山脈資源 (RRC) 2003 Q3 法說會逐字稿

Welcome to the Range Resources third quarter earnings conference call. This call is being recorded. (OPERATOR INSTRUCTIONS)

Statements contained in this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements.

After the speaker's remarks there will be a question and answer period. At this time I would like to turn the call over to Mr. Rodney Walle, Senior Vice President of Range Resources. Please go ahead, sir.

Good afternoon and welcome. On the call today are Charlie Blackburn, Range's Chairman; John Pinkerton, President and Chief Executive Officer; Jeff Ventura, Executive Vice President and Chief Operating Officer; and Roger Manny, Senior Vice President and Chief Financial Officer.

Before turning the call or to John, I'd like to hit a few administrative items. First, we have filed a third quarter 10-Q with the SEC. It is now available on our website or on EDGAR. Also on our website we have posted supplemental tables that provide the calculation of cash flow, EBITDAX, cash margin and the current hedging position of the quarters for your information.

I will now turn the call over to John.

Before we reviewing our third quarter financial results, I will summarize some of the key aspects of the quarter. Overall we're pretty pleased with the results, although we had some nonrecurring items such as the large gain on debt retirement that somewhat muddled the picture. On a recurring basis EBITDAX, cash flow and earnings all increased, hitting our internal goals and met or exceeded the First Call estimates.

On the production side, production rose 5.2 percent on a year-over-year basis and was higher than the second quarter 2003. The production increase was driven by our drilling program. Our drilling is achieving exceptional rates of return on capital invested. On average the initial rates of the new wells has exceeded our original expectations. And lastly, our inventory of drilling project continues to grow as our technical team has continued to initiate new projects at a solid pace.

Turning to the balance sheet, our debt reduction effort has been completed. From a high of over 750 million at quarter end debt had been reduced to 280 million. Our debt to capitalization at quarter end was 49.7 percent. And now that we don't have to allocate a portion of our internal cash flow to pay down debt, we're in a much stronger position to profitably grow our production and reserves.

Overall our more balanced approach to exploration, development and acquisitions, coupled with our upgraded technical team, is having the intended impact. We're growing our production through the drill bit and we're not having to rely on acquisitions for our baseline growth.

Finally, the last piece of our management team has been put in place, as a Roger Manny recently joined Range as Senior Vice President and CFO. To give you a brief bio, prior to joining us Roger was Executive Vice President and CFO at Matador Petroleum over in Dallas. Matador was recently acquired by Tom Brown, as many of you all may recall. While at Matador Roger helped grow the Company tenfold to roughly 400 million of assets, a pretty good accomplishment. Prior to Matador, Roger held various positions in the Energy Group of BankAmerica and the predecessors, with the latest position being Senior Vice President. In addition to outstanding experience and references, one of the contributing factors for hiring Roger and selecting him was based on Jeff Ventura's input, as they worked together, obviously, at Matador.

With that I will turn the call over to Roger for a review of the third quarter financial results.

I'm excited to be here at Range and look forward to being part of the new management team. Jeff Ventura and I had the opportunity to work together at Matador Petroleum, and I have the utmost respect and confidence in Jeff and his abilities.

After seeing what has been accomplished with the balance sheet this past quarter, pushing the capitalization ratio below 50 percent, I feel a secure platform has been created upon which we can continue to build a strong and profitable company.

Third quarter results included several special items, making the quarter-to-quarter comparison less apparent than usually is the case. As Rodney mentioned, you may wish to access the supplemental schedules posted on the website for a detailed walk through our numbers.

Third quarter revenues totaled 76.2 million, 48 percent higher than the prior year period, with gains on debt retirement accounting for 18.6 million of the total. Oil and gas revenues were 55.7 million, up 16 percent from the third quarter of last year, driven by a 10 percent increase in realized prices and 5 percent higher production volumes. All other revenues in aggregate decreased 364,000 from last year.

Production volumes for the quarter increased 5.2 percent from the prior year quarter to 159.2 million cubic feet per day. Natural gas production increased 5.7 percent to 120 million per day, while oil and natural gas liquids production increase 3.9 percent to 6,526 barrels per day for the quarter. Seventy-five percent of our production was natural gas. Production for the third quarter of 2003 was about a million a day higher than second quarter of 2003.

Including the impact of hedging, the realized natural gas price for the third quarter was $3.81 per mcfe, a 9 percent increase over last year, and the realized oil price was 23.76 per barrel. This represents an 8 percent increase. The average mcfe price received for the quarter was $3.81. Hedging decreased our average realized prices by 84 cents per mcfe.

Expenses for the quarter totaled 50.4 million. Direct operating expense was up by 604,000, due primarily to higher production taxes. However, due to higher production, direct costs per mcfe were reduced to 55 cents versus 61 cents last year. Exploration expense rose 1.8 million. This was due primarily to higher seismic costs and to a lesser extent higher dry hole expenses and delay rental costs. General and administrative expense, before non-cash deferred compensation plan expense, rose 266,000 due to additional personnel and higher professional fees. DD&A expense increased 978,000 due to higher production volumes.

I should add that due to the adoption of FAS 143, which relates to asset retirement obligations, 1.2 million of accretion expense was recorded in the quarter versus none last year. (indiscernible) expenses fell 230,000 due to lower interest and administrative expenses. And a 2.4 million onetime charge was recorded in interest expense attributable to the redemption of the 8 3/4 notes; 2 million of this amount was related to a call premium and 370,000 related to the writing off of unamortized debt offering costs. Interest expense on debt outstanding fell 516,000 during the quarter due to lower debt balances.

I should also mention that due to the issuance of the new 73/8 notes 31 days prior to redeeming the 8 3/4 notes, we had a negative interest carry of approximately $400,000 for the 31 days. Looking to the fourth quarter, we anticipate that interest and dividends will total approximately 4.8 million. This is nearly 900,000 lower than the fourth quarter of 2002.

Third quarter EBITDAX -- earnings before interest expense, income taxes, expiration expense, depreciation, depletion and amortization and other non-cash charges -- for the third quarter totaled $40.8 million, a 16 percent increase. Cash flow totaled 35.6 million for the quarter, 20 percent higher than the third quarter last year. This represents the second-highest quarterly cash flow in the Company's history. Cash flow per share was 63 cents, 17 percent higher than third quarter last year. EBITDAX for the last 12 months totaled $154,300,000. And cash flow for the past 12 months was at $134,100 -- 134.1 million.

Again, I invite you to visit the Range Resources website for supplemental schedules detailing the calculation of these non-GAAP measures.

Pre-tax income impacted by the debt retirement gains and other special items was 25.8 million for the quarter compared with 9.6 million last year. Income tax expense for the quarter was 9 million, reflecting the 35 percent rate, while last year taxes were just 386,000, reflecting a 4 percent rate. Due to increased profitability, we anticipate that fourth quarter 2003 and full-year 2004 deferred taxes will probably be recorded at a 35 percent rate. No material cash taxes are anticipated for the foreseeable future.

Earnings per share were 31 cents basic and 29 cents diluted. Excluding the special items, earnings per share were 11 cents basic and 10 cents diluted. These approximated the 11 cent First Call earnings estimates for the quarter. For cash flow per share, actual results came in at 63 cents, 1 cent higher than the First Call estimate.

I should add there were approximately 4.5 million shares added to our adjusted diluted share count this quarter. This increase was prompted by our unusually high profitability due to the 18.6 million gain on debt retirement recorded in the quarter. Pursuant to accounting rules, even though none of the security issues called in the dilution are presently on the money, dilution must be recorded when earnings reach certain thresholds. These thresholds are reflected in the table included in the news release.

This accounting treatment is much different than the treasury stock method used to calculate the dilution associated with our stock options. Using the treasury stock method none of the 4.5 million shares would have been included.

Diluted shares going forward should be much easier to calculate when using the profitability thresholds that are included in the news release. I view this as another one of those well-intentioned accounting rules that occasionally produces unintentional and sometimes confusing results.

Over on the balance sheet debt has been reduced 88.2 million since year-end 2002; 78.2 million of the reduction occurred in the third quarter from a combination of debt reduction transactions and the application of excess cash flow. Range's debt to capitalization ratio fell from 64.1 percent at December 31, 2002 to 49.7 percent at September 30, 2003. Total debt at quarter end, divided by last 12 months EBITDAX was 1.8 times, down from 2.4 times for the second quarter of this year.

As further confirmation of the improved balance sheet, on October 10th Standard & Poor's upgraded our debt one notch, assigning a B rating to the new 7 3/8 senior subnotes.

One of the major benefits of redeeming the 8 3/4 notes, besides lowering financing costs and a sixth year maturity extension, was the elimination of certain restrictive covenants that hindered us from repurchasing additional junior debt, as well as prohibiting the repurchase of common stock or payment of common dividends. This restricted payment basket under our new 7 3/8 notes currently allows for roughly 25 million of such activities. And in general the permitted amount grows by 50 percent of future net income.

With regards to our bank credit facility, I'm pleased to announce that effective October 1, 2003 our bank group increased the borrowing base by $10 million to 180 million. This results in $86 million of unused availability at quarter end.

To summarize the debt side of the balance sheet, we've reduced the debt to cap ratio to just under 50 percent, our ongoing financing cost is now running less than 5 million per quarter and we have significantly liquidity available under the bank credit facility going forward. One of my primary responsibilities at Range will be to find ways to continually strengthen and simplify our balance sheet and enhance the financial flexibility we have today.

Lastly, I would like to share some of my initial impressions regarding the quality of financial statements and the financial policies here at Range. And it may be gleaned from the absence of goodwill, capitalized interest and capitalized G&A, there is quality in the numbers and the policies that underpin them here. Appropriate valuation practices are evident in items such as unproved properties, which total less than 3 percent of the total assets. This is well below most other companies. It's been obvious to me even in a relatively short time I've been here that financial reporting integrity is top priority, and I plan to work hard to ensure that that remains the case.

With that I'd like to turn the call back to John.

As you can see, Roger has really jumped in with both feet here. I think he will do a superb job as CFO for the Company.

With that, now I will turn it over to Jeff to give us an update on our E&P activities.

I'll begin by reviewing production for the quarter, which is on target to meet our projection for the year. Production for the third quarter averaged 159 million cubic feet equivalent per day, which was a 5.2 percent increase over the third quarter of 2002 and about 1 million per day higher than the second quarter of 2003. This growth was driven by the drill bit. The 159 million per day is comprised of 78 million per day or 49 percent from the Southwest division, 45 million per day or 28 percent from the Gulf Coast division and 36 million per day or 23 percent from the Appalachia division. An interesting fact is that 81 percent of our production came from onshore fields, while 19 percent came from the Gulf of Mexico.

We're also on target to spend our $105 million capital budget for the year. The 105 million excludes acquisitions. Third quarter 2003 spending was 28 million, bringing total capital spending to 77 million for the first three quarters of the year. In addition to these capital expenditures, Range spent 1.6 million on producing property acquisitions during the quarter, which brings the total acquisitions for the first three quarters of the year to $8 million.

In the third quarter our Range drilled 105 gross or 53.2 net wells, of which 6 wells or 3.9 net were unproductive. During the first nine months of the year 254 wells or 139.9 net wells were successfully drilled, while 11 grows wells or 7.9 net were dry. As of September 30th, 219 wells have been placed on production. The remaining 35 wells were in various stages of completion or waiting on pipeline connection. Currently about half of these wells are online, with the other half estimated to go on later this quarter. As these wells are put on production and we drill the wells, I expect to see continued production growth in the fourth quarter.

Currently we have 12 rigs running and we expect to be active throughout the first half of December. Activity will slow in December, as typically is the case on a seasonal basis.

I will now review some of the highlights of each of our divisions. The Gulf Coast division has continued its successful drilling program at South Louisiana by drilling the Villejoin #1. This well was a successful offset to the Arsenal #1 (ph) which was drilled in late 2002. The Arsenal #1 logged 8 feet of pay (indiscernible) about 11,800 feet. The Villejoin #1 targeted a projected thicker pay section based on 3-D seismic and found 61 feet of high porosity and high permeability pay, excellent quality rock. The well is currently producing 12.2 million per day equivalent or 3.9 net to Range. Range recently acquired additional 3-D in the area and we will be looking to expand this play.

We have one more well to drill in South Louisiana prior to year-end. This prospect is approximately 11 miles north of the Arsenal and Villejoin area, and we have a 21 percent working interest in this 14,000 foot nonian screwma (ph) test.

In a Gulf of Mexico, the West Camp 45 #20 (ph) is currently producing 25 million per day or 5 (ph) million net to Range. Range and its partners have completed their analysis of the reprocessed 3-D data and or finalizing the location of an onset to this well. Current plans are to spud the well in the first quarter of 2004. Range will have a 25 percent interest in the offsets.

One point to note -- El Paso recently drilled a well on a block west of us and made a well that is producing 90 million cubic feet per day. Chevron has also drilled west of us and has a well making 25 million per day, and has followed up with another well that is (indiscernible) substantial amount of pay. Unocal just drilled a second well to the east of our well that logged 140 feet of pay and is expecting a well that will produce in excess of 40 million today. So you can see this area is really heating up.

Range has also spudded a 14,700 foot Howei (ph) test in Orange County Texas. (indiscernible) reserves for this well are 14 bcfe and it could have up to four additional offsets. We have a 67.5 percent working interest in the well, and our drilling is under a turnkey contract. The net dry hole cost exposure for the well is $120 million.

In the Southwest division, Range is continuing on with the successful drilling program in the Texas Panhandle. We recently brought online two new Courson Ranch wells at a combined rate of 4.2 million per day gross or 2.3 net. An additional Courson well just recently logged pay in the upper Morrow which should be turned to production within two weeks. We have six new locations in the queue to drill over the next 120 days. We have also just completed a 21 square mile proprietary 3-D offsetting Courson Ranch and plan to drill the first well there in the first quarter of 2004.

East of Courson Ranch we just recently drilled the Pioneer 4-31 and this well came in as expected in the lower Morrow. It found 26 feet of very good quality pay. Completion should begin within a week and we have a 100 percent working interest in the well. We've also just completed a Morrow well in western Oklahoma and it is currently producing 1.5 million per day gross or 1 million a day net. So as you can see, we have a lot going on in the Morrow play.

I'm also pleased with the program of continuing to develop some of the Southwest division's more mature properties in West Texas. Recent results include three successful wells; two Canyon Sands wells in Sterling and Sutton Counties drilled to 6700 feet and one in Wolfcamp well in Glasscock County drilled to 8400 feet are producing at a combined rate of 5.9 million cubic feet equivalent per day gross or 2.8 net. Range has also recently recompleted an 8300 foot strong well at Sutton County and it is producing 2.1 million per day gross or 1.6 net.

The team working this area is also reengineering drilling and completion costs of the wells to see what improvements can be made. Economic sensitivities of the Sterling well show that each $10,000 reduction in the cost of drilling to complete the wells increases the rate of return by 1 percent. Decreasing costs by 10 percent at Sterling would enable us to add another 15 to 20 locations to our inventory.

The Appalachian division is very active and is on target to meet its goals for the year and is continued to add value to its 1.4 million acre leasehold position. During the first three quarters of the year they drilled 184 gross or 153.6 net wells, with an additional 81 or 71.9 net wells scheduled for the fourth quarter.

If I stand back and look at the four different divisions and summarize, you could say Gulf Coast has done an excellent job expanding onshore South Louisiana. The Villejoin, the Arsenal and Faulk wells are very exciting wells, and it's fun to drill wells that produced 15 million today. That same team has taken some of their technology and moved just across the border into Texas, and has spudded our Howei test in Orange County, so I'm excited about the upside that that has. West Cameron -- our West Cameron well has been great. You go offshore and look at that, and the good news is people are making good wells east and west of us. So I think we have a very good opportunity there to really grow production and reserves. There are also several other projects in the queue that I haven't talked about that will be drilled next year. So there's a lot of good projects going on in the Gulf Coast.

If I go to the Southwest division and reflect back on what they have done, Paul Blanchard (ph) in his team up in the Texas Panhandle have done a great job really a growing production there; they've grown production 2.5 times over the last three years and have taken production from 13 million a day net up to in excess of 32 million. And during that time they have driven their LOE down from 60 cents per mcf to 40 cents. So they have a great track record, have done a really good job and I expect a lot of good things to continue to happen up there.

In the Permian, the team's done a good job reworking oilfields, extracting value out of the properties that we have. And it's exciting when you can drill a well that's 6700 feet that makes a couple of million today that generates great economics.

And going into Appalachia, they have had good steady growth, good track record. They keep their eye on the ball on both driving up production and costs. And we have large acreage position there with good upside.

At this point I would like to move from talking about the specifics of the wells to the status of our drilling inventory.

Historically, Range was an acquisition company. In the last three years the Company has matured into a more balanced approach in internally generated drill bit growth coupled with acquisitions that are complementary to its core areas. A lot of progress has occurred in those three years, and at this point Range has a good inventory of drilling projects. The inventory includes lower-risk, modest-return projects as well as higher-risk higher-return projects and projects in between.

An example of the strength of Range portfolio is despite several Gulf of Mexico projects lining into next year and disappoint results in the James Lime Prospect in East Texas, the Company is still on target to reach is production targets for the year. Solid results from the Texas Panhandle and onshore South Louisiana have more than made up the difference.

The Company is also patiently evaluating complementary acquisitions in its core areas. They are well done, thorough, quality evaluations. The teamwork is very good. The western Oklahoma acquisition that we completed last year is a good example of an excellent complementary acquisition with good follow-up potential which was very well executed. This property was making 2 million per day when we acquired it last year and over the course of the year we will triple production.

Having both a good drilling machine and a good acquisition team is very important. Being able to grow year-over-year with the drill bit without having to rely on acquisitions helps ensure that we will hit our growth targets. Not having to do an acquisition to meet our targets allows us to be patient with acquisitions. Good quality work, coupled with patience helps ensure that the acquisitions that we do will achieve attractive returns and will be complementary to our core areas and drilling programs. Being able to make complementary acquisitions helps the drilling machine by reloading it with good acreage and prospects with helps to build inventory for the company. It's like a good football team -- the patient running game helps open up the passing game. We want to be able to rely on the running -- or drilling game -- but also pass or acquire when it makes sense.

Also, our strategy will be to continue to focus where we are. We are in good areas that we can grow in. We will be expanding on our current successes and on proven and successful plays in those areas. We will also be looking deeper in our existing areas.

Range really is a niche player. A lot of our projects are too tedious for the majors and large independents, and too technically extensive for the smaller players. Both Courson Ranch and our south Louisiana projects are good examples of this. Range has good fully integrated technical teams, working on its projects and we do good pick and shovel work. By that I mean we stress data gathering, research and fast forwarded analysis. We also use state-of-the-art technology judiciously. The key is to know when the extra cost and time is technically and economically justified.

All and all I am pleased with the progress made this year. I look forward to the fourth quarter as it looks to be a very good last chapter of the year. Back to you, John.

As you can see, our E&P activities are on track and we're looking forward to a superb fourth quarter. Before I talk about the fourth quarter, I will touch on a few other things.

First, at IPF we continue to make solid progress in terms of montaging (ph) the portfolio. We are using the cash generated at IPF to help fund our E&P capital program. During the quarter the net receivable balance was reduced from 16.3 million to 14.5 million. During the first nine months of '03 the receivable balance has fallen $10 million, which is a 41 percent reduction. Currently there are 12 investment remaining in the portfolio. That's about half the number that we started the year with.

Turning to the hedging side, since the last second quarter conference call we've added a few oil and gas collars to our hedging program. On the gas side collars were added in '04 and '05 with floors ranging from $4 to $4.50 and with caps ranging from $5.35 to $5.92 per mcf. On the oil side, again '04 and '05 collars were added with floors ranging from $24 to $25 with caps ranging from $26.70 to $30.60.

Looking to the fourth quarter, our average hedge price is approximately a dime higher than the third quarter hedge price. So assuming futures prices stay where they are today we anticipate roughly a 6 to 7 cent pick up in realized price per mcfe in the fourth quarter.

Looking to '04, we have roughly two-thirds of our production hedged at an average price of $4.15 per mcfe. As a result of this, when you look at the current prices for '04, they can drop nearly 50 percent. And we're still going to be able to fund our anticipated '04 capital program with internally generated cash flow.

Obviously, to turn the chapter a bit, the most significant accomplishment in the quarter was finishing the debt reduction process we started several years ago. The debt now is slightly less than 50 percent of total capitalization. And from our perspective it is in the fairway for a company with a long 10 plus year reserve life. This puts our debt at slightly less than two times annual cash flow.

As we look at it, if you look over the past three years, from our perspective we've been essentially playing with one arm kind tied behind our back as we dedicated 20, 25 percent of our cash flow to debt reduction. Assuming we have sufficient projects to generate attractive returns, we are now to the position to use that to all of our cash flow to grow reserves and production. In 2004 this will allow us to increase our drilling capital, say, 10 or 15 percent and still have roughly 40 to 60 million available for acquisitions.

Our management team is excited about the opportunity to have a full range of options in terms of capital. However, we will remain focused and disciplined in terms of our capital spending.

The other important area of progress this quarter was the growth in production. Over the past week or so, as I have kind of filtered through some of the other press releases, it seems like a lot of E&P companies reported flat to down production year-over-year and for some that did report increasing volumes it appears that acquisitions were the primary driver.

In our case I think it's very clear the growth has been fueled by the continued success of the drilling program. As Jeff mentioned, in our view this is key. We view, to use Jeff's analogy, the drilling program like the running game in football; without it you're forced to the passing game, or acquisitions, which in our view can be hit or miss. Our plan is to use our drilling program to steadily grow production year-over-year, as we've done so far this year, and use acquisitions to complement our drilling. For this strategy to work, as Jeff mentioned, it's important that we maintain a balanced drilling inventory. We are continuously working on the inventory and have initiated a number of new projects over the last few years.

From my perspective, the encouraging point this year has been the fact -- and Jeff mentioned that -- we've been able to meet our production goals despite some failures along the way. As you recall, our West Canlon 45-56 well (ph) in the Gulf of Mexico was off production for a good part of the second quarter. Also some of our East Texas drilling simply hadn't panned out. But the good news is our ability to absorb these disappointments and meet our production goals has been achieved, and from our perspective -- or at least from my perspective -- that's a very important milestone.

The third quarter accomplishments, for all that they did have a fair amount of noise from the financial statement perspective with the gains on debt, the large $18.6 million debt retirement gain and some of the other things. Looking to the fourth quarter, it should provide a lot of clarity. First, production is anticipated to continue to increase. We're estimating fourth quarter production to average no less than 162 million a day. This equates to an 8 percent year-over-year increase. Again, this growth will be generated from the success of the drilling program. With higher production volumes coupled with higher fourth quarter hedge prices, our fourth quarter oil and gas revenues are anticipated to be the highest in our company's history.

And on the cost side, we're looking for decreases in several areas. As Roger discussed, interest expense will drop materially due to the outstanding debt and lower interest rates. Direct operating expense last year fourth quarter were 64 cents an mcf when you exclude production Texas. And we will hope to beat that fairly materially, assuming we don't have any sizable workovers in the Gulf of Mexico.

We do, however, have several exploratory wells that will be drilled in the fourth quarter. Jeff mentioned the RLH (ph) well that has a dry hole expense exposure of 1.8 million. Because (indiscernible) successful efforts the dry holes expense is going to vary based on success or failure of these wells. So I just want to make sure everybody's aware of that. The good news is however irrespective of the dry hole cost and how it settles out, we are looking at significant increases in fourth quarter cash flow and earnings versus the prior year.

Looking ahead to 2004, we really just see a continuation of the fourth quarter 2003 as we move into 2004. Revenues are expected to continue to rise due to higher production and stronger hedge prices. We hope to hold expenses flat to a modest increase, which should drive up our cash flow and earnings. Per share results should reflect the aggregate increase, as we don't expect or plan to issue any additional shares in exchange for debt. That's over with.

Besides the stronger financial position, we will be entering 2004 also -- which I think is really important -- with a newly put together management team with Charlie, Jeff, Roger and I, as well as the other officers -- at least from our perspective -- we've got a high-quality team of professionals now with the ability to use all of our cash flow. We're pretty excited about it.

Obviously the key will be to execute our plan and stay focused and disciplined. But from everything we're currently seeing 2004 looks like a year that we're going to set records results in many areas. Again, the key is going to be focused execution.

Before opening the call to questions, I will turn it over to Charlie, our Chairman, for his assessment.

I have a few brief remarks. I think it would be pretty clear that my assessment is very favorable with what's been going on. It is a pleasure to be here today and to be a part of this very positive report. As we announce our third consecutive quarter of production growth, it's clear that the investments and technical staff in land and seismic over the last several years are beginning to pay off.

On the financial front we had two major events basically. One was our debt restructuring, which got out debt to cap down below 50 percent. And the second one, of course, is adding Roger Manny as our Chief Financial Officer which let us complete our management team.

Looking ahead to the fourth quarter and coming year, we plan to stay focused on the goal of achieving steady growth and production and reserves at a reasonable cost. These are the keys to our success and the keys to creating shareholder value. The recent increase in our stock prices is a reflection of these accomplishments, coupled with an improving financial position.

Finally, I think you can conclude from the reports you heard from John and Jeff and Roger that our executive staff have a firm grasp on this business and we can expected that this positive trend, therefore, will continue, and we look forward to reporting to you on our progress in the future. Thank you very much.

Operator, why don't we go ahead and open the call for questions?

(OPERATOR INSTRUCTIONS) Ron Mills, Johnson Rice.

A question, John, just a follow-up. You had mentioned looking ahead to 2004 in terms of preliminary capital plans. Have you all started to look at that and come up with a rough number of what you plan to spend? Or is it really purely going to be a function of your cash flows?

We're going to obviously stay -- I think it would be extraordinary if we spent more than our cash flow. But the good news -- with our hedge prices where they are, we're going to generate the highest cash flow in our company's history. So that's the good news. I think our capital budget for '03 was 105 million. As Jeff said, we're going the right at that at the end of the year, plus or minus 1 million or 2 probably. Our preliminary look -- and obviously the Board gets the final say this December, but our preliminary look is that the drilling side will be somewhere in the 110 to 115 million is kind of what we're looking at right now.

To the extent you generate additional cash flows beyond that, would the idea be initially pay down some on your revolver? Or what would the use for that excess cash flow?

I think As Jeff mentioned, one of the things we've been doing is -- at least in our view -- is putting together a very technically driven acquisition team. They've been working pretty hard over the last 24, 30 months looking at a lot of different things. And we do have a number of what we call complementary acquisitions that are in the queue. So hopefully we will be able to nab one or two of those and use a fair amount of that excess cash flow. Again, all that come down to making sure we're acquiring things at respectable costs and attractive rates of return.

So we do see that as the primary user of the excess cash. If we have some excess cash above that, then it's really a decision of the Board should we pay down debt or return some of it to the shareholders. Again, that's something that I'm sure we will discuss with the Board in December and the successive Board meetings after that as we go through the year.

Is 2003 in terms of the kind of organic production growth you're going to end up with, which will probably be in your original target of 4 to 7 percent for the year, is that something that you think you can sustain over the next couple of years or maybe increase given the debt reduction initiative has really been completed?

Just so we don't get the cart before the horse, I think a conservative route would say we're going to stick with the 4 to 7 percent kind of through our drilling program and let the acquisitions kind of add up from the top of that. So I think that's kind of where we are today. Hopefully we will be able to treat that and get to the higher end of that in '04 versus '03.

But again, I think the key here is just solid, steady execution. More than the growth, it is the rate of return on the capital that you spend is the key to success. And the good news is that our technical teams have done a great job, and probably with a little bit of luck we're really making very high rates of return on capital turn on capital expenditures. So I think that's the ultimate driver in value.

Roger, these is probably for you, just clarification questions on operating costs. It sounds like you had gotten down to the upper 50s in terms of just direct operating costs. Looking ahead, if you include the production expenses, the production taxes, about where should we expect operating costs to settle in terms of on a unit basis?

Why don't you let me take that. For the four quarter we were 76 cents all in, including production taxes for this quarter. Next quarter, just given some of the winter issues up in Appalachian and some of the other places, we're looking at probably in the 75 cent range again. So we feel pretty good about that. Again, that's assuming we don't have any catastrophes in the Gulf of Mexico where we've got to spend millions of millions of dollars (ph). We don't expect any. So 75 cents I think is a good number for the fourth quarter. And probably I'm just looking at kind of an '04 forecast, it's kind of right in the middle of the range for '04 as well.

Okay. And then the clarification on financing costs, you said the interest and your preferred dividends combined is going to end up being less than $5 million. Is that correct?

Right around the 5 million, slightly under.

Thanks.

Rahan Rusheed (ph), Friedman Billings Ramsey.

A quick question for actually Jeff. Jeff, could you give us a little bit more detail about the outlook for the Courson Ranch project going out into '04 and if possible maybe talk also about the Appalachian outlook?

In Courson Ranch there's a number of prospects to continue to drill where we have been. In addition, as I mentioned, we had a 3-D that we got that we will start drilling on next year. We've got a good acreage position there -- 40,000 acres -- and we're continually looking at tacking on and adding acreage to that as we go forward. So I feel good that the guys in Oklahoma City are going to continue to be able to perform up there.

In Appalachia I think year-over-year those guys are growing in that 4 to 5 percent range. And I expected that they will be able to continue that. I think the excitement up there is just the size of their acreage position. They're looking at several shallower programs that if anyone of those hits could add 40 to 50 wells. In addition they have got the deeper potential. In time I think good things that will happen that over time maybe (indiscernible) to accelerate that. But they have got a good team in place and they do a good job up there.

When do we start testing some of the deeper potential?

Just to kind of reiterate what Jeff said, I think we've got that 1.4 million acreage position. This year we put our toe in the water a little bit on some of the deeper stuff and we've had mixed to decent results, nothing fairly spectacular. The good news is that we do have a fair amount of acreages that is in the area that are being fairly heavily drill. So that's the good news. I think from our perspective, probably '04 we're going to actually see some things that could have a fair amount of difference up there compared to '03. But again, we've got 1,500 drilling locations up there, so we've got over a five-year inventory on the shallow stuff. And the deep stuff we will just take care of itself. But we're continuing to move forward. We continue to complete our 3-D seismic surveys.

For example, we drilled a pretty good deep well with Dominion that's producing over 2 or 3 million today. We only have an eighth interest. That was our acreage contribution to the prospect. So that's a good. We drilled a shallow dry hole up there. The good news is that we had rock, but it was wet so it confirms some of the geographical things we're doing. But it didn't make commercial production. So again I think we're making good steady headway with the deep stuff. Also the good news is that there's some good news out there from some of the other operators like Talisman and some of the others making good progress. So again I think we are in a great position. We've got a huge acreage position up there of 1.4 million, which I think is tied for second or maybe even second in terms of largest acreage position. So it's a pretty exciting area.

One of the interesting thing, and I'm not sure Jeff touched on it, but we are in terms of evaluating some of that having some of our technical people from down here starting to take harder look at that up there; not so much trying to push the other technical guys aside, but really lend support to what they're doing and some of the things we're doing because in some views, like the stuff that Talisman is doing, it is horizontal in nature and we do have some experience down here whereas we don't up there. So again that's where we're going to be able to I think transfer some of our technology and some of our experience from here up to there. So that's starting to work as well. Nothing to really show for it now in terms of tangible results, but there's lots of intangible things that are pretty exciting.

Real quick, I'm not sure if I understood the answer to an earlier question correctly as far as excess cash flows are concerned. Are you telling us that maybe you're comfortable with your current debt to book cap level and excess cash flow more towards acquisitions than continuing to pay down debt?

Yes. Given our ten-year reserve life and our hedge position, we feel pretty comfortable with the 50-50 debt to cap. That being said, we would probably feel more comfortable with 40.

But that being said, I think it all comes down to what uses you have for your cash flow; if you have attractive uses for your cash flow. Our position is we ought to use that because that will create the most value. Paying down three percent bank debt at this point in time is not what we think is the best uses of capital. That being said, we're not going to go out and pay single digit returns for acquisitions either. It's just a balancing act between uses of that cash flow versus trying to be disciplined in terms of the application.

Thanks.

Jack Aydin, McDonald Investments.

Three questions; one about the Great Lakes. Do you have a put or a call on those assets? And who has the right to exercise it?

I think what you're referring to is a joint venture we have in Appalachia. We have a partner that owns 50 percent of this well.

Right.

The way joint venture agreement is structured is that each party has a preferential right on each other if they want to sell their interest. So for example, if our partner did want to sell, we would have a preferential right to purchase that.

But there is no call or put or anything of that nature?

Yes, we do. There is buy-sell arrangement in it which is pretty typical -- a buy-sell agreement as well in that. But I don't think it's anything that -- I think the key is the preferential right.

Second, John, I see you made a tremendous progress on the operating costs, but DD&A continued to be a little bit on the high side. Any efforts over there or any comments about that? I mean versus a year ago you are up about seven cents from last year's like period.

The accretion expense on itself, the new accretion expense under FAS 143 is eight cents. So if you take that off we're actually a penny better.

I appreciate that one. Really that's all I have. Everything else basically has been asked. Thanks.

Chris Miller, UBS.

My question was actually answered. Thank you.

Brad Evans (ph), High Rock Capital.

John, I was just curious if you might be willing to offer a preliminary reserve booking or reserve placement estimate for fiscal '03 and maybe a ballpark estimate for where you think F&D might come in for the year?

I think I'd rather just not answer that. We're just in the process of beginning of the year end reserve evaluation progress in terms of putting all the data together. I just think it's too early to tell. I think we're pretty confident that we're going to be in the ballpark of guidance that we've given. But other than that, I think it's just a bit too early right now.

Just to refresh my memory, what was that guidance you had given for reserve replacement?

It had kind of a good range it. It was 125 percent reserve replacement at $1.25.

That's great. Lastly, just in terms of as you look prospectively into next year, as you apply more of your cash flow to the drill bit, do you see that changing -- development versus exploratory type of drilling; any major shifts there?

No. I think we're pretty comfortable in using 10 or 15 percent of our drilling budget for expiration, what we call pure expiration. And I think we'll stick with that. But again, plus or minus that is I think where it is. I really don't see any big changes. Jeff?

We're currently putting that together as well, but it should be similar to what John said. We'll have good follow-through in the next year from what we're doing right now. We've talked about it. We have a good portfolio of projects with that full risk profile of the higher-risk but higher-return coupled with the low-risk good-return projects. So you'll see that type of thing next year.

I lied; I got one more question. In terms of thinking out to December, any thoughts on where you might see exit rates for production as you exit fiscal '03?

Our average for the fourth quarter, where we think we're going to be, is 162 million a day. So I would guess that the exit rate is going to be somewhere in that area. We do have some wells that we're not quite sure are going to be on by the end of the year (ph) or what not, so I think we'll just stick with the 162. I think that's a nice, good, solid number. To give you a little guidance, I'm a little bit want to be optimistic. I think if anything we should err higher than that versus lower than that.

I'm just trying to get a sense -- all things being equal, if you're able to exit obviously the higher rate than the average clearly that -- if you just annualized that kind of exit rate for 4Q, then that 4 to 7 percent organic growth rate is conservative, and that's good. That is good to be conservative.

Again, without trying to be Chicken Little here, we have had three consecutive quarters of production growth. The fourth quarter barring any disaster should be the fourth. I'd like for this to be a company where four years of consecutive growth, but we really only have one year where we have had four consecutive quarters of growth. I have all confidence that we will continue it. But I think at this point in time in terms of where we are, I think a 4 to 7 percent is a good solid number for us. We're obviously going to want to beat that. And the good news is that we do have some extra cash flow this year that if we find some acquisitions, or if we find some areas like South Louisiana or Courson or some of those other things we're working on, we can ramp up a little bit and we can get to the high side, if not beat it. But I think where we are today, I think we want to be -- we want to make sure that we deliver on what we tell you guys.

Thanks for taking the question.

We're nearing the end of today's conference. We will go to Ray Anello (ph) of Guardian Life for your last question.

John, nice job in getting the company back on track. It sounds like you're comfortable with a 50-50 debt to cap ratio. I was wondering what the prospects are for issuing additional equity, given your renewed interest in acquisitions. And also, should we expect some acquisitions over the next couple of quarters? And are there any more divestitures in your portfolio?

I think those are good questions. Quite frankly, they're things we're talking over at the Company. Charlie and I and Jeff over lunch spent some time talking about those same things.

In terms of the acquisition side, the one thing you will not see from us is a monster acquisition. I've been severely traumatized from some of the ones we've done before. So I don't think you're going to see that. If you do see anything of size, I think we will bring in a partner to reduce our exposure on it.

That being said, again, on the acquisition side where we're focused is what we call the complementary acquisitions. These are 5, 10, 15, $20 million type transactions that we feel very confident in. They're in our core areas, we can execute on them and there is very low risk that we're going to get burned on them. That's really what we're talking about in terms of the acquisitions.

And the good news about it is, is that talking to our acquisition team we have a fair number of those under evaluation currently. So we are hopeful that we will be able to execute on some of those in '04. So I think that is clearly in our plan. Obviously only the future will tell whether we'll execute on that. So that I think is kind of the acquisition side.

What was your other question? I am sorry.

As far as issuing equity, you're at the 50-50 ratio right now and if you had a couple of these $20 million acquisitions that would get you closer to 60. Would you be comfortable with that?

Our forecast of '04, given where the cash flow is and whatnot is that we can do 40 to 50 to 60 million of acquisitions, given where our capital budget is going to be and we will still stay at 50 percent or below.

The other thing is that in '04 we're going to generate a lot of earnings and so that earnings will add to net income. And so by definition our perspective is that if we can do 40 to 50 million of acquisition, execute on our drilling program, that the debt to equity is actually going to go down probably 3 to 4 to 5 percentage points.

Again, I think it all comes back to the kind of projects we see, the rates of return and the opportunities.

And the good news is, from you all's to perspective, is that the last three years we really have tightened up the evaluation process. We've got what I think is some superb reservoir engineers that are on the acquisition team. They've been working hard over the last 24 months -- haven't got a lot done, but we worked on a lot of things. So we've been going through it time and time again. So I think there's been enough practice there that if we do something we will be able to do at the right way and really buy something we think is going to be meaningful. And as Jeff mentioned, the acquisition we did in western Oklahoma where we spent $5 million, bought 2 million of production a day and doubled within six months, I think that's a little optimistic in terms of being able to do that time and time again. But those are the kinds of things, at least from a 30,000 ft. approach, is what we're trying to do on the acquisition side.

And the divestitures? Are we still able to improve the portfolio here maybe with the small acquisition and maybe some small divestitures and helping out that internal growth rate over time?

Yes, I think that's really a good point. One of the things that we have spent some time on just recently is going through the portfolio of projects that we've got in terms of producing properties. Our Mid-continent group have verified some assets that we're going to be divesting of probably first or second quarter of next year. And again those are properties that don't provide any significant production, but do have some relatively high LOE. So we're going to be in the market of selling those. We've got a couple of properties we've identified in West Texas that could be sale candidates.

So yes, the one thing, just stepping back here, is in our review we claim victory on the balance sheet to some extent, but that doesn't mean that we still don't have a lot of work to do. As I mentioned, we're going to continue to sell off these lower value, less meaningful assets, which I think will help us in terms of being able to decrease LOE on a per unit basis and also try to keep our overhead flat in '04 compared to '03, which is going to be a real challenge, given where the salaries of technical folks are going in our business.

So again, we've got that to do. We have still got a tad bit of trust preferred and the six percent debentures that we'd like to clean up and get those off the balance sheet. We've got IPF where we only have probably somewhere in the 10 to 12 million of receivables on the books at year-end, but that something we would like to get cleaned up and done. There are some things that we're really focused on. Those are some of the things that Roger and some of the other people are going to be focused on very intently last part of this year and next year.

To answer your question on the equity, we don't plan at this point in time to issue any equity for the foreseeable future. We think that in terms of the exchanges those are essentially done, so there's no reason to do that. And quite frankly, we think the equity is trading at a sufficient enough discount from at least our internal net asset values and we just don't think it would be a good thing to do in terms of -- we don't think it's adding value to our shareholders. Again, it's because we've got all long line of reserve base, we've got some good hedges in place, our production is going up and we're going to have more than enough cash flow -- at least in my view -- to execute the opportunities that we've got on the board. Again, it all comes back to -- the only reason I can even fathom issuing equity would be for an acquisition, and again I just think the acquisition market is so competitive today given our stock price it's just not going to make sense right now.

Thanks John.

I guess that's it for the questions. Do you want a go ahead and sign off?

Thank you for your participation in today's conference. You may now disconnect.