Par Pacific Holdings Inc (PARR) 2015 Q3 法說會逐字稿

Greetings and welcome to the Par Pacific Holdings third-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Christine Thorp, Director of Investor Relations. Thank you, you may begin.

Thank you. Welcome, everyone, to Par Pacific Holdings' third-quarter 2015 earnings conference call. With me today is William Pate, President and Chief Executive Officer of Par Pacific Holdings; Chris Micklas, Chief Financial Officer; and Joseph Israel, President and Chief Executive Officer of Par Petroleum LLC.

Before we begin this discussion of Par Pacific Holdings financial results for its third quarter ended September 30, 2015, please note that remarks made by management today may contain forward-looking statements. These forward-looking statements may discuss plans, expectations, estimates, and projections that involve significant risks and uncertainties which could cause actual results to differ materially from the results discussed in these forward-looking statements.

Information about the risks we face and the uncertainties associated with Par Pacific Holdings' forward-looking statements can be found in the Company's periodic reports filed with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

Today's call is being recorded and will be available on the investor relations section of our website. Now let me turn the call over to Bill.

Thank you, Christine. Thank you, everyone, for joining us this morning. We've now reported four consecutive quarters of strong financial performance and it's important to note that this quarter's adjusted EBITDA of $34 million reflects midcycle crack spreads, although we did have a few events that broke our way and boosted our results. Notably, the continued decline in crude oil prices.

Joseph and Chris will go into these items and our overall operating and financial performance in a minute, but first I wanted to make a few comments about my recent appointment to the organization and the creation of Par Pacific Holdings. The Board of Directors and management decided to change the name of our organization to Par Pacific Holdings to more properly reflect our ambitious and diversified growth objective. We have a couple of great businesses in our Hawaiian franchise in Laramie Energy.

As you may know, Par came into existence in 2012 and it started with one employee. Since that time, this management team has built a large corporate entity from scratch and we believe we can accomplish much more. With our equity sponsorship from Sam Zell, our $1.4 billion net operating loss carry forward, and the proven ability of our management to acquire and integrate businesses, we feel we are perfectly positioned to execute an acquisition-oriented growth strategy. This strategy is timely, given the need for a number of energy and infrastructure companies to address balance sheet and other capital requirements in this challenging environment.

Our tax attributes give us a unique advantage, allowing us to generate higher returns on our capital invested and, therefore, greater shareholder value creation from accretive acquisitions.

Personally, I'm delighted to be leading this effort. I spent 21 years in the Zell organization pursuing opportunistic acquisitions and serving as an advisor and board member to companies that were situated similarly to Par Pacific. My sole focus will be to build on what already is a very successful company, and I am fortunate to be part of a great team that has created and implemented the necessary controls and processes to ensure crisp business execution and swift acquisition integration.

To be clear, we intend to buy and build energy and infrastructure businesses. Our main focus will be on growing our existing refining, marketing, and logistics business to leverage our commercial operations and our fixed asset base. We will also prioritize similar businesses in Hawaii that, like our current operation, serve as a critical provider to the island's energy and infrastructure requirements. Our Laramie Energy business unit is completing some great wells and we will consider ways to expand their operation as well.

Finally, we will look at other energy and infrastructure opportunities in the United States that leverage our tax attributes.

Before turning the call over to Joseph to review our refining, marketing, and logistics operations, I would like to provide an update on the progress at Laramie Energy, our natural gas development company that operates in the Piceance Basin of Western Colorado. First, Par and the other investors have agreed to change the name from Piceance Energy to Laramie Energy. This was the name that was used by Bob Boswell and his team in their first foray into the Piceance Basin.

Laramie continues to make great progress on their development program, including reducing drilling and completion costs over the past three years by 33% to less than $1.2 million per well. They already have a 99% success rate with EURs of 1.8 BCFE and they are able to generate single-well economic returns in the 15% to 25% range based on the current NYMEX strip.

The team recently announced a wellbore drilling program with Wexpro, which is the upstream subsidiary of the Utah-based utility Questar. This arrangement further enhances these well economics because Wexpro has agreed to fund approximately two-thirds of the drilling costs, yet Laramie will receive more than its pro rata share of the economics in this partnership.

We understand that this is an extremely challenging environment for natural gas development companies. Nonetheless, unlike many of Laramie's upstream peers, we have significant flexibility in the operations. Almost all of our acreage is held by production and we have no midstream or interstate pipeline minimum volume commitments. The Laramie team has a proven track record of creating value through commodity price cycles and we believe they will continue to create shareholder value with the progress they have demonstrated in their development program.

In summary, the new Par Pacific reflects our desire to continue to grow our business opportunistically and build on the strong organizational momentum. I thank you for your support.

Joseph will now comment on the progress of our Hawaiian operations.

Thanks, Bill, and good morning, everyone. Yesterday we reported Par Pacific's third-quarter adjusted EBITDA of $34 million. Results were driven by the following three key dynamics.

One, mid-Pacific refining margin environment at midcycle in the third quarter; two, approximately $11 million positive impact attributed to falling oil price environment; and three, successful execution of planned maintenance in the refinery with approximately $2 million cost. Overall, strong results reflecting our improved capture rate and profitability profile across the board. In other words, by improving and maintaining a high level of safety and reliability, performance, yield optimization, feedstock selection, and flexible sales profile, we were able to improve our financial performance beyond just what market conditions gave us.

Here are some numbers to put into perspective our improvements. Year-to-date, when comparing with last year, our on-island sales are up 13%; throughput is up 11%; production cost is down 19% on a per barrel basis.

On the production side, we have improved our yield value by increasing distillate yield from 39% to 44%; gasoline and others from 28% to 30% yields; and reducing fuel oil yield from 30% to 22%. Bottom line, year over year while market is giving us additional $2.93 per barrel to work with, on combined product and feedstock index basis our realized net margin or operating margins improved by $7.56 per barrel.

In the third quarter, our refinery system operated under a midcycle environment combined $8.49 per barrel. 4-1-2-1 crack spread and Mid-Pacific co-differential index in the third quarter was $0.07 per barrel under the three-year average. The weak index in the third quarter was mainly driven by seasonally low availability of AMS and global negative distillate pricing trends. Also, the Singapore fuel oil crack was back down to midcycle following the strong first-half 2015 environment.

The October combined Mid-Pacific Index for products and co-differential was $7.50 per barrel. $14 a barrel falling Brent price in the third quarter has supported our refining and retail EBITDA by approximately $11 million.

As communicated in the past, the sensitivity of the oil price trend to our business is reflected in the following two ways. First, the contractual pricing lag on our jet fuel and utility-related fuel sales and, second, the natural retail street pricing lag to changes in commodity prices.

In the third quarter, we successfully executed our planned reformer catalyst regeneration and other planned maintenance in our visbreaker and cogeneration units at a cost of approximately $2 million, or $0.30 per barrel. No major turnarounds are planned until the third quarter of 2016.

Third-quarter on-island sales at 57,000 barrels per day were 8% lower than our second-quarter on-island sales, mainly due to timing and demand for jet fuel and fuel oil. 17,000 barrels per day were exported, including gasoline, to the West Coast. We are expecting fourth-quarter on-island sales to get back on track, and based on new supply contracts, including the recent award from the Defense Logistics Agency, we are well-positioned for 2016 on-island demand with over 65,000 barrels per day, 8% more than our 2015 forecast.

Our refinery throughput in the third quarter was 74,000 barrels per day, consistent with guidance, and our planned throughput for the fourth quarter is close to 80,000 barrels per day. Our retail segment contributed $10 million of adjusted EBITDA in the third quarter. Year over year gasoline volume and merchandise sales are up 3% and 11%, respectively, on a same-store basis.

Mid Pac, on a standalone basis, has contributed approximately $11 million of adjusted EBITDA to our retail and refining results since we acquired it on April 1. Integration efforts continue with the objective of realizing annual $5 million of synergies and cost savings by the end of the year.

In summary, we have now generated $133 million of adjusted EBITDA in the past 12 months. We have benefited from favorable market conditions, but most importantly, we have improved our profitability profile to better capture future opportunities. In addition, we are well-positioned to grow and duplicate our business model in different places.

Now I will turn the call over to Chris to review our second -- third-quarter numbers in more detail.

Thank you, Joseph. During the third quarter, Par Pacific reported net income of $50 million, or $0.39 per share, compared with a net loss of $39 million, or $1.19 per share, in the third quarter of 2014. Adjusted net income for the third quarter was $24 million, or $0.64 per share. Adjusted EBITDA was $34 million, a $62 million improvement compared to a loss of $28 million in the third quarter of 2014.

This quarter we have two additional adjustments for rising at adjusted EBITDA. The first is a $13 million reduction in net income to adjust for changes in the valuation of our refinery inventory and changes in the valuation of our liability related to our supply and offtake agreement with J. Aron. We used the FIFO method of accounting for valuing inventory and we value our liability to J. Aron using -- our liability to J. Aron at an estimated termination value at quarter end. This results in a timing difference.

The inventory valuation adjustment used to calculate adjusted EBITDA removed the impact of timing differences to more closely reflect the cash impact of cost of sales.

The second adjustment removes a non-cash charge of $10 million related to our commodity marketing and logistics business. We have continued to see market softness in the spreads between heavy crude sourced in Canada and the prices sold to refineries on the Gulf Coast. As a result, we decided to terminate our barge leases. The change in market conditions resulted in an impairment of goodwill and our intangible asset related to barge leases.

Consistent with previous quarters, our third quarter included the following items that are excluded from adjusted EBITDA: an increase of $4 million in the estimated amount owed to Tesoro under the earn-out provision of our agreement. As our earning profile improved, the profitability -- the probability of future payouts has increased, which is reflected in this adjustment.

Due to falling crude prices, we had $7 million in unrealized losses on future commodity contracts and a lower of cost or market inventory adjustment. We had a $1 million loss due to increase in the value of our common stock warrants. However, during the quarter approximately half of our outstanding warrants were exercised; therefore, going forward we expect the magnitude of this adjustment to decrease relative to prior periods.

We reported approximately $1 million in losses from our equity investment in Laramie Energy. And, finally, we incurred $200,000 of acquisition and integration expenses related to our acquisition of Mid Pac.

At quarter end, our cash balance totaled $102 million, total debt was $170 million, and total liquidity was $153 million. Year-to-date we have generated $144 million of cash from operations, which has enabled us to repay net debt of $29 million, complete the Mid Pac acquisition, and make an additional $28 million investment in Laramie.

Now I will turn the call back to Bill for his closing comments.

Thank you, Chris. That concludes our prepared remarks. Operator, would you see if we have any questions?

(Operator Instructions) Jeff Dietert, Simmons.

Good morning. I was hoping you could talk a little bit about your crude procurement strategy during the third quarter. Typically, as you mentioned, A&S goes into maintenance during the summer months and becomes expensive relative to other crudes. And I know you canvas many markets for your crude feedstocks, so could you talk about what was attractive during the quarter?

Jeff, crude flexibility is critical for us, for our success. In 2015 we ran 13 different types of crude versus eight in 2014. Our willing to search, scan, try new crude, adjust operations is extremely valuable for us so we can pick the right differential and buy crude accordingly. We really do it on a monthly basis.

The dynamics in Asia are interesting with BP and Caltex's refineries shutting down in Australia recently, and with the Petrobras refinery shutting down in Japan, we have some room on the demand side. Then on the supply side it looks like the Saudis and the Russians oversupplying this market. So crude availability in Asia is translated to opportunities for us and we stay on top of it.

Very good. Could you maybe talk about the defense logistics contract and your overall strategy on increasing island sales? It looks like you are making some progress there.

Yes, on-island sales are very important as well to our margins. We want to realize on-island pricing versus exporting it is much as we can.

DLA, or the defense, barrels are a big part of it and this quarter the DLA announced an increase for us. We basically double our volumes sold to the military for next year and this is a great start to build our on-island sales further. In 2016 we will be 8% to 10% higher to where we averaged in 2015, and on average, this is probably a $5 to $7, $8 a barrel benefit to us versus the export alternative. So very excited about that.

Congratulations on your execution there. Thank you.

Doug Leggate, Bank of America Merrill Lynch.

Thanks. Good morning and, Bill, I'm looking forward to meeting you at some point. I got a couple of questions, if I may, on I guess various different parts of the business. I hate to kind of push back on this a little bit, but I just want to take you up on your comment about the earnings in a midcycle environment.

Can you explain what you mean by that? Because I think by any measure crack spreads in the third quarter were pretty strong across the industry. I just want to get -- make I understand correctly what you're referring to.

I will let Joseph handle that in detail, but I think we post the 4-1-2-1 on our website on a weekly basis and I think from that, as we look at the three-year average, we came in -- and, Joseph, you can correct me -- within a dime of where that was I believe. But go ahead and give Doug more detail on that.

Yes, Doug, we just have a different benchmark to your typical US refinery. We view ourselves as a Mid Pacific because our impact is coming from Singapore on what we consider 80% and the West Coast is what we consider 20%. So we continue to track the product spread there and co-differentials and publish them on a weekly basis on our website.

In the third quarter, the combined index was $8.50 per barrel. This is exactly three-year's average and this is why we consider it midcycle. It's probably not the case in the Gulf Coast and other places.

This is Bill. Just to follow up; I think one of the key element here is, unlike continental refineries, we really don't benefit from the TI Brent spread materially and so we don't have the kind of profitability. We haven't seen it and we don't anticipate a major change associated with any narrowing of that spread should that take place or as that's taken place recently.

I guess you answered the question in the first sentence with the three-year average. I guess we think of more of a five- or 10-year average. But that's very clear, thank you.

My second question, I guess on a related topic, is you said that you benefited from the decline in crude prices in the quarter. Is there any way of quantifying how that would've contributed? And obviously, assuming oil prices stabilize unfortunately at current levels, what -- how that would change under the same midcycle conditions.

Doug, I will take that. About 20% of our sales are considered jet fuel and utility sales related that are driven by contractual one-week to one-month pricing lag. So when there is a pricing lag in falling market we benefit from the price change and this is actually -- we run cheaper crude and selling a more expensive product basically.

So 20% of what we sell is translated to about 400,000 barrels, call it, in a month, which in this $14 a barrel reduced crude price is translated to $8 million for the quarter for the refinery. And then on top of that we have retail, like any other place in the mainland in the country, has benefited from the same dynamic, so we think it's about $3 million. $8 million plus $3 million is the $11 million we are considering as a price lag impact.

That's very helpful. My last one if I may; I guess, Bill, this would be for you. I'm just curious if there was any further thoughts on how you might attempt to utilize what is clearly a great asset for you in the form of your NOL. Just any strategic thoughts about where you might go after the Mid Pac acquisition.

Sure. First and foremost, we are focused on building the refining marketing logistics business. We want to invest in areas where we can leverage our capabilities and I think we've got a great team here. We've got good processes. We've got some assets, so to the extent that we can identify opportunities where we can leverage what we already have, that is going to be our highest priority.

But as I've told everybody around here, we're going to look -- we're going to scour the United States for opportunities. We're also look at other areas that might be a little further afield. They may require us to build more in terms of managerial capability, but given our tax attributes, I do believe we have a cost of capital advantage and we can leverage that. As long as we can identify good investments where, risk adjusted, our return on investment is materially better than what we believe to be our cost of capital is, we're going to pursue those deals generally focusing on the energy and infrastructure space.

The way I visualize it and tend to present it to people around here is our bull's-eye is refining marketing logistics, and that includes Hawaii. But as we step out, we're going to diffuse the focus, but we are not going to preclude anything.

Perhaps as a quick follow-on to that, Bill, if I may, has there been any movement in as far as you can tell on Chevron's situation in Hawaii? I'm just curious, either from the impact in your market or as a potential acquisition opportunity, notwithstanding any regulatory hurdles.

I'm not going to restate any of the publicly available information regarding Chevron. All I will say is we're not going to comment on any acquisition activity.

Got it. Thanks, guys.

Chi Chow, Tudor Pickering Holt.

Thanks, good morning. I guess following up on the defense logistics contract, do you actually have the actual volumes on that contract?

No, we don't disclose volume and what is available in the public records, you can look it up, it was like a $220 million award, they call it, for next year. So I think you can get from the math from there.

Okay. Then back on this question on the midcycle crack, what's your outlook on how Singapore cracks and how that market will trend going forward here?

This is a hard one; I wish we knew. We will continue to monitor it. Gasoline looks good all over: demand; elasticity; low crude price; good demand, not only in the US, good also in Asia. We look at gasoline spread out at five years' high and we benefit from this side and from the West Coast side.

However, the distillate that are 95% correlated to industrial production are having some hard time with global economy and we will see distillate at below five-year average a point. Fuel oil that was okay for us in the first half is now going down from a high five years to a midcycle. Overall, it's translated to a midcycle environment, just a mixed bag. And going forward we will continue to monitor the Asia economy and the crude price will be a big factor, and take whatever market give us.

Now on the crude side, Chi, let me just add. The Brent being relatively weak and the differentials coming in are helping overall Asian refineries' margins, and we get this boost or the help from the crude differential side as well versus the typical use refinery. Just as a trend in the recent month or two.

Joseph, on the crude sourcing, it looks like you sourced a lot of barrels from Asia this quarter, this past quarter. Can you talk specifically on what types of crudes you've run in from Asia?

We don't talk about specific rates. Obviously it's commercial information we don't disclose. But the Russians and the Saudis are fighting for market share in China and Europe, so the Russian crude is more attractive than ever. I think for the first time they are now the largest supplier to the Chinese market this month.

And add to that the refineries that used to supply the Australian refineries that are not they are, crude is basically accumulated in Singapore and provides opportunities to us and others. Can't be specific about countries or grades.

Okay. Final question, maybe Bill, back on the M&A side. Do you have any specific geographic focus right now on opportunities in the US mainland?

No, we don't. We are focused on the US, but other than that we really haven't, I would say, geographically concentrated any of our efforts. The West Coast is probably a little more attractive to us because in some areas it gives us an advantage and a leg up and ability to develop some relationships with our Hawaiian activities. But I wouldn't say that that's a strong desire.

Would you say your focus is more on the refining side or logistics at this point?

Look, the continental refineries, they're minting money right now so it's very hard for anybody to really justify selling one and it's harder for -- hard for a buyer to step in and say I can pay you a fair price that makes sense for both sides. I doubt that it's a refining acquisition and I think logistics is probably a little more attractive.

Then stepping out a little further, we are also looking at midstream opportunities because obviously there are a lot of issues in that marketplace right now. Especially in areas where you've got process-oriented industries, we think we can add value and we think we can acquire some attractive assets.

Got it, great. Thanks for your comments.

Andrew Schapiro, Lawndale Capital.

Two questions on the refinery and then I'll back out into the queue, but I have a few others on Laramie.

In the past, Joseph, you have talked about how you can ramp up that throughput or not, but it's a question of economics. And you said that you thought you could increase your on-island sales to at or above 65,000 or so, but at present prices, at what level of [online] sales, if any, would justify increasing your throughput? And alternatively, at the present level of the spreads and the pricing, in your present level of on-island sales, what kind of price increase would be necessary to similarly justify increasing that throughput and lowering our cost per barrel?

We demonstrated 81,000 barrels per day throughput in the second quarter. In few days we can also demonstrate, and we did, 90,000s. So we can definitely use our nameplate; it's not just a theoretical number.

But, for us, it's driven by demand. It's not driven by unit limits, configuration limits. I think this is what makes our story very interesting and attractive.

You're right; at midcycle 75,000 barrels per day, it's normally a good spot but it's also going to be driven by planned maintenance. It's going to be driven by availability for ANS and other type of crude, so we thought 74,000 was a good spot for the third quarter and this was also our guidance in the last call.

Going into the fourth quarter, we are still in a midcycle environment but we are going up to 80,000 barrels per day because we have more crude available. We have the ANS; we have other crude differentials to work with. We have some on-island demand kicking in in the fourth quarter and bringing us more opportunities.

And you're right; the 65,000 we gave in the past still valid and this is where we are heading next year. This quarter is not a good example on the on-island sale. We suffered some timing issues with some customers and pipelines, etc., and don't view it as a trend.

Okay. And then there's a follow-up on the refinery here. In what ways was the cost per barrel changed from prior quarter due to the change in production versus, we will call it, a change in efficiency? Do you think you are now operating close to your lowest cost levels in terms of efficiency, or are there some more things that could be done?

There's always room for improvement in our industry, period. We never reach a point where we are all happy and satisfied. So with $4.18 per barrel operating cost, we had $0.30 per barrel of special items, which is the refinery cost. So true direct operating cost was $3.88 per barrel and it's very consistent with our profile. It's a little bit higher than the previous quarter because we are -- our throughput is lower, but it's on the curve. And we will continue to look at it and improve going forward.

Great. Thanks, I'll back into the queue, but please come back to me. I've got some questions on Laramie and a few other corporates.

(Operator Instructions) Thomas Mitchell, Miller Tabak.

I'm just checking on a couple of things here. You have talked about the $11 million benefit from the drop in the price of crude during the quarter. And generally speaking, you've had like two incidents of dramatically lower cost of sales: one occurring in the fourth quarter of last year when your -- on a percentage basis, the cost of revenues dropped about 10 points. This one -- and established sort of a new benchmark. This one dropped about 5 points.

I guess my question is if $11 million of that turned out to be, for want of a better term, a windfall resulting from a steady, directional move in the price of crude, going forward should we be looking for margins to return to where they were, more like the previous three quarters before the third quarter?

Good morning, Tom. We actually spoke about it right before the meeting. It's actually right on, same ratio.

You look at the fourth quarter of last year, Brent was down $37 a barrel. You look at this quarter, Brent was down $14 a barrel. That was a 2.6 ratio. If you look at the $11 million positive help on our financial versus the $20 million help we discussed in the fourth quarter, it is exactly the same match with the adjustment of how much retail we had at that time and how much fuel oil sales we had at that time.

The $11 million impact is right on and we can talk about it offline if you would like more details. We went through the math just previously on this call and I just want to repeat it.

But if we were to -- I'm thinking more about modeling going forward. If we are not going to project beforehand that there is a steady directional move in the price of either Brent or WTI, wouldn't we move to a somewhat higher cost of goods sold as an ongoing projected level? Or have you really hit, with Mid Pac and everything else, a new lower level?

You're right, Tom. Going forward we have some hedging opportunities there because there's obviously a position here that we can protect going forward if crude price goes up. So we keep looking at it and we, management, will do the right thing to protect ourselves on the way back up.

Thomas, why don't you give us a call and we will try to work through the details of that margin issue with you offline, too.

I think so. The only other thing I was going to ask: your hedges at the end of the last quarter were about $60 through, I'd forgotten what period next year. But has that changed since then?

It has not changed significantly. We were hedged through 2016, so it's not changed.

Okay, thank you.

Andrew Shapiro, Lawndale Capital.

Some follow-ups here on Laramie. Can you tell us some information here, like what production equivalent level did Laramie exit September at, and is your production growth still on track to hit your expected range of 55 million to 60 million cubic feet equivalent production by the year-end?

Andy, I'm going to let Will Monteleone handle that question but generally, yes, go ahead.

Good morning, Andrew. We exited September about 46 million cubic feet a day equivalent. We have a number of wells that have been drilled but aren't completed, and we still think that our expectation for the fourth-quarter exit between 55 million and 60 million per day is online. So yes.

You guys are now in the midst of now a multiyear capital investment program and you announced, and actually Questar Wexpro announced with even some greater detail, this 80-well program to be targeted into the Mesaverde. Are there other development plans in different formations or is the focus on this Mesaverde program first?

It's on the Mesaverde first. We believe that we generate the most compelling economics out of that reservoir, but we do, as you are probably aware, have the underlying rights to the deeper formation, the Mancos. But we are focused on the Mesaverde Williams Fork with Wexpro and are commencing that program as we speak.

I would add to that that the number of drilling locations in the Mesaverde are such and the economics are such that it's hard to imagine getting to the Mancos in the near future. And, frankly, the Mancos, from a just single-well economic perspective, it's not in the same league as our Mesaverde program.

No, and it's much more costly. Is there any more cash investment from Par required or anticipated for the Mesaverde program?

Not currently anticipated, given the Questar program.

Then in terms of tracking their milestones, did the Collbran Valley drilling begin on time, as you suggested in the last -- it was suggested in the press releases in early October, so it would've just begun? And what are your plans or Laramie's plans to disclose progress and results from the program?

I think the rig has been operating almost continuously since March, so they've been drilling. And, Andrew, year-to-date I think they've drilled in the mid-50s in terms of wells. And as Will mentioned, the drilled but not completed count, there's over 40 wells in inventory right now to be completed. I think the focus really right now is completing those pads. (multiple speakers)

When you say 40 and then there's 80, are you saying that they -- did they buy into the program after the fact and there's been a rebate come back in with the capital?

No, no, sir. They've been drilling pads and as they drill these pads they are drilled, but then in order to commence production they have to complete and refract the wells. And that fracking process really just began. In part, because the Company invested -- a fair amount of the capital in the last quarter has really been focused on infrastructure for water handling, which allows the Company to more efficiently complete wells.

And the 80 wells are really sort of now commencing now, Andrew, so there's a program earlier this year and then the Questar agreement really is commencing.

The wells I was referring to are all 100% working interest for Laramie.

With the economics, how do the current energy market conditions and pricing affect this program? And when I'm talking about that, for example, with Wexpro's announcement and such, did their partner that was referred to in their press release get successfully board approval to participate in the production from these wells?

I'm not sure I know what you are talking about and can't really reference what Wexpro or Questar might've been discussing.

All right. Well, it was in their release. I am just wondering how the current market conditions affect the program or it was based on the current economics and so there shouldn't be any delays.

Again, as I said, I think the single-well economics are attractive, even at today's strip. And I'm referencing a strip price from late October. And with the Wexpro program those economics are even better.

We think the development program is attractive, even with the most recent changes and the concerns over a warm winter that are affecting prices. Clearly, it's a challenging environment, no doubt about that, but I think these guys have a very attractive development program here in the Piceance.

Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments.

Thank you. Listen, I want to thank everybody for joining us. I have been here now for three weeks and a day, so it's been a learning experience for me and I just want you to know that we have a great team around here. We are very proud of what we've created and we look forward to creating even more.

I look forward to speaking with you guys in the near future. Thank you.

Ladies and gentlemen, thank you for your participation in today's teleconference. You may disconnect your lines at this time and have a wonderful day.