先鋒自然資源 (PXD) 2004 Q1 法說會逐字稿

Good morning. My name is Marianne, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Evergreen Resources first-quarter 2004 financial and operating results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

I will now turn the conference over to John Kelso, Director of Investor Relations. Mr. Kelso, you may begin your conference.

Thanks, Marianne, and thanks to everyone for joining us today for our first-quarter 2004 conference call. We certainly appreciate your interest. As always, I need to mention that this call is being broadcast live over the Internet with an accompanying slideshow. To view the webcast, go to our Website at www.EvergreenGas.com. Over the next half-hour or so, Evergreen management will discuss today's press release, which provided operational and financial results for the first quarter of 2004 and also provided estimates for the year ending December 31, 2004.

I need to mention that these forward-looking statements are made under Safe Harbor provisions established by the Securities and Exchange Commission and that the risks and uncertainties involved with these forward-looking statements are described in more detail in the Company's most recent annual report on Form 10-K, which is filed with the SEC.

I'd also like to mention that we will be holding our annual meeting of shareholders today at 12 noon. The meeting will be held in the Front Range Room (ph) of the Pinnacle Club, which is located on the 38th floor of the Qwest Tower. The address is 555 17th Street, and it's located in downtown Denver. And if anyone is on the fence, there will be a free lunch provided.

With that, I'd like to turn it over to our Chief Executive Officer, Mark Sexton.

Thank you, John. It sound like you are anticipating a low turnout.

As you're all aware, we recently this week announced a merger deal with Pioneer Natural Resources. We had a conference call Tuesday to discuss the transaction in detail. I suspect there will be some more follow-up about it now that people have had a chance to think about it, read some of the research that has been written about the transactions. The consideration for the transaction for this merger is Evergreen Resources shareholders will receive at their election stock; half-cash, half-stock; or all cash. If they selected 50 percent stock, 50 percent cash, they'll receive 0.58175 shares of Pioneer stock, with $19.50 in cash. They will also receive an additional cash consideration of a minimum of $0.35 per share. In my opinion, that would be a larger number. In my opinion, this transaction is not a $39-per-share transaction, but a $40-per-share transaction, because I believe that Evergreen will be able to monetize its Kansas asset for something at least a dollar a share.

There has been a lot of interest from the outside community -- not only the investor community, but industry, in these properties, as we would expect there to be because we think it is a quality asset. It did not, however, fit the particular profile of properties that Pioneer and Evergreen were looking for as a result of this merger. And this is one way we found an elegant way to give additional value to Evergreen's shareholders.

So the purchase price per share will be a minimum of 39.35 in cash plus stock considerations, assuming Pioneer retains the Kansas property. My believe, however, that the actual purchase price per share will be shown ultimately to be in excess of $40 per share.

This will be a tax-free reorganization. We are, of course, going to require SEC approval. Both companies will probably be taken a look at by the SEC. Likely closing is late September. I think in the models that we have prepared for the joint companies together, we have assumed a closing date of September 30. This is, of course, subject to shareholder approval of both companies, as well as Hart-Scott-Rodino approval. And a relatively low termination fee of $35 million was set -- relatively low for a transaction of this size.

We will be talking about the transaction more. Now we're going to turn over the call to Kevin Collins, Evergreen's Chief Financial Officer, to discuss the first-quarter earnings results. Go ahead, Kevin.

Thank you, Mark. This is a very interesting quarter for Evergreen Resources. We completed a $200 million senior subnote deal on March 10 of this year. Total amount of the notes was 200 million. The maturity was eight years. We use the proceeds to repay existing bank debt and we'll use (ph) it for general corporate purposes. Our initial ratings by the Moody's and S&P was a Ba3, BB-. We had a 4B (ph) rating right out of the box, which we were very pleased with. The interest rate was 5-7/8. We sold the notes at a discount, so the actual yield on the notes is about 6 percent.

Evergreen had excellent quarter. In the first quarter of 2004, we reported net income of $20.4 million or $0.44 per diluted share, and that's on slides 4 and 5. I will be referring to these slides throughout our discussion of the first quarter results.

On slide 6, we listed out our historical net income allowance for the last two years plus the first quarter. Again, these trends are going in the right direction. We think we are on track for another record year in 2004.

Slide number 7 indicates the net income or loss per diluted share for the last couple of years, with Q4 being $0.44 per diluted share -- excuse me, Q1.

On page 8, actual production for the quarter was 13.1 Bcf. Our guidance for the quarter was 13.5 to 13.9. We missed our production guidance for a number of minor reasons. In the Raton Basin, we were off our projected guidance because of a couple of items. Our production forecast was right on target; however, our net sales were off. And this is due to two areas -- first one being that as a result of the increase in fuel shrink of compressors running at lower suction pressures -- we did this in order to lower the field pressures to try to increase production. This accounted for about 0.1 Bcf. And our net revenue interest has decreased over time due to the increase in production and lower areas -- in areas where our NRI is lower. And therefore, our NRI has dropped on an absolute basis over the past couple of years. And because of the items, our production guidance for the remainder of 2004 has been adjusted slightly. In Piceance and Uintah areas, we're still trying to get an understanding of how to develop these properties. In the first quarter, we drilled more wells then had been drilled in the past several years, and therefore, it is giving us an idea of how long, how much we can get done this year.

There's another number of small items that have caused us to not meet projections. One of them was out of our control in terms of our third-party gathering company -- they did not complete in any (ph) that was going to allow several inert wells to come online, and therefore, that caused a decrease in our production for the first quarter.

Also, in Canada, it's taking a little bit more time from spud to first sales. We are doing what we can to try to reduce that time frame. But that did cause a decrease in some of our production in the first quarter. We also had a delay in the installation of a new compressor due to weather issues. I'll talk more about our revised guidance for '04 in just a minute.

The average for the first quarter was 129 million cubic feet in the Raton Basin, and in the Piceance and Uintah area, we had 5.9 million cubic feet per day, and in Canada, 9.1 million cubic feet per day.

On slide 10, we have now changed our guidance to 57.3 to 58.9 for 2004. And that's up from 46.3 in 2003.

On slide 12, we ended up the year at 1.495 Tcf in reserves. We're still estimate that we'll be somewhere between 1.7 and 1.75 Tcf in reserves for the year ended 2004.

On slide 13 is an overview of Evergreen's asset base as it currently exists. Our net producing well count as of 3/31/04 is 1,222 wells -- 1,007 in the Raton Basin, 133 in Piceance/Uintah, and 82 in Canada. Our current production is 133 million cubic feet a day in the Raton Basin, 6 million cubic feet per day in the Piceance/Uintah area, and 11 million cubic feet per day in Canada.

Net acreage has increased since year end. Right now, we have about 1.45 million net undeveloped acreage positions to go out and develop our properties. The Raton Basin has significant upside in terms of the number of locations that are available to drill. We also have a lot of upside in Piceance/Uintah areas. Kansas is an area that we're just starting to develop, and there's also significant upside for development in the eastern part of Kansas.

On slide 14, our 2004 (ph) drilling program was laid out there. We drilled 66 wells in the first quarter, which -- our target was 70 wells, so we were very close to our target. Total wells for the year will be 381 wells, which is up significantly from the 180 wells that we had drilled in 2003.

Slide 15 is our production guidance. We have modified this a little bit more. We did it also on our last conference call. We're still trying to tweak these numbers and make sure that we feel very comfortable with them. And we do feel comfortable with these numbers because we're trying to factor in a lot of unknowns going forward for 2004. The Raton Basin we tweaked slightly just because of the items I mentioned before in terms of the net revenue interest and the fuel (ph) shrink that we have been using this year. So we've adjusted to production down somewhat from the 52 B's (ph) that we anticipated back in February to about 50.9 from about 51.4 B's after 2004.

The Piceance/Uintah area -- again, the Indian (ph) plant problem was causing us issues in terms of not getting additional production. Now that that Indian plant is online, it's still not producing at the levels that we anticipated, so we are behind in that respect. We are still -- we also anticipate there will be some delays in permitting based on timing of BLM approval process. We think we're going to be going from 30 to 90 days, so that may delay us a little bit. And we're trying to factor in some of those future delays in our guidance. And also, we are anticipating delays from the Division of Wildlife protest to the BLM for the sage grouse (ph). All these things are little items, but they do add up in terms of total production.

Canada -- again, it's similar issues in terms of not major issues, but they're just delays that our causing us not to get wells hooked up there as quickly as we would like. We have again taken a little bit more time from spud to first sales -- that's causing us a delay in meeting our production goals. We've had a delay in the installation of the new compressor system -- the new compressor, which is now online, so we should be back on track with that. We had originally anticipated doing CBM and conventional wells in the near term, but have delayed that due to the formation of a joint venture in the next few months. We had anticipated buying additional production, but however, some of the royalty trusts (ph) have run up prices in the areas we were looking at and we couldn't acquire the properties at economic prices -- again, just a few factors causing us to tweak our guidance going forward.

On slide 16, we have noted our hedges that we have in place and had talked about on prior conference call. Over the last week or so, due to the merger with Pioneer, we have added on an additional layer of swaps for both November and December of '04 of 25 million cubic feet a day at roughly $5.72 -- and that's a net number, that's net of fuel and basis. And in the period from January '05 to December '05, we've added in another 100 million cubic feet at a net $5.14, which is again net of basis and fuel usage.

On slide 17, we have our operating costs for '04 listed out. Lease operating costs for the first quarter was in line with guidance. We have adjusted the Q2, Q3, and Q4 to higher levels from previously projected -- due to lower production guidance, we have not changed the absolute dollars, but because of the number of units that we are producing, we will have higher unit cost. Generally, transportation and DD&A were in line with our previous expectations. G&A was a little bit higher as noted in our press release. We've also added a new line for transaction costs. Due to the merger with Pioneer, we will be incurring transaction costs over the next two quarters. And we have reflected this in our guidance, and that will amount to about $0.20 to $0.22 for Q2 and $0.06 to $0.08 in Q3.

Interest expense was in line for the first quarter; however, due to the bond transaction we did in March, our following (ph) interest costs from the bond deal are now going to be approximately 6 percent. That's about little over 3-plus percentage points higher than our bank debt, and therefore, our interest expense will increase for the remainder of 2004.

Production property taxes will be about 5 percent of net sales, and income tax rate for 2004 will be about 37 percent. We have a small amount of current cash taxes that we pay, and that is due to the Canadian properties. All other taxes are deferred.

On slide 18 is our CapEx budget for '04. Our full capital expenditures for Q1 were about $50 million, pretty much in line with what we expected. For the remainder of the year, we're still expecting a CapEx budget of about 200, $220 million.

Mark, I'll turn the call over you.

Thank you, Kevin. We are obviously very excited about this merger opportunity with Pioneer Natural Resources. We think it's going to be a very, very good deal for our shareholders and our employees. As we conducted due diligence on each other, we were very pleased to find that there's a great cultural fit in the companies, both very entrepreneurial.

One of our main reasons for doing this deal at this time was, as you can tell from a lot of Kevin's comments, it's clear that we pretty much have the Raton Basin fine-tuned, and expect continued growth prospects there. A lot of good opportunities -- have drilled up some very, very good wells in the Basin with plenty of additional drilling prospects. Yet, we started reaching out into new areas, a few delays here, a few delays there, a few problems with the BLM here, some issues getting a few things done in Canada. Nothing major, nothing that's going to affect our projected reserves, but enough that we recognize that we are going to have to start to reinvent the kind of company we were to be able to do the necessary things to comply with all the regulatory requirements, not only at the BLM level, but also with the SEC and all the regulatory agencies in this new regulatory environment.

So as we look to the future and examine what kind of company we needed to be and how we needed to hire additional people and different internal infrastructure we needed to create here, we recognized that this was an important inflection point for shareholders. We had a few conversations with a few other companies. But when we looked at who we thought was the best fit, it turned out that it was people we knew, people we respected, people who have a great business model, and people who buy many accounts, have one of the most undervalued stocks in their peer group.

So what better combination than to find and undervalued currency with a great management team, with a great vision, with projects all over the world, that still understand doing business in places like the Midland, Texas, or Hugoton (ph), or the west Texas Panhandle -- very complementary to what we're doing in the Raton Basin? They are very interested in our expertise in coal bed methane. A couple of people have asked me, what's Pioneer going to do? They don't have any experience in coal bed methane. They do now. People have missed the point. This is a merger. And we're looking forward to sharing technology and operating practices with each other. And I suspect as we go forward we will find very, very nice synergies -- not only in the Raton Basin and learning from some of the things that Pioneer has experienced with them (ph), especially with regard to low-pressure gathering systems. But I think Pioneer's people are going to enjoy the vertically integrated model that Evergreen has developed. I believe we'll want to apply that more aggressively to their own plays onshore North America.

So great synergies between the companies, very compatible philosophies. Both companies care very, very much about their employees, about their relationships with the community, about their relationships with the investor community. We just saw a good fit all the way around. And with that, we are going to open it up for questions.

(OPERATOR INSTRUCTIONS). Brian Singer, Goldman Sachs.

Pioneer mentioned on its call that you had already locked in hedges for about 75 percent of 2005 production. In the release and then in your comments, you referred to about 100 million cubic feet hedged in 2005. Are there additional hedges that either have been or are currently being put in place? Or should we extrapolate from that 100 what production you would expect for 2005?

That 100 million was the amount in the contract, and it represents about 60 percent of total 2005 production. We may go up to an additional 75 percent, if required to.

And you're doing the delays (ph) in production getting wells drilled, regulatory, etc. Why wouldn't CapEx decrease for 2004?

It may do that. We have not factored any of those decreases. If we can't get 55 wells drilled this year, we will obviously decrease our drilling program in the Piceance/Uintah. If we can't get the 65 wells drilled in Canada, then we'll obviously decrease some of those costs. Also, Kansas is another area where we may, depending on what happens with the divestiture of that property -- that drilling program may be adjusted also. So the 220 could be adjusted significantly for 2004.

Well, certainly that Kansas portion of the CapEx budget will be adjusted, although even though we are in a divestiture mode on that property, we are still moving forward. We are still moving forward with the project, both in terms of infill acreage, in terms of drilling additional wells, in terms of frac-ing (ph) them, in terms of putting in gathering systems. So we are going forward with this project right up until the time it is divested.

I will say, however, that if we are hamstrung in these other areas, in Canada or the Piceance/Uintah, then we have the resources to go ahead and drill more wells in the Raton Basin. So we're going to work aggressively either way to try to get that $220 million CapEx budget by drilling quality wells, regardless -- although, obviously, there has to be an adjustment made for Kansas.

I would like to put in the more color on Kansas, and that is that we are going to conduct a very quick process to monetize this asset. All interested parties I invite to call Kevin Davis (ph), who is our Director of Managers and Acquisitions. And we will be conducting an open, competitive bid for it. But there's going to be a very quick timeline. And given the realities of the merger agreement we're under, we want to guarantee that we complete this transaction prior to the close of the merger, because that is in the best interests of Evergreen's shareholders.

Just one more question on the Raton -- you've had very good luck in terms of the regulatory permitting relative to other peers. Do you view this delay as something that is a little bit more permanent, or something that is temporary?

Well, just keep in mind, we have only had these properties since really November 1, and we're still learning how to get things done. However, 85 percent of the Raton Basin acreage is fee (ph), 5 percent is state, and 10 percent is federal. And so, less than 10 percent is affected by BLM permits. Permits in the Raton Basin on BLM lands still take 150 to 180 days on average, whereas the well drilled right next to on fee (ph) land takes exactly 30 days to get a permit from the Colorado Oil and Gas Conservation Commission.

We have factored that into our operations in the Raton Basin. We just haven't quite factored it enough in to our operations in other areas. Again, that was part of looking at what it was going to take to do this right. Seeing the infrastructure we were going to have to create internally to make this happen, so, we felt that this was the time to either gear up the company in a big way or look for a strategic merger, and obviously, we chose the strategic merger.

Ellen Hannan, Bear Stearns.

Good morning. Question on the on the Forest City Basin, Mark -- can you tell us what your investment (technical difficulty) in that area has been?

Ellen, you asked what the investment to date has been in the Forest City Basin?

Yes.

Currently, as of March 31, we have about $42 million in lease acquisition and drilling costs. And we've also allocated another $8 million for the frac equipment and the coil tubing (ph) unit drilling rig that we are purchasing for Kansas. So that's $8 million. The total cost in Kansas right now is about 50 million.

And Kevin, while I have you, one other thing on the -- the slight reduction in your projection on the Raton -- on the fuel shrinkage? Can you go through that again? Also, your net revenue interests?

The fuel shrinkage -- usually, our fuel shrinkages run about 9 percent in the Raton Basin. This last quarter, we saw it at about 9.7 percent. And so that 0.7 percent was about 0.1 Bcf for the first quarter, and we factored that in for the remainder of the year. So that's reduced our production estimates a little bit.

The net revenue interest adjustment is that over the past year or so, we've really ramped up our production in the Long Canyon area. And the Long Canyon area is an area that we acquired back in 1998. And our net revenue interest in that area is around 70 percent, which is less than the normal NRI in the rest of our properties of about 85.5 percent. So that has caused our -- while our production hasn't gone down, it has caused the net sales to go down for us.

David Heikkinen, Hibernia Southcoast Capital.

Just had a question for you on looking back on the carbon properties and some of the execution problems and looking forward now on the combined company -- Pioneer did not talk about that as much as a core area. Do you think that those will be a core set of properties for the combined company?

Absolutely. I think that Pioneer is already looking at ways to consolidate the Canadian operations in a very favorable way for both companies and both companies' groups in that area. Also, in the Piceance/Uintah properties, Pioneer had been looking at this area when we started looking at doing our own merger negotiations. We really believe we can grow the Piceance and Uintah asset, and Pioneer believes that too. That means being more aggressive about getting control of the gathering systems out there and putting in your own and putting in the plants that are necessary and putting in the infrastructure and being a dominant player and being a consolidator. And we were just starting this process. Pioneer not only has the same approach -- if anything, they'll probably be even more aggressive than Evergreen would have been. So I expect the Piceance and Uintah to be an attractive core asset for Pioneer. It's certainly one of the hot growth stories and hot growth basins in the Rockies right now and I don't think Pioneer plans to miss the opportunity. (multiple speakers)

We're very, very pleased -- other than our inability to get wells actually hooked up, we're really pleased that the early results of the drilling program there. Kevin alluded to the fact that we've drilled more wells in the first quarter than carbon (ph) had been able to drill for a lot of other reasons over the prior year or two. And we really like the results. In fact, we knew we would.

The comment that you made, Mark, about -- there were other offers or other discussions that occurred. If Pioneer's share price trades off (ph), is there any threshold where those other discussions become active our more appealing? Or is the goal to just marched down the path?

Well, we looked at a lot of different companies. Obviously, Pioneer was looking for an expansion of its North American asset base. So it's obvious why this is a strategic fit. And if it's not, Scott and I will be out talking about why we think it is next week, as well as Kevin and Tim will be at the same time.

Obviously, Evergreen had a few choices in terms of kinds of company they could approach. I don't want you to think that we did not approach or talk to anyone else. We have had conversations. But on balance, we think this is the best deal for our shareholders. And it's certainly a very good deal for our employees who are going to find themselves in a very similar entrepreneurial culture that encourages the sort of attention to detail, taking risks, finding ways to improve your ability to get things done, looking at statistical plays, looking at maximizing statistical plays like the spray berry (ph) coal bed methane, getting into other tight sands, fractured shale plays.

The more we looked at it, I was surprised at all the synergies. The more we looked at it, the more it made sense. And there is no question in my mind that the $40 that I expect plus in total consideration for the deal was fair and reflected a very nice premium to the stock prior to the run-up that everybody saw because of the EnCana transaction with Tom Brown.

So this combined company, looking forward -- I know people have asked me, are you taking the cash or are you taking the stock? The answer is both -- my personal election is 50/50, for the same reason that we did the deal for shareholders. It affords our shareholders the opportunity to take a little bit off the table now, but gives them a currency that I think is one of the best growth stories in their peer group.

Onto the carbon properties -- really looking at those. Is it a drilling issue? You said you drilled a lot more rigs -- or drilled a lot more wells. So it isn't the procurement of rigs, it's just getting the wells on production, primarily in the Piceance and Uintah. Is that a fair characterization?

Well, that's right. I mean, let's face it -- we control so much of the Raton Basin that we've taken for granted our ability to get pipe hooked up and (multiple speakers) Only 10 percent of the lands in the Raton Basin. And it's only 10 percent of the lands in the Raton Basin is federal, but over half the lands in the Piceance/Uintah Basin is federal. There is a lot more permitting issues. And there's clearly a permitting slowdown going on, because it has taken -- in the Piceance, it's gone from about 30 days to get a permit to over 90. And at the same time -- that's not just for drilling wells, that's also for getting lines laid.

And then of course, as Kevin alluded to, there's issues now where certain groups are trying to get, you know, the greater (ph) sage grouse, listed as an endangered species. The obstacles to industry are tremendous, but industry is working to do this the right way. And ultimately, industry will prevail and do it right. And ultimately, it's going to be companies like Evergreen and Pioneer that get in and do it right and show that you don't have to choose between quality of life and environmentally responsible development in a place like the Piceance/Uintah Basin area.

Okay. And then on the Canadian side -- you kind of piqued my attention with the commentary of a joint venture being pursued, slowing down some of the production? What are the details around that?

Well, in the past, in prior conference calls we've indicated that Evergreen's ability to get into Canada and one of the attractions was our desire to do joint ventures (multiple speakers) some of the groups that have large land positions there. That is still our desire. Of course, there are deals in discussion right now. The only guaranteed way I know to jinx it is to tell you exactly what we're working on.

Fair enough. So there isn't any details as far the amount of acres that you're trying to get exposure to, both conventional and coal bed methane, that you're ready to talk about yet?

Well, in the past, I have said that we planned to add a couple hundred thousand acres at least to our position in --

In the deals you're talking about --

(multiple speakers) Canada and in the deals we're doing --

are in that magnitude (multiple speakers)

Every time I talk to Scott, though, when I think I have a big appetite, he has got a bigger one. (multiple speakers) he's going to want to increase that.

So the deals that you're talking about, just in order of magnitude are in that couple hundred thousand type of exposure, if they were to, knock wood, get done?

Stay tuned. I think (multiple speakers) Canada and unconventional gas and coal bed methane in Canada as we have said is going to be a hot growth area. And I do believe Pioneer is looking forward to taking advantage of that opportunity.

Rehan Rashid, Friedman Billings Ramsey.

Good morning, Mark. Quick question on the comment that you made that Pioneer now has CBM expertise. What incentives have been given to your key technical people to stay on board after the merger? And then I have another question.

I chained them all to their desks.

Say that again?

Let me come up with a slightly more comprehensive answer. As part of the transaction, retention of key people was an important part of this merger. And it is a merger, it's not just an acquisition. Pioneer is very much looking to merge with Evergreen's expertise and acquire that expertise. They cannot acquire that expertise if our people walk out wholesale. And so we have -- I won't get into the details, because I have not told all the employees specifically what each of them are getting yet, but a number of employees in key positions are given strong incentives to stick around for a few years in terms of restricted stock as a retention device.

So we are very concerned that our employees be taken care of. I was pleased to find out that that was one of the easiest part of the negotiations as the transaction committee described it to me, that Pioneer very much wanted to keep these people and wanted to give them strong incentives to stick around. I think anybody that leaves is crazy after some of the things I saw offered.

Second question -- how many wells in the Raton Basin -- how many wells do you have producing? And then how much more will it take to kind of fully develop the area?

Plus or minus one or two, it's about 1,063 wells currently producing in the Raton Basin. And we believe that easily another 1,000 wells will be drilled there, both through expansions of the Vermejo (ph), shallower drilling in the Raton coals (ph) and the Raton sands and conglomerates as well as infill drilling and tighter spacing -- which, at these gas prices, I have to tell you that if you are in $5 plus gas price environment, it makes a lot of sense to drill eight wells per section in terms of value creation for shareholders and in terms of rate acceleration of the production profile and a way to shorten that 30-year reserve life to 20 years.

Just by way of history, you've gone from basically zero production to wherever you are now. Could you give a quick synopsis of just the broader issues that you had to face growing production to these levels? And as you go forward, does the compression/low-pressure issues become of any concern? And then how would that be addressed, I presume (ph)?

Well, that's a big part of the competitive advantage. Evergreen was one of the first companies to come in and put in such an extensive and looped low-pressure gathering system. The pipe in the field, the 24-inch-diameter pipeline that links these compressor stations, the eight compressor stations we have in the field -- seven of them are hydraulically linked together on the suction side, and of course, it's all going to the same discharge line. So we have tremendous redundancy.

The willingness to invest in that capital, that large pipe and that over-80,000 horsepower total compression is one of the keys to the success of the area. That's a tremendous asset. But that asset is -- you know, we're still experimenting with fine-tuning it. The problem with fine-tuning it, sometimes you go a little too far over the dial and you have to come back. That's one of the things we found out that as we were looking, experimenting with some of the lower field pressures.

One of the things we'll be doing, for example, is -- the next step in modifications to the system will be adding booster compressors on the suction side which are going to improve the overall hydraulics of the field and allow the system to produce more gas than it already does. The system was really way, way overbuilt for the thousand wells that are there because it was built anticipating not just production from these thousand wells, but from the next thousand to 1,500 wells that will also be flowing through this system is it's expanded and extended.

That was one of the synergies we saw with Pioneer -- they're actually operating their Hugeton system on vacuum. And we're getting very low pressures now. It's too early yet for the Raton Basin, but there is a day coming when that field is operated on vacuum. It's going to be terrific to have a company like Pioneer that already knows how to do that.

So really the approach, the growth, the overall profile was looking at the data that was there from other companies. A large independent and a major oil company that each considered themselves the coal bed methane experts of the world drilled some wells in the Raton Basin, pronounced it generally uneconomic, and got out. Evergreen was one of the small independents grabbing crumbs as they became available and looking for ways to improve on those crumbs, and by slowly acquiring acreage. And by buying out some of the other smaller operators in the Basin and improving on the results that they saw, Evergreen was able to amass well over 300,000 acres of very consolidated acreage, and able to develop this in a very logical, technically proficient way. The Bureau of Land Management when they reviewed this area and the federal units that we have there stated that this area was a textbook case for what unitization was expected to accomplish in terms of orderly development of the reservoir.

So really it was getting a large acreage position, consolidating it, figuring out that we could improve on the results of the vertically integrated model, which included not just providing services for ourselves, but also doing the gathering ourselves; not just owning it, but actually putting it in, controlling it, operating it, building the pipe. We don't have any arguments with ourselves when we're expanding the system in terms of trying to decide, should this be a 6-inch-diameter line, or a 20-inch-diameter line. We have erred on the side of putting in the larger pipe. And quite honestly, we're very glad we did, because now we have a system that is built to handle the next thousand to 1,500 wells that are likely to be drilled in that Basin.

Of course, the field evolved as technology has evolved. In doing their own services, we developed our own frac technology and our own specialized techniques. We are not the world's experts in frac-ing coal bed methane wells. I believe we are the experts in frac-ing coal bed methane wells in the Raton Basin. And we've experiment with different equipment, equipment, such as coil tubing units, which are state-of-the-art now for pumping fracs. We've also experimented with different fluids, different pumping rates, different chemistries, different additives. And we think we've got a pretty neat recipe of the Colonel's secret herbs and spices that work awfully well in the Raton Basin. And we can't wait to trying to convert this frac technology to other areas -- not just the Piceance and Uintah Basin, but probably the most exciting application in it will be Canadian coal bed methane and the for major coal groups up there that are likely to be developed.

(OPERATOR INSTRUCTIONS). Joe Allman, RBC Capital Markets.

Mark, could you comment on the progress to date on the de-watering process and production testing in Kansas?

I can. It's working. It's working very slowly, but it's working. And that is consistent with what we said before. I wish I wasn't conflicted so I could go out and buy this project myself with private capital. But I could see why Pioneer felt it wasn't a fit for our combined companies. I believe, however, that some person will be lucky and glad they got that asset. But I can understand why it doesn't fit our combined companies. Were we not doing this merger, it is certainly an asset we were planning to stay with, and an asset that we were looking forward to developing. But it's just one of those things, you know. Anytime you're high-grading assets in a merger like this, when you look at the real quality assets and high-impact assets that Pioneer has -- it's clear why they need to put priorities in other areas.

You know, one of the things about -- if you looking for a good model for Kansas, while the coals are thin and a little under-pressured, they are really under-saturated. You can see them much better -- you obviously have an analog in the Cherokee Basin and several hundred wells that Devon had drilled that were recently acquired by another company in there. But this is probably a more analogous petrophysically to a lot of things going on in the Warrior Basin in Alabama.

So that's just the key on coal bed methane. Each basin is a little different. Each one requires a different combination of drilling and completion and operating techniques. That's why it is an exciting phase of our business to be in right now. It's very statistical, very low probability of failure once you figure it out. But you have to experiment with the recipe. And each basin, and each area in each basin has a different recipe.

I think that -- talking about that and the differences in coal bed methane, one of the reasons why Kansas is a low priority for Pioneer is they see the huge opportunity, as do we, for Canadian coal bed methane. And if you're going to be experimenting -- while I fully believe that Kansas project will be very attractive to some lucky company, Canadian coal bed methane has much larger opportunities.

Have you seen any positive or negative surprises just in terms of say, the coal thicknesses that you've encountered? Or have any areas -- I know you got a big block kind of on the north side and another big block in the south. Are any of those areas more interesting based on what you've seen so far?

One area is more interesting for the fractured shale. The other area is more interesting for the coal. I will let you figure out which.

And then, I know another operator out there is getting ready to flare gas from a handful of wells. Are you folks looking to do the same fairly soon? And then after that, can you just talk about Alaska a little bit, too?

Well, flaring coal bed methane wells isn't our model. And you won't see us flaring wells. We would take a different approach. But as you're aware, since the project is going to be sold in the not-too-distant future, I don't know what any comments there would really help. You know, some areas we have been venting for a few days. We've got thirty days of venting on some of our own wells. And obviously, we watch other operators in the area.

We have been very, very careful all throughout -- the way we've talked about Kansas is to say, look, we think it's going to work. We think it's going to take us a little while. We indicated that we were a little disappointed at how slowly we got started on it. And it became clear to us that it was going to take longer for these wells to de-water. They are de-watering. We are making gas. It's too early to claim economic victory, but everybody else out there is. So we have been very careful not to hype this play, but other operators in the area haven't had the same disciplined approach.

Up in Alaska, we are coring our fifth and last well up there. It's at about 2200 feet. And it's drilling and coring ahead. We're days away from being finished there. Once we do, we're going to look at the five core holes we drilled, figure out which of the areas deserves production pilot. And hopefully we convince Pioneer that it's worth drilling the production pilot.

Markos Kaminis, Standard & Poor's.

First I'd like to thank you, Mark, for creating a lot of value for shareholders over the years. But I also want to say that I'm wondering about the value creation in this deal, because it seems like there's some value being killed in Kansas directly off the bat. And with the acquisition price being below-market price as well -- I know that the stock had run up on two other deals in the region, but the market price implies that an acquisition should be a little higher, and not lower.

So I have some concern about the value creation for Evergreen shareholders -- directly, I don't see it. Indirectly, I guess the expertise transfer to Pioneer is certainly a synergy. Just wondering about Evergreen shareholders in the near-term.

Well, I understand your concerns, Marcus, and let's face it, it was -- in the middle of our conversations, a couple of transactions get announced that had some influence on the market. And looking at this transaction overall, it's not like we haven't talked to a few other folks. We have.

But most companies -- we had reached a point where we needed to do something, Marcos, as a company. We either needed to reinvent ourselves, or we needed to go find a company that already had that infrastructure in place. We feel that Pioneer has great projects also. It's a different kind of growth profile. It has a lot of North American assets that are long-life reserves, statistical play, where there are obvious operating synergies. But combining with this company at this time gave our shareholders access to some really, in my opinion, sexy, high-impact projects that if they come in as we and Pioneer expect them to, you know, this conversation will be a moot point a year for now. (multiple speakers)

I also expect that Pioneer, after this merger is completed, will trade closer to the cash flow multiple of its peer group, and will be appropriate for it to do so when these assets are combined. (multiple speakers) have been very strong supporter of us over the years, Marcos, and we -- by the way, I'd like to return the compliment; we really appreciate it.

Thank you. They talked about -- Scott spoke about acceleration of -- exploitation of your reserves possibly through the deal. But he also talked about 200 wells in the Raton per year through 2008, or something like that. And that doesn't seem like an acceleration. You're doing 200 wells this year.

Did Scott say that?

I thought so.

We have got to talk to him about that. Actually, the plan is -- Evergreen drilled 200 wells this year. And collectively, we agree that it makes sense to drill 250 wells next year and 300 wells the following year. I will tell you that if we get any more delays and the Piceance or Uintah Basin or some of the Canadian projects, expect to see us shooting for more than 200 wells this year because we will deploy the capital. We are going to hit our production targets. We are going to do what we said we would do. But the plan is -- we have discussed with Pioneer the need to do this in a responsible way, pay attention to details and not lose out on the quality control, looking at the equipment and the people that are necessary, and we're already making plans to gear that up and to get ready to drill at a faster rate, because they do plan to increase the drilling activity in the Raton Basin, which is appropriate for a company pro forma this merger.

Okay. That's reassuring. One last question -- what is the permitting situation in Kansas? You spoke about the Piceance/Uintah compared to the Raton. But what's the situation like in Kansas?

Well, again, when it's fee acreage, it's easy. 100 percent of the Canadian -- part of (ph) the Kansas acreage is fee. Unlike certain parts of Colorado, where the anti-development groups come out to fight you at every step of the way, you can get a permit in just a few days. You can get the well drilled in and out a few days -- very low impact. Frequently, the difference between an uneconomic farm and an economic farm in Kansas are the ones that do or do not have oil or gas wells on them. And our experience drilling out there has been actually quite positive. And in many cases, the farmers' wives serve the crew cookies, which is a very nice change.

Bill Nightfuls (ph), SAC Capital.

Mark, it's Jeff Bellman (ph). You've talked about this before in the past, but can you go over it again? I saw the numbers that you published on reserves, proved improbables of 2.4 Tcf. What do you think, though, is ultimately proved recoverables in the Raton Basin? And what do you think the incremental CapEx is to bring that down?

Well, you know, we are at 1.4 Tcf now in the Raton Basin, or were at the beginning of this current year. The 900 to 1 Tcf is completely consistent with what we have sent all along is likely to be what is going to happen in the Raton Basin. These reserves are -- while they are probable, they are what we call internally probable, or the closest thing to PEDs (ph) you'll ever get.

So we are extremely confident we'll get there. And the cost of getting there -- the cost as you go forward, of course, is starting -- you know, there has been some cost creep in our business. Although we do our own services and we've saved a great deal of money doing it, we have seen increases in cost of sand and pipe and cement. And since we get tend to give our people raises and not take money away from them, so the costs go up every year. But we're getting good economies of scale. But we are getting -- we are seeing where the -- we are getting less productive, but actually more predictable wells. So I am extremely confident that we'll get over 2 Tcf. And in fact, you know, we have had our independent engineers look at this and they are not really allowed to publicly talk about reserves other than proved, but you know, they generally share our outlook on this. Certainly, within -- I would guess that their thought of the upside potential of the basin and our expectations of the upside potential are within 5 percent, which is right on the money.

So I think -- we're confident we are going to get there. Obviously, (technical difficulty) cost per unit are going to go up because as you start to drill up the field -- but it's still going to be way below what the industry averages are.

You have been operating there for such a long time -- you obviously have a good sense of the probable number moving (ph), because that's what you have been doing over time. Any comment on the potential upside beyond that 2.4 Tcf number?

Well, in addition -- I can't comment on it, but I am just wildly speculating now. But we have said all along that there is deep potential in the fractured shale. There's also the potential to do deals with other people that are in the basin. There are other possible plays that could emerge for tight gas sands or fractured shales. At some point, we will -- maybe Pioneer will want to more aggressively drill some deep wells just to see what is there. And I certainly can't fault that, because the Raton Basin would be unique if only the coal play was productive. Almost every other basin is productive for coal base methane is started with conventional production, and coal bed methane came as an afterthought. The Raton Basin is, I think, the very first basin to actually develop as a coal bed methane play without the benefit of the more conventional production.

So is there something else there? The answer is probably. Now I am speculating, of course. But we have also drilled some shallower tests in some areas as well as some deeper tests, and we are going to drill those. We are also experimenting with some directional drilling.

So, yes -- is there additional potential? You bet there is. A wise man in our industry once said to me, the best place to look for oil and gas is in an oil and gas field. And I think the Raton Basin has proven to be the basin that keeps on giving. And I'm sure that's one of the reasons why Pioneer wants to build on it as a core asset and for our Rocky Mountain approach to getting a very strong consolidated position in several basins in the Rockies.

(OPERATOR INSTRUCTIONS). John Zariner (ph), Loomis Sales (ph).

I just need a little clarification on the hedge position. The differences that I'm seeing -- you reported in your (technical difficulty) current press release and your prior guidance largely are for the 2005 hedge position, though it was a little extra first quarter (ph) of this year. It's that what you had pledged to put on to satisfy your end of the merger bargain?

Yes, it was. We added the 25 million a day for November and December of '04, and the 100 million cubic feet per day in 2005.

So that makes -- you're all set in '05.

Yes, we are.

Okay. Good. That is all I needed.

At this time, there are no further questions. Mr. Sexton, are there any closing remarks?

I would like to thank everyone for their support of Evergreen. As some of the comments we heard, this has been a wonderful success story. I'd like to think it's not over. I think we're just evolving through this merger with Pioneer into the kind of company that we would have tried to create anyway. And it's a great opportunity to work with a company that has a similar philosophy, similar values, a similar entrepreneurial approach, and a desire to constantly push themselves and try to find ways to do things better.

We are very excited about this merger -- hope it happens sooner rather than later. But it will take its time, and we will have a lot of opportunities to talk about it and talk about the transition this summer.

I'd like to thank everybody in the investment community for their support that we have enjoyed and their trust, and I think we've made a lot of people a lot of money. And I think we're going to continue to do so through this transaction.

This concludes the first-quarter 2004 earnings conference call. Thank you again very much.

Thank you for participating in today's conference call. You may now disconnect.