EQT Corp (EQT) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

I'll be your conference operator today.

I would like to welcome everyone to the Equitable Resources second quarter 2007 earnings conference call.

All lines have been placed on mute to prevent any background noise.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Mr.

Patrick Kane, Director of Investor Relations.

Sir, the floor is yours.

Good morning everyone and thank you for participating in Equitable's earnings conference call.

With me are Murry Gerber, Chairman and Chief Executive Officer, Dave Porges, President and Chief Operating Officer, and Philip Conti, Senior Vice President, and Chief Financial Officer.

In just a moment, Phil will briefly review the second quarter financial results released this morning.

Then Murry will provide updates on horizontal drilling and the ongoing regulatory review process the acquisition of People's Gas and Hope Gas.

Following our prepared remarks, Murry, Dave, and Phil will available to answer your questions.

As reported in the press release, the expected drilling costs and production of our horizontal wells have improved.

The horizontal drilling slide in our analyst presentation has been updated and the available on our website.

We are in the process of a more comprehensive update to our analyst presentation, and we're targeting our August 22 presentation at the Enercom Conference in Denver.

The presentation will be webcast and the slides will be posted on our website that day.

Today's call contains forward-looking statements related to such matters as our pending acquisition of Peoples and Hope, SG&A expenses and our drilling and infrastructure programs, and other operational matters.

It should be noted that a variety of factors could cause the company's results to differ materially from the anticipated results or other expectations expressed in these forward-looking statements.

These factors are listed in today's earnings release.

The section of the company's 2006 form 10K, the 2007 second quarter 10Q that will be released today as well is on our website.

I'd now like to turn the call over to Philip Conti.

Thanks Pat and Good morning, everyone.

As you saw this morning Equitable announced earning per diluted share $0.87 for the second quarter of '07.

That compared to earnings per share $0.36 in the same quarter last year.

This quarter's results were heavily impacted by a gain from our previously announced transaction with Range Resources.

That gain was partially offset by an incremental charge associated with our executive performance incentive program and a $2.9 million expense associated with a statutory change in the tax law in West Virginia.

I will discuss all these items in greater detail in a minute but first, the highlight in the quarter from an operating standpoint was that we continued to see some encouraging results from our horizontal drilling program and that led to our decision to drill all future Kentucky shale wells horizontally.

Murry will elaborate on the horizontal program in his comments but that decision in the second quarter did result in fewer vertical wells being drilled than planned, and therefore slightly lower volumes in the second quarter.

A small timing delay relative to the significant upside we see by using horizontal drilling technology.

That decision will also affect our capital spending.

Because of the longer lead and higher initial flow rates the ramp up of our horizontal drilling program requires us to commit and spend capital for both drilling and infrastructure sooner than as required by our vertical program.

We expect to have capital expenditures in 2007 of approximately $800 million which is higher than our original forecast of about $712 million.

Before summarizing our operating results, I wanted to briefly discuss the impact of the Nora transaction.

That transaction has a significant effect on any comparisons of the second quarter '07 results.

As you know in April we entered into a purchase and sale agreement with Range to jointly develop the Nora Field.

That agreement resulted in a sale of portion of our reserves in Nora.

Range also purchased 50% of the Nora gathering system as we formed a joint venture, which we are call Nora Gathering LLC.

On May 17 or approximately halfway through the second quarter we closed on approximately 80% of the reserve portion and a substantial majority of the Gathering portion of that transaction.

We are in the process of attempting to receive the consent agreements needed to close the remainder.

As a result of the closing we realized a gain on sale of assets of $119.4 million after netting out the cost of unwinding approximately 7.3 BCF of associated hedges.

We received approximately $170 million of up front after-tax cash proceeds to date.

A portion of the pretax proceeds are currently in an escrow account and you'll see when we release it later today on the balance sheet there will be a line item called restricted cash.

You'll see $95 million on that line item and that is that escrow account and as we continue to identify and close any lifetime exchange transactions over the next three or four months or 180 days from the date the transaction closed.

In terms of the transactions impact on our second quarter operating results on the production side are second quarter produced volumes were approximately 0.6 BCF less as a result of the sale of the Nora reserves.

On the Gathering side.

as a result of the asset contribution to Nora Gathering LLC gathering volumes, revenues and expenses related to the Nora field gathering activities are no longer included in Equitable Supply's operating results.

The company did report equity and earnings $0.6 million in the 50% ownership in Nora Gathering From an operating perspective, the production and gathering segments operating income of $71.2 million was up 9%.

That improvement was driven primarily by the increase in sales volumes up approximately 5% when normalized for the Nora sale.

As well as a higher average sell price, that price was $5.07 compared to $4.71 per unit a year earlier as a result of the increase in NYMEX prices and bases in this most recently completed quarter versus last year.

So we continue to make process toward our goal of accelerating production growth.

The Supply unit increased sales volumes and drilled 157 wells in the current quarter and 267 wells year to date versus 114 well in the second quarter and 214 wells in the first half of 2006.

Even with the impact of the decision to stop drilling vertical shale well in Kentucky, Supply is on track to meet its sales target of 77-78 BCF and its drilling target of 650 wells.

On to Equitable Utilities and as you know the second and third quarters of each are generally uneventful quarters from an operating standpoint for utilities.

Particularly from a revenue perspective due to the relatively few heating degree days in those quarters and this quarter was no different.

Utilities operating income in the second quarter was down $3 million verses the second quarter of '06.

In preparation for the acquisition for Peoples and Hope Gas we did expense $4.3 million dollars of cost in the second quarter of 2007 and that was about $1.6 million more than we expensed in the second quarter last year.

Even though the closing schedule was delayed verse our original forecast.

The costs to date are in line with expectations when we announced the deal.

And Murry will update you on the regulatory process surrounding the Dominion acquisition shortly.

Finally in making any comparison to the second quarter '06 results at utilities, bear in mind that we had a positive impact in the second quarter of last year from a $2.4 million reversal of an office consolidation impairment charge and that was nonrecurring, obviously in this most recent quarter.

Moving on to the executive performance incentive program Equitable stock has risen from $41.75 at year end to $50.09 as of yesterday's close, which represents 20% of appreciation year to date.

This increase in share price also improves our relative rank in the peer group of 29 companies.

As a result of the change in share price and relative rank and the continued progress on our horizontal drilling program, we have changed the assumptions used to calculate the expense each quarter to a 225% payout multiple and a $60 final share price up from a 200% multiplier and a $57.50 share price that we were previously using.

Because we had to make up for accruing for this place for nine quarters at the lower assumptions the expense for this program in the second quarter of 2007 was $20.8 million versus the approximately $7.7 million prior quarterly run rate.

Ultimately this total charge for this place will be determined at the end of 2008 when we know what the final stock price is and where our relative rank is.

Barring another change in the assumptions, the expense run rate for this plan going forward is approximately $9 million per quarter through year end 2008.

And with that I'll turn the call over the Murry.

Thanks, Phil.

I'd like to give you a brief outlook for key value drivers and we'll take as many questions as you might have.

First on the Peoples and Hope deal in Pennsylvania there's nothing new to report.

On the FTC process on May 14th, the district court judge granted Equitable's motion to dismiss a FTC complaint opposing the Equitable-Dominion transaction and the FTC subsequently appealed the decision of the district court judge in the third circuit entered an injunction against the transaction pending the decision to up hold or reverse the lower court decision.

Briefs are being filed and oral arguments if required are scheduled for the week of September 24th after which an opinion will be issued.

In West Virginia, the process continues with a bit of a bump in the road.

As you are probably aware during the May Public Service Commission hearings a disgruntled ex-Dominion employee made certain allegations against his former company related to gas purchases.

This week the PSC issued an order to move forward with the review of the acquisition case separate from the hearing of the matter regarding gas purchase costs.

All said, the timing on West Virginia approval is not known at this time.

We have agreed with Dominion to a extension of our purchase and sale agreement with some modifications until November 1st.

Equitable and Dominion are currently negotiating the ability for us to complete a closing of the Pennsylvania LDC in advance of closing the West Virginia portion of the deal if the remaining regulatory barriers to Pennsylvania LDC transaction have been cleared.

Moving on to production and gathering.

First on Big Sandy, as you'll recall the capacity on Big Sandy is 130,000 decatherms a day through the first two phases that has been fully subscribed.

Phase one expected turn in line date is later this year for 70,000 of the 130,000 decatherms today, phase two turn in line which will include the completion of the new Langley plant the scheduled for Spring of 2008.

Operationally we are moving smartly ahead on all areas on Big Sandy.

On the drilling program in general, still mentioned we're planning to drill 650 gross operated wells verse 560 last year.

About 580 vertical and 70 horizontally.

We have 13 rigs running, 10 rigs are drilling vertical wells, 1 rig is drilling the vertical portion of our horizontal wells and 3 rigs are dedicated exclusively to horizontal drilling.

We expect peak rig count to be 13 to 14 rigs drilling vertical wells and an additional 9 drilling horizontal wells.

As of June 30 we had about 267 gross operated wells, 53 wells or 25% ahead of last year.

2007 well costs just for information, on an apples to apples basis seemed to be about 1 to 2% below 2006.

I mentioned this is first quarter and it seems as though we've seen the peak on drilling costs and maybe are seeing relief going forward.

On coal bed methane down spacing current results of the 2006 infill pilot, 16 wells are still on track with expectations.

We're targeting to drill 50 coal bed methane infill wells this year but we'll drill as many as we've been permitted to do.

Digging a little deeper from the initial pilot program the 16 infill wells are producing better than expected.

Declines from the original offsetting wells are worse than expected.

But net-net the program looks good right now, so far in 2007 we've drilled 11 coal bed methane infill wells.

We have only two months of production dated from those wells on average but initial results are encouraging.

Overall performance of this infill program is in line with our expectations and we are moving forward to expand the infill drilling in the coal bed methane.

On horizontal drilling to date we have in we have spud 30 Devonian shale plate, 25 in 2007 and five in 2006.

Twenty- two of those wells have reached total depth of which 16 have been turned in line with six wells currently awaiting completion.

Eight wells are currently drilling.

We are now planning to drill 70 essential wells this year, but we will drill as many as we can, we currently have four rigs running in this program.

Three are dedicated exclusively to drilling the horizontal portion of the wells.

One rig is being used to drill the vertical portion of the wells, for the time being we're using sort of a piggy back approach to drill horizontal wells, using one rig of lower capability to drill the wells to the kick off point and using another rig for drilling the horizontal section, which is more suitable to do so.

And we're using that process to maximize utilization of the drilling equipment that's available.

We'll be adding two additional horizontal rigs by the end of July and we plan as I said to have nine horizontal rigs running by the end of this year.

Based on the results to date we have come to two important conclusions about our Devonian Shale horizontal drilling program referenced in the release this morning.

First, based on our recent experience, we posted updates to our well drilling costs and to the production type curve for horizontal wells.

Estimated per well costs are now $1.2 million per well, 14% below our initial projections.

Per well reserve estimates are up 17% from about 3/4 of a BCF to .9 BCF per well.

Keep in mind that while on a positive track the projections are still based on a relatively small data set.

Second, during the second quarter we came to a significant fork in the road regarding the future employment of horizontal drilling technology in the Kentucky portion of the shale play.

(Inaudible) either to continue to drill a mixture of horizontal and vertical wells or alternatively to drill horizontal wells exclusively in this part of the play.

We took the latter path and therefore are our intent at this time is to drill virtually all shale wells in Kentucky using horizontal drilling technology.

We took this important strategic step for several reasons.

First, we are quite encouraged by the results we have seen so far in the horizontal program.

And therefore have concluded that each shale well drilled vertically that might otherwise have been a candidate for horizontal drilling is an economic opportunity lost.

Second since land access and permitting relating to horizontal drilling is different and somewhat more complex than for vertical drilling we wanted to online our team to a common drilling objective in order to avoid duplicative and wasted time and effort.

And thirdly, perhaps most significantly the horizontal drilling program has required us to commit to an expanded gathering pipeline and processing infrastructure designed to carry the larger gas flow rights that the horizontal wells produce.

A transportation system geared to the flow rates for vertical wells in this area is unlikely to be flexible enough to carry the extra burden of flows from the more productive horizontal wells.

We decided it was time to make a firm commitment to horizontal drilling in Kentucky and we have done so.

Having said that, we still have much to learn about how to optimize the value of our horizontal wells, particularly in the completion of those wells.

You should see us continuing to experiment to assure that well geometries and completion techniques are appropriate.

In addition to expanding our horizontal drilling program in the prospect area that already been successfully tested in Kentucky, we will be testing several prospects in West Virginia during the second half of the year.

We will also be testing a new multilateral well design that if successful would give us up to four times the amount of horizontal lateral footage per well than our current design.

We hope this design will result in sufficiently high natural flow rates from the wells that additional completion and stimulation will not be necessary.

If so, we expect the new well design to cost $1.1 million per well or less.

That's an experiment.

We'll report on that when we have got a couple of these wells done.

We will also be testing them (inaudible) in the second half of 2007.

Our plans are to drill at least two Marcellus wells in West Virginia and another two in southwestern Pennsylvania.

We'll turn it over the questions now, but overall I would say the Equitable team is quite enthusiastic about our prospects for organic growth and production in midstream and we remain hopeful that our LDC deal will close and Pat we'll turn it over to questions.

That concludes the comments portion of the call.

(OPERATOR INSTRUCTIONS Your first request is from Schneur Gershuni UBS.

Hi good morning guys.

Just a couple of quick questions here.

The first question I wanted to ask is just about the change in the curve with respect to the recovery per well on the horizontal plate.

Is the change more due to the fact that the decline rate is less deep than initially thought or are you extending the life of the well?

We're not extending the life of the well.

The first part is the more significant piece.

The decline rate seems to be a little less early than we thought.

Just a couple of other quick questions here.

With respect to Nora-Gathering LLC.

Will it have an opportunity to target third party volumes at all?

This system is really designed for Equitable and Range right now.

And then just switching back to the horizontal play one last question here.

I guess it's sort of a two part question.

Have any of the wells come in below 1.2 million to drill and are their productivity opportunities that we could see the costs come down even further?

We're still experimenting a lot.

Let me put it this way.

The short answer is we're going to update the curve and we're going to update the table based on best projections at the time.

I think your question is, is there more room or more scope for improvement on costs?

And you could ask another question.

Is there scope for improvement on volumes?

I'd say the answer to that question is yes.

But at this point management is not ready to commit to you that what those numbers would be.

Just to add to that, we're going to update the curve periodically and when we see that we are able to reduce costs or increase volumes we'll make sure the those changes are represented in the curve.

I guess the resulting after tax benefit as well.

Correct.

And if I could just ask one last question, how many days is it taking you to drill I guess to spud a well on the horizontal basis?

You know, how long does it take to drill them?

Less than a month.

It takes -- the way we're doing it now, we're not doing -- we're starting with a vertical, we're moving with a vertical rig and than we're moving that rig off and putting a horizontal in.

And then we're staging the completions.

So there's usually a gap between the time when the well has been completely drilled and the time at which we put the completion tools in there.

Some wells have been produced naturally and we haven't seen the necessity to put in a completion system.

So I don't want to give you a number.

It's kind of varies.

Right.

Is it possible to think of it this way that with nine rigs drilling, we can probably see in 2008 over 110 wells.

I'll let you know later how many horizontal wells we're going to drill in 2008 How about that.

I'll make it easy for you.

I'll tell you.

But not today.

Thank you, Murry.

Operator?

Your next question is from Faisel Khan from Citi.

Good morning.

On the -- you went through some of the data.

You've [TD] 20 wells and you've completed six wells is that correct on the horizontal side?

Yes.

What I said was that we have drilled 22 have reached TD and 16 have been turned in line.

16 are flowing to sales right?

Yes, yes.

And have you had any issues with the 16 wells flowing to sales, have they've knocked out any of your kind of older producing wells within the same gathering system?

We're somewhat concerned about that.

That's why I made the comment in my remarks that we're -- we had to make the commitment to more gathering.

And processing for that matter.

Capital in order to support the drilling of those wells.

And Kentucky as I'm sure you recall has always been a bit of a tight spot for us.

And so yes, we're worried about that but we think it's solvable.

We just have to commit the capital and gathering to getting it done.

Which we've done now.

Okay and that's -- that's all the questions I've got.

Thank you.

Your next question is coming from Ray Deacon from BMO.

I think when you got started your mentioned the number of around 900 BCF of potential increment reserves to be added though horizontal drilling and based on the results sound like potentially that number could move higher.

Is that what you're saying?

Also how much variability have you seen across your acreage so far with the 20 wells or I guess the 22 wells that have been at TD.

Is there a big range?

Let me answer the first question on reserves.

You know, we tried to include in the P2 and P3 reserves some notion of the potential impact of horizontal.

Obviously, we'll be going through another reserve review this year.

At that time we will be determining how much proved reserves could be attributable to the horizontal drilling program.

I would just suggest that based on a limited number of wells that you're shouldn't expect that number to be great in '07 because of the rules on how one books proved reserves.

To put a fine point on it.

We're going to drill 70 wells.

If we drill all 70 and they're all completed and all producing there only 70 (inaudible) locations, it doesn't add up to a lot of reserves.

I think there will be more clarity by the end of the year on the risks you might assign to the P2 and P3 reserves.

If you see what I'm saying I think that's the kind of calculus that investors and I'm going to have to be thinking about as we represent the value of the company going forward.

Have we changed the notion of the riskiness of the P2, P3 because of this horizontal program.

I think we'll be talking about that quite a bit.

As far as the variability, there is variability and you recall one of the areas -- prospect areas we called Tiptop in Kentucky doesn't seem to be responding yet to the drilling and the completion.

Our so called standard drilling and completion techniques for horizontal drilling so far.

Doesn't mean it won't work.

But that clearly hasn't responded as well.

And we've had the other extreme where we've drilled wells where we haven't needed to stimulate them at all.

They've just flowed naturally.

So we're seeing some considerable variation to date.

But expect for that one area, we haven't been knocked out.

All the other areas seem to work economically quite well.

There's some variability as to whether they should be completed, stimulated or completed naturally and I think we'll continue to see that for some period of time.

Just a quick question.

You've always said you didn't feel like LNG would have an impact on Appalachian pricing relative to NYMEX which is true, which kind of surprised me.

Any qualification to that going forward if we were to see potentially another half a B to .7 be coming in to LNG.

Do you think there'd be an impact of Appalachian differentials?

I don't think so.

At least not to the extent that it would be a significant to our base, as it might be some differentials that are present in other bases, it might have an effect but I don't think its going to have an effect that's going to knock us out.

Okay.

Got it.

Thanks.

Thank you your next question is from Carl Kirst from Credit Suisse.

Good morning, everybody.

Just, Murry you may have mentioned this in your comments but my line got dropped and I came back in as you were talking about the Marcellus shale.

Did you mention a timing of when you may test horizontal drilling in some of the areas outside Kentucky, West Virginia, Pennsylvania.

We're already beginning to test horizontal in West Virginia already.

Okay.

Okay?

And then you might have heard that Range is expecting to drill a horizontal well in the non-coal portion of the north field area where we have some joint operations with them.

So they'll be at least one horizontal well there and they're already talking about down spacing in the non-coal reservoirs as well.

So there's a lot going on.

Okay.

But we don't have anything to report on that.

Understand and with respect in context of the I guess before we were talking about having 11 total prospect blocks if you will.

Are we going to when we leave 2007 are all 11 blocks going to have been tested?

Probably not all 11 and we're probably going to add more in the West Virginia area as well.

So what we're trying to do is to make sure that we understand the geographic area generally over which this new technology is applicable.

And it might mean that we don't have to test every single prospect area to get that done.

Those prospect areas are more geographic reference points for us.

The shale extends well beyond the boundaries of those individual prospect areas and those things were set up not necessarily from a geological standpoint but from sort of a -- to organize our thinking on how we should prosecute the plan.

It's also, those areas were set up in relation to certain infrastructure right?

So what wells would tie to certain infrastructures?

So the play itself is much broader than the individual prospect areas.

So I don't think we necessarily have to have wells in all 11.

And beyond that, we may be testing areas outside those 11.

So we'll be providing more detail on that.

And I think at this Intercom Conference we'll try to lay that map out a little bit more clearly.

Fair enough.

Two final questions if I could.

Just the first is on Kentucky we had been thinking about 3500 locations.

Is that still the right number?

And two, is there any move afoot -- correct me if this number is wrong -- something like 6000 existing vertical locations, is there room to go back and recomplete some of those verticals?

All of those things are possible.

I would say although it's tempting for me and you to try to project number of locations we have as a result of the horizontal drilling, we're going to take our time and go through the reserve report again and than later this year, early next year come out with a revision of both proved and unproved reserves and proved and unproved locations and all the data that we're receiving.

So it's a little too early for me to make a comment on that.

Fair enough, lastly, the timing on Big Sandy?

On time on budget.

It's on time.

It's a little over budget but it's still very profitable.

Fair enough.

Thanks guys.

Thank you, your next question coming from Carol Coale from SMH Capital

Two questions, First of all it's been my understanding that your acquisition of Dominion distribution companies to create critical mass so that ultimately you can separate the E&P from the utility business and I know there's the regulatory situation has been frustrating for you and us.

At what point is this West Virginia situation continues to drag out at what point would you go forward with your plans to pursue the Pennsylvania acquisition so that can further your initiatives to separate the businesses or are you going to wait and let West Virginia play itself out.

I just want to make sure we're clear in all our previous conversations so far what we've said is that we're reviewing whether separation is a good thing for the company.

And that we would make that decision at the time that there was clarity around the LDC acquisitions.

So I don't think it's a fair comment at this point to say that we are the management of the board has definitively said that if the LDC's go through there will be separation.

Not to say there hasn't been a lot of discussion and talk and inference around the investment community.

Just so we're clear, that decision has not been made.

I just want to get that out on the table.

To your other point, it is clearly true that clarity around this matter is -- or lack thereof -- has been somewhat troubling and in extending the deal with Dominion, we have both agreed that clarity is important.

And to that end, we are currently negotiating to a deal with Dominion or trying to negotiate a deal with Dominion, wherein if the barriers to Pennsylvania have been removed and those relate to the FTC.

That we are able to close at least that portion of the transaction.

And again, at that time if we're able to start closing a part of this LDC then your first question becomes more relevant and we'll be discussing what the structure of the company should be at that time.

And we have not made a conclusion on separation.

Fair enough.

And one other question just to clarify.

Phil in his comments talked about how it's the majority of the transaction with Range is completed and if there was still about 20% of the deal had still yet to close, so one time item that you took in the recent quarter the gain on the transaction and the loss resulting from your reduced hedge position, is there residual impact in the third quarter or--

If we close the remaining 20%, there will be another gain in the third quarter.

And an offsetting hedging loss probably too?

I believe we've taken most of the hedging loss that we're going to take against that first piece.

Okay thats it thank you very much.

Thank you.

Thank you.

Your next question is from Matthew Jones from Catalyst Funds.

My question has been answered.

Thank you.

(OPERATOR INSTRUCTIONS) The next question is from Becca Followill from Pickering Energy Partners

Good morning.

You touched on it briefly about you're going to relook at reserves etc.

in January or talk about it the first of next year.

But I'm not particularly patient.

So in looking at the implications for Kentucky and what it means going to all horizontal versus all vertical can you talk about what that means in terms of production reserves.

It seems like it's going to have a very significant impact.

Can you ballpark in some way?

I'm not ready to do that.

What we did was we took some notion of where we thought horizontal drilling was going to take us and we worked that into our updated P2 and P3 we did in '07 and the reserve booking rules are not going to let us move much of that into the proved categories.

It's a fair question for you to ask how fast will the proved reserves start reflecting the impact of this technology and my answer to that is probably not in '07 but probably in '08 it will.

And the second part is much will it affect the unproved reserves in terms of magnitude and timing.

I think that's a fair question and I'm not ready to go there yet.

But what we have said and at the end of the first quarter we're projecting a higher growth rate in production from around 5%, which is where we've been for the last few years to more like 9% in our presentation and right now I'm tiff sticking with that.

I'm sure that's not satisfactory to you.

But that's where we are.

I'm try to be patient.

Your next question is from Brooke Glenn Mullin from J.P.

Morgan.

I had a quick question on production numbers for this year.

On the change to more horizontal yet we saw no change in your production is that just a timing issue that these are going to be later in the year?

Keep in mind on a program of 650 wells, we've only drilled 20 -- 25 this year.

Started drilling and haven't completed all those.

So even though the per well volumes are fairly significant from those horizontals, it's kind of a drop in the bucket in the greater scheme of things so far.

So yes, it is a timing issue.

And as Phil mentioned, and this is probably -- there's probably more subtlety to this than most appreciate.

But we are in the move from drilling verticals to horizontals.

We've had to revamp our whole permitting process and that requires a bit of a lag.

And so we had to face the decision about whether to continue on the path to drill as many vertical wells as we originally planned and then add horizontals which was one possible path.

And try to do two things at once.

Then when we came to the conclusion that every well that we might have drilled horizontally, was an economic opportunity lost.

Wait a minute, let's stop.

Let's drill those -- all those wells horizontally.

Which is introducing a lag and that's result of changing the technology.

So there's a bit of a lag.

That's the thing Phil talked about.

We think in the long run and we don't mean 10 years but over the next couple of years, you're going to see that the benefits of having made this transition will far outweigh the short term negatives on production.

So that's the calculus that we've made.

It's a very significant change for the company.

And -- but we think it's the right thing to do given what we know.

Okay great thank you.

(OPERATOR INSTRUCTIONS) Your next question is from Alex Meier from the LP.

I just wanted to ask real quickly, what did you book in terms of your Kentucky horizontal locations before?

Your prior reserve report?

I don't have that number in front of me.

We have published that, haven't we, Pat?

Are you talking about the horizontal incremental?

It's about 75% of what we think potential locations would be 3500.

So 75% of 3500 approximately.

Thanks, guys.

There appear to be no other questions.

Thank you.

That concludes today's call.

The call will be replayed for 7 days beginning at 1:30 today.

You will need a confirmation code 8104544.

The call will be available on our website also for 7 days.

Thank you all for participating.

Thank you ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.