山脈資源 (RRC) 2003 Q4 法說會逐字稿

Welcome to the Range Resources 2003 financial results conference call. This call is being recorded. All lines have been placed on mute to prevent any background noise.

Statements contained in this conference call that are not historical facts are forward-looking statements. T&ASuch statements are subject to risks and uncertainties which could cause actual results to differ materially from those in the 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 Mr. Rodney Waller, Senior Vice President of Range Resources. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome.

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

Before turning the call over to John, I would like to cover a few administrative items. First, we have filed our 2003 10-K with the SEC. It is now available on the home page of our website, or you can access it on the SEC's Edgar system.

In addition, we have posted on our website some supplemental financial tables which will guide you in the calculation of the non-GAAP measures of cash flow, EBITDA, cash margins be and dilutive shares that will be discussed on the call today.

The tables will also give you details of our current hedge position by quarter, and comparative information of our reserves for 2002 and 2003.

Range will be participating in several conferences in the near future. On the 17th of March, we will be speaking at the Johnson Rice Small Gap E&P conference in San Francisco. On March 30th, we will be at the Howard Wheel Conference in New Orleans.

And on April 20, we will be at IPAA in New York City. If you can attend any one of these events, we hope you will come by and visit with us. Now, let me turn the call over to John. John?

Thanks, Rodney. Before we review the 2003 financial results, I will summarize some of the key aspects. After that, we will turn it over to Roger and let him give us a review of the 2003 financial results, let Jeff update us on the operations, get Charley's thoughts. And then we will throw the call open to Q&A.

Looking at '03, we were very pleased with 2003 results. They exceeded our expectations in nearly every category.

In terms of the income statement, although we had several nonrecurring items such as a large gain on debt retirement and a significant swing in deferred taxes that somewhat muddled the picture, on a recurring basis, revenues, EBITDA, cash flow and earnings, all increased -- exceeded our internal goals and met or exceeded the First Call estimates for the year.

On the balance sheet side, again, much was accomplished during the year. We lowered the effective interest rate. And extended the average maturity by fully retiring both the 8 3/4 senior subordinated notes, as well as the trust preferred securities.

Most importantly, our more balanced strategic approach of organic drill bit growth, coupled with complimentary acquisitions, is resulted on high returns on invested capital -- and that's obviously what we're in business to do.

We are growing our baseline production through the drill bit, and we are using acquisitions for incremental growth. The execution of this strategy provided for strong operating results for 2003. The first is reserve growth. Our reserve replacement for '03 was 286%. Roughly half of this came through drilling, and the other half came through acquisitions.

Overall, proved reserves increased 18% for the year; and looking forward to '04, we anticipate drilling will again more than replace production. Second is finding and development costs. Our all-in 2003 FD&A cost averaged $1.25 per Mcfe.

In this calculation, we've included all capital spend in '03, and includes roughly 10 cents a share -- or 10 cents per Mcf -- for acreage and seismics that relates to projects that we will drill in '04 and beyond.

We look at the $1.25 as well below the industry average, which seems to be coming in somewhere in the $1.75 range, based on some of the preliminary numbers we've seen from some of the brokerage outfits.

Third is our production growth. Production increased 6% in '03; and importantly, the rate of growth steadily increased in each quarter during the year. And the fourth quarter ended up at 10% year over year increase; again, due to the success of our drilling program.

Fourth and probably most important in terms of looking forward, is our inventory of drilling opportunities. Over the past several year, we've added significantly to our technical team, and we've expanded our inventory of drilling projects.

Importantly, we're building a diversified multi-year inventory project that provides a solid foundation for our growth. Jeff Ventura will talk about our drilling inventory later in the call during his talk. Overall, in 2002 we had a very strong operating performance that translated into record financial results. That's the summary.

With that, Roger, why don't you go ahead and give us a review of the '03 financial results?

Thank you, John. Before looking at the full year-end figures, I will spend a few minutes on the fourth quarter results.

For the quarter, revenues totaled 61.3 million dollars. 19% higher than the prior year period. Higher fourth quarter revenues were prompted by a 10% increase in oil and gas volume, an 11% increase in gas prices, and a 7% increase in oil prices.

Fourth quarter 2003 realized prices were $4.11 per Mcf for natural gas and $23.59 per barrel for oil. While fourth quarter revenues rose 19%, total expenses increased 18%. But a closer look at expenses reveals that noncash expenses increased 31% in the fourth quarter of 2003, while cash expenses only rose by 3%.

Lease operating expenses increased $1.2 million, or 15%; but only 3% on a per-unit cost of production basis. Exploration expenses increased 2.9 million, due mainly to a 2.3 million increase in seismic expenditures for the quarter.

And interest expense fell by 1.9 million in the quarter, due to a lower level of borrowings and lower interest rates. General and administrative expense was $355,000, or 9% higher than the prior year period, due to higher employment costs.

The noncash deferred compensation plan adjustment for the fourth quarter was $4.4 million. That was $3.4 million higher than the 2002 fourth quarter adjustment. DD&A increased by 1.7 million, or 8%, due to higher production.

The 1.1 million in FAS 143 asset retirement accretion expense wasn't present in 2002, as this new accounting rule is just implemented January 1st of 2003.

Pretax income for the fourth quarter of 2003 was $7.5 million, 25% higher than the fourth quarter of 2002 figure of $6 million.

The provision for income taxes changed significantly from the fourth quarter of 2002 to 2003. Range recorded income tax expense in the fourth quarter of 2003 at a 39% effective rate, versus a 19% effective rate in fourth quarter 2002.

Due to a higher level of pretax earnings and a change in the tax rate from 35% to 37%, we recorded a catch-up amount in the fourth quarter, representing the change from a 35% full-year tax rate to a 37% full-year tax rate. The catch-up amount led to a 39% rate for the fourth quarter. As a result, income tax expense more than doubled to 2.9 million in the fourth quarter.

Going forward into 2004, we anticipate recording taxes at the full 37% rate. Fourth quarter 2003 net income available for common shareholders was 3.9 million, a 1 million decrease from the 2002 fourth quarter.

Excluding various noncash item, however, 2003 pre-tax fourth quarter income would have been 13.4 million, or 87% higher than 2002.

Even after the change in income taxes, fourth quarter net income, adjusted for all these noncash items, would have been 47% higher in 2003 than 2002. Adjusted non-GAAP earnings per share, taking these noncash items into consideration, were 14 cents basic and 12 cents dilutive.

The catch-up in fourth quarter deferred taxes cost us one cent earnings per share, which when added back to the earnings would have equaled First Call's earnings of 13 cents per share.

There is a table in our news release, in addition to the schedules on our website that Rodney mentioned, which provides the details of these non-GAAP financial measures. EBITDA for the fourth quarter of 2002 was 44.9 million, a 25% increase over 2002.

Cash flow before preferred dividends for the fourth quarter of 2003 was 40.9 million, a 31% increase over the 2002 amount, representing a record quarter for the company. In addition, fourth quarter 2003 cash flow exceeded third quarter 2003 cash flow by 15%.

As I mentioned, supplemental schedules containing the non-GAAP financial measures of EBITDA and cash flow can be found on the Range Resources website.

Turning to the full year 2003 financial results, total revenue of $249 million was 51 million higher than last year, driven by a 22.5 million increase in oil and gas prices, a 12.9 million increase attributable to the 6% increase in production volumes, and a 15.9 million higher gain on debt retirement for the year.

2003 revenues were up 26%, while total expenses were 13% higher than 2002. Excluding the various noncash items, cash revenues rose 18%, while cash expenses increased 10%. Lease operating expenses were 63 cents per Mcfe in 2003, versus 58 cents per Mcfe in 2002.

This 9% increase was due to higher workover expense and higher field level operating expenses. Production and severance taxes were up 4.3 million on higher volume and higher prices. Exploration expenses were 2.4 million higher in 2003, due primarily to the higher seismic expenditures. Range expenses all seismic costs, even seismic related to our development projects.

Interest expense for 2003 increased 15% versus 2002, due to lower debt outstanding, and lower interest rates. In 2003, 2.4 million in debt retirement costs were incurred related to the August 2003 retirement of our 8 3/4 senior subordinated notes. Recall that Range did not capitalize any interest expense.

Depletion, depreciation and amortization expense was 7% higher in 2003 than 2002, mainly due to higher production. FAS 143, the new accounting policy for asset retirement obligations, represented a 4.5 million depreciation amount for 2003.

General and administrative expense for 2003 was 10%, or 1.6 million higher than 2002, due to 572,000 in higher salaries for new hires, 387,000 in legal and consulting and other professional fees -- which I might add also include initial expenses associated with some Sarbanes-Oxley 404 work.

Range does not capitalize any G&A expense. The noncash deferred compensation plan, mark-to-market adjustment, was 6.6 million in 2003, versus 1 million in 2002.

Now this adjustment, it relates to the accounting treatment under EITF 9714 that pertains to company stock held in a rabbi trust under the company's deferred compensation plan.

Now under this rule, the company stock held in the plan is mark-to-market each quarter, even though the Range stock held in the plan is issued and recorded as treasury stock at the time the contribution is made. Because treasury stock is recorded at cost, the Range stock price subsequently goes up, an increase in noncash expense is recorded.

Likewise, if the Range stock price subsequently goes down, a reduction to expense is recorded. Pretax earnings in 2003 were 49.4 million, a 27 million or 121% increase from 2002.

As I mentioned, 2003 was an inflection year for income taxes, as Range moved from booking a 3.4 million income tax benefit in 2002, to an 18.5 million tax provision in 2003.

Now, less than 200,000 in cash income taxes were accrued in 2003, with the remainder being deferred taxes. We anticipate booking provisions for 2004 income taxes at the full 37% rate. So all but about 2% of the provision being deferred.

2003 net income available to common shareholders, including the 4.5 million FAS 143 asset retirement item, was 34.6 million, 34% higher than 2002. 2003 non-GAAP earnings per share, which are adjusted for certain noncash items, were 49 cents basic and 46 cents dilutive.

EBITDA for 2003 was 163 million compared to 140 million in 2002, representing a 17% EBITDA increase. Cash flow for 2003 was 144 million dollars compared to $118 million in 2002, a 22% increase. Both EBITDA and cash flow for 2003 were the highest in the company's history.

Returning to the balance sheet for just a moment, the barring base under the range senior secured bank credit facility was increased in December of '03 from 180 million to 225 million.

This increase was the result of the Conger Field acquisition, and following the acquisition funding, we ended the year with 178 million from Range bank debt outstanding, leaving 47 million available.

Our key credit statistics showed continued improvement in 2003. The debt to capitalization ratio decreased from 64% at the end of 2002 to 57% at the end of 2003.

Debt per Mcfe accrued reserves decreased from 54 cents in 2002, to 52 cents in 2003. Debt to EBITDA decreased from 2.6 times in 2002 to 2.2 times in 2003. And EBITDA interest expense, that coverage increased from 6 [AUDIO BREAKING UP] times in 2002, to 7.4 times in 2003.

[INAUDIBLE] on the company's balance sheet, financial performance and overall outlook look was recognized in October of 2003 by Standard and Poor's, with an upgrade of our senior subordinated notes from single B minus to a rating of single B. Moody's still carries the Range senior subordinated rating one notch lower than S&P at B-3, and we plan to meet with Moody's shortly regarding the rating.

In summary, 2003 represents a solid financial performance, with the company benefiting from a combination of higher production volume, higher prices, coupled with an improved cost structure.

The balance sheet is further enhanced, providing the company greater financial flexibility and freeing up additional cash flow for investment. Another key point in maintaining high free cash flow for investment is control of costs.

While Range already has a culture emphasizing frugality and efficiency, we feel there is always room for improvement. I am a firm believer in the power of the cost curve to create value for shareholders in a commodity industry, and I intend to press hard for continued headway in Range's cost structure.

Now, unfortunately -- or I guess fortunately, depending on your perspective -- there aren't any planes or hunting lodges or company cars to sell here, so we're just going to have to hammer away on costs everywhere we can. I anticipate small improvements in many seemingly inconsequential areas will probably make up the bulk of the impact.

We will need this -- we will need this effort as higher oil and gas prices always place up ward pressure on costs. It seems to be human nature to focus more upon costs on the bad times than the good, but it is part of my job to make certain that cost control knows no season.

Lastly, I would also offer a qualitative note to my remarks regarding this year's audit. The 2003 audit was my first audit at Range, and I was particularly pleased by the quality of the work relationship with Earnst and Young, and also the professionalism and diligence of the Range accounting staff.

I was impressed upon my arrival here five months ag, by the modest level of unproved property, the absence of goodwill, capitalized interest and capitalized G&A, and it was rewarding to see my first impression of the quality of Range's numbers reinforced by our 2003 audit.

At this point, I will turn the call back to John.

Thanks, Roger. We're really pleased to have Roger on board. As you all know, he joined us last October as our CFO. He is doing an excellent job. He has integrated very well with the existing staff. And he's got a number of initiatives that we're very pleased about.

I will now turn the call over to Jeff Ventura, our Chief Operating Officer, to provide an update on the E&P side. Jeff?

Thanks, John. I will begin by reviewing production. For the fourth quarter, production averaged 164.7 million cubic feet equivalent per day, a 10.4% increase over the fourth quarter of 2002, and a 3.5% increase over the third quarter of 2003.

The 164.7 million cubic feet per day is comprised of 82.2 million per day, or 50%, from the Southwest Division; 46.2 million a day, or 28%, from the Gulf Coast; and 36.3 million per day, or 22%, from the Appalachia Division. This success was -- this increase was due to the success of our drilling program.

In particular, production rose for all three divisions, with the Southwest leading the way with over a 7 million per day increase. Company wide, production in each quarter of 2003 increased both sequentially and year over year; again, driven by the drilling program.

For the year, production averaged 159 million per day, which was a 6% increase over 2002. One interesting point is that due to the success of our onshore drilling, we ended the year with our onshore production making up 83% of the company total, with offshore at 17%. Our capital spending for 2003 was 108 million, excluding acquisitions.

This spending resulted in 358 gross wells and 56 gross recompletions. Including both exploratory and development wells, we had a 93% success ratio. We spent 12 million including new leaseholds and seismic.

These are key expenditures, as they help build our drilling inventory. In addition, Range spend 95 million on producing property acquisitions. Acquisition of the Conger Field property was completed in late December and accounted for 85 million, or 90% of the total amount spent on acquisitions.

2004 capital spending is projected to be 126 million, excluding acquisitions, which is a 17% increase over 2003. 2004 capital spending will be funded with approximately 75% of internal cash flow.

The capital has currently allocated approximately 50% for the Southwest Division -- 25% feeds the Gulf Coast and Appalachia Divisions. Range's reserve volumes as of December 31, 2003 were 685 billion cubic feet equivalent which is an 18% increase over the previous year.

We replaced 286% of our production at an all-end cost of $1.25 per Mcfe. Excluding price revisions, Range replaced 271% of its production at a cost of $1.32 per Mcfe. Of the 286% replacement, 130% came from drilling and revisions and 156% from acquisitions.

87% of Range's reserves were reviewed by independent petroleum consultants. At year-end, the company's reserve life index was 11 years. At year-end, 72% of our prove reserves were classified as development -- as developed, and 28% undeveloped. This is essentially the same as the prior year.

Of our undeveloped reserves, 58% is attributable to Appalachia, 28% to the Southwest, and 14% to the Gulf Coast. Overall, I feel very good about our reserve estimates.

I know that reserve quantities and write-offs have been in the news quite a bit lately. One thing we do at Range to help keep the reserve process as independent as possible, is that our Vice President of Reservoir Engineering, Allen Parkerson, and his department, report directly to me and are independent from the operating divisions.

I believe that this provides a good check and balance system. And I would like to compliment on Allen and his group for the excellent job that they do.

Turning to drilling results in the fourth quarter, Range drilled 94 groves or a 54 net wells, of which 14 groves or 10 net wells were unproductive. For the year, 333 groves or 185 net wells were successfully drilled, while 25 groves or 16 net were dry. As I mentioned earlier, this equates to 93% success rate.

As of December 31st, 257 wells have been placed on production, while the remaining 76 walls were in various stages of completion or waiting on pipeline connection.

Currently, 47 wells are still waiting on pipeline and are anticipated to go into production shortly. As these wells are put on production and we drill new wells, I expect to see continued production growth in 2004.

Currently, would he have 12 rigs running; six in the Southwest. four in Appalachia, and two in the Gulf Coast -- one offshore and one onshore. I will now review some of the highlights of our each of our divisions. The Southwest Division successfully grew production nearly 10% in 2003.

The Texas Panhandle was a key contributor to the growth in 2003, and 2004 is expected to be another good year, as we have a solid inventory of high quality prospects. Range's most recent well in the area was placed on production in late January at 4 million per day gross, or 2.2 million net.

The company currently has one rig drilling in the Texas Panhandle and one drilling in western Oklahoma, in the Watonga Chickasay [PHONETIC] area. We expect to drill 45-50 wells in these areas in 2004.

And as I mentioned, the Texas Panhandle was a key contributor; and within there, really the Courson Ranch was one of the prime areas. And I believe that 2004 will be a good year as it has been up there for the last couple of years. A lot of the success that we had was really based on 3-D drilling on the Courson Ranch.

Late -- well in the fall of last year, we shot new 3-D as a continuation of what we had and we integrated those 3-D surveys together. And I'm excited about what I see there. We see a continuation of the upper Morrow Channel play that we had on our existing 3-D on to the new 3-D.

Now, that's one thing. The second thing is that we see another horizon that looks very prospective. It is the Brown Dolamite, it is about 4,000 feet. And we see some Brown Dolamite potential above proven gas water contact upon a small structural feature that could lead to multiple wells, and we will be spuding a well in the second quarter to test the Brown Dolamite.

And thirdly, by integrating the two 3-D's together and working the production data with it, what we have been playing so far has been upper Morrow.

We see in the middle Morrow, or a little bit deeper sand within the Morrow, a potential pan. It looks like there may be another parallel channel to our upper Morrow channel.

So what the new 3-D does is build our inventory of upper Morrow prospects, opens up the middle Morrow, and an additional horizon in the Brown Dolamite. So we are really playing multiple horizons on Courson Ranch.

So I believe that 2004, our program is going to continue with the success they've had in the past. Now the Southwest Division is also getting steady contributions from its mature areas such [INAUDIBLE], Conger and Lower Lavelle.

Successful drilling at [INAUDIBLE] last year resulted in a 103% production increase over the prior year. We currently have a two rig program under way in the field, and early results are encouraging. The first three wells have been successfully completed for a combined rate of 2.7 million per day gross, or 2.1 net.

The Conger Field acquisition had closed on December 23rd of last year was very important for the division. Range is now the largest operator in the field, with net production of approximately 32 million cubic feet per day. Our acreage position is about 69,000 gross acres, on which we have identified 64 drilling locations.

We just picked up our first rig to begin drilling there this year, and we will pick up another rig by the end of March. We plan on drilling 22 wells in the field this year. Production volumes are tracking the acquisition economics, and we are ahead of schedule concerning capturing the operational synergies that we projected in the acquisition economics.

Just talking a little bit about the acquisition, I'm please sod far with the integration of the two organizations. We are on schedule for that. As a result of that, hopefully we are building a better organization, bringing the best of both. There's cost savings associated with it.

We've also seen cost savings associated with putting the sets of properties together. For instance, on a few of the Range leases, we had rental compressors that were on the property we picked up, we had low pressure lines. We were able to move some of those wells off the rental compressors into the low pressure lines, which reduces money.

So when we look at the synergies that we've captured so far, they are of a greater magnitude than what is in the economics and we're capturing them early, and I believe other things will come.

The team has identified basically retooling some of the compressors to make them more efficient, which should reduce our fuel gas use. And there are many other things I think that will happen over the next 12 months.

Moving on to the Gulf Coast Division, we have continued our success launch redrilling program, with a new discovery there early this year. We recently drilled and completed a gas discovery that encountered 55 feet of high quality pay, of which the bottom 30 feet were perforated.

The well tested 7.4 million per day gross, or 3.7 net, with a flowing tubing pressure of approximately 9300 pounds. Now, that's really important to note. We got a high flow rate at a high pressure, so what we have is a very high quality reservoir and very permeable, very high pressure, and you can put a lot of gas in place with the higher pressure as well.

So we're encouraged by what we see, and yet, we've just perforated part of the section. The well is scheduled to be on line by the end of March and Range has a 68% working interest. The well was drilled based on 3-D seismic, and subject to the well's performance, Range has sufficient acreage where additional wells could be drilled.

Overall for the Gulf Coast Division, onshore production grew to 32% of the division's total production in 2003. I view this as positive, as we have more control over costs in the timing of expenditures onshore, and per well drilling costs tend to be lower.

In addition, we purchased an additional 140 miles of 3-D seismic on shore near our 2003 successes, and we are working the seismic currently and hopefully, we will come up with a number of new drilling opportunities.

In the Gulf of Mexico, two wells, a state-leased 17619 Number One, in which Range has a 33% working interest, logged 30 feet of pay; and Highland 111810 Side Track, in which Range has a 17% working interest, logged 25 feet of pay. Both wells are currently being completed.

In West Cameron, the Block 56 Number 17 well, which is a field expansion to the 4520 discovery drilled in 2002, spud and is currently drilling below 13,000 feet.

The 45 Number 20 well began making water late last year; and currently, the well is producing at a gross rate of 7 million per day and 620 barrels of water per day. We are considering two options for the well once it ceases to produce.

Either the well will be side tracked to a higher position or it will be deepened to test additional horizons. Additionally, Range has completed arrangements to drill a Falcon prospect in East Cameron.

We will retain a 25% working interest to casing point and a 37.5 working interest after casing point. Plans are to drill the well to 17,500 feet, beginning of the next month or so.

While this is an exploratory well with significant risk, if successful, it could have a very positive impact on production and reserves. In Appalachia, the division had a good year, successfully growing production by 5.1% in 2003. This growth primarily came from the drilling program.

For 2004, the division plans to drill 245 development wells and 19 deeper wells, including five wells to test the Trenton Black River formation. Importantly, in 2003, we acquired 300,000 gross acres and several new drilling plays.

We drilled the initial wells in these plays, a number of which were encouraging. As part of the 2004 drilling, we plan to drill 35 wells on these new plays.

We're looking to develop areas where we can drill hundreds of wells, like in Meetville Field [PHONETIC], where there are over 2500 producing wells that we operate.

In addition, last year, we acquired 6,000 acres to start a co-pilot cobalt methane play. The initial coring has been successfully completed and we plan to drill two five spot pilot programs, consisting of 10 wells, to further test the concept.

We have additional colbate methane projects in Ohio, Pennsylvania and West Virginia currently under review. In summary, 2003 was a very good year for the company. Production grew 6% year over year, and reserves grew 18%.

We replaced 286% of our production at a $1.25 per Mcfe finding and development cost. Looking forward, 2004 looks encouraging. We are forecasting 10-15% production growth. Our balanced program -- our balanced drilling program is off to a good start in all areas. Our technical staff is generating attractive opportunities, And our prospect inventory is expanding.

And I would like to compliment our technical team. They're generating quality ideas, building inventory, working well together, and executing and implementing the program.

And in summary, I'm excited about what I see, and I believe Range is very well positioned to add value in 2004 and beyond. Back to you, John.

Thanks, Jeff. As you all can see, we've got -- we've got a lot going on in terms of the drill bit. Before I turn to kind of the outlook for 2004, there are a couple of miscellaneous areas that I will cover.

First is IPF. We continue to make solid progress and [INAUDIBLE] in the portfolio. We are using the cash generated IPF to help fund our E&P capital program. During the year, the IPF receivable balance was reduced almost 50%, from 24.5 million at year-end 2002, to 12.6 million at year-end 2003.

I would expect this to continue in 2004, as we decline out the portfolio. On the hedging front, since the third quarter conference call, a few oil and gas collars were added, and we swapped out some of the NGLs we acquired in the Conger Field acquisition.

As Rodney mentioned, there is a table in the news release and more detailed information in the 10-K that was filed this morning. That gives you a lot more detail on the hedging.

As you recall, in mid '03, we modified our hedging strategy to begin to place a greater emphasis on costless collars versus straight swaps.

Given our improved financial position, our thought was that the collars give us down side protection, but also allow us to obtain a portion of the upside.

Looking to 2004, our average hedge price per Mcfe is 11 cents higher than the '03 hedge price. Also, the 2004 hedges include some collars where none existed in collars in '03.

As a result, the current futures price is, for '04 -- can drop 50% or more and will still be able to generate sufficient cash flow to fully fund our anticipated 126 million dollar 2004 drilling program.

Looking at 2005, our hedge volumes are materially lower than 2004. In addition, approximately 30% of the '05 hedges are now collars. Turning back to the income statement just for a second, regarding the noncash deferred compensation plan adjustment of 6.6 million for 2003, as Roger said, it is a direct reflection of the increase in our stock price.

During 2003, the stock price increased 75% from $5.40 to $9.45 a share. You take the $4.05 increase, and you simply multiply times the 1.6 million shares of common stock in the deferred compensation plan, and you get the 6.6 million dollar adjustment.

Just echoing what Roger said, it seems pretty odd to me that as your stock price appreciates, our earnings get reduced downward. But that's how the world works. Conversely, if the stock price would decline, we would magically become more profitable.

Again, this seems a little counter-intuitive to me, but again that's how the rule works. The shares in the deferred comp plan are a 10-year plus accumulation of shares that represent a portion of bonuses that the Board requires officers and certain key employees to take, versus stack -- versus cash each year, to align the interest with the shareholders. I greatly concur with the Board and the compensation committee and the concept, but I do think that the accounting treatment is a bit strange.

When you look at '03, I think one of the things that separated it from '02 was the growth in production. Over the past several weeks, many E&P companies have reported flat to down fourth quarter production. And for some that did report increase, it seems that acquisitions were the primary driver.

Our growth for '03 was fueled by the continued success of our drilling program. This is key in our opinion.

As I mentioned in the last -- in the last quarter's -- the third quarter conference call, we view the drilling program like the running game of football. Without, it you're forced to the passing game or acquisitions, which can obviously be hit or miss.

Our plan is to use the drilling program to steadily increase production year over year. And like the Conger Field acquisition, we plan to use that to compliment our drilling.

From my perspective, one of the more encouraging points about 2003 was that we were able to meet our production goals despite some drilling failures along the way.

Our ability to observe these disappointments and still meet production goals was an important milestone in my thoughts.

Lastly, before I turn to some outlook for 2004, we're obviously very gratified that the market began to recognize our progress in the year with regard to our stock price increasing 75%.

And the good news, it's also continued to increase during '04, with a 20% increase so far in the first couple of months of the year. We're hopeful that our evaluation continues to improve as we post solid quarterly results.

And as we get more recognition with some of the -- some of the things that we're doing. And in addition to the stock price improvement, the Board voted late last year to reinstitute our quarterly common stock dividend.

The first dividend was paid in January at the rate of one cent per share. I'm hopeful that as we continue to grow earnings and cash flow, that we'll increase the dividend -- the dividend rate over time.

Now, let's turn over -- just give a brief outlook for 2004. As Jeff mentioned, we're looking for our operating performance to increase and get better in '04 over '03, we're expecting production to increase somewhere between 10-15%, which is roughly double the increase from '03.

And to give you a snapshot for the first quarter, we're still looking for first quarter volumes to be 174 million a day, which is the guidance that we gave previously. And this represents a 13% increase year over year.

When you take higher production and a higher revenues and higher hedges, our revenues are expected to continue to grow in 2004.

As Roger said, we hope to hold expenses to a modest increase, which will help drive up cash flow and earnings to record levels again. Our per share results should show a similar trend.

Besides a stronger financial position, we enter 2004 with a management team fully in place. That's to me, is key.

With Charlie Blackburn and Jeff, Roger and I and the other officers like Rodney and Chad and Herb, and then the others, Allen, we really have a tremendous group of professionals. I'm really excited about what we've got.

And to give you a little viewpoint, in terms of of some of the activity, as Jeff said, our business is driven from the bottom up. It is our technical staff that develops the opportunities. It is really -- Jeff and I are the traffic cops.

And I can't say enough about our technical staff. They're just doing a great job of generating new ideas and new projects. Our inventory of drilling and recompletion projects is the largest in our history and gives us much confidence that we can internally grow production and revenues in the future.

Looking to the Southwest Division just for a second, we currently have a four-plus year inventory of projects in our long life fields, like Conger, Furman, Val Verde and Laurel Lavelle.

And we continue to generate new projects in these older properties, it seems, every year. Some of the newer areas like the Texas Panhandle, western Oklahoma, and East Texas, really contributed solidly to our growth in '03, and we see activities in these areas increasing as we increased our acreage position, which in these areas is now exceeds 100,000 acres.

So we're aggressively expanding in these areas, and as Jeff mentioned, with some of the thoughts in terms of the Courson Ranch in the Panhandle.

In the Gulf Coast, our onshore activity was really rewarding in '03. We drilled a number of really, really high quality wells. And we're expanding that onshore effort in 2004.

The good news is that we've already had a significant discovery, high potential discovery, which hopefully we'll put on production in this month, to be able to give you all some idea in terms of rates and future development later on.

And we've also acquired a 150-mile 3-D seismic survey next to some of the success we had last year that we're currently working. So that will generate some new ideas as well.

We have a -- just going a little further, we have a multiyear inventory down in the the Gulf Coast of what we call home run projects, both onshore and offshore. That will be exciting to see drill in 2004, the next several years.

Lastly, in Appalachia, we have a six-plus year inventory of shower projects. As Jeff said, we're developing a number of new large-scale shallow development projects that we plan hopefully to drill hundreds and hundreds of wells on during the next several years.

We have developed -- we're in the process of testing one [INAUDIBLE] methane play that we have already taken course on that looks promising. We will be going to the testing phase in early '04; and then we've got three nor near colbate methane plays that we're working on as well that look promising -- but you know, obviously won't have much impact for '04. But may have some impact for '05.

I guess most importantly, Appalachia, the way I look at it is we have, you know, a 1.5 million acre grove position in terms of leasehold and to provide substantial deeper potential. For one of the largest onshore basins in the U.S., Appalachia has seen the fewest deep penetrations of any of these large basins.

We view this as significant options that should be become more visible over the next few years, as we and the other more technical companies in the basin apply 3D seismic horizontal drilling, and improve frac technology, these deeper plays.

Lastly, I can't -- I also want to mention our acquisition team, it's really a talented group, under the tutelage of Chad Stevens. They are multi-disciplined technically.

The team is, you know, actively searching for attractive opportunities in our core areas. We are going to stick to our knitting, so to speak, and stay in the areas that we feel like that we have some competitive advantages in.

And as Jeff said, the Conger Field acquisition we completed late last year is a perfect example of what we're looking for in the way of what we call complimentary acquisitions. So in all, you can see that we have a lot going on.

We're -- as we look out in '04, beginning of '04, as you can see, our challenge is really not trying to find opportunities to implement in '04. We already have plenty of opportunities.

Our challenge is to execute the opportunities that we have, stay focused and disciplined. From everything that we can see, '04 looks like it will be a record year both operationally and financially. Again, the key will be focused execution.

Okay. Let's see here. Next on the hit list -- Charlie, why don't you give us an update on your views of 2003 and what you see for 2004.

Okay, John. I will probably be very brief. It goes without saying, I'm very pleased with the results of 2003, and the outlook for 2004.

The company set more than one financial record for the year. From an operational perspective, it certainly appears that the drilling program is now achieving what we intended for it to do.

Production grew in every quarter of the year. And reserve grew through the drill bit and a reasonable cost for the second consecutive year. The technical team is doing a great job.

The company plans to participate in the bidding of over 400 wells in 2004, which is a very quick pace for a company this size. As for myself, I'm personally involved in reviewing the technical aspects of our projects and our risk assessments.

I'm using my experience, which is considerable, to help assure that risks are appropriately managed, and the technical aspects are properly evaluated. Obviously, with our $1.25 finding cost, the team is already doing an excellent job.

Even so, I've enjoyed getting involved and have been very impressed with the quality of the projects that are being generated.

As far as 2003 and the fourth quarter, from my perspective, the key highlight was the Conger Field acquisition.

To be able to purchase an estimated 80 Bcf of proved reserves that at a reasonable cost is quite an achievement. The purchase is expected to fuel a low-cost, low-risk drilling program for years to come.

With this acquisition, on a 2004 drilling program, as John mentioned, we expect to achieve a 10-15% increase in production volume for 2004. I look forward to reporting to you on our progress towards that goal.

John, back to you.

Okay. Operator, I guess that's all of our prepared remarks. Why don't we turn the call over to Q&A?

Thank you, Mr. Pinkerton. The question-and-answer session will be conducted electronically. If you would like to ask a question, please indicate by pressing the star or asterisk key, followed by the number one, on your telephone key pad.

We will take as many questions as time permits. If you are on a speaker phone, please pick up your hand set before asking your question. If you would like to withdraw your question, you may do so by pressing the pound key.

Once again, please press star one to ask a question. And we will pause for just a moment to allow everyone a chance to respond. The first question is from Ron Mills of Johnson Rice.

Good afternoon, gentlemen.

Hi, Ron.

Just a couple of questions that you just talked about, can you just -- I missed the production break down at year-end between your three areas.

Can you walk me through that again? And then also, on the outlook for 2004, what -- any kind of guidance in terms of gas versus oil, versus NGLs?

I will answer the first one.

Okay.

For the fourth quarter, we had 164.7 million cubic feet per day. Of that, 82.2 million, or 50%, was from the Southwest Division. 46.2 million, or 28%, was from the Gulf Coast Division.

And 36.3 million or 22% was from the Appalachia division.

Okay.

Ron, this is John. In terms of the -- the break down between oil, gas, and NGLs, we're looking for -- to give you an idea, the oil being somewhere in the 6400 barrels per day area for the year, in gels, roughly, I don't know, 24, 2500 barrels per day area for the year and then the rest of it being natural gas.

Okay. And in terms of pricing for the NGLs, I saw that you -- in terms of hedges, you have a -- in '04 and '05, some pretty nice prices on NGL prices.

In terms of differentials for your commodities, now that you have the Conger Field integrated, any guidance in terms of the differentials that you -- that the commodities now should trade at?

Yeah, Ron, as you know, in NGLs are a little bit of an oddity. There is a lot of things that influence them. It is not that much of a thick market or deep market, so they tend to bounce around all over the place.

But I think a good solid number in gels, equaling on average 60-70% of nymex oil prices in terms -- or mix of NGLs.

Okay.

Just, you know, just -- Ron, just one point, is that when we -- when we close the Conger Field acquisition -- I got to come in -- Rodney did a great job, and we had not hedged NGLs in the past, because they're relatively hard to hedge, because there's not many markets.

Rodney was able to find the guru of natural gas liquids hedging, we were able to do some hedges that were extremely attractive.

Roughly, you know, somewhere at five -- four to five to six dollars higher than our acquisition economics per boil, so we were thrilled, and you know, about that, and we were able to go ahead and lock those in, and bring those to the bottom line kind of day one.

So that was pretty encouraging to us. The only thing about NGLs is that when we hedge those, we're going to have to do it through swap,s because you can't -- you essentially can't collar NGLs for any reasonable length of time.

So going forward, whereas you see collar -- mostly collars on the oil and the natural gas, you will see more swaps on the NGLs, just because the market is thinner, and it is really the only way you can do it.

I mean, you can do collars, but they are so costly, it is really not worth did.

Okay. And in terms of oil and gas, did the addition of those properties change the price differentials? I know I was looking for about kind of a quarter off of nymex for you all on the gas side, and between 2.75 and three bucks off on oil.

Just trying to see if that production mix, especially with the 30 million a day, impacted the -- the remaining price differentials.

Well, once you factor in the NGL numbers which I just gave you, the numbers, the differentials that you just spoke about are still good for oil and natural gas.

Okay. And because I know it is going to be asked, and I don't know where I will get with it, but the onshore discovery that was announced earlier this year, any more information that they can be provided as to where that is? Is it -- the Gulf Coast is a pretty -- is a pretty broad area.

Ron, let me -- let me take that one. Jeff, if you don't mind. The -- at this point in time, we are going to continue to keep it fairly close to the vest for competitive reasons.

We're still -- have a little business to do down there. So we're going to be relatively quiet here. I think by the time that we put it on production and go, you know, get enough history to be able to give the market any viewpoint one way or the other, we will go ahead and open the book, and give you an idea where it is.

So it is really just for that. We're not trying to do anything fancy. It is just some competitive reasons in the area and we're just -- we want to get everything tied up before we get too specific.

All right. I will let someone else jump in and come back if we have time. Thanks.

The next question comes from Rehan Rashid of Friedman Billings.

A question on Appalachia. Could you talk a little bit more about the option value in terms of what is the industry doing? And again, remind me, please, what is your plan for this year, as far as trend in Trenton Black River wells are concerned. Thanks.

Thanks, Rehan. Let me give you a Trenton Black River 101 here. The Trenton Black River formation is -- for lack of perspective, is the same of the Ellenburger in West Texas and the Arbuckle and the Oklahoma.

This is not something, that, you know, all of a sudden we found yesterday. It has been there for hundreds and hundreds of millions of years. The interesting thing is the basin, as I mentioned, is one of the biggest onshore basins in the U.S.

But it has had less than 100 penetrations below 12,000 feet, and many of those were drilled back when the majors just happened to go up there and drill a few deep wells a year just to have something to do. So very little technology has gone into some of this D drills. The good news is there are some companies up there being fairly active.

I think the one that has gotten the most press is Tausman [PHONETIC] out of Canada ,and their basic history really came back from drilling some wells in Ontario, so they're bringing down their technology and what they know down into New York state, and they drilled some very nice wells with initial rates.

We don't know yet, in terms of the extent, and you know, wells that are -- have initial rates of over 10 million cubic feet a day, production rates, end of the line, so I mean these are not test rate, but real production rates, so that's the good news.

The thing we don't know how is long they're going to last, you know, what kind of reserves are going to be and what not.

But clearly, you know, with these kinds of gas price, these are very economic wells, you know, the Tausman stuff is 10 to 12,000 feet, so it is not deep in terms of any material sense in terms of what we do down here in the Gulf Coast and some of the stuff we do -- and elsewhere.

From so from that perspective, you know, the basin is getting more active, there are some more operators, bigger companies, like Tausman, into the basin, that have bought acreage that we've kind of -- that we know about.

We will let them tell you who they are when they want to. So that's encouraging to us. In terms of our activity, we did have -- it's been fairly -- it's been fairly spotty. We drilled a nice 15, 16,000 foot well down in west Virginia last year. They had some really good shows, but we never could get technically to produce. And the pipeline was a fairly long pipeline, so that well is basically T &A until we figure out something better to do.

We also drilled some wells, took some minor interest some wells. You know, again not great, you know, a couple of P&A, wells, a couple of decent wells. We did have a nice little discovery late in the year up in the more shallow part of the play, up in New York, that is less than -- less than 10,000 feet, and we're far less than 10,000 feet, that we hadn't hooked up to a pipeline yet but we tested it, you know, a fairly decent rate.

And that will try to get on production here in the second quarter. And then we've got about 25,000 acres around. So that is something that we are going to focus on.

For '04 specifically, we have five Trenton Black River wells in our budget. And from varying rates of 15% working interest up to a 50% working interest. And these are -- some of them are shallow. Shallow as 3 to 4,000 feet, and some of them are deep as 12, 13, 14,000 feet.

So that's what we've got in the budget so far. We do have a number of other projects we're looking at, we're trying to put the acreage together.

We're trying to -- you know, one thing about the Trenton Black River, for the first time ever, the basin operators are having to work with each other and do these projects together, which they're not used to doing. So that takes a little bit of time and effort. So that's coming about.

But the good news is -- out of all this is, I think of all the companies that are positioned up here, the fact that we have a million and a half acres already under lease, of which I think we've got the deep rights on over 95% of that, we are really in good shape, you know, when the play becomes more kind of from R&D, into the, you know, what I call you know, real oil and gas.

So again, we're encouraged by it, there is a lot of neat things going on. You know, just to give you an idea technically what we see the play is, it's really a 3-D seismically image play, and ultimately, you know, we will be enhanced to horizontal drilling.

So you know, again, the technology is there. It is just applying the technology, getting the partners -- and it is a huge area. So I mean, there is going to be plenty of dry holes drilled because this play runs from New York state all the way down to West Virginia, and some people think it runs further than that.

So it is a huge area. There is going to be lots of dry holes drilled.

We are going to be active, but we're not going to be crazy in terms of trying -- we're not going to lead the parade, but we are going to be one of the main players in there drilling wells, and gaining, hopefully, advantages technology wise and competitivewise. And again, our biggest competitive, bar none, is our big acreage position.

Good. Thanks. Quick question on differentials for Appalachia.

With all the L&G now coming in at Cove Point facility, are you seeing any impact on your differentials maybe narrowing from where you used to be before?

Right now, we actually, in '03 -- and we did a lot -- we redid a lot of our -- we sell a lot of our gas up in Appalachia on a one-year kind of arrangement. They're all nymex-based one month to month, but they tend to be -- we liken the basis differentials once a year, so to speak.

But most of the things that we did in '03 and a few that we've done in '04, we have actually seen the basis differentials tick up a penny or two or three over what we have had in the past. So you know, again, nothing material.

But I think if there is any trend that we see, actually, it is, you know, modestly better versus modestly worse.

Okay. Thanks.

We are nearing the end of today's conference. We will go to Andrew Calmar of Lord Abbott for our final question.

Hello?

Yes, sir.

Thank you for taking my question. I was wondering, maybe you could explain sort of the logic, you know, behind an increased use in the cost of collar.

It seems that you guys are using the drill bit more, so -- and you're not acquiring a lot of properties, so it would seem to suggest that just a swap would be better, you don't have to take it to the income statement. Unraveling it won't be costly in certain instances.

What is the -- what is the, you know, driving reason to use the collar more often?

Well, one is from a business perspective, or you know, when do you a swap, you basically have -- decide to lock in a price, and bet on that price going forward.

And what we used to do is, you know, we kind of did a bunch of economics, and it seemed to us that the kind of the magical number where most of our drilling projects made exceptional rates of return was four dollars in Mcf.

So what we did was, as the future prices got out to four dollars we would lock those in at four dollars, at four and a nickel, four and an an 8. as those prices kind of moved out. What happened is the market got really, really strong in a hurry, and blew past four dollars and went right just, you know, in the 5.50 and 6 range.

So that's what generated you know, the hedging losses we incurred over the past few years. What we did is, we looked back and it and we said to ourselves, well, again, our financial position is better, we can take a little bit more risk, so what the Board decided to do is a hedging strategy, which we pointed out was to try to have an equal amount of, over a long period of time, of collars and swaps, so that on the swaps, you are betting -- we're locking in prices. On the collars, we can -- we get -- we're protecting the down side, but we're also participating in the upside.

And for example, where as before, we were locking in prices at 4 to 4.10, now we're doing collars, and you can see in the press release, the collars range, you know -- I'm just flipping through it now, but if you look at the collars for '04, they're 4.50, floor, to 6.07 trend then for '04 they're 4.22 on the floor to 5.86 on the top end.

So what we're doing is, where we were happy at four dollars, now we're taking it kind of the next logical conclusion, and you know, getting that $4 floor in, but we're also participating in the upside up to, you know, somewhere in the five, you know, upper five to lower six dollar range.

So again, we're just -- I think it is just a maturation, and it is just a maturity of the process, coupled with, you know, the company's financial position, kind of hand in hand.

All right. Thank you.

Thank you. This conclude's today's question-and-answer session. I would like to turn the call back over to Mr. Pinkerton for his concluding remarks.

Thank you, operator. Well, again, I think as everybody on the call has mentioned, we are thrilled with the results from '03. It is obviously set the bar very high for '04.

But again, I think we've got a great technical team. We've got some really good projects we're working on. We've already got them on the board for '04. It is just a question of executing, and getting to the finish line.

We're excited about how the year started off in terms of the discovery we had in the Gulf Coast. Hopefully, we will get back that on very shortly and be able to give you all a perspective in terms of the production rates, and the ongoing development of that, assuming it holds up.

So we're pretty excited. I think the first quarter is going to be a great idea, give you a great idea, in terms of what the rest of the year is going to look like. So we're anxious to get March over with and get the numbers on the board, and get them reported out into the market.

With that, Operator, we will terminate the call. And we will see you at the end of the first quarter. Thank you very much.

Thank you for your participation. In today's conference. You may disconnect at this time.