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Operator
Good afternoon.
Welcome to Vintage Petroleum's second quarter conference call.
This call for the benefit of Vintage shareholders and other interested parties and any rebroadcast of this call for commercial purposes is prohibited without the permission of vintage.
As we indicated earlier people such as the press and bloomberg can listen to the conference call but cannot ask questions.
I would now like to turn the program over to Mr. Bob Phaneuf.
Robert Phaneuf - VP Corp Dev.
Thanks very much.
Good afternoon everyone.
Thank for joining us today.
Present though call today are Vintage are Charlie Stephenson our Chairman, Craig George our CEO, Bill Abernathy our COO, Bill Barnes the CFO and Larry Shepherd senior Vice President of new ventures as well as other members of our management team.
After my preliminary and introductory remarks our call will begin with prepared remarks from in this order Bill Barnes, Bill Abernathy, Larry Shepherd and Craig George.
Then we'll open it up for request & A -- Q & A. The slides which accompany our presentation are available on our website at WWW.Vintage Petroleum.com.
Via the conference call icon or the presentation section of our web page.
Comments today include forward-looking statements within the meaning of the private securities litigation reform act of 1995.
Statements other than historical facts are forward-looking statements.
Such statements are of course no guarantees of future performance and actual results and developments may differ materially from those statements.
Factors that could cause actual results to differ materially include the risk factors listed in our 2002 form 10-K and other documents filed with the SEC.
Also during the call we are likely to refer to non-GAAP financial measures such as cash flow from continuing operations, earnings before certain major item, or EBITDA.
Please refer to the tables in our current press release and those in the appended section of our webcast presentation both of which are on the company's website for reconciliation of these measures to a comparable GAAP measure and for other information regarding these measures.
So at this time I will turn the call over to Bill Barnes our CFO.
Bill Barns - CFO, EVP, Treasurer, Secretary, & Director
Thank you, Bob.
For those of you with access to the webcast I'll begin with a summary of the quarter that we set forth on page 2 of the webcast slides.
We reported a net loss for this quarter of $8.7 million. 14 cents a share.
Non-cash charges for impairments of $41.6 million pretax were recorded during this quarter relaying almost entirely to assets in Canada and were the driver behind the loss for the quarter.
Excluding these come pairment charges and a few other items that I'll in just a minute our earnings before certain major items and non-GAAP financial measure for this quarter would have been $17.7 million or 28 cents a share.
This compares to the similar measure in the year earlier quarter of 17.3 million or 27 cents a share.
Cash flow from continuing operations for the quarter of $64.2 million brings our first half of 2003 total to $148.7 million cash flow.
This non-GAAP measure excludes the impact of changes in working capital items and other items listed in the reconciliation which appears in the appendix that Bob referred to earlier.
Long gas production from continuing operations this quarter totaled $6.9 million BOE.
This brings first half production to a total of 13.9 million BOE which is in line with our expectations and previous annual production target guidance of 29.1 million BOE for the year.
Expected decline from the year earlier quarter is 8.2 million BOE in production is attributable to property sales which occurred in June 2002 and March 2003 and national production declines which were magnified by the effects of the substantially curtailed cap-ex program that we implemented in 2002.
We only spent 54% of our cash flow last year and used the excess of cash flow along with proceeds from asset sales to substantially reduce our debt levels.
As expected this adversity impacted production levels as we started into the year 2003.
On page 3 of the webcast we identify certain major items impacting the net income or loss reported for the second quarter of 2002 and 2003.
Net loss for this quarter again was 14 cents a share compared to the year earlier quarter's income of 35 cents a share.
The after tax impact of this year on this year's quarter from the property impairment charges I mentioned earlier is $24.3 million or 38 cents a share.
Foreign currency exchange losses for the quarter were another 4 cents a share.
Adjusting for these items earnings would have been $17.7 million or 28 cents per share as opposed to the loss of 14 cents.
The year earlier quarter included the after tax impact of gains asset sales of 17 cents a share.
Income for discontinued operations of 3 cents, a loss on earlier extinguishment of debt of 8 cents and impairment charges of 5 cents.
Adjusting for these items the year earlier quarter would have been $17.3 million or 27 cents a share.
These earnings before certain major items are non-GAAP financial measures and are presented to explain the impact certain items had on our reported results for the quarters presented.
Strong product prices in the second quarter were significant factor impacting our overall results for the quarter.
As shown on page 4 of the webcast, our realized oil price was $24.95 a barrel including the impact of hedges.
Up 17% from the year earlier quarter's $21.39 a barrel.
Realized gas prices were also up significantly. 43% above last year's $2.29 for MCF at $3.28.
Turning now to page 5 of the webcast.
You will see these strong prices more than offset this quarter's expected lower production compared to the year earlier level.
Fallen gas revenues were up 4% to $159.5 million and cash flow from continuing operations was up 5% to $64.2 million.
Looking forward our first half cash flow of nearly 149 million barrels and continuing strong product prices have caused us to raise our 2003 targets for cash flow and EBITDA.
These revised targets will be discussed later in our prepared remarks today.
While our restricted capital spending in 2002 and assets sales adversely impact our production levels as expected, we accomplished the desire goal of strengthening our balance sheet and position Vintage for future growth.
We ended the second quarter with our debt net to cap ratio at under 51% and $107 million of cash on hand.
Currently we have nearly 300 million of unused availability under our bank facility and we're now actively pursuing acquisition opportunities as we return to growing production and reserves.
At the same time we remain focused on maintaining our healthy balance sheet and our financial flexibility.
This point I'd like to turn the discussion over to Bill Abernathy.
Bill Abernathy - EVP, Treasurer, Secretary, & Director
Thank you, Bill.
For the next several minutes I'd like to briefly discuss our production and lease operating expenses for the quarter in the first half a few operational highlights from our exploration program.
The impairments we recorded in Canada and our revised operating financial targets for the year.
On slide 7 on the webcast has an outline of the topics that I'll be covering.
Production for the second quarter was 4 and a half million barrels of oil and 14.6 BCF or 6.9 million BOE.
That brings our first half production to 13.9 million BOEs which is consistent with our expectations.
Going forward we are adjusting our second half and our annual volume targets downward in two countries.
First in Canada there's a reduction of 200,000 BOEs for the impact of properties that were sold in June and July which is something we have previous I announced.
Then there's additional 200,000 BOE's resulting from higher royalty rates that we pay in Canada and higher price environments.
Royalties paid to the crown in Canada are based on a sliding scale that is the function of price among other things.
So as prices go up the royalty rate goes up.
Which means the net volumes go down.
We've not changed our underlying forecast.
Only the royalty.
And the good news here is that in higher price environment the revenue increase from the higher price is larger actually quite a bit larger than the royalty increase so the net result is that there's still quite a bit higher cash flow.
Also going forward we see the Bolivia gas markets are not improving in the fashion we had expect so we're lowering our Bolivia volume forecast by a total of 400,000 BOEs most of which is gas.
So the overall result of this is a reduction of the company total volume forecast by 800,000 BOEs 2.7% from 29.1 to 28.3 million BOE.
Lease operating expenses for the quarter were $54.3 million.
About $2 million above our expectations.
About $600,000 of this was higher severance and export taxes as a result of higher product prices.
About $1 million was from strengthening of the Canadian dollar.
And the remainder was from some higher electrical costs in Canada on some OBO properties likely owing to gas price increases there.
These cost variances combined with the volumes I just discussed translate into $7.86 per BOE for the quarter which is little over 50 cents above our expectations with the Canadian differences being the largest owing to the higher electrical cost the strengthening of the Canadian dollar and the reduces net volume as a result of the higher product prices.
But I think the real story on LOE is quite a bit letter than these figures might sound on the surface.
If we look at the first half of '03 and remove all of the impacts of higher prices on the lease operating expenses in the form of taxes, and the impacts of higher prices on volumes in the form of increase royalties and look at the direct lease operating expense in the field and the volumes that were actually produced we are right on what we had forecasted for the first half of the year.
Going forward we're increasing a total LOE estimate for the year by a little over $5 million. $3 million of that is production and export taxes.
This translates to a revised LOE target of $7.60 per BOE.
Next I'd like to make a few comments about our exploration efforts since this is where a large piece of our capital budget is spent.
In a few minutes I'll turn it over to Larry Shepard to discuss exploration and acquisitions.
In the U.S. the focus 6 our drilling this year is largely in Texas an quite a bit is horizontal drilling.
In three fields in south central Texas that being West Ranch, Lilling and Darsh Creek, we drilled 14 horizontal oil wells so far this year and achieved an initial build up of a little over 2000 barrels a day.
We expect to drill another seven wells in the same areas by year end and we hope also to be drilling at least one horizontal well possibly even more in the North Antelope Hills field in California.
We're also doing some infield drilling in some tight gas fields in east and south Texas.
Namely Lumablaca and Gilmer.
Two wells are being completes at the moment and we expect to drill another three by year end.
In Argentina we've been back to drill since the fourth quarter of '02.
In Argentina we've drilled over 325 wells since 1996 with success rate in excess of 95%.
So far this year we've drilled 24 wells.
That's several wells less than we expected by this time as we had to wait several extra weeks for the second and thirds rigs that we picked up to become available.
So for an interim time we've added fourth rig to get us caught up on our well count for the year.
We ultimately expect to drill 63 wells in Argentina this year.
In Canada we've drilled a little over 6 net wells year-to-date with some activity in most all of our areas.
Sterjon Lake, West Central, Peace River Arts and East of 5.
Because of the geologic diversity in all of these areas there's no one type of well or target that has dominated the program so far.
In the second half we'll drill 14 to 15 wells.
For the most part in Sturgeon Lake and West Central areas with Sturgeon Lake, Bad Heart Gas and Le Duc Oil, West Central Cardium Gas and Peace Rivers Arts dominating the program in the second half.
Next I'd like to address the impairments that we recorded this quarter.
In Canada specifically the exploration acreage in the northwest territories at $23.7 million and though producing of oil and gas properties at 12.6 million.
Both of these figures being pretaxed.
In the northwest territories we recorded an impairment for the three licenses that we have an interest in.
After completing a review of the remaining potential in the determining that while we believe the area may still contain significant exploration potential it no longer fits into our investment portfolio.
We don't have plans for additional capital expenditures there and we're initiating efforts to farm out our interest.
The producing property impairments were distributed over three fields.
Dawn, Weir Hill and Little Bow and were driven by negative reserve revisions resulting from unsuccessful workovers and additional technical evaluation of some other non-producing jobs.
Finally I'd like to address our revised targets for the year.
I've already discussed volume and LOE revisions in slide 8 on the webcast addresses those revisions and others.
We've increases the oil and gas prices to$ 29 per barrel and $5.25 per BTU respectively and we've marginally increased our net realized prices a as percent of nomage prices.
Our non-acquisition capital budget is unchanged at $185 million and the result on EBITDA target is increased to $385 million and the cash flow target is increased to $265 million.
In just a moment I want to turn the mic over to Larry Shepherd to give an expiration update.
Talk about those activities and some comments on the acquisition environment.
You just heard what I had to say about what's going in exploration so it's pretty clear all together we have a high level of activity going on here.
I also want to say that we have a lot of very good experienced, creative people looking at ways to extract new value from a very diverse set of assets.
Sometimes it's tedious.
It requires a lot of focus, hard work.
But our people are up to the challenge.
They're dedicated to it.
And I just want them to know that we appreciate their very many efforts.
So with that, Larry, I'll turn it over to you.
Larry Shepard - SVP/ New Ventures
Thanks, Bill.
I will spend just a few minutes to speak to Vintage's new venture undertakes a we look to the future of the company I think as Bill did a good job of closing his comments with, we're excited about what we see ahead of us and I would just like to convey to you briefly where we are first as far as exploration goes then we'll follow-up with a few comments related to acquisitions.
During 2002 we implemented a new exploration program in Vintage.
The objective was to create a third leg to our growth stool.
So having spent 2002 implementing this new program, during 2003 we're now beginning to see the fruition of that come to bear as drilling is underway.
I want to spend just a brief second and I would like to do so just to help clarify the foundation of the program we embarked upon.
The tenant of the program is first we are now as explorationists play focused versus prospect focus.
We want to be in the right place.
That gives us the leverage to be able to utilize experienced gains from the work in the area to look to the future and we believe it also makes the probableistics statistics work for us.
The other thing is that we're technology driven.
We look for places where we can apply technology to pursue plays that maybe have not been as actively pursued in the past with the current technology that exists.
We're doing this in a disciplined way.
And we do that through the rigorous company wide risk assessment so that we can finally develop a balanced portfolio and balance our risk reward, our production growth versus reserve growth.
We can do so in a sustainable way while also using a very small amount of our capital to expose us to potentially company transforming events.
In North America and I believe you can see this on the webcast on slide 9, comments about where we currently stands in the program.
First of all in the basis of west Texas and Eastern New Mexico we're utilizing an established play concept which is a lower risk, technology driven program based on utilization of horizontal drilling and track technology to try to unlock known gas reserves in tight carbonates.
We generated three prospects and currently have over 19500 acres that we holds in those three prospects.
All three prospects are in drilling phase right now.
First f all our leatherwood prospect the well is down.
It has been fracture stimulated.
Right now it's recovering load after frack.
Our Austin prospect has just completed the pilot hole and we're turning the well to the horizontal within.
And our Rolls Hill prospect should commence drilling during the third quarter of this year.
Each of these prospects if they prove successful have a number of follow-up drilling locations that we currently have under lease.
Moving along to the Texas gulf coast.
We now during this year have picked up acreage covering three prospects that were generated during last year.
Our Trait prospect which is in highland 55 L we'll be pursuing that and drilling later in the fourth quarter of this year.
That is the prospect that is looking to combine exploration for gas along with redevelopment of myasine gas and oil.
Our Wesley prospect is the newest one.
We just picked the acreage up in the state lease sell in July .
For the Wesson prospect this is a lower frail prosect, and we anticipate it moving to drilling phase early next year.
In Canada, British Columbia the Cyprus prospect area is a relatively new area for us.
It is one that we began to focus on later last year and this year during the year we have picked up an additional 8400 net acres in that area along with our partners.
We have a 40% interest with them in the acreage.
This is a part of somewhat of our retooled Canadian exploration business plan.
If successful this will expose us to much greater reserves and production and also provide some additional stability to the Canadian reserve base as these will be low decline, longer life, higher rate type of prospects.
We have five prospects that we're actually -- five wells and four prospects that we're looking at drilling prior to year end.
The average prospect size is between 20-150 BCFs on the prospects that we plan to drill this year we are exposing Vintage to approximately 90 net BCF unrisked.
And the other comment is although this is still a relatively unexplored area, it is in the area of existing infrastructure.
Moving along, in Nova Scotia this is a project that came about this year.
This is a frontier opportunity.
Truly this is green field exploration on shore Nova Scotia.
We're looking for carbonate reef that crop throughout Nova Scotia.
All the outcrops that we have examined have oil stain.
We know there's a working system.
What we're attempting to do is to find the same carbonitious reefs in the flip surface in a trapped and sourced position.
Unlike most frontier areas though the attractive thing about this is there is existing infrastructure both for oil and gas so if our program proves successful we'll be able to bring production on in the very near term as opposed to using the longer term in most frontier areas.
And the prospect is the first one and we have the drill in the grounds right now and are keeping our fingers crossed as we look forward here over the next few weeks to the outcome of that well.
Northwest territory, you noticed in our release, we have and we have not -- last quarter we have drilled four wells there.
We have tested them.
We have just completed in the last few weeks our assessment of northwest territory and although there is still we believe significant exploration potential in those properties they don't stack up with what our investment criterias are company wide.
So we're going seek to farm that position out to people that have a strategic position in the northwest territories.
From that I'll move along to our international.
Of course first and foremost right now is Yemen.
As you noticed again in our press release we're becoming increasingly excited about our prospects there.
Just to give you a point of reference again.
To date vintage has made two discoveries in entirely new place within the basin in Yemen.
During our first drilling campaign we discovered heavy oil in a super salt above salt carbonate formation.
We continue to evaluate that at the moment in our just recently concluded second exploration campaign we discovered oil sub salt in the land formation in our prospect area.
Our second appraisal well in Anaugea we've now drilled three wells there.
Our second was number 4.
That well originally tested I believe back in May about 1300 barrels a day on a short-term test.
We have just concluded a long term test and during the 27-day continuous slow test the well produced at a rate of approximately 1200 barrels of oil a day.
Again that is certainly elevated our level of enthusiasm about this area.
Currently we're integrating that data into our on-going technical and economic evaluation of the area in order to determine the final commercial assessment of this area.
But I would say that if our assessment turns out positive, and we determine that we believe a commercial development project can go forward, we would plan to have that good declaration of commercial alt and planner development before the government prior to year end.
We're also looking at the possibility of trying to come up with an early production scenario and if we don't run into any hindrances there we would anticipate that we might be able to have some very early production on even as soon as early next year.
Then to close it out a couple of others that will be of note here over the next few months in Italy we've talked about this.
We're in the midst of obtaining drilling permits for on first two prospects there.
This is a lower risk moderate reward type opportunity.
Somewhat similar to Argentina in the fact that we're going in and applying technology that has not been utilized in the area in a very mature province heretofore.
And if we're able to demonstrate success through the utilization of this new concept, this new approach, then we believe there are numerous follow-up opportunities just like what we found in Argentina through the use of the new approach and new technology.
We would think that we'll have the permits in hand and should be able to spout our first well early next year.
Finally Bulgaria, that's further down the road but fits in the category of spending a limited amount of our budget on things that could really truly transforming events.
This is a deep water project in an unexplored basin.
We have just finished shooting about 1700 kilometers to the sides of what we are targeting there are truly enormous anti-kinal structures.
That's the primary target.
The second target would be [nonaudio ] deep water fans.
These are similar to other deep water type reservoirs that we found around the world and yet again this is an explored area.
Our plan here is to continue to move the technical piece of this forward and certainly before we get to a drilling phase we would then cease to farm out significant portion of our interest to one of the major deep water players and at that point then we would be ready to move this forward.
With that I'll speak just a second to acquisitions.
You know Vintage has grown historically.
Through acquisitions and exploration of the remaining reserves in those acquisitions.
Having spent last year getting our balance sheet in order, we are now excited again about it being aggressively out seeking acquisitions.
We have the firepower to be able to go after them and we are very aggressively doing so.
Right now our primary focus is in North America.
We see an adequate supply of acquisitions there that are going give us a stream of opportunities that we believe we can move forward with.
Then as the program goes forward our plan would be that as we're able to execute on them in a somewhat higher than what the mean price environment has been historically we would look to hedge production in order to protect acquisition economics.
We also in addition to the firepower we already have finding capital markets right now conducive to being able to finance additional activity.
The last comment that I'll make and I know Craig will reemphasize this.
Our plan to go forward is to do so in such a way that we keep our balance sheet and our capital structure in line with the targets that we've articulated.
With that I'll turn it over to you.
Craig George - President & CEO
Thank you.
Larry.
There's no two ways around it.
The last couple years have been very challenging are for Vintage.
If you look at where we were a year or so ago on slide 12 our picture didn't look all that rosie.
First we had disappointing results from our acquisition of Genesis in Canada.
Instead of the growth we expected we found ourselves reporting a string of production short falls it seems like quarter after quarter after quarter.
Second, having using solely for the acquisition we strains our balance sheet to the point where we were stymied from doing good additions and acquisitions have always been the largest growth factor for us in our history.
Third at the same time Argentina which as you know is the home of 40% of our production was going through political and economic events that cast a dark shadow on a large portion of our cash flow.
So for the last year we've focused on problem solving.
Swallowing some bitter pills to cure the ills that we for the most part brought on ourselves.
On slide 13 we show what we did.
In Canada we certainly swallowed some bitter pills.
We've taken reserve right down, sold some properties we considered under performing, wrote off our single largest unevaluated lease hold element in northwest territories this quarter as we talked about earlier and made some significant organizational changes.
Also as Bill alluded to we resigned both our exploitation and exploration programs to be more consistent with the company's technological strain and we've concentrated our capital spending in focused areas rather than a host of discrete areas so when we have success allows us to move the needle on Canada production.
We're enthused about our projects underway.
Our drilling success so far this year has been 74%.
I believe when we look back a year from now we'll see that 2003 was a turning point for our Canada business.
As for debt a year ago with a billion dollars of leverage on the balance sheet we set a goal to reduce our debt by $200 million.
To do that we made some tough decisions to cut back capital spending in 2002 and sell some properties and as you heard earlier both of those have hurt our production this year.
We sold our entire asset positions at Trinidad and Ecuador then some select properties in the U.S. and Canada.
And at the same time we took a cap pell to our costs trimming away some of the excesses but unfortunately most of this was obscured by increases power cost and the Canadian issues that Bill Abernathy talked about a while ago.
But in the cost-cutting that we did we were always careful not to sacrifice our long term growth potential and we've taken advantage of high commodity prices so we could even exceed our debt reduction goal.
In Argentina we reacted quickly to optimize our financial management.
In 2002 and the midst of Argentina's corrective measures which limited capital out flow from the country we reaped $114 million.
We also participated proactively in economic reforms in both Buenos Aires and Washington and whether we had an impact we'll never know but we made our presence and concerns known to both the government in Washington and in Buenos Aires.
While uncertainties were growing we cut back and halted our Argentine drilling program which had been one of the best growth drivers and that was another bitter pill to swallow.
So where are we now?
On slide 14 we show the picture look is a lot rosier right now.
As for debt our net debt is down by about $300 million which counts the $100 million of cash on hand.
We currently have essentially no bank debt with $200 million available to us under our facility.
As for high yield debt our earliest maturity is 2009 and our net debt to book cap stands at 50%.
So our balance sheet is looking a lot better than it did a year ago.
In Argentina it's back to business.
We've seen strengthening of the peso with the exchange rate stable for more or less the last year.
Recently between 2.9 and 3 which is on target with the government's economic growth plan.
The inflation rate this year was originally projected to be in the 15-20% range.
But really right now it's looking more like 5-10% and that compares very favorably with 41% in 2002.
For GDP the government's forecasting about 5% growth this year and this is the first growth in four years.
On the political side the newly elected President has been in office for about ten weeks and he's demonstrated an impressive capacity for leadership and has high approval rating among his people.
On the world stage Argentina's continuing to work constructively with the IMF and they're in the process of negotiating a new two or three year agreement to refinance multi-debt collateral debt.
And this process is expected to conclude in September and should be supportive if continued economic stability and development for the country.
So we're obviously true believers in Argentina and we have put more rigs to work.
Currently there are more rigs that we're working that even before the crisis.
So we're glad to be telling the Argentine story again.
And here's an interesting part of the story at the end of this year we will have spent about $750 million in cap-ex for both acquisitions and drilling in total.
At the same time our cumulative operating cash flow will be essentially equal at $750 million and we still have over $200 million barrel equivalent of crude reserves left to provide production growth and increase in cash flow and profits into the future.
In addition to dealing with our problems in Canada and debt and Argentina we've kept a lot of focus on organic growth.
With a stronger capital budget in 2003 exploitation is returning to its most important role of hoping to maintain our year over year production levels.
We're drilling at a pace to offset a significant portion of our natural decline and results have been good with success rates above 85% for exploitation so far this year.
We still have a robust inventory with years of opportunity ahead.
I am also pleased to say that our exploration program is stronger than any time before in the company's history.
And Larry described a moment ago we had meaningful prospects in the U.S., Canada, and Yemen and Italy.
And all of those are nearing fruition.
And we're continuing to add quality prospects to our inventory every month so that our exploration growth will be sustainable not just a flash in the pan.
We're also generating a significant amount of free cash flow that can be applied to growth in addition to exploitation and exploration as you heard before we have our acquisition wheels turning full speed looking for opportunities that can provide the raw material for us to create value as we did in the past by growing production and cutting costs.
My final point is that despite all the good things that have happened our stock price really hasn't kept pace with all those good things so.
We're looking for some recognition of the good parts of our story now that the bad parts are fading into history.
And looking forward to growth from here.
And with that I'll turn it over for questions.
Operator
Thank you.
If you would like to ask a question please press star 1 on your touch-tone phone.
In the interest of allowing all questionnaires to have an opportunity to ask questions Vintage has asked that each participant limit themselves to one question and one follow-up.
If you have additional questions you may return to the queue to ask them.
If a question you intended to asked has been asked and you do not have another question press the pound key to remove yourself from the queue.
Our first question comes from Joe Allman with RBC capital markets.
Please go ahead.
Joe Allman - Analyst
Good afternoon.
Craig George - President & CEO
Hi, Joe.
Joe Allman - Analyst
Craig, in terms of acquisitions, is the focus going to be on asset acquisitions or are you looking also equally hard at corporate acquisitions?
Craig George - President & CEO
You know if you go back and look at how we've done with different kinds of acquisitions it's probably safe to say that the things that we've done best on are when we've been able to buy properties from measures.
We've been able to increase production more significantly and reduce cost as much as 40% so.
To the extent that the majors will be selling properties this year and into next year that will probably be top of our priority list, but we'll look at essentially everything that comes our way.
Joe Allman - Analyst
All right.
Thank you.
Operator
We'll take our next question from Van Levy with CIBC.
Please go ahead.
Ben Levy - Analyst
Good afternoon, gentlemen.
Bill Barns - CFO, EVP, Treasurer, Secretary, & Director
Hi, Van.
Ben Levy - Analyst
Bob, welcome back.
Good to have you.
Robert Phaneuf - VP Corp Dev.
Good to be here.
Thanks.
Ben Levy - Analyst
Couple of questions.
First congratulations you have done a lot of work and the company looks very stabilized at this juncture.
I guess kind of the key question you know an investor or person would have you know clearly you made a big mistake with Genesis it was an acquisition.
Could you articulate, Craig, what you learned, what kind of specifically you think went wrong in that analysis process?
And what you will do different this time as you know put new incremental money to work.
Craig George - President & CEO
I think there were a number of things that we learned.
Some of them had to do with assets and some of them had to do with financial management.
On the asset side since it was a corporate deal and there were some sensitivity to what might leak out in the market place we really didn't do our technical due diligence in the same way we normally have done.
In addition to that if you look at the mix of assets in genesis portfolio there were a lot of wells that really were relatively young in their lives and of course the younger a well is in its life the more difficult it is to really forecast what the outcome and ultimate reserves will be and there were some development wells that were predicated on those wells.
So from a technical standpoint that we would have done differently.
Another thing that we certainly should have done and would do differently is in that at the time we were in a high cycle for gas prices we should have hedged gas.
So that we could have mitigated some of the other problems we had as gas prices went down.
And the final thing is and I alluded to this a little bit earlier as we financed solely with debt.
And at the time we thought that might be wise that we could come back later on and sell some equity as appropriate.
But unfortunately the equity markets moved against us.
So that was really not a credible thing for us to do at the time.
So I think those three areas are the three areas that were the most important from learning.
We'll make sure that in any other acquisition that we do be it corporate or asset that we'll go back to the same grueling detailed analysis that we have in the past.
We'll be careful about wells that are relatively new and how we forecast that.
And then on the financial side we'll when we're above an average point in the commodity cycle we'll hedge and we will always make sure that our equity ratio ends up in the right place when an acquisition is over.
Ben Levy - Analyst
Okay.
Last question.
Reserve write downs, what was the volume that was affected?
Craig George - President & CEO
It was about 1.2 million BEOs.
Ben Levy - Analyst
Okay.
Thank you.
Operator
Once again if you would like to ask a question please press the star and one on your touch-tone phone.
Our next question comes from John Herrlin with Merrill Lynch.
Please go ahead.
John Herlin - Analyst
Two quick ones I. think I asked this last quarter.
Why not just sell Canada?
Craig George - President & CEO
That's a good question.
And as you know we went through a sales process not too many months ago and had many of our field areas and packages that were up for sale.
I guess there were a number of reasons that we didn't get offers that were as high as we might have liked for some of those packages.
Some just based on where they were geographically or based on crime rates.
Probably word is conducive to the income trust as other properties might be, so that had something to due with it.
And I guess the other reason it's just that we've done a lot of soul searching here and thought about why we got into Canada and are the opportunities that that we wanted to be able to access in Canada still there and we think the answer is yes.
One of the prospects that Larry spoke about in Cyprus is one that's exactly like we had hoped for.
Where individual wells producing capacities are generally higher than anything that we find on shore in the U.S.
We've been able to tie up a significant amount of acreage.
So it could be a significant place for us.
In addition to that some of the revamping that we've done in our exploitation work that Bill Abernathy talked about.
We tried to figure out what has worked for us in the U.S. and what has worked for us in Argentina, and we are trying to apply that same technology.
Some has to do with being as technological efficient as we can and some has to do with doing work in programs and areas where if one or two things work we can scale the learning curve and figure out a way to make significant increases in production.
At this point and time I don't think we're willing to throw in the towel on Canada.
We hope when we look back a few years from now we'll see this was the turning point and we will indeed grow production.
John Herlin - Analyst
Well I wasn't implying so much throwing the towel as just assuming the royalty trust would pay more.
Two other quick ones.
What are you seeing in the M&A market in the U.S. in terms of size?
And lastly, with Italy, what kind of lead time before you actually start spouting wells?
Larry Shepard - SVP/ New Ventures
John, Larry Shepherd.
First of all on the M&A activity in the U.S., it's probably picked up from where it had been for the last year or so.
Certainly some of the majors are about divesting additional assets an we see packages of all sizes I think you know everything from small to the large size packages such as the ones that you know Apache did not too long ago.
So I think you know we've got a broad array of opportunities out there and we're pretty well hooked into those.
And trying to target those we believe are most conducive to our competencies.
Then as far as Italy, we expect to have the drilling permits before year end.
And given that likely right after the first of the year we will spout our first well there.
John Herlin - Analyst
Thanks.
Operator
Once again if you would like to ask a question police press the star and 1 on your touch-tone phone.
Our next question comes from Andrea Wagner with Bear Stearns.
Gary Stromberg - Analyst
Hi it's actually Gary Stromberg.
Question just to follow-up on Van's question.
The reserve revision you said 1.2 million barrels is that for Canada and Bolivia?
Robert Phaneuf - VP Corp Dev.
No.
There are no -- okay.
I think Van's question had to do with the reserve adjustments that went along with the oil and gas property impairment.
Gary Stromberg - Analyst
Right.
Robert Phaneuf - VP Corp Dev.
That was 1.2 million BOEs.
But there's nothing that has to do with Canada that's a reserve write down.
That was just an adjustment -- I'm sorry with respect to Bolivia that's just an adjustment in the volume forecast for the second half of the year.
Gary Stromberg - Analyst
So you wouldn't take puds off for that?
Robert Phaneuf - VP Corp Dev.
No.
That is market driven entirely.
Gary Stromberg - Analyst
Okay.
Second question, hedging you know you have I think one percent or so of production hedged in '04 on the oil side.
What are you thinking there?
Do you think you're going add to that?
Robert Phaneuf - VP Corp Dev.
Well we look at supply and demanded and the statistics just daily and it's fair to say in the last couple days we've played non-hedges and we'll continue to watch what the strip does and look at the underlying fundamentals and don't be surprised to see us hedge tomorrow.
Gary Stromberg - Analyst
Okay.
Great.
Thank you.
Operator
That is all the questions we have in the queue at this time.
I'll turn it back over to Mr. Phaneuf for concluding comments.
Robert Phaneuf - VP Corp Dev.
Thank you very much.
If there are no other questions we'll conclude.
We do appreciate your time and as always Julie and I will be around if there are any questions that you need to ask us after the call here.
Thanks very much.
And this concludes our call.