先鋒自然資源 (PXD) 2003 Q1 法說會逐字稿

Welcome to the Pioneer Natural Resources First Quarter Earnings Conference Call. This call is being recorded. Joining us today will be Scott Sheffield, Chairman and Chief Executive Officer, Tim Dove, Executive Vice President and Chief Financial Officer, Rich Dealy, Vice President and Chief Accounting Officer and Susan A. Spratlen, Vice President, Investor Relations and Communications.

Pioneer has prepared power point slides to supplement their comments today. These slides can be accessed over the Internet at www.pioneernrc.com. Again the Internet sites to access the slides related to today's call, is www.pioneernrc.com. At the website, select "Investor", then select "Investor Presentation".

The First Quarter Earnings Release discusses Pioneer's business outlook and contains forward-looking statements. Except for historical information contained herein, the statements in the presentation are forward-looking statements that are made pursuing to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements and the business prospects of Pioneer Natural Resources Company are subject to a number of risks and uncertainties that may cause Pioneer's actual results in future periods to differ materially from the forward-looking statements.

These risks and uncertainties are -- include among other things, volatility of oil and gas prices, product supply and demand, competition, government regulation or action, foreign currency valuation changes, foreign government tax and regulation changes, litigation, the cost and results of drilling and operations, Pioneer's ability to replace reserves, implement its business plans or complete its development projects out-scheduled, access to and cost of capital, uncertainties about estimates or of reserves, quality of technical data, environmental and weather risks and acts of war or terrorism.

These and other risks are described in Pioneer's 10-K and 10-Q reports and other filings with the Securities and Exchange Commission. At this time for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Scott Sheffield. Please go ahead sir.

Thank you Stacey. Good morning. We would like to thank everyone again for taking the time and effort to listen to our First Quarter Call. I'm going to start off with the ones that have access to slides on slides number 3, First Quarter update and begin there. The company had one of the best quarters ever, with regard to earnings, reported net income of $84 million or 71 cents per diluted share. Tim will talk more about the fact that we did have about $15 million gain from FAS 143, adopting that.

We reached full production rate from Cannon Express, [inaudible]specifically, Aconcagua Number 4 was brought on by the end of January, we've been producing at a full rate over that time frame. We initiated production from our Falcon project ahead of schedule and under budget, beginning about the middle of March.

The first part of the quarter we announced the Harrier discovery in Deepwater Gulf in Mexico; we'll talk more about that as a tie-in in our Falcon quarter area to the Falcon nest. We acquired remaining interest in Falcon and Harrier fields, where we own 100% working interest in those projects. [Inaudible] the quarter, and really it's finally-- after beginning our strategy several years ago, we actually have seen a significant increase in production. We grew daily production 45% for the last twelve months with two of our five large projects on stream; that's based on the midpoint of our second quarter guidance, which we'll talk about in a second.

We have, still, three large projects; they'll be coming on over the next nine to ten months. Our Sable FPSO was actually on location in South Africa, offshore. I had a chance in the last three weeks to go to Mississippi and visit the hull that arrived from Singapore just recently from our Devil's Tower spar structure and that should be set in the next 60 days. And, we initiated and approved development of, in what we call the two-pipe case to increase capacity because of the Harrier discovery in our Falcon area. And lastly, we announced the discovery in Alaska, which we are very excited about, and will be bringing up and talking about at press release in regard to that over the next three to four weeks.

Turning the slide to slide number four. We're giving you a history of quarterly production since the fourth quarter of 2001. As most of you all have seen, we've been fairly flat-production for the last three to four years. Production is up significantly already with the first quarter announcement of a 128,000 barrels a day equivalent, with the mid-point of our guidance at 150,000 to 165,000 barrels a day equivalent, will be up 45% at mid-point to the second quarter of 2003. As I mentioned already, we will have sales in Sable third quarter of 03, Harrier is expected to come on January the first and Devil's Tower in the first quarter of '04. So, we have two projects Harrier and Devil's Tower coming on, the first part of 2004.

Turning to the next slide, as most of you all know, in this business it's always tough to estimate production. The purpose of this slide is to show you, -- I'll look at stuff daily that move production estimates around. We are widening our range of guidance for both 2003 and 2004. Our stated goal is to continue to grow this company over a five-year period at about a minimal of about 10% per year on a five-year compound annual growth rate. We will look at -- we will be averaging about 12% during 2004. Potential additions that we have, Falcon performance is doing much better than expected, based on a new facility that [inaudible] has put in place in the U.S. [inaudible], which is one of the longest lead-tie items will be ahead of schedule. So, we could see Harrier as a much earlier startup than January the first.

Argentina gas sales are much higher than expected, based on early winter and the economy recovering. We also will be appraising our Tunisia well, Adam well which is expected to come on in May, and appraising [it shorly] there after, we have not forecasted any of that. In regard to potential reductions, Falcon is the only project that we have that had the attachments in regard to --. All of our over deep-water discoveries are royalty free; only one of them has some provisions in regard to price.

Due to the fact that the price of the first quarter and the outlook from the stand point of accounting rules, we are taking a position from a conservative stand point that the average [nine-max] will exceed [$10] and so we are accruing Falcon royalty which is [18]. We do no pay royalty upon this price deck -- upon our other deep-water projects, including Harrier, going into 2004.

Because of new accounting rules of last year, we have to match up sales, most likely what we'll be producing out of Sable second quarter, but we will have first sales because we have about a million in storage in both the FPSO, and also the flooding tanker. So, first sales will be third quarter of '03.

We didn't get a lot of our wells tied in, in Canada, because of the short winter, and also warm winter up in the BC Alberto area. And then with a lot of deep-water projects, we do have, -- could have allowance for unexpected down time. We generally run about 7% down time -- on a given basis on our deep-water projects.

Our guidance for 2004 will be 63 to 75 million BOE's. We are leaning more towards issuing annual guidance; we will be making a decision over the next three months. Tim will talk more about that during his presentation.

Slide number six, really shows our history, 2000 to 2002. Generally, production between 41 and 43 million BOEs shows 2003 and then 2004 will be growing about 5 year compound annual growth rate of about 12% a year.

Slide number seven just really illustrates our track record over the last three years and five years. In addition, compares [us] on a three years finding cost of 624 compared to the peer groups so we are in the top portal of our peer groups. These are all in finding cost for this group.

An update on slide number eight on exploration activity in 2003. As I mentioned already, we had a discovery in Alaska, tested at 1300 barrels a day. We completed oil pressure build up test. Everything looks very positive, we'll be reporting on this in about three to four weeks in a press release.

The Falcon --- in the Falcon area we had our Harrier discovery. We will spud two more wells starting in July or August depending on their success, hope to tie those in early '04. We're drilling the first well, deep shelf well, with Woodside as our partner. The first of five wells, we're picking up a second rig to drill. Two of the prospects, we had contacted a rig already, drilling the first three prospects.

In Tunisia, we're drilling one well now with Inardarko (ph) where we own 40%; they own 60. We're spuding this week a second well with Inardarko. We'll be drilling an appraisal well with E&I on our Adam well and then we'll be spuding an exploration well with E&I on the same block, starting sometime this summer. Then we have a three well exploration program in South Africa, we're drilling now on the first of three wells over the next 90 to 120 days.

Slide number nine, an update on Falcon court order, where we now own a 100% working interests in several blocks. We have our Harrier field discovery. We have several prospects on 32 blocks, we'll be drilling two more of these, starting as I mentioned in July or August of this year. We have approved a twin pipeline from Falcon Field up to the Falcon Nest, which is operated by El Paso Energy Partners.

This is illustrated on slide number ten. El Paso Energy Partners built the capacity at Falcon Nest to handle 400 million a day. We had 200 million a day from Falcon -- a line, we are looping that line to build another 10 inch line to better handle 400 million a day. With our prospects, our success rate out here in this area, we have a stated goal of getting up to somewhere between 3 or 400 million a day sometime in 2004. With just Harrier we will be up to 275 million a day by the end of this year.

Slide number eleven just an update on Alaska, as I mentioned last time we press released, we tested the Jurassic formation, which is very similar in geologic age to the Alpine Field operated by Conico (ph) Phillips. We're seeing very similar permeability and voracities. Our build up tests were very positive and as I mentioned, we'll be completing our results and making a press release in regard to that over the next three to four weeks. What's positive here is the fact that we are only six miles away from unused capacity at Kuparuk[inaudible].

Slide number twelve, an update on North American onshore activity. As you can see, we're currently running 13 rigs onshore US, primarily in Spraberry, Mid Continent Infield Drilling, South Texas and East Texas. Here we have a 100% success rate in that drilling.

Canada, we've already commented on our winter Canadian drilling program. We drilled about 40 wells up there. There's a lot of wells we didn't get tied in and also a lot of wells we had a lot of pay and did not get tested due to the early shutdown of activity by the end of March. We also had several wells that we hit pay on in regard to our exploration program and we'll be - hope to be going in this summer and doing some testing depending on whether it's a dry or wet summer up in the area. So we'll continue this same activity. Don't have any --don't have any plans to increase our capital budget from here even with higher cash flows for 2003. Let me turn over to Tim Dove, our Chief Financial Officer to go over the quarter.

Thank you Scott and in the first quarter we've finally begun to see the significant positive financial effects of our continuing ramp up in production. As a result, as Scott already mentioned we reported net income of about $84 million in the first quarter or 71 cents per share. We did include in that a cumulative effect change for FAS 143 and the net effect to that is the fact that we overly depleted salvage benefits to the tune of about $15.4 million on a net basis. Backing that out our income reported would have been about $69 million or about 58 cents per share. You can see if you take a look at our DCF and [EBITDA][inaudible] numbers, a very significant improvement in these numbers as we've been the beneficiary of higher production and higher prices, both up to the tune of about 30%. These two have backed out our non-cash amortized benefits from terminated interest rate and commodity transactions.

You can now turn to page fourteen, our revenue has increase substantially as a result again of production and price increases. It's up about 44% in the first quarter compared to the fourth quarter.

On page fifteen is our analysis of daily production volumes. The first thing you note is our production did come in as Scott already mentioned as well, a 128.4 thousand BOE per day that is above the top end of our range. It includes, of course, a full quarter of Canyon Express operations. Canyon Express averaged about 103 million cubic feet a day net, of course we have that 95 million cubic feet a day in our plan. As well and one of the great benefits we had this quarter is the Falcon start up, having been early at approximately March 15. It really performed exceedingly well averaging on a gross basis of 152 million cubic feet a day for the last 16 days of March. Accordingly, our net production for Falcon after the royalty that Scott mentioned and after the net --- out of the 25% we did not own it that time from Mariner, the 75% was our ownership in the quarter, our production was about 100 million cubic feet per day. All told though, productions was up about 10% from the prior quarter and about 16% from the prior year quarter.

If you take a look at these splits on gas you can see our gas production is up substantially about 447 million cubic feet per day. Importantly, our U.S gas production was 340 million cubic feet per day that was up 25% from the prior quarter, again owing to the new production from the project. Canadian gas was about 41 million cubic feet per day and Argentina gas about 67 million cubic feet per day.

Our base oil development drilling, you start to see the benefits of that as we increased oil production slightly. We did have a slight reduction in NGO production, primarily because we were in ethane rejection mode during about a month of the first quarter. We are now as of the quarter results, about 58% gas, our number show about 60% for the year.

As Scott already mentioned we do have a big range, put in place for our second quarter production, you can say see it's 150,000 to 100,065 BOE's per day. We've really expanded the range for this quarter with the idea with two of our large projects now on production. We have a bigger challenge when it comes to forecasting the near term production. And the key variables are of course, are when projects are going to start up and down time related to projects. we do consider downtime in our forecast and the fact is as we bring more of the types of projects on stream forecasting just becomes difficult, if not a possible to get it exactly right.

So for this quarter we've widened the range to allow for unexpected down time. This doesn't mean that we have a reason to believe that we're going to have down time, in fact our best guess for production is more than the mid point of the range, but we're trying to be conservative in turns of how we're looking at production forecasting, especially when we're looking at it on a quarterly basis.

We're going to evaluate our guidance practices, Scott mentioned this earlier, over the next few month and we just may go through a practice of annual guidance so we're going to be evaluating this as I said over the next quarter or so. We also included in the second quarter guidance the [18] Deepwater royalties that becomes effective on Falcon. I think Scott discussed this as well, and it only applies to the Falcon field that prices average in excess of [410] for the calendar year.

We saw our course through March, and March particularly was an extremely strong month, and then when we looked at the effects of April's actual OMEX (ph) prices, as we get very close to the setting of May prices, we believe it's probable that this year's price will exceed [410] and so we're going to be reduced, therefore, our production to account for the [1/8] royalty.

Turning to page 16, the production was broken out by geographic area, you can see in the first quarter our production increased in the U.S substantially again owing to the new projects coming on stream. For the second quarter, we will have a full quarter of production from Falcon, which should implement a significant increase as shown, in the 150 to 165 range. Also, we begin to see the full effects of the Canadian drilling program, hitting each of the quarters, it's the period during which Argentina gas hits it winter demand period, which should increase. We do anticipate, as Scott mentioned that Sable start up will incur during into the second quarter, but actual sales and therefore production probably cannot be booked until the third quarter. And therefore in this range, we did not consider any Sable production guidance.

On page 17, realized prices, our prices obviously were up substantially, on all commodities of course we had the effects of hedging dropping some of the relative realizations, but substantial increases on all, including NGO. Currently, we do not hedge any NGOs, we have a substantial improvement there.

You'll see if you page back into the details surrounding our differentials, that in the first quarter this year U.S mid-continent and perineum differentials widen significantly due to --- related to history anyway, due to the fact that, most of that gas goes to California and or the midwest and the demand there simply was not as high, as it was in the East Coast, where most of the Gulf of Mexico production and therefore the [inaudible] basis is set.

We are seeing improvement in the basis differential as we get into the second quarter. In addition, we sold most of our gas, in fact we sold all of our gas at Falcon, based on the daily market, that's of course, because we didn't know exactly what day Falcon would come on and of course we didn't know what day, and what volume for that matter. So we did sell all the Falcon gas in the day market in March and as you are aware, the index was set about 920 for March and by the time we entered the [inaudible] it was 650. So that contribute to a lower overall realization on U.S gas than we would have anticipated, based on index prices. As well, because of uncertainties on production, we're forced to be conservative at Canyon Express and we've sold about 20% of Canyon Express gas in the daily market, verses the three month index market, and of course, with drop in prices through the month, we saw degradation in overall realization. But overall, our North American gas price was extremely strong, even after these effects at 468 per Mcf. Mcf Production cost are outlined on slide 18, you can see we do increase, slightly above even our guidance range to 554 per BOE, a substantial amount of that is unusually high gas prices, if you take a look at the effect on production taxes, where we had a substantial increase [in] field fuel, these are where we always get affected by higher gas prices. We did have an increase in our base, as you can see from 268 to 302 per BOE. This is predominantly related to the fact we had the early Canyon Express start up issues. We're beginning to pair back some of those cost and we anticipate that, that number will be decreasing as we go into the future. As you look to the second quarter, our guidance is in the range of 485 to 515, again, lower gas prices reduces field fuel and production tax, and we should be more of a normal operating mode in Canyon Express.

Page 19, other costs, G&A came in lower than our range, about $15 million [for] our base G&A just simply seems to be lower than we anticipated, we're anticipating about $14 million from the second quarter. In terms of interest, interest came in essentially where we had forecasted. We no longer, of course, are capitalizing interest on the Falcon project, related to the fact that it's already on production, as well, we're starting to see the benefits of our interest rates swap program, having been put in effect earlier this year.

In terms of the second quarter, we're anticipating about $24 million to $26 million, as mostly related to capitalized interest effect. In terms of DD&A, we reported 606 [inaudible] that's slightly above our range, again, it's simply a matter of again of forecasting what will be the contribution of higher cost basis in the Gulf of Mexico properties. In other words, you have significantly higher affect of Falcon and Canyon Express, which are higher basis properties and that moved the number up, compared to what we had in our plan.

In the second quarter, we're anticipating a range of about 650 to 690 again, related to that same effect as we see the full effect of Falcon production in the quarter. Cash taxes for the quarter were about $2 million, mostly Argentina, we think that would go up to about $5 million in the second quarter, principally due to the fact that Argentina is going to be up to about $3m and we're going to be [inaudible]in the U.S probably about $2 million, so a total about [544].

On page 20, exploration abandonment expenses are outlined in terms of G&G we have the normal G&A load that hits this expense item of about $6.6 million for the first quarter, as well as, seismic expenditures in Argentina, Canada and the Gulf of Mexico. As to exploration cost, either principally [expense] wells, we had announced earlier in the year two unsuccessful wells in the in the Falcon corridor area, that is predominantly the U.S. exploration cost number, and in the case of Canada, expense wells from this winter's program, and in the case of Africa, that is the earlier announced well that was unsuccessful in Tunisia that was announced earlier this year. Overall exploration of Venom (ph) is about 36 million, essentially right in the middle of our range. We're having to put in place a relatively high range again in the second quarter, because as Scott mentioned, we've got some substantial wells going down, including wells in South Africa, in Tunisia, Canada, Argentina, Ponee (ph.) and so on as well as our normal G&G, G&A.

On page 21 on our costs incurred, we had a large spending quarter, $286 million, that's predominantly affected by the fact that we completed the Falcon acquisition, it's shown as $123 million at the top end of the bar. We were very active as shown in the exploration arena and particularly in Alaska in the Falcon areas, as you can see our exploration spending was $85m in the quarter. And our development spending has come down somewhat from last quarter to about $78 million, not only because we're essentially obviously done with the Falcon expenditures.

We started this year with initial guidance of about 450 to 550 million on capital, the Falcon acquisition obviously puts us at the top of that range, in our budgeting and our capital planning we did not assume exploration success and obviously we've had one at Harrier. We're going to add the two-pipe case at Harrier and ramp up the production volume at a capacity and in addition we now have %100 of it, so additional capital is going out the door for the development of the satellite fields. Accordingly, when you add that along with additional seismic and other expenditures, we you currently see the budget at about 650 for 2003.

What's important from my perspective is, even at that level of capital we have a substantial amount of room for debt reduction, if you turn to page 22 you can see kind of the way we forecast it. Our debt was up to - - up about $100 million in the first quarter, if not for the Falcon acquisition we would have been down somewhat and that's even [with a] substantial capital [load]. As you can see, we're forecasting based on strip prices, a burn rate on debt reduction of about $200 million between now and the end of the year, this would put us about $100 million or so below year end 2002. Our overall goal is to be down a minimum of $200 million between the end of '02 and the end of 04, and I think we're well on our way to doing that this year and we have lots of room to do that in 2004. And I'll show that - - celebrated the return of the rainbow chart on page 23, in which you can pick up your set of commodity prices and figure out where our [EBITDA] [inaudible] would come out. This is based on a $70 million BOE case, it's the case we run internally, so even though we give you big production ranges for '04 this is the models, what it generates for our productions is what we're internally using and it's basis of this rainbow chart.

We have this, this basically does not include taking out a non-cash items, so you have to reduce the non-cash items for interest rates and commodity, terminate transactions as well as interest to get down to our available cash. But using strip prices of a couple of days ago when this was put together, we generate over 1.1 billion of [EBITDA] [inaudible] and then when I boil it down for non-cash items and interest it will about $1 billion of [EDITDA] [inaudible] that's comparison with normal - - I'm sorry [net] [inaudible] DCF, I said that wrong. So it's $1 billion DCF after interest and after non-cash items. And accordingly that compares with our typical capital budget range [a beginning point] of 500 million, so you can see again, I'm very confident in our ability to reduce debt a minimum of $200 million, our models obviously show substantially more than that.

On page 24, as a summary of our hedge position, I point you towards the supplemental schedule in our press release for more details, I thought I'd just touch on a couple things that we've done. We have added some '04 gas, to the tune of about 95 million a day in a combination of swaps and [collars], [about] $50 million a day of swaps at $5, and about $5 million a day in gas, and collars ranging from 4 to 680. What's not shown on this page but is further documented in the supplemental pages is the fact that '05 gas, we've added about 50 million a day for 40, we have added some oil in 2005 too but it doesn't show up here, of about 3000 barrels at $24.

That concludes my comments, and as usual I already mentioned we have supplemental information back in slides 28 through 32, to cover those non-cash charges I meant - - discussed the termination of interest rates [inaudible] and commodity transactions, our gas and oil differentials and our income tax situation.

So with that I'll kick it back to Scott for discussion of the last slide.

Tim, thanks. On slide number 25, just reiterating our 5 year growth rate, we feel like we're going to hit somewhere near 12% approximately over a 5 year time frame, we want to at least be able to grow over a 5 year 10% going forward [inaudible]. So what's also important is the fact that we have a lot of potential projects, we feel like in the 2005 - 2006 time frame, and some of these here will come on in 2004. We have Alaska, which I commented on; we'll be press releasing more detailed issues or items about that and that success. Gabon we do have a team wrapping up negotiations with the [Gabonese] government; we've talked about changing the terms and getting that project off the ground. Triton was a discovery off setting Devil's Tower and we have picked up several other blocks and recent lease [sale] that are very similar to Triton and they'll be coming on in 2004 to 2005. We are moving forward with Marathon Ozona Deep. We are getting this project commercialized. Falcon areas as I mentioned we feel fairly confident we'll hit on several more prospects making the additional investment for capacity. We'll be drilling our next two prospects starting late this summer.

Talked about the Devil's Tower already, we'll be drilling --- we have about four to five look-alikes to Triton. We'll be drilling one a about every year there, keeping the capacity filled at the Devil's Tower infrastructure. I think one of our things that we will ---we'll really see some potential growth and could see it early at the Gulf of Mexico Shelf. Drilling five deep shelf wells this year, three next year. We'll be sprinkling in some shallow shelf prospects we've picked up. In the lease last year we anticipate and continue to see growth there on the shelf.

Combine that with our deep water success will be a key driver for growth in Pioneer. Tunisia we are really excited about the current activity. Especially with the solarium wells that we are drilling and the Adam Well coming on here shortly in May. And then [inaudible] after we are drilling three key wells there, which will really help determine whether or not we have a long-term gas project there in bringing into [Mossel Bay].

Let me go ahead and stop there again thank you we'll open up for questions now at this time.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

And our first question comes from John Herrlin of Merrill Lynch.

Yeah a couple of ---

Yeah John.

Morning. With Harrier, how much incremental cost are we looking at Scott?

Tim may have the exact number.

It's about 50 million. That's just the Harrier development though John.

In the pipe case?

The second pipe's about 20 more plus 70 in incremental, not counting drilling for the new prospects.

Okay. With Gabon, are you planning to sell [down] at all? Have you thought about it?

Yes as soon as we change terms. We did want to go out and get a partner before we start our early phase, which will commence late this year, early next year in Gabon.

With Alaska, why the three or four week delay? What are you waiting on?

First of all a team is finishing up their presentation. They are showing it to me on May the 8th. On May the 6th I'm showing to the board, on May 17th before our press release something I want to go to management committee and the board, so. They won't be finished until early next week.

That sounds reasonable. Last one for me for Tim, with PD&A once you get more well performance under your belt should we expect to see some moderation, since it popped up?

Yeah as you know we take a conservative approach in terms of booking. Especially Falcon, we are booked right about [the P-90] or something like that right now. So as we have seen this substantially great production performance revival we'll be booking more reserves as we get through this year. I think that will also be true for perhaps Canyon Express. So, that will also be true in Sable where we have some upside near the booking as well. So we'll definitely be working on the BOE side of the equation.

What kind of a drop do you think, kind of ball park ---

I don't think its substantial from what we're going to report in the second quarter. I mean we've got such a big inertia built with the base, that probably an immaterial amount of drop.

Oh thanks.

Our next question comes from Jonathan Wolff of Wachovia Securities.

Hi guys.

John hi.

Can you explain, I'm a little confused mechanically, how the royalty scheme works at Falcon? Is there a catch-up effect at the end of the year, or?

In 1995 the MMS put out some rules, they were amended in 2000. Those rules exempted paying royalty for discoveries and leases taken during that time and discoveries between that time. And that's where we picked up all of our leases on our Deepwater discoveries and they attached price provisions that --- above they started at $3.50 and I believe it was like 25 or $26 crude--- no its about $30 crude and $3.50 gas at the time in 1995. They escalated those that's why this year it's [410] on gas and [3280] on crude. If the price - the average in OMEX price for those commodities got above the --for the entire year, which we won't know that answer, until February of 2004. Then we have to pay 1/8 royalty on certain leases. Falcon had this price provision attached by the MMF of Devil's Tower, Harrier, and our two discoveries in Canyon Express did not. So that's why Falcon is the only one that was attached.

So will you make an estimate as we go on the production side or we'll just see [eight, eights]- through out the year?

You'll be seeing net. So we make the decision to go in and accrue a 1/8 royalty. And we have only accrued the first quarter, which wasn't that much. And each quarter we will accrue and then the decision in regard to -- and we won't make the payment until next year in February. And then next year we will have to re-look at the price. Right now it will move up to probably 420 may be 425. And so we will have to make a decision at that time whether or not to book production or accrue the payment to the feds. Based on what we think in gas prices are going to do at that point in time.

Got it.

In the old model some of you all may not be using 420 or 425 for next year. So you would either work with Susan with regard to how to adjust. So March gas pulls out at $9 and the average price of gas would have to average about 325 for us not to --- for the rest of the year, for us not to pay the royalty. And so we made the--- using conservative accounting made the decision to go ahead and accrue for it.

Okay and a little more on the DD&A as Sable comes on that doesn't really help the 650 to 690 range --.

Yeah John, but the fact is Sable is a relatively small component in total production by the same token as I mentioned the other day, inertia and so accordingly, you know I look at the numbers essentially being flat from that which we had forecasted for the second quarter for the remaining part of the year.

Okay thanks.

And once again if you do have a question, please press star 1 on your touch-tone telephone. And we'll move next to Andrew Lees of RBC Capital.

Morning guys. I was hoping you could go over your activities levels. How many rigs were used in the first quarter, particularly North America. What do you plan on doing over the balance for the year?

Yeah we did have a slight [inaudible] -- we are currently running 13 rigs onshore US. Of course we dropped the rigs -- we were running 3 to 4 rigs in Canada, those rigs have been dropped by the end of March due to the early shut down of winter drilling up in Canada. We did have - or actually two rigs drilling our [three] Alaska wells, they were shut down in the North Slope. So we shut down 5 to 6 rigs, call it winter drilling. Argentina is running on 3 to 4 rigs plus the 13. And then we have, of course the rig, we'll have two rigs in Tunisia, a rig in South Africa. Eventually up to 2 rigs in the deep shelf. Pretty much [inaudible].

Okay great and how about the deep shelf- like can you can of outline what you have seen to date? How many successes you have had versus - - and your success rate and what the average prospect? I think you were saying the average prospect you discovered to date was like 30 to 50[Bs], I think you said that in the fourth quarter?

That's right we have only drilled 6 wells and we hit on two of those 6 wells the --next we shut down that program when rig rates got high in 2001. Rig rates have come back as you all know. We signed one of them up for 3 prospects and we will pick up another one. Our average prospect size is 50 to about 300 DCF - 50 DCF to about 300. And in regards to the 8 prospects, we are drilling on the first one now. We will pick up the second rig. We think the chance of success is we need to hit on at least one out of 4 of these 8 prospects or 2 out of 8. So the 8 - if we hit on 2 of them we will be excited.

Great thank you.

Any other questions?

And just a reminder it is star 1 if you do have a question. Now we will pause for one moment. And Mr. Sheffield at this time there are no further questions. I'll turn the conference back over to you.

Okay again thank you very much we are looking forward to seeing you all second quarter as production continues to ramp up inside Pioneer. Again I thank you for taking the time, the effort to listen to our call. Look forward to talking to you in the next quarter. Thank you.

And that does conclude today's Pioneer National Resources Company First Quarter Earnings Conference Call. Thank you for your participation.