hedging activity changes over time.
In the first quarter 2002, our hedging program added 15 million to pre-tax revenues, compared to market prices for the quarter.
Looking forward, we have shifted
units of our previously disclosed
for the second quarter and the third quarter, lifting the
range on those volumes almost one dollar higher.
For the second quarter, 14.96 billion units of
natural gas, had a ceiling of
and a
.
These volumes represent less than 22 percent of lower 48 gas volumes, and less than nine percent of worldwide gas volumes.
For the third quarter, 10 billion units have a ceiling of $3.98, and a floor of $2.63 cents.
These volumes represent less than 15 percent of lower 48 gas volumes, and less than six percent of worldwide gas volumes.
Forward looking price assumptions are subject to significant change on a daily basis, and analysts should look to the changes in the latest benchmark prices for oil and natural gas to adjust their earnings estimates accordingly, during the quarter and in the remainder of the year.
The full year production estimate is a range between 490 and 500,000
per day, compared to earlier expectations of 504,000 per day.
Higher oil prices in Indonesia expected to reduce our
volumes by around 3,000
per day.
These changes in
volumes do not impact earnings or cash flow due to the mechanics of the production sharing contract for the east
contract area.
The full year earnings estimate also includes dry hole expense of $120 to $130 million pre-tax.
And now for a perspective on first quarter results and other matters, I'm gonna turn the discussion over to Mr. Tim Ling, Unocal's President and Chief Operating Officer.
Tim?
- President and COO
Thanks,
.
Good afternoon.
I'm gonna run down some of the major things that either have occurred or are occurring in our operations in the first quarter and second quarter.
First of all, as many of you may have seen, we did have an incident in Alaska on our King Salmon platform.
Last Saturday during the routine pump change, we did have a gas blow, and that was ignited.
We had four contract employees, three from
and one from
injured.
Three injures were treated and released, and one had some burns on the hand.
That person is stable and just being observed at a Burn Center in Seattle.
The
is stable and plugged, and we're not focused on business recovery.
The production facility and the platform was basically undamaged, and it should be back to full production within the next four to five days.
I'll talk about Thailand, number of things going on there.
First of all, with respect to the settlement on our gas contracts, and as Robert had mentioned, that is the reason why Mr. Williamson cannot be at the call today.
After much negotiation and discussion, we agreed basically to discount our 1-2-3 production of about two percent, or about five cents per
.
In exchange for that, we received a five and a year extension of our
field contract, which now takes our major concessions through to the year 2012.
We also had our production license application recently signed
although not directly related to the negotiations.
I think the overall discussion and settlements reflects again our experience over 40 years, and our commitment to the Thai's and their commitment to Unocal as a superior operator in that area.
I think both sides feel like a fair and equitable settlement was made.
We're very happy about our extension on
and they get the discount that they thought they needed.
So we're off and running on that.
We have two new developments which will be coming on or ramping up as the year progresses.
Our
oil development, which I just, as I just mentioned we just recently signed our production license for the
piece of that field.
It's currently producing an 8,000 barrels of oil per day gross.
With the just received production license, we will be ramping that production up to about 9,000 barrels per day in May, and 15,000 barrels a day by June, and should be that
, or exceeding that for the rest of the year.
Our facility's limit is 18,000 barrels a day of oil.
Preliminary or initial results in our oil development, and the
area tells us that our reservoirs are performing significantly ahead of what our initial prognoses were, and I think we have reasonable optimism that we'll be able to hit that facility limit and pending some issues about reservoir performance and facility safety, we'll actually be looking at the potential to even produce above and beyond the facility's limit over the next 12 to 18 months.
Our second new development is our
gas project.
That project is on track, and will be starting up on July 1st.
So our two new developments are now looking good, and we're showing
now with those developments through the rest of the year in Thailand.
Finally, in Thailand, I think it's worthwhile talking about the economy.
We are definitely seeing the economy picking up.
We're now forecasting GDP growth in the range of 3.5 to four percent for 2000, 2002, and 2003.
And that is up from our previous assumptions at the year end of 2001.
Things are looking robust.
Year-on-year power demand was up almost nine percent in March.
We're setting new records, and gas demand is up 7.3 percent from the year 2000 on a year-to-date basis.
This is encouraging news on Thailand.
I know there were, especially given the Thai press on the negotiations we were having, I know there were some concerns.
But I think that beyond those and between the field performance, and the economy and gas demand, I think we're feeling very good about Thailand.
Let me move now to Indonesia, and focusing on our Indonesia
program, where as many of you know, we've been very active this year.
I'd summarize our
program continues to develop, and develop in a good way.
As a matter of fact, looking around the world, we believe this is really one of the few
plays which is really working in multiple arenas.
And as many of you know, we really do control a great deal of this play, and it's our expectation that as we learn more, as we drill more, the play will continue to advance and we remain very encouraged about our ability to have success there over the short, medium and long range.
Let me first talk about our
oil and gas field appraisal program.
We put out a press release a number of weeks back upon completion of our fourth
gas appraisal well.
That well encountered about 180 feet of oil, and about 60 feet of gas play.
But the key purpose of this well was to appraise the full potential and a reservoir performance.
We do
that well
at 8150 barrels per day.
And we're estimating a well performance of over 10,000 a day.
This was a P90 outcome for us.
We did have concerns.
Fluid quality is a little bit different than the fluids that we're used to at
.
And this is a bit of a different reservoir as well.
So we're very, very encouraged by the reservoir performance, and the flow rates that we got on that appraisal well.
We're drilling a well, our fifth appraisal
now called
five.
We are still drilling this well.
We are still in productive interval as I speak right now.
We will likely put out a release on the specifics of this well sometime in the next week to 10 days.
I will say that
five looks to be the best well by far that we have drilled to date on the
structure.
This obviously gives us some real encouragement about commerciality.
We may drill one additional appraisal well towards the end of this year, but that will really be more an exploration of a deeper zone that we really haven't been counting on that we think now may exist.
So I won't say anymore except that we're in a very good well right now, and again coming off of P90,
on
four, I think we're starting to become, you know, very
yet we are on another field instead of another prospect here.
Obviously, as with any appraisal program, 20 things can still happen, but I think we're right where we wanna be on
, feeling good and we're gonna begin to turn our attention to preliminary engineering studies, in preparation for the ultimate development of a PAD, as we officially go to commerciality pending the results of future work.
So good news on
.
On
three, this is a gas field in
.
We've called it our
field complex.
We drilled a well, we drilled a number three well a few months ago.
We also press released on this well.
This well confirmed the quality of the reservoir and the simplicity of the structure.
And one thing, I think, to note, in that area where we are finding these giant gas fields, is the geology in this particular field is very simple.
So we have very, very large structures with variant little complexity, which ultimately will make for, we feel very, very attractive development costs and schemes.
The DFT
to confirm high gas deliverability, which we did.
We estimated well deliverability of about 90 million a day.
But we were presently surprised with some very high condensate rates that this test yielded.
We believe that these wells, in addition to 90 million a day, will be able to deliver about six thousand
a day at condensate.
potential field development scenario, of some 500 million a day plus 30 to 40,000
a day condensate.
This condensate result is not entirely expected, and the teams have been working hard, post that test, to develop an appraisal program, indeed specific to early condensate stripping field development scenarios, which we are now envisioning.
We will likely drill at least two of these condensate appraisal wells sometime in the next six to 12 months.
And we feel that this field by itself, contains you know, as much as 100 to 100 million barrels of condensate, and well over two and a half trillion cubic feet of gas.
So short story is the gas story continues to develop, and we are encouraged and exploring the potential, and again I emphasize the term exploring the potential for early condensate delivery as that gas ultimately will go to
in the next round of contacts.
We drilled three exploration prospects in the area.
All of them found hydrocarbons.
Likely probably only one will be commercial, as a tie back to
.
We drilled a prospect called
where we found great reservoir, but non-commercial quantities of hydrocarbon, mainly we think probably due to a
failure, which we had identified as the major risk.
This was an encouraging well, however, in that we found you know, a rich, new reservoir
which we had not penetrated for, mainly due to rig capability.
This is going to give us a number of new play potentials, we believe, for oil and gas, including potential
tests under existing discoveries such as
and the central delta gas discovery.
We've shot a new
over our giant gas area which has significantly increased the size of our already large gas structures.
As an example we have a prospector field called
which now has a P91 excess of eight trillion cubic feet under the new seismic.
So we're now really looking at some very, very large gas structures.
And as we said before, we believe there may be some oil deep in this structures, or
, which we'll be exploring when we get rig capability.
So this program is going to remain active for the foreseeable future, focusing on oil and condensate appraisal, focusing on gas certification,
prospects, such as
that we're still maturing, and others that were maturing, and deep well prospects that we're waiting for rig upgrade on.
We'll now focus, shift our focus to the Gulf of Mexico shelf.
As we stated we bottomed out our production in the first quarter, and we're now on a modest upswing for the rest of the year.
As we talked about in the last conference call, we had our rig count all the way down to one or two, pretty much for most of the second half of 2001, as prices softened.
We're just now bringing our activity up, although we're still not anticipating a big capital uplift for the Gulf region.
We have five offshore rigs going at this time.
There are a number of major projects that are gonna contribute to the upswing in our gas deliverability as we go through the end of the year.
Our first joint venture, which we announced at the end of last year, production authorization brought initial production from 4,000 up to over 5,000.
Our
, completion programs and new drills should take production all the way up to about 15,000 barrels of oil per day net to Unocal by the end of the year.
So this program has taken shape nicely.
We're just starting
other results are giving us real encouragement, that we'll be able to meet or exceed these production
and that'll be a big part of us reversing our decline and getting our growth during the year.
We're also having some good success in
field exploration and exploitation program, allowing our
, and a similar program in east
158.
We've had early success on a major recompletion program in the Mobile area, which has yielded over 20 million a day net.
We have additional projects slated for the end of the year, and we're putting on some new
recompleting others in our
completions in the Mustang Island area, including our recent discovery at
, which we believe holds in the neighborhood of 50
.
In respect to the
focus of our Gulf of Mexico business, we are increasing, and we have made the shift to our focus on our deep
, deep shelf program.
Indeed the majority of our efforts on the G&G side have been on this play since the beginning of 2001.
We'll have
drills in the western gulf in the second quarter, two to three in the third, and three to four in the fourth, giving an aggressive, steady
drilling program from about four to six feet prospects per quarter, as we get towards the end of the year.
We had a
and are continuing to pursue additional commercial deals.
You will see this program is going to yield prospects that are a
of what we like to call type two prospects of about 20 to 50 BCF, as well as type three prospects that are gonna be in the range of 50 to 300-plus BCF.
Two of these type three prospects that we've shown are
which is the
somewhere between 50 and 200 BCF target range, and
308, which is somewhere between 85 and 300 BCF.
This program is a major strategic initiative for the company and really the key to the future of the Gulf of Mexico business.
We're not gonna try to
this business without success from a deep program, and have significantly curtailed activity on smaller
exploration.
Recently rising gas prices have done nothing to shift this focus.
The key is, we believe, we've done the hard regional geology and geophysical work, and now believe we have strong competitive
not only on our
models, but also on
properties as well, allowing for selective use of direct hydrocarbon indications.
hard work doing
modeling, we believe, puts us in a very, very situation, to develop, deliver results from this program over the coming years.
We ship now to Canada.
We believe
has turned a corner.
We talked about it in the fourth quarter conference call, and is now providing us with the type of drilling performance we expected when we acquired them.
They've really focused down on a number of, fewer number of plays and improved the exploration processes.
In the first quarter we drilled 53 gross wells, and had 50 successes. 28 oil completions and 22 gas completions, F&D for the businesses running below, six
.
And we've had encouraging results in two high skilled exploration wells, which we're holding tight due to commercial reasons.
We are likely going to consider expansion of this higher scope gas exploration program, if our success continues.
Moving out of the deep
, let me talk a little bit about the Gulf of Mexico program and what to expect over the next quarter and year.
continues to move along.
We're preparing and permitting the Trident three, our second
which will happen towards the end of the year, depending on when we receive our rig back from
.
This well will be testing down strike extent of the reservoirs that we found in number one and number two.
Conceptual engineering is progressing for potential stand-alone or pool developments.
This work continues to be encouraging although it's still early stages.
We just, we added our partnership
an appraisal
on our K2 discovery.
K2 discovery made, I think, back in 1999.
This is a
of Unocal
.
This well will be testing for lateral extent of the reservoirs in Canada and K2 number one, as well as looking for fluid samples.
And a positive well could well point us towards an economic tie-back.
Should have news on this well sometime this summer.
Excuse me,
.
Our 2003 drilling campaign is shaping up, and with that
program really is going to be around Green Canyon.
Three of our Unocal owned and operated prospects we call
, Green Canyon 436 and 480.
Corona Del Mar Green Canyon 950 and 951, and
Green Canyon 814, 815 and 851.
These are our, what we call neighborhood plays, made even more attractive by the recent Tahiti discovery.
We're really trying to focus the brunt of our Unocal activity on this Green Canyon area, given the success that we've had in places like
, as well as recent success that Chevron has had in Tahiti.
We're currently working on finalizing the maturation of all these to be drill-ready, commercially and geotechnically in 2003.
I think this development really does underscore the need that we feel, to allow the industry as well as Unocal to take risks out of the system.
For example, we still have very attractive prospects in other areas, more western than the deep water, such as Cat's Eye and
and many others.
But we really do wanna wait for additional developments in the basin before we drill these.
We continue to be in active discussions with large companies about drilled
on difficult but attractive wells.
And we'll look to give more guidance on that as we go forward, and we'll continue to look to farm out
and discover
prosecution of our prospect inventory.
Last thing I'll say before I hand it back to
and then we'll get into Q&A, I just returned, along with Mr. Williamson, from our business
in Brazil, where we were reviewing our exploration program, and specifically the prospect that we'll be participating in with Exxon starting this summer.
This is a prospect called
which is Portuguese for total in the BMES one and BMES two blocks.
It is a large
and it is a total, and this is a prospect that we believe is one of the best the industry will drill.
No question, given the disappointment we've seen in the basin so far, it is a high risk prospect but it's one that we are very anxious to drill, as is Exxon and as is
, our other partner.
This prospect has been getting bigger with every seismic reprocessing, which is always a good sign.
With that I will turn it back to Robert, and we'll be ready after some comments for question and answer.
- Vice President Investor Relations
Thank you, Tim.
Maggie, we're ready to move on to the Q&A portion of the call, so I ask you to begin that process now.
We'll be happy to take your questions.
Operator
Thank you.
If you would like to ask a question, please press star one.
To withdraw your question, please press star two.
Once again, that's star one to ask a question, and star two to cancel.
Our first question comes from Mark
of Bank of America.
Good afternoon, guys.
A couple of questions.
The tax rate in the quarter looked a little bit high.
Can you give us some reasoning and what the outlook is for the rest of the year?
Unidentified
Hi, Mark.
I'll take that one.
It was a little bit high.
It's only about five percent higher than the fourth quarter.
The average rate for the, if you're talking about the
tax rate, it's about 42 percent.
I think some of it had to do with the waiting of Canada, and some adjustments we made there.
I'll have to look into a little more detail and I'll get back to you off the call, but going forward, I think you should probably be looking at around a 45 percent rate.
Gotcha.
Getting to more operating stuff, on Ranggas, can you give us some idea as you
year, how big
potential timing of when we might see first production, what kind of rates just broadly speaking.
Unidentified
OK, let's see, there's a lot of stuff there.
I think when we press released on Ranggas-4, we talked about a range, a risk resource range for the Ranggas structure by itself, of between 200 and 350 million barrels of oil equipment.
You know, I will say that there's nothing that we found in these last two wells that would take us out of that range, and you know, indeed, if, I think if we continue to have encouragement, we may be pushing towards the upper end of that range, although again,
it's early.
You know, I think the reservoir, the
results on
four, in a relatively small
gave us some real encouragement, you know, on rates, although I would say it's still probably very early to give you an idea on combined field rates right now, so I don't wanna do that.
I'm sorry about that, but you know, I think 10,000 a day deliverability is pretty well, given what we're seeing so far in terms of our pay intervals and the complexity of structure.
You know, those things really do point that you know, we're gonna likely have a commercial development on our hands here.
And what would, when all is said and done, of those kinds of gross numbers, your net come down to if we went into development Here?
What would your net revenue interest be?
Unidentified
Well we're, you know, I'd say about between 80 and 85 percent, depending on whether we have a buy-in from
.
, as far as the, if you're asking about the host country's share, it would be on a sliding scale.
terms, so whatever the long term, we would be getting a 35 percent after-tax return.
In the early years,
since you get
cover over the, it's geared towards the beginning, it would be lower than that.
And so you'd have higher net
declining over time to that where we'd wind up with 35 percent.
OK.
And finally just broadly, the timing-wise, if you had to pick three years in the future as a range for initial production here, what three years might you pick?
Unidentified
Oh, geez, you know, I'd say you know, well there's still a lot of work to do.
We do have some complex engineering and design work to do here, to ensure that we don't have
issues given the creed that we're seeing.
So you know, we could, let's say, push to a POD, maybe within a year or so, maybe, I'd say the range would be four to six years.
From now, for initial production.
Unidentified
Yeah.
Tim?
- President and COO
Yes.
Gotcha.
Great, thanks a lot.
- President and COO
Thank you,
, take care. operator: Our next question comes from
at Goldman Sachs.
Unidentified
Thanks.
Tim, you spoke about the importance of the deep shelf to your future Gulf of Mexico business.
I mean, how should be think about that, if success is below some expected level, would it be a situation where you sort of then let production decline, you exit the shelf or make an acquisition?
How should we think about sort of good success rates here, one in three, on in four, better or worse than that?
Maybe I'll start with that.
- President and COO
Yeah, it's a good question.
You know,
I think you and I have talked, but one of the reasons why you know, we wanted to pre-invest with 18 months of hard
before we made a big drilling commitment here, is we have always said, Mr. Williamson and myself that we believe that the fields exist.
And we believe that the hydrocarbon system should be working maybe all the way down to 25 to 30,000 feet.
You know, economic basement has been 15,000 feet.
The geotechnical basement is a lot lower.
One of the reasons that we think the economic basement has been at 15,000 feet is that people have, you know, I won't say randomly, but I will say, not as calculated as they need to be through all these big bumps and have not had a great deal of success.
And we think the only way to give ourselves the best chance for success was to really, really pre-invest and get proprietary understanding of their regional G&G systems, which I think we have now, although I'm sure there's a few other companies that believe that as well.
We strongly believe that this program, you know, on the type three things that I talked about, should have
success between 20 and 30 percent.
The category two things, potentially between 30 and 40 percent.
So the key is really building an inventory
of enough prospects that have enough quality so when we start actually a repetitive drilling program, you know, statistically we're gonna have our success.
Probably in the last quarter, we've not gotten to the point where our drilling inventory is now far exceeding our capital, meeting for you know, certainly the next three of four quarters.
We really wanna stay, we wanna be aggressive, but we'd like to stay within that sort of four, four or five deep prospects per quarter, as we get into the second half of this year.
But that's the kind of success probabilities that we're expecting.
You know, we've, you look at our program in Mustang Island
we've hit a much higher probability of success in the
.
So you know, I think you'll see that.
I think you'll see some areas where you'll have a higher degree of success, and you'll see some areas quite honestly where you know, we're gonna come up without a lot of joy, but on average you know, we're pretty convinced that we're gonna have our shares of success.
Just out of that Mustang
, we have two discoveries, of 50 percent
gross basis, you know, in that 50 to 60 DCF prospect range.
So you know, gives us good validation that you know, with the right hard work, and the right regional framework, the discoveries are gonna come.
Now, if we're on the low end of expectations,
, I think that's a very fair question, you know, I mean, we certainly don't see a situation where you know, we're gonna wind up in the
.
We believe without a reasonable level of success from the deep shelf, growing that business just purely organically through small pool exploration, is not what we wanna do.
I think the
acquisition and the performance that we're seeing on that does tell us that under certain circumstances, consolidation for us around our skills and around our infrastructure makes sense, but as all of you know, we're not gonna be in acquire for the sake of an acquire company.
So you know, I think, clearly we have aspirations to do this deep shelf exploration to augment that with smart acquisitions.
And you know, where it makes sense, continue to do these organic programs like we're doing at
39.
But just broadscale organic growth out of the small pool exploration, I don't think you're gonna see us do anymore, even if prices continue to stay where they are right now.
Unidentified
That's very helpful.
Thanks, Tim.
- President and COO
Thank you,
.
Operator
Our next question comes from John
or Merrill Lynch.
Yeah, hi.
Tim, could you clarify some things on the
you were talking oil.
Are you talking really gas equivalence or oil in terms of the volume growth?
- President and COO
Yeah, it's gas.
I should've flipped it around, I apologize.
So more or less, you're gonna be bringing your gas volumes up.
Did
just totally tank, is it gone?
Or
...
- President and COO
Yeah, I mean, Muni, we're definitely on the pails now.
We're probably producing somewhere between 10 and 15 million a day.
And that's out of one well.
OK.
With respect to
and cash flow, you know, you added some more debt in the balance sheets since year-end.
You know, obviously you got
cash flow.
How are things gonna look the rest of the year, was this more front ended?
And also, in terms of the split between international and domestic, how's that gonna play out?
- President and COO
On capital,
?
Yeah.
- President and COO
Yeah, let's see, with respect to cash flow, our latest projections, given where pricing is right now, have us basically maintaining our debt position fairly stable.
We had some front end
of our capital, especially in places like
who had to commit to a program pretty much in the fourth quarter on rigs.
So I think overall you'll probably see us stay relatively flat in respect to what our debt to total cap looks like.
As I stated earlier, you know, even with the rising prices, we don't, we're not feeling very motivated right now to increase our capital expenditures.
Now depending on success, for instance, in our deep shelf program, and obviously we need to continue to watch what
is doing, but I think we're pretty happy right now at the levels we're at.
With respect to where the capital's going,
, I didn't bring my
but it really hasn't changed from the last time we updated
.
If you need
or myself, and we'll give it to you.
I just didn't bring it to the call, I'm sorry.
No, it's no problem.
I was just trying to get a sense because you talked a lot about some of these higher risk award projects in places like Indonesia and I was just wondering, you know, whether you'd be skewing more dollars there.
- President and COO
Right now, because we're drilling these, especially in Indonesia,
, we're drilling the appraisal and the exploration well so quickly that we're relatively in our budget.
We have, and we actually, we do have an option to hold the rig in the deep water
for I think two or three months,
what we have right now.
But we haven't exercised that option yet.
If we do that would probably be you know, an additional 15, 20 million dollars of capital, which would be deployed against the deep water in Indonesia.
OK, thanks.
- President and COO
Thank you,
.
Operator
Our next question comes from
of First Albany.
- President and COO
Hi,
.
Good afternoon, guys.
Do you have a specific location for the
appraisal yet?
- President and COO
Yes we do.
The answer is yes, and we're in the process of
the location right now.
Do you have any idea how far it is from either the discovery or the first appraisal?
- President and COO
Yeah, let's see.
It will likely be about four
down strike, four or five kilometers down strike from the discovery
.
So this is purely a strike line test.
As you remember, that
two was pretty aggressive, as it turned out to be
test.
OK.
- Vice President Investor Relations
, that means it'll probably be on 947 block, discovery
and the appraisal is on the 903.
OK.
Tim, I'm having a little conceptual trouble with the Gulf of Mexico expectation, production expectations for the rest of the year.
You know, merely because Muni is down to next to nothing, doesn't mean declines stop.
And I guess I just don't see or maybe you know, you haven't elaborated to a sufficient extent, you know, on what the increments are gonna be to achieve, you know, a second half rate of 860 in order to make your revised full year forecast.
- President and COO
You know, I think, Mark, there's, obviously
, the
field, not declining anymore does not take away, as you said, from a, you know, a 45 percent decline in the base.
We understand that.
You know, I think the increase is in our overall North American gas as we go forward.
In the Gulf of Mexico, as I talked about before, we are gonna see significant increases from the prosecution of our
joint venture.
That program really consists of three of four completions of
gas reserves, a number of recompletions, production optimization, and
which all go in total, to increase our net production out of that set of assets you know, some 60, 70 million a day, net towards the end of the year.
The other programs which I've mentioned before, such as our
39 field development, our
field redevelopment, are all projects that we have embarked on and are accelerating, and are seeing good results out of already.
And you know, I think we've, on a day-to-day basis, our
gas production just from the well in the first quarter to where we were a few days ago is up some 25 to 30 million a day.
So I think we do see our way just with our projects, to
as we said before, to modestly grow out of our declines as we go through the rest of the year.
OK.
You also revised up your Thailand gas forecast.
Is that strictly demand related?
- President and COO
Yeah,
two...
- Vice President Investor Relations
- President and COO
plus
, there probably is some upside
that's related to what I've talked about with respect to the economy and the gas growth.
But you know, things can be so
that we really don't wanna count on that right now.
Your revised forecast is what, 30, 40 over the combined DCQ of
one and two, and the one, two, and three areas?
- President and COO
Well it's about 20.
I think the combined DCQ's is about 585 and the new estimate is 605, so it's about 20 million a day above that.
OK, finally one more.
The cost in the other international area, you know, dropped several dollars, an equivalent barrel in the first quarter.
, can you talk about what went on there, and whether it's sustainable?
- Vice President Investor Relations
It's not, because part of it is since it was at one less
the way we account for that is, is that the inventory addition, which is basically capitalizing your costs, went against production expense, so that'll turn around when we, when that lifting catches up.
So if you wanna look at overall costs for other international, just kind of take the year end, the year average last year and straight line that.
OK, and I guess I'm a little bit confused.
You referred to the listing in your variance analysis, as being a net negative seven million dollars.
- Vice President Investor Relations
That was overall the, the actual revenue involved was significantly higher.
That was the net of the, as you look at the variance, the variance does not equal the total change if you're looking at the data warehouse.
The variance was the next of the revenue decline, less the capitalization of the lifting cost for those barrels.
OK,
.
- Vice President Investor Relations
OK,
.
Operator
Our next question comes from Sherry Alpern of
Asset Management.
Good afternoon.
I was wondering (audio dropout) on the progress of the lawsuit that was brought by the victims of
in Burma and what impact that would be having on shareholder value?
- Vice President Investor Relations
Well, none.
The prospect is it's totally off our radar screen.
The judge
judgement against the performance of that.
They have appealed it and as far as I know, we're still waiting a hearing on that.
But basically we feel the impact on shareholder value is zero.
Thank you.
Operator
At this time I show no further questions.
- President and COO
OK, well, I guess that concludes our first quarter conference call Q&A.
Thanks to everyone for your participation.
In summary, I wanna just say that Unocal's legacy assets in Southeast Asia continue to perform well, as we thought.
And we expect some
contributions from them in the future, from already discovered oil and gas lines, as well as additional recourse potential we're pursuing.
These assets are important
for Unocal and we have the people and resources in place to continue to perform at industry leading levels.
Our North American legacy assets have also performed well, but the lower 48 assets are currently challenged, due to significant area decline of the
field and from
back on drilling in the last six months.
Our continued exploration in the lower 48 including the important deep shelf program, is expected to bear fruit, and help us build a business back to previous levels and higher, assuming we get success.
The lower 48 is a crucial cash flow generated for the company.
At Unocal we're focused on nurturing our existing assets, while prudently growing our reserve base to be exploitation, exploration and acquisitions, with all the focus adding real value per share.
We appreciate your confidence as we carry out our plans with integrity and clarity.
Don't hesitate to contact any of us in investor relations if you have a question.
This will conclude our first quarter conference call.
Thanks.
END