Ranger Oil Corp (ROCC) 2005 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Penn Virginia Corporation conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jim Dearlove, Chief Executive Officer of Penn Virginia Corporation. Thank you. You may begin sir.

Good afternoon to those of you who are on the call, or on the internet. As I could just run through the roll call here. Here with me in Pennsylvania is Baird Whitehead, who runs our oil and gas company. Frank Pici, who is the CFO of Penn Virginia, and Penn Virginia Resources Partners, Nancy Snyder, who is the General Counsel of both the Partnership and the Corporation. Somewhere in the deep south is Keith Horton, EVP, who runs our coal business.

In Texas and various places are Randy Lentz and James Andritsos, who between them are representing Penn Virginia Midstream today, and in Kingsport, Tennessee, is Forrest McNair, who is Controller of the Company. I have all of these people on the call with me, so if there are questions that require thinking, or deep information, I have someone I can hand off to. I get to do the fun part, which is to tell you a little bit about the quarter, and where we stand for the year.

As you can see from the press release, which I won't endeavor to read to you, but I will try to pick out some of the highlights. Penn Virginia had a very solid, a very good quarter in what is so far a very good year. The numbers that we publish on the front page of the release are the financial score card net income, cash from operations, operating cash flow. As you can see some of those are at record levels, net cash from operations, operating cash flow, significantly over where they were a year ago, in some cases by 50%, in other cases 75%, and net income is actually 3 times what it was a year ago. More significantly they are running ahead of numbers from the second quarter of this year, which is maybe a little more meaningful in some ways.

Year-to-date, again, we are outperforming where we were after the first three months of 2004, pretty much across the board. The cash numbers are up about 50% over a year ago. The net income number is up more than 20%. The drivers here, the main driver is the performance of our Oil and Gas segment. That is not to say that PVR didn't have a very good quarter, and we will talk on that for a minute.

But a lot of these numbers come out of the Oil and Gas where production at 6.9 BCF is up some 23% over where it was the third quarter of '04. It's fairly flat with '05 and that's despite the fact that we were, although not terribly badly affected, we were subjected to some discomfort from Katrina and Rita. Operating income for the Oil and Gas group was $27 million for the quarter versus $9.4 million last year. And two-thirds of that came from prices. Prices were certainly up.

The other third came from higher production. As I said, Penn Virginia Resource Partners, our MLP posted some strong results in both its Coal and its Midstream segment. And I will as I said touch on that.

I'm going to refer a little more now to the operations report that we put out on the 26th of October, so roughly a week ago, has a little more color in it than the press release and I'm not going to again read that to you, but I thought I would touch on a couple things. As I said, production for the Oil and Gas company was up 23% over the comparable quarter in '04, and that was driven by our horizontal CBM results in the East, by Cotton Valley production, where a third and a second and third rig are now deployed, as well as some accelerated drilling in Mississippi.

Year-to-date again production up 20 BCF through the third quarter, versus about 18 a year ago. So 13% ahead, and that number become more significant when you recall that in the first quarter this year, we did sell some nonstrategic assets in west Texas, that made a small contribution of production, and this year unlike last year we did have some hurricane issues. Ivan didn't really bother us too much last year. This year we think the total affect of the hurricanes throughout the whole of the year will be a half a BCF. We expect to stay within our guidance range.

Very quickly on the Gulf Coast, we drilled 11 gross, 7 net wells all were successful. Ten were development wells despite those successes, the production from the Gulf Coast from the quarter was down slightly. Again, that was due primarily to the sale of those assets and the hurricanes, somewhat offset by increased production from the Cotton Valley, and all of those numbers are in the October 26 release, which is on the internet. I don't feel I should read that to you and waste your time that way.

In terms of growing the company, we did announce that we signed a deal with Bill Barrett Company for 50% working interest in 25,000-acre horizontal oil play in the Bakken shale or Bakken dolomite in the Williston basin. We expect to spud the first of those wells this quarter. Subsequent to our release, that is of the 26th, we signed a second deal with Bill Barrett Corporation in the Williston basin, maybe 30 miles from the first one about 41,000 acres, we think there is a potential there to drill at least 100 wells.

Again, it's a horizontal oil program. So it fits with our strategy of having an inventory of things to do, finding things to do that are somewhat nonconventional. So we are very pleased to be able to announce those two deals. As I say, we will be spudding the smaller one this quarter. And we at least expect to.

In the East, we drilled 36 grossed 31 net wells, 30 were successful. Production in the East is up considerably, about 47% higher in the third quarter of '05 than it was in '04, and that's because of the accelerated drilling in Mississippi, and our horizontal CBM program, where we drilled 5 wells this quarter, that's gross, about 2.2 net. They were all successful.

We were able to modify our agreement with CDX during this year, such that they are now committed to running 3 rigs and crews, they were running that many but now are committed to it, and more importantly there are provisions in our revised agreements to put a fourth, and even a fifth rig on, during the year 2006. That won't happen tomorrow, but we were hopeful we can begin to see that affect going through next year.

We have acquired about 60,000-acres of coal bed methane acreage, that's contiguous to the where CDX and Penn Virginia have drilled in the past. We have a well down now. It's going very, very well. CDX had an opportunity to acquire a 50% interest in that 60,000 acres, and may have in fact done that. But with that acquisition, Penn Virginia Oil and Gas now controls about 420,000 acres of CDM leasehold within central Appalachia.

If I flip back to our press release now, where there are several paragraphs that discuss our expenses, I won't read those to you. They are up about $7 million, or 30% quarter-to-quarter, meaning third quarter to third quarter and again the detail is there. The drivers were a $3.5 million impairment, related to a change in reserve estimates in the South Texas field. And the other big component of that was higher DD&A, which basically comes because production is up, we were producing some oils that while they have higher returns, have higher costs associated with them, and that was basically the thrust of that change.

Just to talk about PVR for just a moment because it's an awfully important piece of what we do here. The partnership also had a very good quarter and a very good year. Its press release is littered with the word "record." I would remind you that those records in part come about, because if I'm comparing 2005 to 2004, we didn't have our Midstream Oil and Gas business in 2004. So year-to-year comparisons don't mean very much. But certainly things are going in the right way.

If you look quarter to quarter, second quarter '05 to third quarter '05, things are moving in the right direction. Again, those press releases are out. I'm not going to read you the numbers discretionary cash -- or not discretionary, pardon me. Distributable cash flow was $24 million. That's the most important measure and that was up about $1.5 million from the second quarter of '05, year-to-date again those numbers don't mean a lot.

What is also important to Penn Virginia is that PVR increased its quarterly distribution for the second quarter of 2005 to $0.65 a unit. Just to remind you we own 7.8 million limited partnership units, as well as the GP and we started to move through the splits, meaning that we are starting to get a piece of the incremental cash flow above certain levels as we move through the splits. That's the value of owning the GP which is what we do. The coal segment of PVR again this is touched on in our release, had a very, very good quarter. A new high, in terms of royalty revenue. Part of that price driven. Part of it because our production is up a little bit due to an acquisition that we made of about 95 million tons in west Kentucky, that gave us now a footprint, if you will, or an entree into the Illinois basin, which we think is very important for us.

Year-to-date as well the Coal segment is doing very well. Coal royalties are well ahead of last year. Mostly because of prices and although they are not significant numbers, in and of themselves they are significant in what they story they tell and that is that Coal services is ahead of last year's significantly and that's this infrastructure whether it's facilities that we own on our own property, or our joint venture with Massey, to own facilities that handle coal at an end user, and that is beginning to show some signs of life. In addition, you will notice other revenues in the Coal sector being up a little bit. In fact, up considerably. It's just not a big number.

But that is due to some fairly interesting transactions that Keith, and Nancy, and some of the folks on this call, were able to put together wherein we were able to take what would have been a nonaccretive acquisition on the coal side in and of itself, because the coal isn't going to be mine for awhile, and combine it in one case with a coal transportation agreement, which is called [WEWEG] agreement, and another case with oil and gas rights, that allowed those transactions to proceed.

The coal markets and I will shut up here in a minute about this. But the coal markets are very strong right now. Prices are off a little bit the last few days, as much weather-driven as anything else, but the fundamentals remain strong. Stockpiles are low. SO2 allowances are through the roof, more than $1000 a ton. That's putting pressure on high sulfur coal, and the mess of the railroads coming east from the Powder River bason, both sort of favor, if you will, central Appalachia, Illinois basin, and northern Appalachia coal right now.

As far as the Midstream goes, I can't talk as much about, because it's Christmas time and we open the box and now we are looking inside. The operating income was $5.9 million for the quarter, which is ahead of where it was for the second quarter at 4.1. EBITDA which a number not in your releases, but it was $9.8 million in our third quarter of this year, versus $7.8 million in the second quarter of the year. Year-to-year comparisons don't mean anything because we didn't own it. We owned it starting March 5 of this year.

However, to give you some flavor of it all, from an operating standpoint, the accounting systems, the IT systems have been converted. The accountants IT people are tweaking that to get the reports to read the way we want them to read. We are now in-sync with the former owner, and running independently of them. We have already completed a fairly important project to expand the amount of gas that we can bring to the Beaver plant, which is the flagship plant of our four facility acquisition.

A second project is about to get underway. There is also some ideas that we have got to build off of a couple of those other facilities, there are some ideas that we have in concert with our friends at PVOG. In fact, we were actually PVR is selling some of the gas that PVOG produces, specifically that in the Gulf Coast in south Texas and south Louisiana. So I think maybe that is a summary of where we are.

The other thing I don't think I mentioned, was that with regards to the MLP, there is this notion of subordination, meaning the units that we own were subordinate to the common unit holders, and there's a formula to come out of subordination, and basically you meet your distribution goals, your minimum quarterly distribution goal for consecutive quarters. After one year some the units come out, after two years which is where we are now, another set of units comes out which is 25% of them. So as of November I think it's 14th or 15th of year year, 50% of the units will be out of subordination, the other 50% should come out this time next year.

I think that's all I will say about the about the release it except to talk a little bit about guidance, which is on page 11 of the release, at least the way it's formulated in my book. There is not a lot to say about guidance in the Oil and Gas segment. You see tightening of the ranges. But basically no dramatic changes and we expect to be as I said within our original guidance and certainly within this guidance, despite the hurricanes and some other things, which were not that terrible for us. Expenses are up a little bit for some of the reasons that I mentioned.

Capital expenditures are up over our original guidance and that's because you put this stuff out based on an estimate of where you are about this time of year, or a month from now. And over the course of a year opportunities come and go and those numbers tend to change. We tend to not include acquisitions in our CapEx estimates. So even some of these things like this acquisition of acreage in the East, or the Barrett deals in the West, get added to this stuff.

If you go down and we talked about this on our last call. The call guidance is again pretty much on with what we have been telling you all year. You will notice if you are studying these sheets that Coal production in the fourth quarter is predicted to be down a little bit. That's because of a long wall system called Panther, which has been on and off of our property. It will be off for most of the fourth quarter. It should be back on sometime in the first quarter of next year. Also there is another long wall property called Federal #2, which is operated by Peabody, where a combination of geology and timing and other things have simply caused them to fall behind a little bit, and the coal isn't going away, and we will get paid for it, but the timing has slipped some.

And we had predicted this, and we had predicted that we would have a -- our guidance was 29 to 31 million tons, now it's 29 to 30 million tons, so we sort of stayed within our guidance, and there is nothing to be alarmed about. If you are looking at it, it might strike you as odd. It might also strike you as odd in a time of up prices, that the realization rate on coal that we are po predicting for the fourth quarters is about $0.10 lower than it was for the third, and that is nothing more or less than contract mix.

We have contracts that are $1.50. And we have contracts running $4 a ton, and some of those coals shifts, or mines shift or long walls move, or what have you, and there is a little change there and you can expect that sort of volatility over time, simply because the coal markets have become that much more volatile. I don't think in the Midstream nor in the bottom of the page there is anything dramatic enough to talk about if any of you have any questions, of course, we welcome those. Let me just sort of sum up a little bit, if I could.

Most E&P companies are benefiting financially from the high price commodity environment that we are in, and Penn Virginia is no exception. But we are fortunate to have had, and I want to give my friend Baird credit for something, and I rarely give him credit for anything, but I will give him credit for this. But he put us in a position of having an inventory of development projects, which we could accelerate when prices did increase. And it's part of our ongoing strategy, as evidenced perhaps by the Barrett deal, the CBM acreage, and some of the other things that I can't really talk about, but that we were working on, that that is an integral part what we try to do. Is to build that inventory of development opportunities, and opportunities where they may have risk associated with them, but we can quantify those risks and move quickly when we have to.

The MLP has created a lot of value for our shareholders and our unit holders, of which we are the largest unit holders. It's quite good for us. The addition of the Midstream has and should continue, I think, to offer a lot of opportunities for both Penn Virginia Resources and PVA.

I tried to sum up for PVR an hour and a half ago on a little bit of an up note, the coal markets look very strong. Not to engage in some sort of self-congratulatory anything, but you guys are the guys who follow us, who own us, who have taken the time to be interested. And I think that it's important that you emerge from these calls, with some feeling of how the management of the Company thinks things are going. And I think we think things are going, easy for me to say. We think things are going pretty well.

So without any further delay, I will take questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question is coming from Joe Allman.

Hi, everybody. Baird or Jim, could you talk a little bit more about this new agreement in the Bakken? Where is it? North Dakota or Montana? Is it 41,000? Net acreage? Is it 50/50. And Baird, could you address the risks of the first agreement? That acreage area versus the second agreement? Are there different kinds of risks based on the locations?

Joe, on the second deal that Jim was talking about, we signed with Barrett, it's on a North Dakota side. It's in Williams County, North Dakota. It's a Radcliffe formation, it's a sandstone/carbonate. We think it has low risk based on some nearby Barrett production just to the west. We will have about a 40% interest in this thing. The reserve upside on a gross basis is about 20 million barrels. These wells will make some water, because it has sort of a bypass pay, because of open hole log interpretation, it calculates on the wet side, but based on new technology and horizontal drilling most importantly, these wells are found to be oil productive. Initial production rates will probably be in the 200 to 300 barrels per day range.

The intent is to get 2 of these wells drilled the first quarter of '06. After which we will get them turned in-line. Evaluate the prospect going forward. Assuming everything works out okay, we will run anywhere, or Barrett will run anywhere from 2 to 4 rigs. The Bakken dolomite which by the way is a recent update, we just spud that well. It has a higher degree of risk with it because of where it is, in the Bakken. It's in the sort of in the fringe of the Bakken. In Richland County, Montana. We don't think it has a lot of risk because of a what we consider a very important show well, that was drilled years ago.

But again, it has about net to [Tempergenie's] interest it will have about 7 to 8 million barrels in this project. These will be around 7500 feet deep, and we'll be drilling these with 5000 foot laterals, and stimulate it, so we have a number of things to do in the Williston, and more importantly probably on the Ratcliff moreso, than the Bakken. Good opportunities to expand that play. And there is also potential in the Bakken underneath that same play, around 1000 feet deeper, we have placed no value on the Bakken at this time. But in all probability, the Bakken will be tested on one of these early wells.

40% interest on the first one, or most recent one?

That's correct.

Okay. Appreciate that. Thanks.

Thank you, Joe.

Thank you. Our next question is coming from Mr. Eric Hagen. Please proceed with your question, sir.

Good afternoon, gentlemen. Earlier this year you talked about leasing some acreage, I think it was in Indiana or Illinois in a shale play. It was an Antrum shale, or maybe the new Albany shale. Is there any update on that? Have you leased any more acreage? Do you plan to drill any wells there in the near future?

I guess we will split at least one and maybe -- spud one or maybe two this quarter. It's in the new Albany shaft.

Correct. In the Illinois basin, in new Albany. We will spud the first one probably in a couple weeks.

The plan is even though ultimately we think it's a horizontal play, the plan is to drill two vertical wells, gather some reservoir formation information, as far as fracture, and those kind of things. But, yes, we still are, we have slowed down the leasing activity because now is the time to test what we have. But we have accumulated about 28,000 acres in total. And we actually have two different prospects. Each well is testing a separate geological idea.

Is there any production out there, any wells drilled? Do you have any per well metrics you're aiming for?

We think these wells, Eric, will have, about half of these you'd have to piece. We probably drilled anywhere from 3000 to 5000-foot of lateral. The New Albany typically is pretty heavily fractured, some silt stones in it. We don't know if we will have to frac these things, or not.

To answer your question, there is established new Albany production in the Illinois basin, probably the largest being Quicksilver to the eastern part of the trend. But Burlington and some of the other larger companies have a position in New Albany in both the Illinois, and Indiana and western Kentucky part of the basin. And this is getting a lot more attention.

This is a plate site that has been around for a number of years. It tends to be on the squirrely side, because it can make a lot of water. But as people have learned over time, you will in some cases have to move a lot of water to move any appreciable amount of gas. There is ample opportunities to find very good disposal zones that are not that expensive to drill. So it's just learning more about an old play type is what it gets down to.

Thanks, Baird.

Thank you. Our next question is coming from Mr. Andrew Coleman. Please proceed with your question, sir.

Good afternoon, guys.

How are you?

Good. A couple questions. Looks like differentials have been moving quite a bit here the last couple months. Could you give me some guidance, on how to look at differentials for your company, since you have production from east Texas, to Appalachia, to the Rockies?

You are talking about basis differential?

Yes.

They've been fairly wild. Katrina took Henry Hub our, things are fairly volatile. I don't have that at my fingertips.

We had relatively less basis flow out in the east I guess you would say. The place with the most flow out, I'm sure everyone is saying is down in the Gulf Coast, and in mid continent more, but we haven't given guidance on it, because we look at it as an overall portfolio, and in terms of how our basis differentials have swung on a combined basis, they just haven't been that huge. That's why we haven't given guidance on it.

So is it fair to say that the Appalachia stuff is somewhat offsetting the sporadicness in other areas of the country?

That's correct.

Yes.

How much of your production do you nominate for [bid week] versus leaving in the spot market?

Almost all of our gas is sold on the spud. We may firm it up for a period of time for six months, but typically it's based on some beginning of the month index.

There's very few of our contracts, even though we have some, there are very little of our gas that is sold on a fixed price. Very, very little. Most of it is an indexed base price.

Okay. Great. Last question I had is, across the areas you have operations and do you think you will feel comfortable replacing reserves in each one of those areas?

Well, we are expanding and had success expanding the Cotton Valley. We were expanding and had success expanding the horizontal CBM play, and in general CBM and shale plays are beginning to be things we are expanding into in the East. If that's two of the pillars we stand on, the third one is Mississippi. And there, we think we might have 350 or 400 wells left to drill. It's pretty darn hard to add acreage there.

We are trying to add some new ideas. But basically I don't think you can downsize anymore, or down space anymore, and it's awfully hard to add acreage. I wouldn't expect a lot of growth in Mississippi. Although as I say we do have another 350 or so wells to drill.

Baxterville, we should have some reserve growth there. Still a lot of possibles. What you are seeing is [inaudible] goes as true reserve growth, and [Gwenville] is probably stagnant.

Maybe getting at what you are asking in a different way, the drivers of the Company right now are the Cotton Valley. there is a lot of room there to run. And we think there is even opportunity to grow the leases there.

In the East, we have been very successful in adding leases. It's not easy. But we have been successful doing it, and I have no reason to think that we can't continue to grow that. More importantly or as important is, you have leases you have to drill them. And this modification of the CDX agreement, if we can add 2 rigs, if we can add those 2 rigs over the course of 2006, would make a big difference.

And then beyond that, whether Mississippi grows or not, and I'm sure -- I know Baird ir right when he says there is room in Baxterville, whether it's the new Albany shale, and it will work or it won't, whether it's Montana, it will work or it won't, there is some other things that are a little more embryonic, that we can't really talk about right now, but they will work or they won't. We are trying to give ourselves a lot of room to run, because not everything is going to work ,and not everything you will be successful growing. I think the two most important things we got are the Cotton Valley and horizontal CBM, and there's room to run.

If I could add another thing. We had some exploration success this year, like the Wise discovery, and the Grisham well we drilled, offsetting it and discovering it's in that field, so there will be some exploration additions also this year.

For those that don't know exactly what Baird is talking about, that's south Texas and south Louisiana onshore.

Okay, great. Thanks a lot, guys. Nice quarter.

Thank you.

Thank you. Our next question is coming from Sven Del Pozzo. Please proceed with your question.

Good afternoon.

Good afternoon.

I have a few questions on the Coal segment. I would like to know -- I patched in late so sorry if you answered this. How much of the coal production during the quarter, was related to the acquisitions and could you give me an idea how much they might produce next year, just the acquired properties?

Keith you want to take a shot at that?

Well, actually there is about 4 acquisitions involved, Sven. And the Green River property in western Kentucky will be about a 3 million ton a year producer. And it is in force, and we are getting the full benefit of that during the fourth quarter this year.

As far as our Appalachian acquisitions, we are just getting started on production out of our Alloy track, which we acquired earlier this year. That property will be at full production, about 1.5 million ton per year production, but it will take us about two years to ramp up to that.

The third acquisition was one we call Briar Creek, adjacent to one of our Cold River tracts. And that property will not be productive for a couple of years. We are exploring that. We have access from properties that we already own, and so we are looking for development on that, on a go-forward basis. You won't see the effects of that for the next couple of years.

And the last property is an eastern Kentucky acquisition that we should begin to see production during the maybe a slight bit of production during the second quarter of '06. And the remainder, third and fourth quarter, they will be a limited amount of production. So that sort of a summation of the acquisitions.

And on the Green River in particular, how much of that coal is developed, and what rate do you think it might be developed? Is there enough demand from lessees to get them in there immediately to start developing? How exactly does the lifecycle work, on a coal lease?

We have an active operation that a lessee who is currently producing from that property, that was producing for the prior owners. So a portion of the property is actually developed, and is under production, and that's the piece you are seeing over the current time period. The remainder of the property, we are actively seeking lessees for that, and I have had conversations with a number of people, in looking to expand the overall production from the property. But that should take a couple of years to get accomplished.

Okay. Thank you.

Thank you.

Our next question is coming from Mr. Daniel Morrison. Please proceed with your question, sir.

I came in a little late as well. If you could, it sounds like you didn't get into any specifics on the recent activity with the [inaudible] well --

Sorry, we couldn't hear you.

Any rates or -- that well -- it was in the process of completing.

Dan, I'm sorry, I could not hear what well you said.

Grisham on the --

Dan, it's Baird. We were still working on that well. I think as we have released the Grisham well looks a lot better than the Wise well based on open hold logs, we picked up an additional sand in the Freo. The total sands which had, had a lot more ferocity associated with them, other than the Wise well. We've been in the process, and Brigham has been in the process of getting 2 strings of pipe set in cement, -- for both of those pay zones. We have 5 inch set through the upper pay zone.

They attempted to set a 3 inch liner in the lower pay zone. The well took a kick. And we have been under a summing operation, in order to get this thing cleaned back. When it took a kick, it blew some cement up the hole, and it set up, those kind of things. They have been under an operation in order to snub in and drill out, they are getting thing back in order, to get this 3-inch liner cemented again, and go ahead and complete it. Based on how this thing looks on a log and how it's acting operationally, and during this completion process itself, we are pretty encouraged.

Good. And quick one additional question in south Louisiana, it sounds like you are getting ready to have a pretty active year. How fast will that come, as far as we see anything TD' by the end of the year on the exploration front? If so, how many wells and what the profile looks like on the drilling side?

Dan, we will probably not get anything TD' before the end of the year. We plan on getting probably two wells spud before the end of the year, one of which is a well operated by Clayton Williams, and we retain a 25% interest in. The other well is a well we will actually operate and by [Upastilian], which is an Iberia parish. But between the end of this year and next year, we are going to have a very active exploration program, on the prospects we have been over the last couple years getting identified, and getting them permitted, and finding partners on '06 will be an important year for us going forward, as far as getting some of these things drilled and tested.

Great. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] At this time, Ray Deacon has a question. Please proceed with your question.

Hey, Baird, can you talk about results from the horizontal drilling in Appalachia a little more? Are you still comfortable with the range of reserves per well, that you have been talking about, and the rates of return there?

Yes, on the horizontal CVM stuff, which I assume you're talking about, yes, things are looking very good as evidenced by how we have been able to ramp up production here in a year's time. You know, we were seeing, as you would expect in anything, we are seeing rates that have a range associated with them.

We were seeing some wells make more water than others. We are seeing some wells that take three to four months to dewater completely, after which gas starts ramping up in 200 MCF a day increments in some cases, in a short period of time. The more we drill, the more we learn. But we are as pleased and excited as ever on this project on this program, and we are dealing with the transportation issues, on takeaway issues. Things are going very well in that program.

Okay. So you would still feel comfortable with talking about the 100 BCF over a fairly small piece of the acreage position that you have?

I'm not sure if it's small. It's probably half of the 400,000 acres that Jim is talking about. The 420,000 acres we think has potential. We are still drilling core holes out in front of our program. And we spent 1.5 million to $2 million a year just drilling core holes at 40, $50,000 a pop.

We are spending a lot of money drilling what we refer to as the G&G activity in the horizontal CBM program. Some thing we have yet to learn, some other zones of coal that we have not focused on. We were tending to focus on the coal intervals that have more areal extension as you would expect.

But there are other zones that are smaller in extent and may support one or two patterns. We are learning something all the time. Over time we think there is no reason that we will not meet this 100 BCF, or probably exceed it.

Great. Similar question for east Texas, you are ramping up activity and the consistency has been there. How much do you think you will ultimately book net net to you on the east Texas assets.

That's a hard question to ask this year. You know, again, we think it has a lot of upside. We think we have got 250 to 350 locations. We just started drilling our 100% acreage. We have no reason to expect, at least based on the initial results that it's going to act any differently than we see as far as the statistical average done in the GMX area, at a BCF apiece in the Cotton Valley alone. So, you know, over the next five years or so, we would expect that number to get fairly large.

Okay. Great. And I'm not sure -- I don't know if Keith is still on, but have you actually given any guidance for from your lessees, for coal production for next year?

No, we haven't given out guidance yet, Ray.

Right after year end. Probably in January, Ray.

Got it. Thanks a lot.

Thank you.

Thank you. Gentlemen, there appear to be no further questions in queue at this time.

Well, again, those of you who participated, or listened in on the internet, or on the call directly, we appreciate the interest. We will talk to you again next quarter. Thank you.

This concludes this afternoon's teleconference. Thank you all for your participation. And you may disconnect your lines at this time.