山脈資源 (RRC) 2002 Q4 法說會逐字稿

Welcome to Range Resources 20004, fourth quarter conference call. This call being recorded. All calls are placed on mute to prevent any background noise. Statements made that are not historical facts are forward-looking statements. Such statements are subject to risk and uncertainties which could cause results to differ materially from those forward-looking statements. After the speakers' remarks, there will be a question-and-answer period. At this time, I would like to turn the call over to Mr. John Pinkerton (ph), president of Range Resources. Please go ahead, sir.

Thank you. Good morning, and welcome. With me today are Tom Edelman (ph), our chairman, Terry Carter (ph), our executive VP of exploration and production, Rodney Waller (ph), SVP and Eddie LeBlanc (ph) CFO. I will turn the call over to Terry Carter to give us an update on our E and P efforts and then to Tom for his comments and then we will open it up for questions after I'm done. We filed our 10K with the SEC this morning. You can view it via our website. I will assume rise a few key points. First is reserve growth. Going into 2002 the goal in 2002 was to achieve 110% reserve replacement compared with 70% reserve placement in 2001. As we previously released, actual reserve placement was 222%, excluding positive price revisions reserve placement was 160% which (inaudible) 126% came from drilling and performance revisions and 34% came through acquisitions. The 126 drill bit placement rate was the first time drilling alone fully replaced production. For 2003, we have increased our reserve praisement market from 110% to 125%. The second point is finding development costs. Our all end 2002 finding (ph) development cost averaged 92 cents per MCFE excluding price revision that came out to be $1.27 per MCFE

In this calculation we have included all capital spent in 2002 including over $8 million of acreage and sizement that will be drilled in 2003 and beyond. Our goal for 2003 is to achieve F & D costs in the $1.30 range or less. This excludes price revisions, with the recent jump in commodity prices and -- in (inaudible) cost we think this will be a challenging but attainable fee In terms of spending -- expanding our drilling opportunities as you know we have enhance our technical team greatly. We have upgraded our engineering staff to also help evaluate acquisition opportunities in our core areas. Importantly, we're building a diversified multiyear drilling projects that should provide the foundation for our future growth. Having a steady stream of drilling opportunity less allow us to be disciplined and selective in the acquisition sector. The fourth point is improving our balance sheet and reducing debt. During 2002 we continued to reduce debt and simplify the balance sheet. Total debt and converts fell $24 million. We also eliminated the ITF credit facility in December, 2002. Since year end 1998, we have reduced debt and convertibles by 50 percent. In 2002, we plan to do the same, and that is to reduce debt and further simplify the balance sheet.

While pleased with these achievements we're obviously disappointed with the lack of production growth. Production fell in 2002 by 1.7%. We started off the year poorly, as you all recall, as we lost gas production in mada Gore island where the highly F-1 well ceased production. For the year, production in the Gulf Coast fell 20% and production in the southwest increased 11%, and production in Appalacian rose 4%. The good news however is we started off 2003 in a much better position. We're benefiting from a number of successful wells that we drilled late in 2002 which caused our exit rate to be the highest in three years. Our 2003 drilling program is off to a solid start. We have 12 rigs running currently, which is 50% more than this time last year. We expect 2003 production for southwest to increase 10 to 12 percent in 2003, while Appalachia should grow five to 6 percent. Assuming no -- in the gulf we expect that to decline and moderate to 5%. This equates to a 4 to 7% increase assuming no acquisitions. With a more balanced approach to development acquisitions, coupled with our improved technical team and far better execution, we're on track to build value for the next several years. With that I will turn to the fourth quarter results.

For the quarter revenues totaled 51.5 million, 13% higher than the previous period. Royal and gas rose 8%. All other revenues increased $2.1 million in total. Fourth quarter realized prices including the impact of hedging averaged $3.64 per MCFE as natural gas prices rose to $3.70 and oil prices cropped 10% to 26.22 cent. Our average gas price decreased our average oil price by 3.51 per barrel. On the operating side, production fell 3% averaging 149.2 million cubic feet a day. Gas production fell 10% to 109.9 feet a day while crude oil and NGL's production jumped 21% to over 6600 barrel's -- on an equivalent basis 73% of the production was natural gas. The drop in gas production is primarily due to lower production in the gulf.

Expenses for the quarter totaled $45.5 million, 3% lower than the previous year, after excluding the fourth quarter 2001 property impairment. Interest expense fell 9% due to lower outstanding debt and declining interest rates. Direct operating expenses which includes production taxes increased 1.9 million to 79 cent per MPFE due to higher field costs and higher production costs. Our DNA expense decreased 13% due to lower volumes and lower depletion rate. Explosion expenses rose 3% and IPF expenses dropped 25% due to decreased activities. GNA expenses decreased 5% due to low or bad debt expense. For the fourth quarter, EBITDA (ph) and other non-cash charges totaled 35.8 million, a 3% increase. Cash flow totaled 32.1 million in the quarter up 7%. On a per share basis, cash flow was 57 cent per share, 1 cent higher than the last year. Now, earnings included a Sable that set forth the cash flow. You can find on our website where we have included some supplemental information on eastbound -- and cash flow. Bottom line fourth quarter was 4.9 million versus 27.6 million loss last year. As I mentioned, last you're loss included 31.1 million impairment charge. Earnings per share for 2002 were 9 cents compared to a 53% loss last year. Turning to full years 2002 results, revenues decreased 11% to 195 million. The decline in revenue was due to four things. One is 14.3 million impact due to oil and gas prices. 5.1 million swing in the accounting for non-cash, ineffective portion of oil and gas hedges. 3.6 million impact with lower production volumes, and IPF revenues were down by 2.9 million. In terms of wellhead prices include (inaudible) the impact of hedging, they declined 7% to (inaudible) MPFC, and average gas price fell to 3 -- oil fell to 22.25 per barrel. Hedging increased our average prices by 32 cent at MCFE. Production totaled 54.8BCF, a 1.7% decline. The crude oil production increased two percent and that was due to the drilling successes at -- field and sterling gas field as well which creates additional NGL production in terms of liquids. Gas volumes dropped 3% again due to declines in the gulf.

On the expense side, excluding 31 million property evaluate, expenses were equal between the years, direct operating expenses were reduced roughly 3 million or 7% due to lower field costs and a decrease in workover expenses. On a per unit production basis, operating costs were 74 cent and workover expenses 15 percent for production and ad -- taxes. Our exploration expense doubled to 11.5 million reflecting increasedseismic expenditures. Our large or technical staff and -- costs. Interest expense was reduced by 9 million to 28% due primarily to our lower debt out standing and falling interest rates. GNA expenses rose 10% due to higher personnel, higher insurance premiums and the cost of the reaudit. DNA declined to slightly lower volumes. IPF reflected 4.2 million valuation allowances offset by lower interest expense and administrative expenses. EBITDAX (ph) was 12% lower than 2001. Cash flow fell to $2.17 per share. Net income increased 47% which included $2 million on retirement of debt and a deferred tax benefit of 4.4 million earnings per Sharon a fully diluted basis increased 34% to 47 cents a share.

Turning to the balance sheet, again the key point here is that we continue to reduce our debt. Debt was reduced by 24.2 million during the year. We retired 22.7 of subordinated debt and trust preferred and our non-recourse debt was reduced by 22.3 million as of the IPF credit for this facility was fully retired in December. A 21 million increase in the bang debt cost by repurchasing these higher cost subordinated debt and by funding the IPF facility retirement. Since year end, we have purchased another 1.3 million worth of subordinated debt and trust preferred. With regard to our debt statistics, EBITDA was 2.6 times based on total -- at the end of the year including the trust deferred divided by the 2002 EBITDAX (ph)covered expense over six times. With regard to hedging, it's reduction of price volatility and made the cash earnings more predictable and lock in turn on capital expended. For 2003 we have -- hedged at Nynex prices at $4 per NCF and 4.27 cent per barrel. We have hedges in place in 2004 and 2005 at lesser (inaudible) and they range 4.04 to $4.17 on the gas side and roughly $25 oil on the oil side. The counterparty, which is the most significant positions currently are J.P. Morgan, bank one, credit -- and MITSUI. We don't have any significant exposure to margin costs. Turning to IPF we lost $3.4million in 2002. The loss was caused by recording. IPF generated $14 million of cash including early payoffs. At year end portfolio balances and we expect that balance to continue to decline. We don't see any new material investments made here. In terms of our 2003 capital expenditures, we set a budget of 105 million excluding acquisitions.

This is a 17% increase over 2002. The budget includes 89 million of drilling and recompletions, $12 million for land and seismic and $4 million to be spent on gathering systems and facilities. During 2003 we expect to drill 326 rose wells, 173 net wells and to under take 37 grocery completions. Approximately half the budget spending has been allocated to our southwest unit which is our primary driver for growth with roughly 25% being directed to each Gulf Coast and Appalachia. Based on current oil and gas futures prices and hedges in place, our current projection tells us that our capital budget will be fund with less than 75 percent of internal cash flow. We use the excess cash flow to either rules debt, retired debt, fund acquisitions or increase the capital budget. Specifically looking to the first quarter of 2003, we currently anticipate production to increase 3 to 4% over the prior year period. With regard to a specific Datapoint, for January 2003, actual production came in right at 3.5% over January of 2002. Based on current oil and gas prices and hedges, oil and gals revenues are expected to increase 25-25% for 2003F expenses are currently anticipated to rise approximate somewhere in the 10 to 13% over last year. And while really difficult to forecast, given the complicated accounting rules, we currently estimate that we will provide deferred income taxes at the rate of 35% of prefax returnings. That being said, no cash -- increases are expected for 2003.

The average of annual (ph) estimates for the first quarter cash flow is 58 cent per shared, compared with 51 cent for first quarter 2002. At this juncture, we feel very comfortable we will meet and most likely exceed that figure. To summarize our objectives for 2003 are pretty simple. One is to increase our production by no less than 5%, to achieve 125 plus reserve placement and to continue to expand our inventory of drilling projects while reducing debt. We're off to a pretty good start. From everything we can tell. We're pretty pleased with the drilling results so far in 2003. With that, I will turn the call over to Terry and let him update you on the E and P activity.

Thanks, John. Before I talk about some key projects in 2002 and what they mean to 2003, I want to talk a little bit more about reserves. I will break away from my prepared comments just a little bit here. As John said, we increased our reserves from 513BCF to 578 at year end for a 13% growth. I think there are a couple of real key points that I want to restate. And that is, we grew our reserve base and replaced production through the drill bit for the first time. 68 almost 69BCF of the new reserves we added for the year came through the drill bit and slight positive revisions that we had that were performance-based. So it's a very key thing for us. Our strategy continues to grow production and reserves in on shore long life areas, while continuing to (inaudible) our self to potentially high impact opportunities in the gulf. We expect to try to maintain a 10-year plus reserve life. So that is the reason for this balanced portfolio. Our reserve additions in 2002 reflect this. Roughly 92% of our total reserve ads for the year came in our southwest and Appalacian regions. So it's consistent with our plan as to where we're going to grow our reserves and consistent where we had production growth through the year. There were a number of important accomplishments in 2002 that will have a positive impact on 2003 and beyond.

I want to talk about a few of them in some detail because much of our current and drilling program is really the result of these successes. We have talked before about the Texas panhandle area and it's becoming a more important area to us. In 2002, as we stated in previous calls. We increased our lease hold by nearly 90 percent to approximately 45,000 acres and we added 32,000 square miles of seismic through a farm end that we did in the panhandle. We had a significant discovery on that farm end at the course - ranch 1-40 that is producing at a top rate of 350 equivalent barrel or 220 barrels of equivalent oil a day net. Just this week we completed the first offset to that discovery and it's capable of producing in excess of 1200 barrels a day, similar to what the first well was. But it's expected to be constrained by statutory allowable. Both wells are producing at top allowable rates of 450 barrels of oil combined or 2.7 million a day net to range. We're currently (inaudible) a third well in the trend. Just to take a step back, because these wells appear to have such a significant productivity, we're in the process of running some maximum efficient race cases for the state to see if we can have this allowable raise. Our expectations would be that we could produce these wells at a higher production rate. Our 3-D (inaudible) says this trend could be substantial. We're drilling another well now. I don't know how many might follow after that but we have a number of them mapped at this point in time. Our Texas panhandle is -- program is dependent on 3D seismic analysis combined with subsurface mapping. We feel like we have as good a handle on it as anybody and our results over the last year or two would indicate that. It's an area where we see considerable running room and extremely good fit for the company. We should be able to continue to add -- at reasonable prices and be able to generate returns in excess of 50%. In2003, we expect to drill some 18 wells in the Texas panhandle area. So it's going to continue to be a growing production area for 2003 and beyond.

Also in west Texas, a couple of key areas, sterling field has been discussed before. It's been afield that has been in the company for a number of years. It's currently producing $14 million a day, up from a little over $13 million a day at the beginning of last year. We drilled 15 wells there a year and currently have a rig running in the field. We're looking for opportunities to expand in and around the edges of that field and adding additional drilling locations. If we're successful with our current program and the expansion ideas that we have, we should have a similar drilling program as what we had in 2002, and I would expect production should increase there five to 10 percent in 2003. Also in west Texas, we have talked about the Fermen (ph) area before, it's a water flood area of (inaudible) area of Tex at about 4500 feet. Last year we drilled 14 producing wells and 4 water injection wells that we used to initiate an increased density water flood pilot at Fermen. After the development in the initial drilling last year, production increased by 440 barrels of oil a day net or 400 percent from what it was before we started that program. The initial performances exceed our expectations such that we're currently involved in another multi-- drilling program, between 13 and 15 wells. We expect to see water flood response in the increased density injection program in the next three to six months. If we have a success, we expect to continue to see growth in this production base for a number of years in the future. We expect production to increase some 500 barrel's day or 60% in 2003 in this field. It's not big number but it's a significant number for us because that field has been in our portfolio for a number of years.

We have also continued our expansion in east Texas. We now have about 50,000 acres of lease hold total in the region. We're pursuing Travis Pete, cotton valley and carbonate, James Lyme (ph), throughout the region. Today the results have been mixed but I'm encouraged by what I see and particularly recently. Although we drilled a significant hole in the sand early last year we successfully drilled in the Travis peek and James Lyme and shallow oil wells at (inaudible) and Wilcox sands.

In the fourth quarter we completed the age Lena lumber company number one in the -- at the horizontal line at oil well creek. The oil declined more rapidly than we expected. After we analyzed it, we determine that the problems in the completion were probably caused by the completion process itself. So we drilled a second well offsetting that well. Yesterday, it came on production and is currently producing at a rate of 4.5 million a day or 3.3 million net. We have other projects identified both on our existing lease hold and outside of our existing lease hold there in the James Lyme play (ph). This could be a significant area for us in the future. We have determined that the key thing in the James line forest and the entire area of east Texas will be drilling and completion costs. Just to back up and give you a little bit of history, we got in this play as a non-operator a couple of years ago. And some of the early wells that operators drilled in the area where we're working cost in excess of $3 million. Our (inaudible) company number one cost in excess of $2.2 million. We're expecting the second well to be 1.2 and 1.$5 million and I think we can probably drive those costs lower as we go into the future. This will make the 1.5 the two BCF wells we're targeting very economic, generating returns in excess of 50% at a $4 gas price, still healthy at $3. These wells will recover about 35 to 40% of their total reserves in the first year of their production.

We now have 25,000 net acres in the trend, and we have got identified acreage that we could pick up and buys in the future as we have success. On the Appalachia we're still focused on ex--- spending our long life -- as well as developing the shallow areas in the current unproven reserves that we have. In 2003 we will drill 220 shallow wells and we're involved in exploring deeper formations, particularly as it relates to recently drilled range or third party discoveries near our acreage. In 2003, we have roughly 14 wells planned for deeper horizons beyond the current shallow production. We have talked about before the Gulf of Mexico. As you know (inaudible)began drilling last year at -- net. We have additionally put less than 4BCF of reserves to the well given it's current performance it's still producing in that $6 million a day range with very little decline in pressure. So we're going to watch it very closely. We're also working with our partners to reprocess the existing 3D data set that we have there to see whether or not there are additional locations to be drilled. At in this point in time we have none in our plan. But that could change as could our reserves in the future if this well continues to perform as it is right now.. We have also previous live announced ship shell 28 discovery, which is a discovery in the -- at least was picked up in the lease sale in 2001. We expect it to come on production in ape at two to three men a day net to range. So with those wells and other development that we have ongoing in the Gulf of Mexico, we would expect to reduce our year over year decline from the 20 or so percent that John discussed earlier down to 5 percent. If we could keep this 5% or flat, I would consider that a home run for the Gulf of Mexico. Range continues to work with its partners in the 5,500 square mile 3D data set that we have to identify areas where we can reprocess that data set and find or develop bypassed reserves on the shelf.

Both west Cameron and ship shoulder utilized this strategy. In addition to drilling non-existingly, I would expect that we will also add to our portfolio through some leasing activity in the industry farm ends that we're pursuing right now. As I mentioned before, the gulf is an area where we're looking for high impact projects but we're not relying on it to be the cornerstone of our growth. The cornerstone of our growth will be the longer shoreline areas where we head in production in 2002. Finally, we did re-establish a small acquisition program in 2002. Really targeting smaller, less-competitive targets in existing core areas. I'll just give one example that I believe we have previously discussed before. But we bought a small acquisition in the WATONGA chickashea (ph) trend. We had operations in that area already. This little acquisition produced 2.2 million cubic feet a day of production and we purchased it for a little over $5 million, roughly $1.15 per MCF of reserves. We quickly identified a number of drilling locations. And since the purchase in September, three successful wells have been drilled, two are (inaudible) is one is on (inaudible). Two are completing and on production. The -- we also have other areas on the lease hold that came with the acquisition. Production increased to 3.4 million a day and will continue to increase during this year as we drill other wells. Although it was a relatively small acquisition, the all-end finding and development costs for capital, expected to be a dollar or less per MCF. In our rate of return it's 40 to 50 percent because of high prices and because of the performance that we had since the performance was made.

We're pursuing a number of other acquisitions in this nature that will compliment our exploration and development program. The important thing about this type of acquisition is, in general, they're going to be less competitive, and we expect to be able to buy the reserves at less than what you see when larger acquisitions are made. And they're also acquisitions that we can very quickly take advantage of any up side that we see that might exist on the properties. So in summary, even though we were disappointed in our third or fourth quarter production and year over year production last year, I think we have begun to demonstrate to define reserves and exploit them efficiently and at competitive costs. As I said, it's very important that we replace our reserves through the drill bit this past year. With the portfolio that we have is right now in our drilling program, I would expect to be able to continue that in the future. As John said, we entered 2003 with the highest production rate we have had in a number of years. We currently have 12 rigs running. Four of them are in the eastern panhandle and Oklahoma three in -- three in west Texas, three in (inaudible), one in east Tex and one on the on shore Gulf Coast area. As he mentioned, we're looking for 3 to 4% production growth in the first quarter. Assuming any reasonable success from our drilling program, I expect the rate of growth will accelerate as we go with the current type of program that we have in place and see continuing throughout most of this year into continuing 2004. I will turn this over to Tom and be happy to answer any questions that that you have later.

I would just like to make a few brief comments before we open this for questions. I think to summarize, 2002 would have been a terrific year except for the production shortfall. The production shortfall was driven by having far too great a concentration of our potential to grow that production tied up in two projects but proved unsuccessful. One at MADAGORDA island and one in the Bossier sand where we placed too much emphasis on something that high school been changed in the current year in terms of the mix of drilling. As Terry mentioned, our projects are far more widespread and have for more momentum. In the course of the year, yet income rose 46% to 45 cents per share, certainly relative to our share price, a fairly handsome number. Reserve growth was gratifying. A lot of it due to some of the late-in-the-year successes that didn't contribute much on the production side but did distribute on the reserve side, most notably at west Cameron. Debt continued to fall. The simplification that we have been working on now for almost four years continues to pace. IPF which has proven to be a significant disappointment with the small operators unable to keep up with their business even under fair prices is radically becoming significant. We got rid of a year end as John mentioned, it is now less than 3 percent of the company's assets and the asset size fell by 50 percent during the year. It will fall by a similar amount during the course of 2003 and will be fully insignificant going forward. Great Lakes, our Appalacian division, the joint venture; performing beautifully. It's reserves and productions are growing very much on the pattern that we want to ensure that we will develop in the overall company in the course of 2003.

So more and more of the impediments that we have suffered from for a long time have been gotten out of the way. 2003, while it's very obviously very early in the year, should be a solid improvement over 2002. Net income and cash flow and recurring of items will almost certainly be at record levels. Reserved, based on everybody that we know to date, are on trend to rise nicely and production should begin to show the kind of growth that frankly we had promised ourselves and had every confidence we believe and fell shot on. The cash flow should be on the order of $150 million for the year. We can readily fund our capital program and, as John mentioned, continue to reduce debt or invest in the incremental acquisitions where we have advantages, buying them and selling them. Going forward, we will continue to work on simplification. So we believe, with just two months out of the 12, there's every reason that the 2003 will be a successful step forward in rebuilding this company into one investors can be consistently profitable going forward. Two quick final notes, one on the hedging, which I know a good number of you have been distressed in the wildly bullish oil and gas markets of the last four months as to how heavily we hedge. As we have stated previously, our objective is to make a high rate of return on our invested capital. And when the prices move as they have in the last six months, way, way beyond anything that we or almost anyone at least that I'm familiar with the business anticipated, that hedging is costly in terms of opportunity costs and will be almost certainly in the course of 2003. The thing to remember, however, is that once you take that position, as we have maintained now for several years, once you take that position, if you are looking in 40 to 50 percent rates of return on capital. You are obviously giving up the upside behind that but profiting for us to do. You're better off to losing your hedging program, making the incremental profits not only on the hedged but it unhedged portion that rides beyond it if you lost in your operations. So obviously, if, in retrospect, we are known where these prices were going, we would have handled it vastly differently. But we're still convinced that the policy of locking in high rates of return, particularly in a company where coverage for range has the debacle of three and four years ago is the right way to go. The last thing to recall is how this company is priced based on our expectations for the year, our hedging and current futures prices, this stock is trading at less than 10 times forward earnings and at roughly two times forward cash flow. Very moderately priced. My own conviction is, if we can demonstrate the type of success that we anticipate for the year, that those ratios will move towards the industry Norms. Maybe not all in 2003, but certainly towards them and that there is room for dramatic improvement in the value of the company and our shareholders' securities if we can be successful in achieving the goals we have set out. So that concludes my remarks, operator. Why don't we open this up for the shareholders' questions.

The question-and-answer session will be conducted electronically. If would you like to ask a question, please indicate by pressing the star or the asterisk key followed by the number 1 on your telephone keypad. We will take as many questions as time permits. If you're on a speaker phone, please pick up your handset before asking your question. If you would like withdraw your question you may do so by pressing star. Once again, please press star one to ask a question. We will allow everyone a chance to respond.

Your first question comes from Rehan Rashid (ph) of Friedman Billings Ramsey.

Just a broader question. Free cash flows for the year in terms of usage, priorities, debt pay down first, or acquisitions and any thoughts on that? I know you mentioned this a little bit but could you expand, please.

Well, our first priority is to, Rehan (ph), as you know is to fund the 500 million capital program. So basically that would be number one. Number two is going to be a combination of reducing debt and attractive acquisitions. Obviously if we can find the acquisitions and feel like we can lock in good returns, we will spend money there. If not, we will be happy to wait for the acquisition to come along. But I do think the small acquisition market is perking up. Our activity, certainly has increased. We have got a number of opportunities under review now. But again, I think the thing that I can't stress enough is the fact that the job Terry and his staff have done in terms of -- on the drilling side, we are just going to be very patient on the acquisitions and take it nice and slow. So, you know, in terms of a target, you know, I'm looking, you know, probably for, you know, 10 to 15 million of acquisitions, and I think that would be in the middle of the fair way. Again, that would leave a nice chunk to continue to pay down the debt.

Okay, thanks.

Our next question comes from Ron Mills (ph) of Johnson Rice.

Good afternoon, guys. Just a question if you will. I guess this would be for Terry in terms of your expectations for the gulf l Gulf Coast area or the Gulf Coast area, obviously to moderate that production decline is -- is part of that due to new drilling that is slated already on the schedule or is part of that as you -- you run off with the initial decline rate that that just Gibbs to moderate on its own?

Do you want to repeat that one more time?

Well, curious in terms of, for you to moderate the Gulf of Mexico decline rate from roughly 20 percent to down flat 5% is most of that due to planned drilling activity or really for just taking into account that the decline rate should be moderating at the initial flush production is -- has already impacted you?

It's a combination of both. Obviously bringing on west Cameron at the very end of the year helps us actually start the year at a higher production rate in the Gulf of Mexico than we were in the fourth quarter. And bringing on chip shol (ph) in April will help us. But we have a number of other drilling locations that we have either in the plans or are developing at this point. So we will have, as John said, roughly 25% of our drilling capital spent in the Gulf Coast, Gulf of Mexico. And so the combination of all of those things will help under the influence mitigate the decline that we saw last year in this year and probably also as we go into 2004 as well.

Okay. And if you look at your -- at your drilling budget for the year, how much of that is going to be targeting what you would consider exploratory projects and what kind of reserves are you targeting with that budget?

Let me answer this maybe in a little bit better way. 65% or so of our total plan this year will be directed to unproven drilling locations. That's consistent with what we went in 2003 with, to enable us to -- which enabled to us more than replace our production through the drill bit in 2002. So from a drilling perspective, we're going to expose ourselves to unproven reserve locations at least as significantly as we did in 2002. I hope that helps. Most of our reserve will be in unprudent locations.

Next question is from Don Cousin (ph) of RBC bank.

What kind of production do you expect on capital (inaudible).

We were conservative in our initial bookings at west Cameron and only booked the reserves that we saw in the amplitude signature and 3D sides Mick so we looked less than 4% -- in the initial well. We're reprocessing the 3D sizing with our partners right now. Given the performance at the well seems to have currently, I think it's very probable that we will see increased reserves on this well as we go into the year. But it's still too early to tell. We will be very careful about how we handle this discovery. And we will work with our partners closely to determine whether or not there are additional locations to be drilled. Currently, we have none in our plan but that can change as we look at the data going forward.

On the coursen ranch (ph) do you have any idea on size that prospect would be?

Only on the seismic maps. It could be a substantial discovery for us but it's still early to tell in the development of that seismic feature. As I said we drilled two successful wells. We have a third drilling now. We have a number of others identified. But it's too early to say whether this is going to be a two or 3 million barrel feature or something larger.

Okay. Thank you.

Your next question compress Arthur Winston (ph) of Pilot Advisors.

Hi. When Tom was talking about hedging, he was using the your return on investment reasons why hedging is good. I'm curious if you pled the same return on investment is your explosion programs in the gulf -- or are we better off doing something better with the money?

Well, Art, everything is analyzed, no matter where it is on a risk rate of return basis. Meaning whether we approve of on shore in Appalachia or the Gulf of Mexico, it gets tested on the same criteria. And at the $4 gas price where the great majority of our hedging is done we're looking at rates of return, depending on the project, of 30, 50, and sometimes even greater percent, all terrific rates of return based on my historical experience at least, drilling. The challenge in the Gulf of Mexico, as you know, is that it was acquired, largely through the -- domain purchase. And the decline we faced there is from having a number of large fields that were declining rapidly. And in this train wreck we went through, we were not investing any further out there in any size over ant a three-year period. In the Gulf of Mexico, that's death. So the rates of return for what we're drilling in the gulf are, as in some cases, more attractive than the things we're (inaudible) on shore. We just have not been investing in it.

So with perfect 2020 hindsight, the money in the gulf, the small amounts put in recently is as good as Appalachia?

Yes.

Thank you.

Maybe better if you include west Cameron but as much as we would like to take credit for it, there's a little bit of luck in that one so far.

Sure.

Once again if would you like to ask a question, please press star 1 on your telephone keypad. Next question comes from Sam Kitston (ph) of Blackrock.

My question has been answered. Thank you.

Your next question comes from David Tessmer (ph) of Rice Holdings (ph).

First question regarding IPF, it cost a little over 5 cent per share last year. When can you completely get out of that and can you give us an estimate on what it will cost in 2003?.

Yes, I mean we have attempted, and it's difficult, we took a hard look at the portfolio on year end and made adjustments on it. Our business plan for 2003 suggests a loss, roughly in the 800,000 to a million-two range for the year. That being said obviously prices will help us. But it's not that much price related. So, again, I think given the portfolio drop, of the hitch we went ahead and took last year, and the fact that the portfolio is half the size, it -- as Tom said, it gets to a very (inaudible) amount going forward. I think in the 800 to a million two on the negative side is what we have budgeted for 2003.

The second question relates to the balance sheet and a couple of issues. Your 76.5 million of share of the non-recourse debt, what kind of interest rate are you paying on that? Does it float? Or is it fixed?

Well, that's the Great Lakes bank credit facility. And it is a libor (ph) based loan. It's LIBOR versus 1.5, 2%. That being said, we do have some interest-rate hedges there that are -- that increase the rate slightly. But those will be rolling off in 2003. So that should give you a pretty good feel.

Okay. And second thing, on the balance sheet, the 8 and three-quarter percent bank that comes due in 2007, can you call that earlier?

I think you're referring to the 8 3/4%.

The subordinated notes.

Right.

Those notes are due in 2007, and the current call is somewhere right at slightly below 103. But we can call them.

Is there any reason why you wouldn't, given what we would probably be able to refinance at?

That is certainly something that we have discussed at the board level and something that the board has, quite frankly, asked us to look into. But we're not far long enough to answer that question with any certainty but obviously something that we're looking at.

And just -- last question, on Great Lakes, which is now performing, you know, extremely well, any thoughts of separating that asset off so that you can make a distribution to shareholders of that asset or is that just something that you want to, you know, really keep in the portfolio long-term?.

Well, our view of, quite frankly, all of our assets as we look at them to try to create as much value for our shareholders as we can, we are looking at different ways to exploit the reserves in the operations that we have out there. As Tom mentioned, we couldn't be more pleased with the performance with our -- our team up there has done a terrific job. So, yeah, we're going to look at ways of exploiting that. There's -- from a number of different perspectives. I think they range all over the map quite frankly.

Okay. Thank you.

Your next question comes from Ed Lefterman (ph) of First Manhattan.

In the release you stated that the company anticipates 2003 -- provides the 4 to 7% growth in production. I guess one would have thought with the performance in adding reserves last year that that would have been sufficient to, you know, boost the production. So I'm wondering, you know, how certain is this forecast, the 4 to 7% growth and how much of sit on the come? I mean, it suggests a lot of it is on the come based on how the '03 -- turns out.

There were two things in '03, 1 is a lot of the lot of the reserves we found surrendered -- occurred in the second half of the year. A number of the wells that we drilled were in the latter half of the year and those are impact 2003 for the entire year. And if you add to that the fact that we feel like we can -- would find reserves similar to what we did in 2002 through the drill bit, we should be able to build on that success as we go through 2003. So it's all based on the fact that we can continue to have the success that we have had throughout the last six to eight months or so and with the portfolio that we have and the results that we have seen so far this year, I don't see any reason that we should not be able to do that.

What you're saying is that, in effect, you can see 2% growth based on what you know from the 100 million or so that you spent last year? I mean, that's the way I read it.

Well, let me kind of comment, Ed. This is John. The Datapoint I gave you from January was a year over year January '03 or 3.5% over '02. So I think -- round it either way you want, I think the lower end of the 4% is based off kind of what we did last year and assuming, again, no hurricanes in the gulf, that to get from 4 to 7 is what we have to prove in the drilling in 2003.

And I guess my second question is a little bit obvious when you talked about your precash flow and you combine that with Tom's comment on about the evaluation of the stock and no one is talking about buying back any stuff. That is not unknown to your management.

You can't, Ed. Because of the 8 and three-quarters, as long as they're outstanding, we are prohibited because of Ed's basket provisions, as indicated in the release in the 10BG, we have about half a million dollars in total available through the term of that issue. And that isn't going to change because of the write down several years ago were not excluded from that basket calculation. So to go into repurchases, we will have to get rid of the 8 3/4 issue first.

Which as you said earlier is callable, is that right?

It is callable and it is under study.

Thank you.

The next question is Ron Mills of Johnson Rice.

Just a follow up in terms of the G. and A. guys on the non-cash mark to market compensation, what is that's related to? It sounds like it has to do with some treasure stock? ?

Do you want me to try or would you like to?

Go ahead, Tom.

This is a little accounting nightmare. I will try this simplistically although you can't do it in less than an hour. Simplistically, we pay most (inaudible) all of my and most of all (inaudible) general bonus over the years -- in stock and trade of the company. Because of the new accounting rules, those shares are treated as if they're treasure shares and you go through the pretense they do not exist as a result. Every quarter, as the stock price rises or falls they pretend a new obligation or decreased obligation comes in to being. From a business perspective, the stock is issued, we account for it as if it has been issued. It simply sits in a preferred compensation plan. But any time our stock price rises you will see a non-cash charge as if it's additional payment threats going to be paid. It isn't. It's just ultimate release of the proceeds from it.

All right, thanks a lot.

Sure.

We are nearing the end of today's conference. We go to John Selzer of Maim Leave Partners for our final question.

Good afternoon. A few questions. It shouldn't take that long. Talk about drilling for the non-proven reserves, I guess -- would you just basically going to call that exploration or is it a little bit less risky than just pure exploration?

John, when you look at our total capital budget, about 12.5 to 13% of it is on what we would call purr exploration.

Okay. So this is -- I mean, for PCS of no nonproven would that be in the 50, 60 percent?

That's correct.

And along those same lines, you know, as you spend this capital, are you changing sort of the production profile of the aggregate or, you know, say your (inaudible)

John, the RP ratio at the end of 2001 was 9.2 years, end of 02 was 10.6 years. So we are -- quite frankly we like to stay over that 10-year --.

That might explain why you're adding reserves but your production might have dip add little bit?

Right. It's the Gulf Coast versus the on shore reserves. The Gulf Coast is by far the fastest to climb. To the extent that is a lesser part of the mix. Your RP ratio tends to grow. To the (inaudible) has remarkable success at Cameron or something else you can have good news that would shorten the life. It's the mix of geographic areas that's likely to swing list.

Okay. And just last thing, on the hedges, the 75% hedge to 2003; that pretty balanced throughout the year? Are you more front end loaded or back or --.

It's a Tad bit more in the front but not much. It's pretty uniform during the year.

And given where the strip is today or recent strip, where would we be on -- you know, as far as take another hit on that or what?.

Meaning continued to hedge?

No.

What does hit mean.

...to mark to market today would there be, as far as a gain or a loss?

Oh, it's gigantic. A the prices today, the mark to market would probably be on the order pre-tax of a hundred million dollars because you've got hedges roughly at 4 and you had gas prices that reached 9.

But you have already -- you have taken the hit and the --.

Well, there isn't really a hit. This is another of, at least in my opinion, an accounting fiction. What a hedge is a lost opportunity cost. If we had not hedged, we could have sold it for six. We don't (inaudible) money on hedges. We lose money because we give to our counterparty the profit we otherwise would have gotten to keep over 4. We get the full four on the hedged volume. On the unhedged volume, we get -- the full profit is, the roughly 25 percent. So the company would actually make more money when you know lose money on your hedges, because you break even on that at 4 and you get the small, the quarter incremental profit. It's emotionally upsetting because we would loved to have hedged it all another nine but we're not smart enough

I guess we're looking at your adjustment to your shareholders equity.

What the accountants and the SEC in their wisdom have decided is that they will look at all future edges and say you took a loss on them. But they don't say that you took a gain on the value of that production going up.

Sure.

They only look at half of the equation. When you put the two pieces of the puzzle together, which is what happens when you get to the month or the quarter that it covers, the old way of accounting, you received $4 you bargained for, whether the market price is 2 or 8. That's what a hedge does. What the accounting has done is taken the approach we will sell a scope into shareholders' equity in the present, all -- telescope into the shareholders' equity, in the future or the present but not scope in future gains or losses from production. You're looking at half the loaf.

Very good. Thank you.

Thank you. This does conclude today's question-and-answer session. I would like to turn the call over to Mr. Tom Edelman for his closing (ph) remarks.

Tom Edelman On the -- we thought we would do it last year. We were not successful. We entered ahead of the game from the carry-over of the drilling that was done in 2002, so we have no reason to believe that we should not be able to achieve it this year but we fully expect we're going to have to demonstrate it to the market before it's reflected in our share price. On the hedging, obviously again emotionally upsetting to us, probably far more than to any of you. It is one of the great commodity booms in history or a perfect storm as I sometimes describe it between frigid weather with Venezuela and Iraq going on simultaneously. I, for one, being a professional cynic do not expect those bullish conditions to continue longer term, and at least speaking for myself, would intend to continuously hedge on a rolling basis as we have for the last three or four years as we can lock in very attractive returns on our capital projects and our budget. But obviously, we have given up some substantial upside if we had been smart enough to anticipate this rise. But putting that aside, the results are extremely likely to be excellent in the course of 2003 and we think the rebuilding of the company into the kind of dependable, growth and profitability that we enjoyed for many years and then lost, we will continue to make progress towards (inaudible) that to ourselves as well as to the market. We thank you all very much. Operator?.

Yes, sir.

That concludes the call.

Thank you very much. Have a great day.