山脈資源 (RRC) 2004 Q1 法說會逐字稿

Welcome to the Range Resources 2004 first-quarter 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. Such statements are subject to risk and uncertainties which could cause actual results to differ materially from those in the forward-looking statement.

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

Thank you, operator. 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 over to John, I'd like to cover a few administrative items. First, we have filed our first-quarter 10-Q with the SEC. It's now available on our homepage of our Web site or you can access it on the SEC's EDGAR system. In addition, we have posted, on our Web site, supplemental financial tables which will guide you in the calculation of non-GAAP measures of cash flow, EBITDA, cash margins and diluted shares outstanding as we discuss on the call today. The tables will also give you the details of our current hedge position by quarter.

Our annual meeting is to be held on Wednesday, May 19th in our offices in Fort Worth. All shareholders should have received their proxy and annual reports by now. We hope you will consider the proposals and the Board recommendations and return your proxy as soon as possible. The easiest way to record your vote is to use the Internet voting access portal shown on the proxy card. If you have any questions concerning any of the proposals, please give us a call.

Now, let me turn the call over to John.

Thanks, Rodney. I will spend a few minutes summarizing the results and then we will turn it over to Roger to hit the specifics on the financial side.

I guess first and foremost is that production rose 15.2 percent year-over-year and 7.7 percent on a sequential basis at 177.4 million cubic foot equivalents per day. That's about -- (technical difficulty) -- million a day higher than our previous guidance. Obviously, we're very pleased with the production.

That being said, we did have some -- you know, the typical freeze-ups in Appalachia and some of the other downside on the compression in terms of pipelines and what not, so we're pretty pleased in terms of production and those numbers. I think those are pretty much at the top end of our peer group.

On the capital spending, we got off to a great start during the first quarter. We are achieving very attractive rates of return on the capital we've spent and we are spending currently. On average, the initial rates of the new wells exceed our original expectations, which is obviously good. Probably more importantly, we are continuing to grow our inventory of drilling projects. Jeff will provide more details, in his operations review, on that.

Turning to the cost side of the business, there was very noticeable progress made during the quarter regarding the reduction in unit costs. Operating costs, G&A costs, interest expense, and D&A expense were all reduced on a new unit-of-production basis. In total, these unit costs fell by 34 cents per Mcfe, so we're very pleased with that. Roger will give more details on that in his financial review.

Lastly, on the acquisition front, our Conger Field acquisition that we completed last December is performing very well. Production is slightly above projections and we are achieving cost synergies faster than anticipated. The recently closed with little Permian Basin purchase for 22 million really fits well with our core operating areas in the -- operations in the area and has plenty of potential that we will begin exploring shortly. Both the Conger acquisition and the Permian transaction fit perfectly with our complementary acquisition strategy, which is really focused on just buying properties in our core areas where we have technical and operating expertise so we can reduce the risk and get the production reserves up.

That being said, we are obviously very pleased with the first-quarter results, but we did have a disappointment or two. Obviously top in the list was the dry hole at West Cameron, were where we had a 25 percent working interest. The well was drilled to roughly 14,000 feet, and the anticipated pay was low and wet, so we are disappointed in that.

From a strategic perspective, we feel like our balanced approach to the exploration and development acquisitions, a couple of our large drilling inventory, is having the exact intended impact that we hoped it would. With the progress made in the first quarter, we are and of schedule to meet our objectives in terms of production reserves and financial goals for the year. Obviously, the key is to stay disciplined and follow up to first quarter with similar or better results for the next three quarters of the year.

I think that's my summary. Why don't I turn over to Roger and let him review the specific financial results? Roger?

Range is off to a good start in 2004. The positive financial impact of higher production, higher prices and lower unit costs are kicking in.

Compared to the first quarter of 2003, the combination of 15 percent higher production and 3 percent higher Mcfe prices resulted in 20 percent higher oil and gas revenues for the first quarter of 2004. The 65.4 million in quarterly oil and gas revenue represents a record high for the Company.

Revenues from transportation and gathering, though, were down approximately 560,000 from the first quarter last year. That was due primarily to transition expenses associated with the Conger Field acquisition. For the rest of the year, I anticipate transportation and gathering net revenue to run about 750 to 850,000 per quarter.

First-quarter 2004 other revenues also included a 1.6 million non-cash expense associated with ineffective hedges and 667,000 of net IPF expenses.

As John mentioned, significant progress is evident in the first quarter of 2004 on the cost side. Though production was up 15 percent for the quarter, direct operating expense increased only 5 percent. On a unit cost-of-production basis, direct operating expense dropped from 69 cents per Mcfe in the first quarter of 2003 to 62 cents per Mcfe in 2004. Production and ad valorem taxes were up a penny due to higher oil and gas prices and exploration expense rose 1.1 million due to 829,000 in higher dry hole expense and 126,000 in higher -- (technical difficulty) -- purchases.

Interest expense and preferred dividends for the quarter totaled 4.9 million, 12 percent lower than the first quarter of 2003. The Company's financing costs per Mcfe declined from 40 cents per Mcfe in the first quarter last year to 30 cents in 2004, representing a 25 percent unit cost reduction.

Depletion, depreciation and amortization expense increased 6 percent for the quarter, versus the 15 percent production increase. The DD&A expense per Mcfe dropped 8 percent from $1.43 in the first quarter of 2003 to $1.31 this quarter. The current $1.31 per Mcfe DD&A rate should hold for the remainder of the year.

General and Administrative expense was down slightly versus the first quarter of last year, and G&A expense on a unit cost basis declined from 32 cents per Mcfe in the first quarter of '03 to 27 cents per Mcfe in the first quarter of this year. I anticipate G&A expense per Mcfe to approximate 29 cents an Mcfe for all of 2004. Please remember, Range does not capitalize any interest or G&A expense.

The deferred compensation plan mark-to-market adjustment was 4.4 million in the first quarter of 2004, compared to 385,000 in the first quarter of 2003. This non-cash expense item is included as an expense for accounting requirements, even though it does not represent current-period cash compensation. Expense relates to Range stock that has been issued over a nine-year period into the deferred compensation plan. Assets in the plan are included on Range's financial statements. As such, the Range stock is accounted for as treasury stock. So, even though the stock was fully expensed at the time of issuance, GAAP requires that the impact of subsequent changes in the stock price be recorded each quarter. So, if the Range stock price goes up, the increase in non-cash expense is recorded and therefore earnings are reduced. If the Range stock price goes down, a reduction to expense is recorded in earnings increase.

I hate to sound like a broken record about this non-cash expense issue with deferred compensation plan, but the costs of misunderstanding here are just very, very high. As you can see from the numbers in the press release that this non-cash expense was roughly the same as the entire G&A expense for the whole Company for the quarter.

The important things to remember on this deferred comp plan issue are, number one, these charges are non-cash; number two, the deferred compensation plan is funded at the time the benefit is earned, there's no unfunded liabilities here; and three, the mark-to-market adjustment covers plan stock contributed from all prior periods; it doesn't represent the current-period contribution.

In comparing earnings quarter-to-quarter, investors should note that the first quarter of 2003 did include a one-time 4.5 million gain representing the cumulative effect of implementing the FAS 133 accounting pronouncement; that's the pronouncement that relates to asset-retirement obligations. Current and deferred income taxes for the first quarter of 2004 were calculated at a 37 percent rate, compared to a 45 percent rate for the first quarter of '03. The 37 percent rate should hold for the remainder of 2004 and of course, all put about 2 percent of the taxes are deferred. The non-cash -- I'm sorry, 2 percent should be deferred taxes.

While the non-cash tax expenses from the deferred compensation plan and hedging effectiveness continue to make quarter-to-quarter earnings comparisons more difficult than they should be, fortunately the news release and the schedules posted on the Range Resources Web site help investors get through those comparisons; I encourage everyone to access those.

EBITDAX for the first quarter of 2004 totaled 46.9 million -- as John mentioned, a record-the Company representing a 23 percent increase over the first quarter of last year. The last 12 months, EBITDAX totaled 172.2 million. Cash flow likewise increased 29 percent increase from last year; it went from 32.9 million to 42.2 million this year. As with EBITDAX, the 42.4 million was a record high. The last 12 months' cash flow was 153.1 million.

Turning over to the balance sheet for a moment, these report no surprises there. Debt is down 9.6 million since the year-end period from the application of excess cash flow, as capital spending was funded by 70 percent of cash flow.

On March 31st of this year, the Range Bank Group unanimously approved raising our note amount of our senior credit facility from 225 million to 375 million and the available borrowing base was increased from 225 million to 240 million. That provides us about 69 million in unused borrowing capacity at the end of the quarter.

Our key credit statistics showed improvement in the quarter. Debt to last twelve months EBITDAX increased from 2.2 times to 2.0 times at March 31st of this year. The first-quarter '04 EBITDAX to interest expense was 9.5 times, while first-quarter 2004 EBITDAX to interest plus preferred dividends was 8.3 times. Those comparable measures last year were around seven times coverage.

The debt to book capitalization ratio remained unchanged from year-end at 57 percent. So, based on current commodity price hedges in place and our production capital spending guidance, we do anticipate that our credit statistics will continue to improve as we go throughout the year.

So in summary, the first quarter of 2004 was a strong quarter with higher production, favorable oil and gas prices that contributed to drive record levels of revenue, EBITDAX and cash flow. While I'm very pleased with the record revenue, cash flow -- I think that's great -- I'm perhaps most pleased with the unit cost reductions that we achieved in this first quarter.

As John mentioned, we had significant progress. Direct operating cost was reduced 7 cents per Mcfe; financing costs were down by 10 cents per Mcfe; G&A expense was down by 5 cents per Mcfe. DD&A, a tangible indicator of reserve replacement and cost performance, was down 12 cents per Mcfe. In total, 34 cents per Mcfe and unit cost reductions are represented by these categories.

So, while I'm pleased about the cost performance, I do see upward pressure on unit costs, going forward. One quarter doesn't make a trade, but you can rest assured we will stay focused on improving these unit costs over time.

John, I will turn it back to you.

Thanks, Roger. Why don't we turn it over now to Jeff and he will talk about our exploration in development activities as well as the status of our capital program. Jeff?

Thanks, John. I will begin by reviewing production. For the first quarter, production averaged 177.4 million cubic feet equivalent per day, a 15.2 percent increase over the first quarter of 2003 and a 7.7 percent increase over the fourth quarter of 2003. The 177.4 million cubic feet equivalent per day is comprised of 99.5 million cubic feet per day, or 56 percent, from the Southwest division, 43 million per day, or 24 percent, from the Gulf Coast division, and 34.9 million per day, or 20 percent, from the Appalachian division. This increase was due to the success of our drilling program and our Conger Field acquisition. Approximately 71 percent of the Company's production was natural gas. I'm very happy with these results. Our first-quarter performance was higher than our plan and guidance and our opening teams did a great job in achieving these results.

Our capital spending for the first quarter of 2004 was approximately $29 million, including acquisitions. For the second quarter, we are projecting drilling-related capital spending to be 33 million. Our drilling-related capital is currently allocated approximately 50 percent to the Southwest division and 25 percent to each of the Gold Coast and Appalachian divisions. To date, we've spent 24.3 million on complementary acquisitions within our core areas.

Turning to drilling results, in the first quarter, Range drilled 78 gross or 48 net wells for an 89 percent success ratio with nine gross wells, or five net were unproductive. As of March 31st, 34 wells had been placed on production, while the remaining 44 wells were in various stages of completion or waiting on a pipeline connection. As of this morning, ten wells are still waiting on pipeline and are anticipated to go on production shortly. As these wells are put on production and we drill new wells, I expect to see continued production growth in 2004. Currently, we have 15 rigs running, 8 in the Southwest, 4 in Appalachia and 3 in the Gulf Coast.

I will now review some of the highlights of each of our divisions.

The Southwest division successfully grew production over 20 percent versus the fourth quarter of 2003. At the West Fuhrman-Mascho unit, Range drilled 18 wells during the first quarter, nearly doubling production to 17.3 million per day, or 13.1 net. As you may recall, West Fuhrman is the shallow oil field producing from the San Andres formation at 4600 feet.

Also in West Texas, our Conger Field acquisition that we completed in the fourth quarter of 2003 is on track. The integration of the two organizations is complete and our team is in place. Actual production from the properties is running slightly ahead of forecasted volumes. The cost savings that were projected for the acquisition are coming in greater than what was projected and we are realizing them ahead of schedule. Currently, we have two rigs drilling in Conger Field and we have drilled the first six wells of the 25-well program planned for 2004. Production at Conger Field is currently about 33 million per day, or roughly 19 percent of the total Company production.

In the Texas Panhandle, Range has drilled the first three wells on a newly acquired 3-D data set that we got at Corson (ph) Ranch last fall. Based on initial test rates, the first two wells are expected to yield in excess of 1.8 million per day net to Range when placed on production, which should be within a week. Range is currently completing a third well in the newly acquired 3-D, which is 3,500 foot Brown Dolomite test. Range currently is drilling one other well in the Texas Panhandle in the Ben Hill (ph) area to test the morrow at 11,000 feet and two other wells in western Oklahoma, one that will test the Red Fork at 12,500 feet and one that will test the Cunningham sand at roughly 9,400 feet. An additional rig is drilling a 2700 foot Tonco (ph) oil well in North Oklahoma. We expect to drill 55 to 60 wells in these areas in 2004.

Moving onto the Gulf Coast division, the Smith #1 well, a successful onshore exploratory well in Orange County, Texas, was placed online in March and is currently producing 7.7 million per day, or 3.8 net. This well, which was drilled to 14,500 feet and counted 55 feet of high-quality pay in the (indiscernible) formation, of which the bottom 30 feet were perforated. Based on what I've seen so far, Range will most likely drill an offset to this well in the third or fourth quarter.

During the quarter, the West Cam 56 number 17 well was a dry hole. The well encountered sands but sands didn't have significant hydrocarbon shows. Range had a 25 percent working interest in the well.

Range recently drilled a successful development well in West Bell at the 30 Field that logged over 100 feet of pay. Total measured depth for the well is 9686 feet. Range has a 49 percent working interest in the well, which should be online by the end of the second quarter.

Range currently has an interest in three wells that are drilling offshore. They are the High Island 119 number 2, in which Range has a 14.4 percent working interest, and the other two wells are the Main Pass 113 number one and West Cam 295 number one, in which Range has a 25 percent and a 14 percent working interest, respectively. Range plans to spud its 17,500 foot East Cam 33 Number Nine Falcon Prospect within forty-five days. The Company has a 25 percent working interest before casing point and a 37.5 percent working interest after casing point in the well. While this is an exploratory well with significant risk, if successful, it could have a very positive impact on both production and reserves.

In Appalachia, the division has drilled 43 wells, which is slightly ahead of schedule. For 2004, the division plans to drill 259 wells, including five wells to test the Trenton Black River formation. In addition, last year, we acquired 22,000 acres to start a pilot coalbed methane play. The initial courting has been successfully completed and we plan to drill two five spud pilot programs consisting of ten wells to further test the concept. Also, we have developed a number of new development plays areas where we've acquired 125,000 gross acres so far in 2004.

Besides driving up production, we did a good job on the cost side. Correct operating expense per Mcfe averaged 62 cents, a 7 cent dropped from the 69 cents incurred last year. The improvements came from reducing unit fuel costs, which is tedious and requires a disciplined approach. Given some of the cost pressures, I am particularly pleased with the reduction in unit operating costs.

I will now briefly discuss our acquisition efforts for 2004. So far, we've spent 24.3 million on two complementary acquisitions, both of which are in the Permian Basin. Combined, we acquired 3.6 million per day and 23.4 Bcfe for a total acquisition cost of $1.04 per Mcfe. We released the data on our latest acquisition last Friday. We acquired a small, private company that owned properties in southeast New Mexico that primarily produced from a Delaware formation at about 6100 feet. There are multiple stack pays in this field from about 6,000 feet to 13,000 feet. As was mentioned in the release, the technical team identified more than 60 recompletion and drilling opportunities on the properties and we will commence work there shortly.

In addition, there is good waterflood potential in the field. This acquisition fits our skill set well and we feel that we will be able to grow the property base over time. The key to our acquisition strategy is that we're purchasing properties in our core areas where we have significant technical and operating expertise. As competitive as acquisitions are today, you have to be very confident in your ability to forecast reserves and you have to quickly exploit the not-producing reserves to achieve attractive returns. As a result, you will see us acquire properties in areas we already operate.

In summary, I'm very pleased with our first-quarter results of 15.2 percent year-over-year growth and a 10 percent reduction in direct operating costs.

Looking forward, 2004 looks encouraging. Production is rising and 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. Let me give you just a couple of examples, both in the Southwest division. We are currently in discussion with a major company regarding their acreage in the Texas Panhandle, and we feel confident that we will be able to expand our acreage position, both in Corson (ph) Ranch and the Ben Hill (ph) areas through an innovative form-in (ph) arrangement.

We've also built a strong acreage position in North Oklahoma, where we are initiating a 2,700 foot Tonco in-field (ph) program. If successful, it could lead to drilling over 100 wells. I believe the key to the drilling inventory is that we have a balanced portfolio of projects ranging from a large inventory of low-risk, good, solid economic projects that will continue to drive our production growth to higher risk, higher return projects that can have significant impact on the Company. In total, we've more than 3,700 gross wells in inventory that represent exposure to approximately 900 Bcfe of net reserves.

In summary, I'm very 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. Before we turn -- I'll turn the thoughts -- for the remainder here, I'll just touch on a couple of items. First, at IPF, we continue to make progress and (indiscernible) in the portfolio. We used the cash generated at IPF to help fund our E&P program. During the first quarter, IPF receivable balance was at least 1.6 million, or 12 percent. The current receivable balance is $11 million. We expect this to continue to decline out in 2004 as the portfolio just produces out -- so nothing particularly interesting there.

On the hedging front, since year end, the year-end conference call, we've added a few oil and gas collars. As you recall, in mid '03, we modified our hedging strategy to begin to place a greater emphasis on costless collars versus straight swamps, given our improved financial position and we just thought it was a good idea to go the collar out. We think this protects our downside, relatively allows us to retain a significant portion of the upside.

When you're looking at the last three quarters of '04, 16 percent of our hedges are collars, increasing to 41 percent in '05 and then 84 percent in '06. So you can see how those are up -- are moving into the mix there.

Looking to the remainder of the year, we are pretty excited. The operating performance we think will continue to be very strong. We're looking for second-quarter production to come in at roughly 179 to 180 million a day. This represents a 13 to 14 percent increase year-over-year. This is roughly 4 million a day higher than our original business plan, so we're pretty pleased.

We are in the process of selling some minor-value properties, which has been factored into the 179 to 180 per day number that I just gave you. We think it's an excellent time to sell marginal assets, as it will help to continue to lower our unit costs. The offset (indiscernible) we be that we will lose some production, obviously, as we sell these minor assets.

On the revenue side, we expect it to continue to rise in the second, third and fourth quarters, basically through higher production and continually stronger prices.

On the expense side, the expenses are going to rise as production rises but obviously, the key is to continue to focus on the unit cost side, which Roger spoke about and we are really pleased about.

When you look at EBITDAX, cash flow and earnings, we expected them to rise second, third and fourth quarters -- a good trend there. I think, obviously, the key is going to be, you know, execute our business plan, stay focused and stay disciplined. Everything we can see for '04 looks like it's going to be a great year and hopefully, if everything -- commodities prices stay where they are, we are going to clearly have record results, the best year we've ever had in our company's history. Again, I think the key is just going to be focus, execution and staying disciplined. Nothing magical about that.

Operator, before we turn it open to questions, Charlie, why don't you give us your thoughts on the quarter?

Thanks, John. There's not much to add to that. We've obviously gotten off to a great start in 2004.

I would like to say, though, that during the past year, we've added a lot of key technical personnel and the operational results have improved pretty clearly. The technical team continues to have success in generating quality drilling prospects and in identifying and closing attractive acquisition opportunities. They are clearly on the right track to generate profitable growth. (inaudible) the word 'profitable', because that's our aim.

Finally, John and I are both continue to emphasize (sic) that we must maintain strong discipline -- (technical difficulty) -- in our approach to venture analysis, taking into account the potential downside implicit in each project. This is particularly important in this time of high commodity prices, and we certainly do not want to make any big mistakes with being too optimistic. Thank you very much. John, back to you.

Thanks, Charlie. Operator, why don't we turn the call over to questions?

Thank you. (OPERATOR INSTRUCTIONS). Rehan Rashid with Friedman, Billings, Ramsey.

Good afternoon, John. A question on the Permian assets that were acquired -- about 23.4 Bcf, 3.6 million cubic feet a day, that's roughly -- call it about an 18 year reserve life. Just in terms of giving us some thoughts as far as out into call it later '04 and '05, any particular guestimates in terms of how you would want to grow this production rate? Then I have got several other questions.

Well, when you look at -- and basically what that is it is a little $22.5 million deal we did plus 1.8 million of some -- we bought out a couple of small interest owners. the 1.8 million is really -- we bought out a couple of small interest owners in the Conger Field that came along with the acquisition. So let's exclude the 1.8 million, because that's just a pure add-on.

If you look at the 22.5 million on the whole Permian deal that we did, that Jeff spoke about, current production is about 3.3 million a day. It's 75 percent oil. We are projecting to spend about $1.5 million on the property between now and the end of the year. That's basically on a series of recompletions that we've identified. Later in the year, we're going to drill a couple of the drilling locations but they really won't have much impact on the production volumes for '04, really for '05. But to give you an idea, we hope to take the production from about 3.3 million a day from when we bought it to about 4.7 million a day by December, just through the recompletions. So, we're pretty pleased with that. It's really an interesting property. As Jeff said, this is multiple pay area of anywhere from 6000 feet all the way to 13. We've identified a large number of recompletions to do; we've got some relatively low-risk development opportunities drilling. We've got some deeper gas potential, and we also -- there's the potential later on to water-flood the thing. It's a neat property.

I think one of the reasons we were successful in buying it is that, again, it's a relatively small asset -- 20 million -- but in terms of being evaluated, it did take a lot of different technical abilities. You needed to understand -- you need to have a really good understanding of the geology; you had to have a really good understanding of operations engineering-wise in terms of doing the recompletions and what not. Also, I think importantly, you had to really understand the waterflood side of the business, which we've been very successful out at Furman and some of the other things. So again, I think it took a -- it was really a team approach. We're very pleased with it and we look at it as a nice tuck-in acquisition to add to the portfolio.

Okay. In your pyramid, call it, of exploration projects, you mentioned East Texas (inaudible) and Mississippi Northwest. Tell us a bit more about these two? East Texas Woodbine -- I remember you guys are drilling something there. Could you please update us on that?

In East Texas on the Woodbine side, we are conducting drilling operations currently. I hate to do this to you but we've got to keep it confidential. I just shouldn't say any more; we just have to keep it confidential.

On the North Lake play over in Mississippi, Jeff, why don't you take that what?

We hope to spud a well by the end of the second quarter. Again, I can't say a lot. It's early on -- because of leasing and other things. But like we talked about, it's a good project; it's at the top of our pyramid. It has a big upside, big repeatability if it works and we are excited about starting our well in the second quarter. As time goes on, obviously we will be able to talk more about both the (indiscernible) and the (indiscernible) Woodbine.

In the -- a little bit more specific on the North (indiscernible), those wells are going to be below 20,000 feet. You're looking at a TD of about 21,000 feet. It's an exciting concept, very good quality technical work and it will really expose the Company to some nice upside.

That pretty deep. How expensive is this?

The expense in drilling in that part of the world isn't bad. You're looking at normal pressures, which is very different, like say from a deep well in the midcontinent or even in East Texas. You're looking at a very cool formation temperatures (sic). So to that depth, dry hole costs really aren't that bad. On a 100 percent basis, though, you're in the order of probably $2.5 million, $3 million plus or minus, of which we will have 25 percent working interest.

Okay. One last question before I let some other people ask -- the (indiscernible) discovery, two things -- one, how has the pressure held? Second, you are in the process of acquiring some acreage around it. Are you comfortable with what you have? Any thoughts on the reserve potential from there?

Just to say, at this point, in terms of acreage, we've acquired all the acreage that we want to acquire, so we have the prospect locked up. It's early on; the well is online. It's producing at 7.7 million per day gross and it's early but it looks like it's going to be a strong well. We will just have to watch it with time. Like I said earlier, we will very likely drill an offset to it sometime in the third quarter.

The pressure is holding around the 9,000 level or dropped a lot, dropped a little?

No, the pressure is still high. Like any new well, when you put it on, pressures in the oil and gas business -- being a petroleum engineer by training and done it for 25 years, they are never flat but, yes, the pressure has hung in there well; it's still producing at that rate at a very high pressure.

Ron Mills with Johnson Rice.

Good afternoon. A question on the Appalachian basin -- obviously, the development up there is proceeding pretty well. You mentioned the five wells in the Trenton Black River. Give us some sort of sense as to timing of those wells. Are you waiting on additional results from what Talisman and EOG are doing up there and/or plans to use horizontal drilling in those wells?

All of our Trenton activity is scheduled for the second half of the year. It's really just rig availability really more than anything else and then just trying to make sure all of the partners are on board and we've got the drill site. On a couple of prospects, we are still pinpointing the drill site. We know we want to drill; it's just a question of exactly where we want to put it. Most of the activity will be in the second half of the year.

Now, I think everybody is focused on the Talisman success and I think that's obviously been very encouraging but it's a huge play. I mean, this play covers 300 miles north and south and 100 miles east and west, so it's a huge area. Aerial extent, it's probably the biggest. Obviously, Appalachian Basin is probably the biggest basin in the United States, onshore. Where we are going to be drilling is not particularly close, on a relative basis, to where the Talisman is. We've got one prospect I guess about 10 miles to the south; I guess that's reasonably close. We've got some other stuff to the north of that. Then we also have -- you know, for example, shallow Black River test over in Ohio and we're looking at some things in West Virginia as well. But none of ours -- and I want to make sure I'm clear -- none of ours is "directly offsetting" into Talisman stuff. They have got most of that acreage tied up and what not.

But that being said, it's certainly exciting and we're very active. We've got some acreage going on. We will get our wells drilled in the second half of the year and we will see how we do.

Okay. With the recent Permian acquisition, the one in New Mexico at least, do you have any current activities in and around that area, or is this just a step out from one of your current producing properties?

Well, it's not a direct step-out but we do operate some things in New Mexico. This is a lot like the Fuhrman property, which is just on the Texas side of New Mexico, so they are a hop, skip and a jump away from each other. The same team is going to be exploring both the properties, same technical staff. You know, we have some really good jobs you experience in the area and we feel very comfortable with it.

It's an interesting area. We feel like that, in the particular we are in, we're going to be able to continue to expand in there a lot like we did in Conger -- continue to expand, cut costs, drive production up and just be real confident in our ability to execute. Obviously, from that, we will be able to lower our risk and hopefully make -- continue to make some what we call tuck-in acquisitions.

Is it similar to Conger in terms of very light on the activity level before you bought it? Is that what has created some of these 60 development and recompletion opportunities?

The company that owned it before had done some of this, but they had limited capital; this wasn't their primary operating area, so I mean, it just wasn't something that was particularly important to that. For our team that works the area, obviously it is very important. We've already got several AFEs; the day we closed it, we sent out several AFEs to the partners. We own half interest, so there's partners in it that we have to get AFEs to start the activities. But AFEs went out the day that we closed. Those AFEs are circulating. We're going to be recompleting and drilling within 30 days. So you know, it's just -- we just look at it as kind of a fundamental acquisition.

The interesting -- again, there is just a lot of variety. There's a lot of recompletions, some offset drilling to the shallow formations, some deeper drilling to what looks like some gas horizons, and then obviously the water-flow potential, so it's an interesting asset. We think we are particularly well-suited technically to it and it would fit in our area, so we were able to buy it.

Okay, and then one question on Conger -- with that field producing about 33 million a day, I think, when you bought the property in December, combined with your properties, it was producing about 25 or 26 million a day. Is that about right? So, is that incremental production just really from the drilling of those six first wells?

I think, back then, it was probably more in the 28, 29 range, so (indiscernible) about 4 million a day, which is, again, right on target. We just started -- we just now started, as Jeff said, started drilling in there. We've got our first four, five, six wells and I think we only have one or two on production, so you're going to start seeing the production move up in there later towards the second and third quarter as we get the wells on and what not. But again, everything looks good and we just got some test rates off one well a day that looks really strong. It had some oil production up in the Cisco and had good pressure at about 1300 pounds, which tells you it's not depleted, so that's encouraging. It's just nothing to jump up and down about but it's right in the middle of the fairway, exactly what we expected.

Rodney, one clean-up on the models-- the price differential, it seemed a little bit wider in the first quarter than it has been. Is that a function of bringing in some of the properties you added in December, or a function of volatility in the gas markets? What should we expect, going forward?

Well, I think you've got slightly both of those factors going in. You also have, with the Conger, with the more NGLs in the mix than we had previously, we will have to take a look at all of those differentials. But the differentials in the first quarter was about forty-something cents if you measure NYMEX on a daily prompt average. If that's how you are measuring your differentials, that is 3 or 4 cents slightly higher than the third quarter, fourth quarter of last year, but I don't think you use that differential, do you, Ron? I will be happy to work with any of the analysts on a specific basis, because I know you all use different measuring tools.

But based on -- this is one that we can all get our arms around -- based on the NYMEX, the daily prompts contract, then it's about 45 cents pre-hedge, right?

That's correct.

How about on the oil side? Has that been --?

On the oil side, it runs about $2.50 to $3.

NGLs are kind of all over the board.

NGLs will be somewhat over the board on it. Remember, we do have some hedges on the NGLs, but NGLs generally will 65 to 70 percent of your oil price historically. But right now, you know, your natural gasoline prices and those liquids has a dramatic effect on what the overall NGL prices are.

Andrew O'Connor (ph) with Strong (ph) Capital.

Good afternoon John, gentlemen. I wanted to know -- your production growth guidance of 10 to 15 percent in 2004, relative to last year, 2003, what does this incorporate for coalbed methane?

Essentially zero.

Okay. Then, John, can you elaborate a little bit more then on your development schedule for coalbed methane?

Well, kind of Coalbed Methane 101 for Appalachia -- obviously, Appalachia has had a lot of coal because we've all seen the movies where all of the coal guys are running around in Appalachia, and there's been a lot of gas produced from coals. Obviously, with all the success in the western side of the U.S., several years ago, it got us -- we started tinkering around and put a team together, did a lot of research over the last couple of years, leased some acreage, did some R&D. We kind of got two project areas we are working in.

The coals are different in Appalachia than they are in the western side of the United States. They are different in terms of, you know, from a lot of different perspectives, so none of this is uniform. It's just like oil and gas; not all coal is the same, so you have got to be careful. But we're putting our toe in the water. We've got -- we did some corine (ph) last year, and then gas saturations were right in the middle of the fairway of what we hoped. Now, we are doing kind of the next stage, which is doing the five spot, the two five-spot programs that Jeff talked about.

I like the progress that the team -- we've got about 22,000 acres leased; we've got several new project areas we are focused on. You know, it's not going to be material in terms of production for '04, but I think it could start having a reasonable, decent impact in '05.

Okay, so it's still early days. Is it too early to suggest anything for '05 then?

Yes. I mean, I think we will have some but to try to give you a number on that I think would be way premature.

Okay. Thanks very much.

Our final question comes from Jack Aydin of KeyBanc Capital Markets.

I have a couple of questions. One, on the coalbed methane, going back over there, Jeff, you mentioned 125,000 acres leased. Are those in the coalbed methane area or somewhere else?

Yes, there's two numbers there. Let me clarify them. The 22,000 acres is what we currently have for coalbed methane and like John said, we're studying and looking at other areas. The 125,000 was for other new, shallow development areas that we are working on. We've done some drilling in those and there's been some encouraging results so far, but that's different than the coalbed methane.

It's not coalbed methane?

That's correct.

Second, going back to the deferred taxes, let me get it straight. You said 2 percent deferred of the 37 percent tax rate, or 37 percent of the total taxes? Could you clarify it, please?

Thank you, Jack. It's all deferred; only 2 percent should be current.

All deferred, 2 percent current?

Yes, sir.

Okay, next question -- how many shares do you have in the (indiscernible) trust?

Roughly 1.6 million.

Okay. Who has them? Could we ask that question?

There is about -- there's somewhere -- let's call it 30 participants in the deferred compensation plan that own the 1.6 including shares. The way they get in there is that, from starting in 1995 roughly, based on my recommendation to the Board of Directors, as we were growing the Company, I felt very, very strongly that we wanted to align the interest of the shareholders and obviously the officers in a meaningful way. So, what we do is we require each of the officers to take -- and some of the key employees to take a fairly significant portion of their year-end bonus -- to the extent that they are paid -- in unregistered common stock of the Company, which has vesting and it goes into the deferred comp plan. So, that is how they get in there.

The hard thing and the difficult thing is, now with this new accounting rule that makes you do this -- what I think is truly strange accounting, you know the question is, should we continue that or should we let accounting dictate? Heretofore, the compensation committee has gone the route that we ought to stick to our guns and do what we think is in the best interest as opposed to doing -- you know, just to make it fit GAAP better. But that's it.

Just to make sure everybody understands, the shares are issued at market, so there is no discount and they are unregistered and they are stuck in the deferred comp plan.

John, let me go back to the press release. On Page Five, talking about the balance sheet, I'm a little bit confused. Over there, you've got two or three items I'd like to get clarification on.

Sure.

On the liability side, you've got current unrealized hedge loss of 76 million; you've got up in the asset side a gain of 10 million. Then go in the deferred taxes; under that, you've got another hedged loss of 20 million. Could you explain what all of those are about, or somebody could explain it?

The net -- when you take the interest rate hedges and the commodity hedges, the net interest rate loss at March 31st is what, Roger, 93, 96 million?

(technical difficulty) -- (inaudible) I don't have it memorized.

It's right at that, Jack; it's 93, 94 million. That's up from year-end just because the prices have moved up.

That's related to hedges?

Yes, that's your commodity and your interest rate hedges, Jack. For the next 12 months, they are classified as current. If they are over the next twelve months, then they would begin down in the long-term pieces. If they are gains, they're shown as gains; if they are losses, they are shown as losses. So it could theoretically break up into four places on your balance sheet.

Okay, thanks.

Yes, they don't let you net than one or the other, which is a bit strange to me but again, it's just -- I'm just following the rules.

A final question -- on Conger, John, is there some opportunity to add more, to acquire more?

Yes, there is, Jack. There's a number of very large companies that own interest in and around the area, and we are having discussions; we are chatting. We'd love to buy it. It's just a question of when and if they are ready to go. But we think, you know, there's nothing imminent that we see but, over time, we think we will be able to continue to expand in the area.

Interestingly enough, we've actually bought some acreage in the area and we've got kind of some new plays in the area that we are working on as well, so it's just not everything old and undrilled; there is a few things (sic) in there that we stepped out and we are looking at. Whether it's successful or not, we don't know yet. So, we've got both that and we're having discussions with all of the players that when and if they are ready to sell, we believe we are the buyer of choice because we feel like, by far, we are the lowest-cost operator in the area.

Thanks.

Thank you, Jack.

This concludes today's question-and-answer session. I would now like to turn the conference over to Mr. Pinkerton for his closing remarks.

Thank you, operator. Well, we're off to a great start for the first quarter of '04. Our drilling is right on target; we are pretty pleased with both the Conger acquisition we did at the end of last year and the smaller deal that we just picked up a week or so ago.

The interesting thing, I think, is that we do really have, over the next let's say 90 to 120 days, some really key wells that we're drilling in a number of areas. The High Island well that Jeff spoke about is an important well; the East Cameron well is a very important well in terms of its impact -- its potential impact on our company and some of the other things we're doing in East Texas and Mississippi and the other things. So, we couldn't be in a better position, from our perspective, at March 31st or from that perspective. So, we are very pleased; we're very optimistic. I think the key in this price environment, as Charlie mentioned, is just to stay very, very disciplined and that's what we will do.

So, thank you all very much for joining us. If there's any other questions, feel free to call Rodney directly and he will try to answer them for you. Thank you very much.

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