Forestar Group Inc (FOR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2012 Forestar Group Earnings Conference Call. My name is Lisa, and I'll be your operator for today.

At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Anna Torma, Senior Vice President of Corporate Affairs. Please proceed, ma'am.

Thanks, and good afternoon. I would like to welcome each of you who have joined us by conference call or webcast to discuss Forestar's Third Quarter 2012 results. I'm Anna Torma, Senior Vice President, Corporate Affairs. And joining me on the call today is Jim DeCosmo, President and CEO, and Chris Nines, Chief Financial Officer.

This call is being webcast and copies of the earnings release and presentation slides are now available on the Investor Relation Section of our website at forestargroup.com. Before we get started, let me remind you to please review the warning statements in our press release and our slides, as we will make forward-looking statements during the presentation.

In addition, this presentation includes non-GAAP financial measures. The required reconciliation to GAAP financial measures can be found at the back of our earnings release and slides or on our website.

Forestar's third quarter results continued to show momentum across our business segments. Real estate revenues have nearly doubled since 2010, and minerals revenues are reflecting the success of growth initiative with further acceleration expected from the recent acquisition of Credo.

Thanks for your interest in Forestar. Now, let me turn the call over Jim for introductory remark.

Thank you, Anna, and I'd also like to welcome everybody to the call this afternoon. To those that are joining us from New York and New Jersey and Boston, know that thoughts are with you and your families, you friends, and your neighbors. Without a doubt, Sandy was a very bad storm that took lives and homes and left millions in turmoil -- is a real tragedy.

This quarter marked a defining moment. We completed the acquisition of Credo Petroleum, in essence, transformed our minerals management operations into an ongoing oil and gas business. We're looking forward to capitalizing on the oil and gas opportunities that lie ahead. We've got the capital and the capability to target investment and generate returns from exploration and production across 735,000 net mineral acres in [8] oil and gas basins.

Relative to the real estate, housing market conditions continue to improve. Although single family housing markets are headed in the right direction, we're still a long way from the historical average of 1.5 million starts a year.

I'm proud of the fact that we took advantage of market conditions during the downturn and acquired a number of good communities in distressed situations. As you'll see, those acquisitions are already paying dividends.

Likewise, we recognized the multifamily market conditions early in the cycle. We capitalized on the opportunity by building our pipeline in multifamily projects, and most recently harvested the value we created into the property. Despite the widespread uncertainty, I believe oil and gas plus the real estate dimensions of our business have us well positioned going forward.

In that vein, I'm going to turn the call over to Chris who's going to review our financial results. But just as important, Chris is going to share with you our results relative to generating cash and making sure we maintain a solid position relative to our balance sheet and liquidity.

Chris?

Thank you, Jim. In third quarter 2012, Forestar reported a net loss of approximately $700,000 or $0.02 per share, compared with net income of $36.4 million or $1.02 per share in third quarter 2011.

Let me begin by reminding you that our third quarter 2011 results include a gain of $1.12 per share after-tax associated with the sale of 57,000 acres of timberland. Our third quarter 2012 results include special items of approximately $5 million or $0.14 per share after-tax. These special items include expenses of $2.1 million or $0.06 per share after-tax associated with the acquisition of Credo Petroleum, and a loss of $2.9 million or $0.08 per share after-tax from the extinguishment of debt related to the amendment and extension of our term loan.

As a result, net income excluding special items was $0.12 per share in third quarter 2012 compared with a loss of $0.09 per share in third quarter 2011. This improvement reflects stronger segment operating results, which are highlighted on the following slides.

The increase in total segment earnings in third quarter 2012 compared with third quarter 2011 reflects the benefit of accelerating value realization across all three business segments. As a result, total segment earnings were $20.6 million in third quarter 2012 compared with a loss of $0.2 million in third quarter 2011.

Mineral resources reported segment earnings of $6.1 million in third quarter 2012 compared with $3.6 million in third quarter 2011. This improvement is primarily driven by higher mineral leasing activity and increased oil production.

Real estate reported segment earnings of $12.7 million in third quarter 2012 compared with a segment loss of $4.3 million in third quarter 2011. This improvement is primarily due to a $10.2 million gain related to the sale of Broadstone Memorial, a multifamily community located in Houston, as well as increased residential and commercial tract sales activity.

Let me also remind you that our third quarter 2011 real estate results include approximately $3.4 million in charges principally related to environmental remediation activities at our real estate project located near Antioch, California.

Fiber resources reported segment earnings of $1.8 million in third quarter 2012 compared with the $0.5 million in third quarter 2011. This improvement is principally due to higher harvest volumes and increased pricing.

The next slide highlights the significant free cash flow we have generated and the debt reduction which has occurred in 2012.

Through the first 3 quarters of 2012, we have generated significant free cash flow and debt reduction, principally through the sale of stabilized income producing properties in raw entitled land. In fact, during the third quarter, we completed the sale of Broadstone, generating approximately $30 million in cash and debt reduction of over $26 million. In total, we have now generated almost $100 million in cash flow and over $57 million in debt reduction through the execution of our strategic initiatives to accelerate value realization.

The benefit of this increased cash flow and debt reduction is illustrated on the following slide, which highlights our balance sheet and available liquidity following the acquisition of Credo Petroleum.

As mentioned earlier, during the third quarter, we completed the acquisition of Credo Petroleum for $14.50 per share, or a total equity value of approximately $146 million. In addition, we paid in full approximately $8.8 million of Credo's outstanding debt at closing.

Our balance sheet at the end of third quarter includes almost $900 million in total assets, with over $550 million invested in real estate and almost $150 million in oil and gas properties on a consolidated basis. The acquisition resulted in approximately $56 million in additional goodwill. However, only $20 million of this goodwill is driven by the fact that we acquired Credo in a stock transaction, and consequently we are now carrying their lower tax book basis. Actual economic goodwill associated with the transaction was only about $35 million.

Please remember that this accounting is preliminary and subject to change based on the timing of the transaction. We ended the quarter with approximately $277 million in total debt including almost $50 million of consolidated venture debt which is principally non-recourse to Forestar. In addition, we have about $177 million in available liquidity.

As I briefly mentioned earlier, we amended and extended our existing credit facilities in September to help provide a portion of the necessary capital to fund the acquisition of Credo.

The principal amendments included increasing the term loan commitment from $130 million to $200 million, extending the maturity dates of the revolver and term loans and reducing the interest rate. In fact, at current interest rates, this new pricing results in over 225 basis points of annual interest rate savings.

This amended credit facility effectively eliminates any significant near-term debt maturities, increases our operating flexibility and provides ample liquidity necessary to continue to take advantage of future investment opportunities.

Now, let me turn the call back over to Jim for some additional operating highlights.

Thanks, Chris. Let me share with you just a few of our third quarter 2012 highlights. Number one, by far, the most notable accomplishment for the quarter was the acquisition of Credo Petroleum for an equity value of $146 million.

Number two, year over year, our share of oil production was up over 63% and we leased over 3,100 net mineral acres for over $1,100 per acre. And note the production doesn't include any contribution from Credo. Number three, we sold Broadstone, our multifamily community in Houston for over $56 million and acquired a development site at an outstanding location in Downtown Nashville.

Number four, lot sales were modestly lower compared with the third quarter 2011, although average pricing was 17% higher, and our backlog of builder option contracts stands at just under 1,300 lots at the end of the third quarter. Number five, and last, we sold over 197,000 tons of fiber with nearly all of our available land leased for hunting and recreation.

Let's begin by taking a look at our minerals segment results. Our third quarter mineral resources earnings of $6.1 million were up $2.5 million compared with the third quarter 2011. And that's principally due to $4 million that we generated in mineral leases, delay rentals and another step-up in production. We leased over 3,100 acres for $3.5 million and received over $590,000 in delay rental payments.

Earnings from royalties and working interests were modestly higher year over year mostly due to oil production being up over 63% from the third quarter of 2011. We had 2 additional wells drilled in the quarter bringing the total to 542, and last we continue to invest in filling out our oil and gas team.

Now, let's take a closer look at the increase in oil production. Oil production continues to increase. Two new wells came on line in the third quarter that helped boost oil up to 49% of total production. Both charts illustrate a marked increase in our share of oil production over the last few years. We expect oil production in Texas and Louisiana to increase to an estimated 250,000 barrels in 2012 and that's just from our legacy minerals.

So, let's take a look at the Credo acquisition in a little more detail. We believe Credo will be transformative to our oil and gas business. There are a number of compelling benefits to be realized -- three in particular. First and foremost, we believe Credo will generate strong returns and provide scale by essentially doubling production and reserves.

Second, the combination will result in a portfolio totaling 735,000 net mineral acres, of which 142,000 are located in oil-rich basins and formations. And three, the ability to operate provides a valuable tool to the business and improves our capability to prove up and report additional reserve categories.

There are a number of benefits, but by far, the most important is that we believe the acquisition will create additional value for you, our shareholders, employees, and partners. Given Credo's investments in oil prospects and production over the last several years, we think the acquisition is very timely. Credo now has a focused strategy on oil.

In 2008, Credo shifted its strategy to a liquids orientation focused on oil production principally in response to an oversupplied natural gas market. From the first quarter of 2011 through the third quarter of this year, Credo has increased oil production over 2.5 times. And since 2008, PV-10 reserves have grown at a 25% annual rate through October of 2011. We expect additional increases in oil production and reserves by year-end 2012.

And keep in mind, our year-end reserves will include about 5 quarters of Credo addition due to the change from Credo's fiscal year to Forestar's calendar year. As I said, we believe the acquisition is timely. We believe both production and reserve growth are still in the early stages with room to run.

Let's take a look at a few of the key plays and regions. Activity in the Bakken/Three Forks continues to accelerate as many operators are drilling to hold leases. As of September 30 this year, there are about 30 wells including PDPs and that's up 21 in the last year.

Let me give you some insight in the potential economics. Assuming 8 wells per unit and 50 core units, there's a potential for more than 400 wells. If each well costs about $11 million to drill and complete and ultimately produces 500,000 barrels of $90 oil, our undiscounted value per well is about $2.7 million. Even using conservative assumptions, the Bakken/Three Forks should be a strong producer for years to come.

Another important region is Kansas and Nebraska. Currently, Credo has a little over 100,000 net acres of leasehold interest in Kansas and Nebraska targeting the -- Lansing, Kansas City. That's an oil play we're using 3D seismic data to identify smaller structures. These are shallow, conventional vertical wells with costs generally in the $400,000 to $500,000 range.

Credo is expecting to drill about 60 wells in the region this year. It's been operating at a 40% success rate to-date. That's pretty strong for exploration. I believe this reflects the quality and the experience of our oil and gas team in Denver.

Reserves were estimated to be in the range of 40,000 to 50,000 BOE or barrel of oil equivalent per well, which yields a pretty solid rate of return. One of the real key benefits in Kansas and Nebraska is that it's both scalable, it's repeatable and it fits well within our risk profile.

The next slide provides a glimpse of the potential created in the combination of Credo and Forestar. On a combined basis, Forestar now has over 735,000 net mineral acres located in many prolific oil and gas basins in the continental US. Within the portfolio, there are a number of opportunities in both oil and natural gas plays, particularly as natural gas markets recover. Forestar now has over 924 gross wells, with a working interest in about 40% of the wells generating additional participation and production.

On a trailing 12 months basis, Forestar produces over 900,000 BOEs, and that's barrel of oil equivalents, a year. That's almost 2,500 BOE per day in oil accounting for about 50% of the production. Given that 2013 drilling plans from the Bakken operators are still coming in, we're currently anticipating about $35 million to $45 million in CapEx for 2013. We believe a majority of the investments are slated for the Bakken/Three Forks and then Kansas/Nebraska.

We expect investment to support and continued upward trend in oil production and reserve growth. After the plan firms up we'll provide a more definitive CapEx estimate for 2013 during the February call.

Let me sum up oil and gas before moving to fiber. Just a few short years ago, we had a minerals business housed in a number of cardboard boxes with little to no visibility. Since then, we've invested in talent, systems, and now an oil and gas company rounding out the platform and capability needed to launch this business forward. We are fully committed to delivering the value that we all believe is inherent in this business.

Let me shift gears to fiber. Third quarter fiber resources segment earnings were about $1.3 million higher than the same quarter last year and this increase is largely due to higher harvest levels and better pricing. During the quarter, we sold over 197,000 tons of fiber with average pricing up for both pulpwood and sawtimber. On average, pricing was up 28% compared with the same quarter last year.

Relative to recreational leasing, we have nearly all of our available land leased. In multifamily terms, we'd say that we're just about at full occupancy. On to real estate.

Our real estate segment results continued to head in the right direction. In the third quarter, year-over-year segment earnings were up $17 million. Results were driven by a $10.2 million gain from the sale of Broadstone. The third quarter also benefited from the sale of 18 commercial acres and $1.1 million in earnings from the community development loan that we purchased in 2011 for $21 million.

The next slide provides a little more detail relative to the development of our multifamily business. We're developing our multifamily pipeline at a time in the cycle when demand continues to exceed supply in most of the markets. If you recall, on previous calls this year, we noted that we were targeting the sale of Broadstone, Las Brisas in 2012. I'm pleased to report they both sold.

Broadstone was a 100% owned and sold for over $56 million in the third quarter. Las Brisas, a 59% owned property located in North Austin closed last week for $40 million, generating about $9 million to $10 million in cash to Forestar and should generate about a $6 million to $7 million gain in earnings.

We're also making good progress developing 2 projects -- one in Austin and one in Denver. Promesa, the Austin project, is essentially complete and over 60% leased. We expect to reach stabilization and begin to market the property in 2013. In addition, we have 3 development sites in the pipeline -- one each in Dallas, Nashville, and Charlotte.

Let me give you a little bit more color on what's likely to be our next multifamily development. This slide is currently an older multifamily property in Nashville, Tennessee that we closed on during the quarter. The 3.7 acre site is in an outstanding location just off West End Avenue the major traffic artery in Nashville.

There are several major employers nearby including multiple hospital campuses and Vanderbilt University, plus the site is just 2 miles from the central business district. Nashville has been one the fastest growing metropolitan areas in the US, with nearly 24% growth since 2000 and projecting nearly 8% growth over the next 5 years.

Over 24% of the metropolitan area's population falls between the ages of 18 to 34, and that's the prime multifamily renters. The submarket is 96% occupied and including development projects currently in the pipeline vacancies are expected to remain in the 4% to 6% range for the next several years which is a healthy level.

We anticipate starting construction mid-2013 and initiate leasing in the second half of 2014. Given the current multifamily market conditions, I'm encouraged by our position and recent progress; 2 units sold, 3 under construction, and a number of solid sites ready for 2013. I'm equally encouraged with the performance in the entire real estate segment. We expect all categories of our real estate segment to improve in 2012.

One point I need to make about the chart before I make any comment is that we excluded revenues from timberland sales. So, what you see is GAAP revenue from owned and consolidated projects -- the core components of our real estate business. Revenue from residential lot, residential tract, and commercial tract sales are all benefiting from improved market conditions.

We expect total real estate revenues to almost double in 2012 as compared to 2010. And as the margin per lot data suggests, margins also remain healthy. In addition, our order backlog for lots remains full at 1,575 lots as of the end of October. That's up almost 300 since the end of September.

Housing markets where we have investments continue to slowly improve yet remain somewhat fragile given the economic uncertainty. Home buyers much like equity and cash oftentimes are hesitant to invest while finding safety on the sidelines. However, our access to credit and ability to deliver lots in communities where people want to live and can invest with confidence is a competitive advantage.

Before we close our review, I want to take a minute to update you on our Triple in FOR strategic initiatives. Let me stress, we are committed to executing our Triple in FOR initiatives. In its simplest form it is tripling segment earnings in 2012 through '15 as compared to 2008 through '11.

I believe we're headed in the right direction and have developed good solid momentum. Lot sales, oil production, and total segment earnings are expected to all be up in 2012 versus 2011. In addition, we expect Credo to make a material contribution to production and reserve growth, plus enable us to report additional categories of reserves going forward.

The sale of two stabilized multifamily properties is another significant step in developing our multifamily business. These sales, coupled with our ongoing projects in a pipeline of high-quality sites has formed the foundation of our multifamily business, and that's the foundation that we can leverage and build upon.

We believe there's more to tell, not only about multifamily, but the entire business. So, we will be hosting an Investor Conference on Tuesday, December 11th in New York. It'll be held from 8.30 in the morning until noon at the Grand Hyatt in Midtown. The morning will enable us to provide additional insights about our real estate and oil and gas businesses.

Since we will be in New York, we plan to bring several of the communities and projects to you. In fact, we've produced a number of virtual visits to our real estate community. And you'll have the opportunity to meet many of our talented team members. So, we hope you'll be able to join us for the event.

In conclusion, I want to leave you with four important thoughts. Number one, our progress to-date has oil and gas production and reserves positioned for meaningful growth. Number two, real estate continues to benefit from our strong presence in Texas, well located communities and ability to deliver lots and tracts to builders.

Number three, we've captured value from the sale of stabilized multifamily properties, while at the same time we've created value by developing a pipeline of projects and sites. And, number four, like our recent acquisitions, we'll continue to make investments that generate solid returns, but most importantly create shareholder value.

I want to thank you for joining us this afternoon on the call. We appreciate your interest in Forestar, and we really look forward to seeing you on December 11th at our Investor Conference in New York.

So now, I'd like to open up the call for comments.

(Operator Instructions)

Your first question comes from the line of Mark Weintraub with Buckingham Research. Please proceed.

Hi, there. This is actually [Brandon Monson]. I'm going to be filling in for Mark on this call.

I have two quick questions. First, assuming where oil and gas prices are currently, would you assume the Credo acquisition will be accretive in 2013 and, if so, by how much?

I would assume that based on the current oil and gas prices that Credo would certainly be accretive in 2013. We have -- we've provided a little bit of information with regards to our forecast, but what I would tell you is we plan on providing significantly more information at the investor conference, and I'd like to wait until then until we provide more definitive information about the 2013 Credo.

Okay, understood. I guess moving on then to the second question, have you seen any measurable pickup in interest on the part of buyers for your residential development properties?

Yes, I think it's reflected not only in lot sales but the backlog that we have. The other point that I would make is we included a chart where we showed not only lot sales, but residential tract sales. They'll be a point in time in the cycle, and we're beginning to see that, where builders will not only want to take down lot positions, but want to take down a phase that we classify as residential tract.

So, I think the best way to capture builder activity is when you look at both lot sales, as well as residential tract. And then last thing I'd say about residential tract is that, generally those are phases or parcels within a community that have been engineered, that have been approved, they've been laid out. So, what we term that in the development business is paper lots. So, what we report are the sale of fully developed lots, but the residential tract reflect paper lots but it's all reflective of builder demand.

Okay, great. That's helpful.

Good. Thank you.

Your next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed.

Thanks, good afternoon. Yes, my first question was also along the line of your land position because clearly a lot of traditional builders are stocking up on their land. So, are you seeing a pickup in inquiries for you and how exactly are you reacting?

There is certainly more interest and even demand today that there was a year ago, and obviously in comparison to a couple of years ago. But what we try to do is remain disciplined in the sales and not get ahead of ourselves, and also to take advantage of some potential pricing power.

As you see that -- in one of the charts that we shared with you that the gross margin per lot is up a little bit over time. And we believe that that's reflective of the markets that we're in, the communities that we have and the demand that we're seeing.

So, as we manage these communities and we manage these projects, we obviously want to drive velocity as much as we can but not to the point that we would potentially dilute margin and take advantage of the position we have with the lot inventory and good locations.

And given the duration of this housing downturn, would you say that we're in the very early innings of a recovery and it has got years and years of improvement ahead of it?

Yes -- Steve, I am certainly encouraged by the recovery; however, it is slow and even though the level of confidence is higher today I would tell you that in general everybody who is involved in the market, in the home building industry is still cautious. If you look at where we are today, in annual starts we are around 800,000 plus or minus, and the historical average, over the last 50 years has been a 1.5 million.

So, we still have a long ways to go. However, I don't see the recovery as a hockey stick. I think that there's still a lot of caution out there. However, it's headed in the right direction.

I mean, is the biggest governor do you think confidence or access to credit?

I think it's confidence and jobs. I will tell you that, in my opinion, the three most important drivers to lot and home sales first would be jobs, second is jobs, and third is jobs. It's -- it is the most highly correlated driver of starts and sales. So, that's a little bit of an overemphasis.

And then, second, I would say is confidence, Steve. I think as we look around people are feeling better, however, when people or potential home buyers write checks for their equity investment in a home, it's a big deal. So, people want to make sure that they make a good solid investment and given what they've seen over the last 6 to 8 years, they are a lot more cautious and careful today than they were prior to the run-up.

Well, perhaps that's what's going to make it more sustainable in the long run. And just switching gears, unfortunately, into an area where I'm not quite as conversant, but when you talk about how the Kansas and Nebraska landholdings are scalable, I mean, why do you believe that? Does that mean that you'll be adding to your land position or just the -- as you see success in one area you can almost leapfrog with confidence to the next?

Yes. Steve, kind of think of it as it's when you establish a position in one of these formations or plays and you become successful, you understand the structures, you begin to perfect the drilling and completion techniques and prescriptions, then it's just a question of almost like bolt-ons over time and you continue to step out in acquiring additional leases.

I will say that, in this business, to the extent that you're successful in a certain play or a basin, most operators will begin to try to acquire leases at a fairly rapid rate in order to secure as much of a position without alarming the market, if you will. Generally, once word gets out that an operator has been successful then the cost of leases and the leasehold interest begins to go up.

Understood.

So, let me back up and just sum up and say that I think Credo has done really well in Nebraska and Kansas, has a nice position and there's opportunity for growth there and to repeat the success that they've had to-date.

Great. Thank you for taking my questions.

Good. Thank you, Steve.

Your next question comes from the line of Robert Howard at Prospector Partners. Please proceed.

Hi, there.

Hey, Robert. How are you doing?

Pretty good. Got the snow coming down now after the storm. Anyway, just looking at the -- you had the table with -- looking at the multifamily business and now you have a bunch of things in Texas, and now you have got Denver, Nashville, Charlotte, there's a sort of a widening footprint in lots of different areas. Is that sort of going to continue, or is it sort of like doing this project in Nashville? Does that give you a foothold here and you look to sort of build on to the regions where you've been -- had -- doing some work in the multifamily?

Two comments, Robert. One is that we're generally going to target investments in Texas. We like Denver, we're in Denver. And we like that Southeastern growth corridor from I-85 from Atlanta up to Raleigh Durham include -- obviously it includes Charlotte -- and we also like Nashville.

And when I say that, which is the second point -- we've had investments and operations in these markets for quite some time, so we are fairly intimate in an understanding of market conditions with relationships, with networks. So, what I would tell you is that these investments are made in markets and locations where we've got experience and we've had success as well.

But I would -- I think it's also important to understand, is oftentimes what you don't see is all the ones that you say no to. So, we are very selective, very disciplined in our acquisition of sites. So, I can assure you there's been a number of -- lots of nos to get to one yes.

Sure. Okay, is the -- do you kind of -- can see the multifamily business kind of continuing -- I guess growing at sort of this pace, or does it take a while to absorb some of these new projects or where is the -- what direction is that heading?

Robert, the way that we think about this business today, which is principally a development business, understanding that it is cyclical and we're going to have to certainly be cautious as markets mature as additional supply comes online, but I would just tell you ideally to the extent that you can generate and deliver four projects a year that's a pretty nice business. So, that is our current target.

And we'll continue to look for opportunities and ways to leverage the progress that we've made. I think with the team that we have in place, the resources, the portfolio we have, it'll open up some additional opportunities going forward. But principally right now, we're just focused on a plan that would generate and deliver about 4 units or properties a year.

Okay, great. Thanks.

Thank you, Robert.

Your next question comes from the line of Albert Sebastian with Prospect Advisors. Please proceed.

Good afternoon, Jim.

Hi, Al, how are you doing?

I'm doing very well. How are you?

I'm doing fine. Thank you for asking.

Jim, just on the Bakken properties and the economics per well, I think you indicated that each well on average has a undiscounted cash flow of $2.7 million per well, is that correct?

Yes, that's what I've said.

And is that net of the $1.1 million for drilling and completion?

Yes.

And what is the --.

Al, the assumption I used was today a well is costing somewhere around the $11 million range, and the net interest that Credo has in the area is about 8%.

Okay. And, Jim, what are the underlying assumptions with regards to WTI pricing and the discount that you would get off of WTI?

In the scenario that I just referred to, Al, I used $90 oil. I used 500,000 barrels per well at $90 oil.

Okay. So, the $90 would be to you, but you would sell at a discount to WTI. Is that correct?

Not -- there was a discount to WTI within the last 6, 12 to 18 months but that -- there's actually a period of time recently, Al, that it was selling at a premium to WTI, so --. On a go-forward basis, it's going to trade very close to WTI. It's just a function of getting the infrastructure in place in the basin -- the takeout and the delivery.

Okay. And the CapEx you indicated about $40 million next year, can that be funded exclusively from cash flow generated internally from oil and gas?

Al, the numbers I had mentioned was $35 million to $45 million.

Right, okay.

Obviously, to answer that question, we'd have to rely on assumption of what oil and gas prices are going to be in 2013. But, I -- I mean, I'll ask Chris to weigh in on this as well. I think we would cover a majority of that through cash flow, but I don't think we'd cover 100% of it.

Chris, do you want to comment?

Yes. I think that's accurate, obviously we're going to need to have a better sense of what prices are for next year, but our oil and gas business would cover a vast majority of that CapEx next year.

Okay. And one last question and this is probably for you, Chris. On the sale of Las Brisas -- just so I'll understand this, the sale price $40 million, is that net to you the $40 million?

That's at the project level, Al.

Okay. So, that's at the project level, so I guess you received cash of $10 million. Is that correct?

Yes, that's correct.

And so, I guess there was a reduction of debt as well.

That's correct. The majority of the remaining proceeds were used to pay down project level financing.

Okay. If I'm reading this correctly, it would be $40 million but net to you would be 59% of that and then --.

No, net to us, Al, of the $40 million was $10 million cash.

After paying the debt.

After paying down the debt.

Okay. And what was the reduction in the debt then?

$28 million, $29 million.

Okay. Thank you, gentlemen.

Welcome.

Thank you, Al.

I would now like to turn the conference back over to Mr. Jim DeCosmo.

Good, Thank you. We certainly appreciate the questions and your interest and participation on the call this afternoon. And once again, for all of those who are in New York and New Jersey and in Boston, our thoughts are with you. Have a great afternoon.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.