SilverBow Resources Inc (SBOW) 2002 Q1 法說會逐字稿

Good morning, Ladies and Gentlemen. Welcome to your Swift Energy conference call. All parties are on a listen-only mode. It is now my pleasure to turn the call over to Bruce Vincent. Sir, you may begin.

Thank you. Welcome everybody. We are looking forward to sharing our updated information with you this morning. I'm going to turn the call over to Scott Espenshade, our Director of Investor Relations to introduce the call. Scott?

Thank you, Bruce. Welcome to everybody. We will cover the first quarter results for 2002. Terry Swift, President and CEO, will give you an overview, then Alton Heckaman, our Senior Vice President and CFO will give us a review of the financial results for the first quarter. Joe D'Amico, Executive Vice President and COO, will review the domestic operations and then Bruce Vincent, Executive Vice President of Corporate Development will update our New Zealand developments and then Terry Swift will conclude before we open it up to questions. Our presentation will contain forward-looking statement based on our current assumptions, estimates and projections about us and our industry. These statements involve risk and uncertainties detailed in our SEC reports and our actual results could differ materially. We expect our presentation to take approximately 20 to 25 minutes and allow additional time for questions. However, we recognize that these calls are even more important in terms of full disclosure and we will be willing to field any questions for as long as necessary. Terry?

Thank you, Scott. Once again, we welcome you to the first quarter 2002 conference call here. We want to start out by telling you that we are very pleased with the results that we are getting here in this first quarter, particularly in terms of the activity going forward, the way that we have been able to position ourselves. As you are aware, we have been in a very volatile commodity environment. We certainly believe that the volatility will remain. In spite of the fact that oil closed significantly up recently, I think yesterday's close was over $27 and gas is approaching $4. Yesterday's close was right at $3.79. In spite of those movements, we are going to remain very financially disciplined through this year. Our strategy is in place. We are implementing that strategy. Our purpose is to stay within our cash flow as the cash flow appears month to month. In particular, this quarter, we have made significant progress toward our goals. The past 90 days and the last 90 days of last year is when we started re-grouping as we saw commodity prices fall significantly. We have made significant progress. We have established additional core areas. We are going to speak to that in detail in this conference call. A lot of the information is in the press release. That's been one of our goals. We continue forward on that to have additional core-producing assets. We are diversifying our reserve base and diversifying our production base. At the same time, we remain committed to that. We have made significant progress toward flattening our decline profile of our production, stabilizing our production profile. Going forward, I think, it's material that we point to what we are doing in Lake Washington in particular where we have low decline oil production. And in particular, in New Zealand as we are bringing on production with our Rimu production station and our [INAUDIBLE] assets also, a very low decline profile type of properties. Significant progress made there. Obviously, strengthening the balance sheet was another high priority. We are proud of our progress there, particularly the activity in April. And as you would expect us to do, we have been focused on controlling our costs. We have made significant progress there. To get specific here for a moment. Lake Washington, we are going to go into detail here today and give you some of the results, some of the particulars in the Press Release. Joe D'Amico will cover that in detail. We have had significant progress in New Zealand. We got a mining license in the first quarter. We closed our [INAUDIBLE] and acquisition in the quarter. We obtained additional interest from [INAUDIBLE] in our Rimu permit area in our first quarter. We initiated aggressive cost reduction. Again, Joe D'Amico, our Chief Operating Officer will talk a little bit about that. On the New Zealand activity, Bruce Vincent will give you detail there. And as I noted, we completed a significant bond and equity offering this April, that has significantly strengthened our balance sheet, positioned us fortunes going forward, positioned us to go through the volatility that we know is still out there, both on the high side and low side. Our production is up significantly, and we have got a plan in place to continue to move production up. 2002 looks like a great year to us. We certainly started out very well. Our Cap-X for the year is going to be about $80 million. That does not include the [INAUDIBLE] acquisition in the first quarter which was approximately $54 million. We will maintain a tandem approach in growing the reserve base. We have been very successful at this. Our management team has managed through more than one cycle. We used both drilling and acquisitions to do that. We are going to stay focused on that. Lake Washington, as I mentioned, this year, we got significant activity. We have identified over 29 locations for this year. We have got an active program under way right now. Joe, will go into how we are implementing that program. And again, in New Zealand, we have significant activity in New Zealand. We have brought on the Rimu production station and we also have [INAUDIBLE] Sands, the shallow sands over in the [INAUDIBLE] area that we are testing, bringing forward we hope, certainly, we hope into a more significant production mode by year-end. And Bruce Vincent will go into detail with that. At this time however, I would like to turn it over to our Chief Financial Officer, Alton Heckaman and he can go through our actual financial performance.

Thanks Terry and good morning everyone. I will quickly supplement some extensive financial information that we have included in the press release. As Terry said, we are pleased with the 19% increase posted year-to-year production volumes to 12.3 Bcfe for the '02 quarter. Closing of the Tawn acquisition in late January, which Bruce will expand on, was key to such increase. We are pleased with the production increase, pricing for the quarter was quite a different story. After a brutal pricing environment in the fourth quarter of '01, we began the year with low prices and watched as [INAUDIBLE] natural gas dropped below $2 and crude oil went well below $20. Cash prices in the field were actually even worse. Both prices did recover by quarter end. And as Terry mentioned, they have gone well above the $3 level and $25 level, respectively where they both currently remain. But not in time to help much for the first quarter. As a result, [INAUDIBLE] 1st quarter price per mcf equivalent dropped 64% of $6.07 in '01 to $2.17 in '02. INAUDIBLE] gas sale revenue, that slid 58% from the record-setting 2001 quarter. A bright financial spot in the 2002 first quarter was a receipt in late March of $7.5 million in cash related to the company's interest in the Sandburg Russian project and which we maintained and earned interest after basically abandoning in 1998. After deducting certain legal and other related costs, the 7.3 million net proceeds is reflected as a non-recurring gain on the sale for the quarter. Factoring in the increased cost, which we experienced sector-wide, Swift realized over $3 million in net income for the quarter, which is 12 cents, both basic and diluted compared with over 22 million in the record-setting '01 quarter. With the improved commodity prices at quarter end and a return to the high yield market to an almost pre-9/11 normalcy. The company seized the opportunity, as Terry mentioned, to improve it's overall liquidity with the issuance of some 10-year bonds which we priced at 9 and three-eighths. Originally we filed it at $150 million but the offering was upsized to 200 million, based on demand and was successfully executed. As a compliment to this debt deal, a tandem equity issuance was accomplished mid-offering, but two was upsized from 1.5 million shares to 1.725 million, again, based on demand. Combined these 2 offerings netted the company approximately $225 million, which was used to virtually pay off our bank line which had previously been used to fund the recent New Zealand acquisitions and other strategic Cap-X dating back to 2001. The bank line as we said in the release, was re-affirmed at $275 million prior to the completion of these debt and equity deals, but has been subsequently been reduced to $195 million, still giving us plenty of dry powder for any strategic opportunities. I should note here, and Terry alluded to in his intro, we are keenly focused on two clear and concise objectives. Number one, reducing our per unit cost which clearly got out of line sector-wide in the 2001 pricing [INAUDIBLE] And number two, living within our internally-generated cash flows as to drilling and development activities, using further debt equity if, and only if, very strategic growth opportunities become available. Recent pricing improvement allowed us at quarter's end, to layer in costless collar hedges for the remainder of 2002 while still maintaining 60% of the upside. Recovered 45 thousand barrels per month represents 20% of our current company-wide crude production while the 280,000 MNBTU covers almost 15% of our current domestic gas production. When you couple that with the New Zealand long-term fixed gas pricing gives us significant protection globally for our natural gas. Further price improvements will likely allow us to layer in more protection in this volatile pricing environment. We feel this method of hedging is very much in line with our historical strategy of protecting the downside without giving up the upside opportunity. Per unit disclosures on page six of the release, along with significant guidance on page seven, clearly reflects our concerted effort to increase production and reduce costs, both of which we have the ultimate control over. We are very committed to this. Cap-X for the first quarter was $83 million, about $60 million of which was related to New Zealand, primarily for the Tawn and [INAUDIBLE] acquisitions and completion of the RPS facility. We have clearly slowed down our activity to match our cash flow and we are high grading our projects going forward. Again, Joe and Bruce will elaborate more on this shortly. Finally, we've included a summary balance sheet as of quarter end. $725 million balance sheet is as of March 31 and prior to the previous debt and equity offerings. After giving effect to these offerings the company finds itself with a balance sheet and liquidity to successfully implement it's revitalized strategic plans both domestically and in New Zealand. I would like to wrap up my part with a thank you to the bank groups, investment bankers and investors and others for their continued support and show of confidence especially demonstrated in the past few volatile months. I will turn it over to Joe D'Amico for an overview of the domestic operations.

Thank you, Al. Good morning. Production has held up extremely well on the reduced Cap-X budget. INAUDIBLE] Lake Washington is becoming a solid and significant part of our production base. We have been concentrating on field work early in the year and believe this will deliver dividends in the full year. I would like to focus my comments on first quarter results, lease operating expense reductions in our Lake Washington field. First, production. Production for the first quarter was 12.29 Bcf equivalent, an increase of 19% from a 10 point Bcf equivalent during the same quarter last year and up nearly 7% from the 11.5 Bcf equivalent during the fourth quarter of 2001. To give you a breakdown by areas and by production, repeat again the corporate production was 12.29 Bcf equivalent. On the domestic front, the natural gas was 4.68 Bcf, oil and condensate was 833,000 barrels for an oil and natural gas equivalent of 9.68 Bcf equivalent. Turning to New Zealand, natural gas was 1.95 Bcf. The oil and condensate was 110,000 barrels for an oil and natural gas equivalent of 2.61 Bcf equivalent. Production expectations for the second quarter of 2002, it has been set at 12 to 13 Bcf equivalent. 2002 productions goals for the year is still set at between 49 and 54 Bcf equivalent. This is a 10 to 20% growth level, which we feel few companies will meet this year with greatly reduced capital expenditures. Domestic declines from the fourth quarter to the first quarter is 16%. Although this seems high, it is due to flush production in the fourth quarter from drilling, which was mainly in the Masters Creek area. Domestic production has been performing better than anticipated. The underlying base decline rate is about 20% and with the Lake Washington activity we are moving to a 15% level. Looking at second quarter and forward domestic production declines should moderate as the year goes forward. We are flattening the underlying decline curve of production this year and we show a more balanced production output to match the price environment. Turning to cost reduction, we have developed a plan to reduce controllable lease operating expense by about a third for the year or $8 million. We have been working on our chemical costs which makes up about 25% of our total cost and looking at ways to improve the effectiveness of the chemicals we use. We have already have looked at all of our compressors. We have reconfigured and optimized the compressors and figured out ways to reduce back pressure which will save a considerable amount of money. In our Toledo Bend area, we have interest in two plants, the Brooklyn Plant and Masters Creek Plant. The Masters Creek is going to be shut down and we're piping all the gas from Masters Creek over to Brooklyn. And then another thing that we are doing, we are selling some of our high LOE properties. We are also looking at repricing other field services. Turning to Lake Washington, we drilled three wells in the first quarter and drilled three wells in April. Out of these six wells, five are development wells, two are completed in producing and two are waiting on completion. One of the two has over 170 feet of net pay and the other has 225 feet of net pay. The one development well had 25 feet of net pay, which was deemed non-commercial. We drilled one expiration well which had mechanical problems and we will drill this at a later date. Our goal is to to double production again by year-end. From the time we made the acquisition last year, we have doubled production. And as I said, I'll repeat our goal is to double it again by year-end. During the second quarter, our focus is to continue our development well program in Lake Washington and continue to work on reducing the lease operating expenses. I will now turn it over to Bruce Vincent to talk about the international operations.

Thanks, Joe. This year has already proved to be an exciting time for us in New Zealand. But more importantly we believe that 2002 will be a defining year for our operations there. To begin with, we have accomplished several things already this year. And let me review those for you. The Tawn acquisition was closed in January, bringing with it three strategic benefits to the company. TO begin with, it added approximately 65 billion cubic fet equivalent of proved, producing reserves. It brought current production expected to average 32 to 35 million cubic feet equivalent per day and can go higher depending upon demand fluctuation and clearly provides critical mass for our New Zealand operations. But in addition, it brings significant excess processing capacity for both oil and natural gas that we believe we can take advantage of as we increase productive capacity out of [INAUDIBLE] or the Tawn area or in central Taranaki. And additionally, it comes with pipeline infrastructure, both an oil pipeline and a gas pipeline that takes our product all the way to its sales points. These assets have been performing above our initial expectations. We believe that we can identify additional upside to further enhance their value. During the first quarter, the average production was 40 million cubic feet equivalent per day. However, a lot of that was a result of increased demand in New Zealand. And that demand has dropped off here, and certainly in April. The average April production was about 30 million cubic feet equivalence a day. But that did include down time for preventive maintenance that's scheduled twice a year. We expect it to go forward to produce another 32 to 35 million cubic feet equivalent per day. Additionally, we completed the acquisition of the Antram interest. This allowed us to acquire an additional 5% of renewed [INAUDIBLE] permit by taking out a minority partner. And we were able to do it largely with stock by issuing 220,000 shares of common. We were awarded the mining license in Rimu which allows us to really begin the development production of those wells in that area around the original discovery. An important to that, we have completed and are bringing on stream the Rimu production station that will allow for the processing of the hydrocarbons. The commissioning is nearly complete. Oil production has been begun. In fact, first sales were a couple of weeks ago. Current volumes are about 500 to 700 barrels a day and about one and a half to two million cubic feet a day out of just the Rimu-A1 well as we move it into full production and commission the rest of the facilities. Natural gas sales are expected to begin later this month as will liquid sales. We're moving through the commissioning of those parts of the plant as we speak. And during the rest of the year, we will be ramping up capacity. And more important than what we have accomplished to date we think are the plans that we have for the year. In Tawn, we expect to maintain steady production volumes. In fact, we expect that production to be relatively flat for the next five years. But important to any new asset that we acquire, it now gives us the opportunity to go through a lot of data that we didn't have at our disposal to evaluate upside as well as review options for increasing the current production levels. Down at Rimu, we will be ramping up production levels through the Rimu production station. We will be evaluating the productivity of the upper [INAUDIBLE] Sands with hydraulic fracture stimulations on one or more wells. In particular, we plan to conduct the first large hydraulic fracture stimulation on the Rimu A2A well, probably to take place late in June. We will also be increasing the productive capacity and extending the known reservoir through additional drilling. In particular, the next well plan is the Rimu A4 well that will take place in June or July of this year. We will also be evaluating the productive capacity during the year of the shallow Manataki Sand by utilizing sand control measures, artificial lift and other modern technologies. Equally important, the Kalri Sands, discovered in the [INAUDIBLE] A1 well bore, we will be evaluating the productivity of those sands through fracture stimulation of one or more lobes in that thick section encountered in the [INAUDIBLE] A1 well. This will be expected to take place in July or August. We will also be evaluating the bright spot seismic anomaly that is located in the upper level of this sand that was not encountered in that particular well bore by drilling the [INAUDIBLE] A4 well, anticipated to take place in the third and fourth quarter of this year. In addition to all of those, we will further evaluate our Mati and Talo prospects, processing and evaluating new seismic data that was shot in February, preparing to drill those in early 2003. The government also just -- at a recent [INAUDIBLE] offering on April 30th, and we did submit bids for several permits areas in this offering and we hope to be successful on one or more of those opportunities to provide ongoing future projects for the company there. In summary, we see 2002 as a very defining year for our New Zealand operations. We have accomplished quite a bit in a few short months. But we are looking forward to seeing the remaining part of the year unfold. Derek?

Thank you, Bruce. Once again, I would like to focus just for a minute as we close up our formal presentation on the issue of strategy and goals and the particular management team that we have assembled here that's implementing these strategic objectives or reaching these strategic objectives. We clearly are focused on adding core areas to the company. In doing that, we are focused in making sure that we diversify. I think it's very obvious that domestically, the success that we have had at Lake Washington, the acquisition that we had at Lake Washington where we followed it with drilling. We followed it with a significant geologic and production drilling effort, is bearing fruit for the company. This is a domestic operation. It's focused on adding a significant core area. Just to re-emphasize what Joe has informed you of and what's in our press release. We believe that this area, domestically, will grow to be one of our largest-producing assets in the years to come. We have done significant geologic work. That work continues as we drill more wells, as we evaluate seismic. As we do those things that the company has historically done with every acquisition. We will add value there, we already have. In particular, we have identified, and I will be very cautious to make sure that everyone understands the nature of this number, we have identified over 40 million barrels of probable reserves that are not booked, and they would not be booked, except to the extent that we continue to have success. But that is a very important inventory item for us. We believe that this very positive event for the company in terms of having an identified area of growth. As Joe noted, we are having significant success there. We are validating all the work there. We have over 29 locations identified. We have a conservative financial plan, though, going forward. Controlling the drilling costs and getting the wells drilled efficiently is critical. As Joe noted, we got a fairly aggressive plan going forward for this year. But within that plan, we are working closer with the vendors than we have ever worked and we're getting cost-savings that last year we wouldn't even envisioned we could get. So we are very excited about that going forward. As Bruce noted, also in New Zealand, we are adding core assets that are good, strong, producing assets that help diversify our reserve base and flatten our production profile. Just in the same way that Lake Washington is helping to flatten the production profile, Lake Washington wells come in with a very low decline rate, so does the New Zealand asset activity flatten our production profile. As Bruce noted, the Tawn acquisition in particular is all proved producing assets in so much as the way we booked it in so much as the way that we are accounting for it. The Rimu production station, we are bringing on at a gradual rate. Therefore, we certainly anticipate that rate will be growing rather than initial decline. We are excited about that opportunity to grow production there. In particular, the Tawn assets, it's a people issue. We put a significant team of people to work there. A good number of those people coming out of prior organizations that were familiar with these assets. We are extremely pleased to have them join us and be a part of the growth strategy in New Zealand, not only for Tawn, but in our Rimu [INAUDIBLE] area. We put this team to work and they are already coming forward with projects of significance for the company that presently aren't booked, presently aren't even put into the probable categories as it revolves around Tawn, but we anticipate that we are going to add to the inventory of opportunities as relates to Tawn this year. We are [INAUDIBLE] on that. We are betting on people, not prices. That served us well throughout the history of the company. Finally, I want to speak about Rimu and [INAUDIBLE]. When we talk about probable reserves and opportunity for the company, this is one of our star assets. We look forward this year to several significant events. We go into the [INAUDIBLE] 1A and we [INAUDIBLE] that well we drill the [INAUDIBLE] anomaly that sits somewhat to the west of the initial test. Those are very significant and exciting events for the company that could significantly grow the company. We are finishing up our Manataki studies. We will be drilling additional wells there. Shallow oil, easy to get to. We are working that forward and hope to have significant production from that area, as well, going forward. I clearly that clearly evidences that we are diversifying the reserve base and growing the production base [INAUDIBLE]. As Alton mentioned, we strengthened the balance sheet. That work is done. We are now positioned to continue to implement our plan with a strong balance sheet. We clearly have made significant progress reducing and controlling our operating costs. We will continue to do that going forward. And all of this in the first quarter with a relatively modest capital budget, staying within cash flow, despite the fact that we have got significant improvement in the commodity pricing environment. With that summary, I would like at this time to turn it over to questions.

Alexis, we are ready for questions now.

Thank you, gentlemen. At this time the floor is open for questions. If you have a question or a comment, you may ask it by pressing one followed by four on your touchtone phone. If your question is answer, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order that they are received. Once again, if you do have a question or comment, that's one followed by four on your touchtone phone.

A couple of questions maybe for Joe, I don't know. What is the current level of production at Lake Washington? Still around 1.2 thousand a day?

The average in March was 1,486 barrels per day. You know, the current daily rate can actually fluctuated one day from the next. That's why we try to give monthly averages there. I think the April average is probably right in line with that.

We should note, if Joe didn't emphasis it I'll emphasis it, but the way that we are drilling out Lake Washington, we are putting the rigs to work. Then we are waiting on the completion for efficiency purposes. The completion rig comes in typically maybe as much as a couple of months after the initial drilling.

Yes. Because the completion work goes a lot faster than the drilling work. You want to keep the completion rate busy. You don't have to mobilize and de-mobilize, so we -- the completion rate is coming in June.

Having said that, yes, we have achieved in excess of 1400 barrels a day as the current rate out there on average. But we have several completions that are awaiting, the wells that Joe mentioned that have significant oil pays in them that are yet to be completed.

It will be in June.

It will be in June.

As I said, we're planning on doubling the production again by year-end.

The next ramp-up will be in the third quarter.

Third quarter.

Total U.S. production expectations for the third quarter, are you going to revert to kind of a 5% per quarter decline or are you looking for a steeper decline from Masters Creek to kind of skew the number?

Adam, this is Bruce. What we're actually looking for as you can see, our guidance for the second quarter is an 8.5 to 9 Bcf number. What we really see, the third and fourth quarter flattening out about 8.5.

Okay. What's the production expectation for Rimu for second quarter?

I don't think we have broken the Rimu apart from Tawn. What we've try to do is provide guidance on New Zealand, there are a lot of variables in there at Tawn and the timing of Rimu. The second quarter is 3.2 to 4 Bcf for the quarter.

I would add to that, in terms of the second quarter, clearly the commissioning of Rimu is much a process of getting every item in the plant working properly as it is trying to establish a particular level of production. In that regard, the initial commissioning process, actually, we have been flaring some of the gas out there. So, that's one of the variables that just has to be that way as you commission a plant.

Thank you.

Our next question is coming from Kent Green of Boston America Asset Management.

Yes. I had a question on Lake Washington. Of the 29 prospects, how many are going to be production wells or production prospects and how many exploratory?

We are probably going to drill 20 wells in total with two being exploratory. 18 development and two exploratory.

That's this year's drilling schedule?

That's right. But we have a lot more development locations than that, as Terry alluded to. We have 29 locations already picked to drill. It's the timing with the rigs. We can drill 18 to 20 wells this year.

And when would we get a good idea, Joe, what you might be doing about increasing the reserves of this field? Well, I know you won't do it until next year, you know, year-end. But will you give us some guidance as we go forward?

Well, each quarter, we have been increasing the reserves in Lake Washington. From the time we bought it, we had a little over 7.7 million barrels at year-end. At the end of the year, we were at 12.1. We added reserves in the first quarter. I don't remember exactly how much. With the continued drilling, the last two wells were in unproven fault blocks, so that will increase the reserves again for the second quarter. Our goal is to add 2 to 3 million barrels a quarter in Lake Washington.

Those would be proven reserves. As you are drilling, you are also testing and reviewing your probable base. And clearly, we hope to be adding more to the probable inventory as we cycle probable reserves into proven through the drill bit.

And in New Zealand, have you -- I know you had reserves addition from the Triki and a little bit from the limestone. Have you added any reserves from the higher-ups' end?

We have some reserves booked in the [INAUDIBLE], down at [INAUDIBLE]but a relatively small amount. We don't have anything booked in the Irinui Sands at all in terms of anything or the Kalri Sands an all the other [INAUDIBLE] sands that we encountered with hydrocarbons as well.

Within the Rimu mining license, all we have booked is [INAUDIBLE] or [INAUDIBLE] limestone volumes, but mostly upper [INAUDIBLE].

And then on the gas prices, you got New Zealand $1.21. Is that indicative of the longer term prices that you are going to receive under those contracts?

That is indicative. Although, the guidance is more like a buck ten to a buck 15. Gas is sold down there and paid in New Zealand dollars. There is some currency fluctuation. The New Zealand dollar has been strengthening a little bit of late, which certainly adds value to our completed RBS. Because that was done at lower value New Zealand dollars. What we try to do in terms of currency issues is to try to match our New Zealand dollar inflows with our New Zealand outflows and our U.S. dollars inflows with our U.S. dollar outflows. The price for the gas does have have a small escalator but will vary a little bit based upon the currency exchange rate.

Let me add to that, it's indicative of the contract prices that we have in place right now, which certainly should be viewed as what we are going to be selling gas for this year and in the very near term. Over the long term in New Zealand, we have not contracted out the larger volumes that we believe we are going to be able to bring into the producing category. There is no call on that production going forward. And I would say over the next two to three years, we do anticipate significant improvement in New Zealand gas pricing, but that would be under new contract regimes.

You may recall, Kent, that 80% of the gas in New Zealand is supplied by one large field that's due to be depleted in 2007, a very short period away given the time that it takes to develop new fields. Shell, which has an offshore discovery called [INAUDIBLE] which will take about four years to develop, and 8 or $900 million has recently put out offers for various gas purchasers to make a bid on their gas coming out of [INAUDIBLE]. That will be indicative of where we see the future gas market going.

On the oil price that you received new [INAUDIBLE], has that taken effect, you know, the Tawn acquisition, that you thought that you would get a higher realization with the Rimu oil because of that, putting it through the distribution system?

That has. What you are seeing in that oil price there includes the liquid price. In New Zealand, they have a separate market for liquids, which is a lower-priced liquid market in the 10 to $11 per barrel range. So, that brings down the overall price when combined with crude oil. We believe, though, as we get more liquid volumes, particularly down to the Rimu area and we can tap the export liquid markets which are much more favorable markets. That is part of our ongoing future marketing plans for that.

Thank you.

Thank you. Our next question is coming from Shannon Nome of J.P. Morgan.

Thanks, good morning.

Good morning.

I joined the call just a little late. Forgive me if I'm back-tracking on this. But, I'm looking at first quarter pricing. It strikes me that differentials were quite a bit wider than at least we would have expected or relative to what some of the peers realized on the domestic gas. It looks to me comparing back to your earlier guidance from February that you have widened out your expectations for pricing differentials quite a bit. I just want to get an understanding as to what is behind that. If you could give me a sense of that. And then I have one other question.

Well, I think in the first quarter in particular, you know, what happens in down-pricing environments, it happens on the oil side and the gas side, is your differentials increase on the downside and the down market. They improve on an up market. When prices are pretty low, those differentials in the gas are larger. And the posted prices which were paid for in oil in the field usually have a significant discount to the NYMEX listing. And we often find a couple of dollars below NYMEX and a couple of dollars discount on top of that. And that's why you are seeing the lower pricing in the first quarter.

So, are you implying that your expectations are for the lower prices in the balance of the year, given the wider differentials that you suggested in your new guidance?

Well, we think that -- we don't know the answer to that. It depends upon where the markets go. We would hope that they would improve. We think that it's more prudent to forecast the larger differentials based on what we had in the first quarter, at least, moving forward until we see something improve.

Okay. And then on the production side, I guess it sounds like you expressed some satisfaction with domestic production performance. It looked to me down 30% year-end year. Which strikes me as a little bit steeper than we'd modeled. Your production guidance for the year looks unchanged from your February numbers. Yet, clearly New Zealand was very strong in the first quarter relative to original expectations. I guess I'm reading into this that there has been sort of offsetting slippage in the domestic production side that is compensating, I guess for the strength in New Zealand. I just want to make sure, a) I'm understanding that right, and b), if so, where has the domestic production performance fallen behind?

Actually, that's not correct at all, Shannon. The domestic production has not fallen behind whatsoever based upon our internal forecast. In fact, it's has been above that. I would be happy to show you those curves at some point in time. If you remember our original guidance, if you go back to the first guidance that we put out on January 15th of this year, we forecasted first quarter production to be 11.3 to 11.7. We increased the guidance on February 14th when we released the fourth quarter earnings from 11.5 to 12. We ended reporting over 12. The primary reason for that was New Zealand. But also we did have improved performance domestically. We are seeing that in all four of our core areas.

Okay. So what I have missed here or forgotten about was the increase in the guidance between January and February when you knew New Zealand was going to come to ahead, that was incorporated in the February guidance. So what your guidance is now is consistent with February?

That's correct.

Got it.

Actually, the year-to-year, quarter-to-quarter, the domestic production decline is 16%, not 30.

I may have looked at the wrong column. Okay. Well great. Thank you for the explanation.

The next question is from Jeff Robertson of Lehman Brothers.

Good morning. Bruce, can you walk through New Zealand and the commissioning process of the production station and how you are going to get from current volumes to, you can correct me if I am wrong, the expectation that you filled the initial 3500 barrels a day of capacity by year-end. Can you walk through the steps of that?

I can walk through the commissioning process to the extent that I'm technically capable. I'm not a processing engineer or a processing person. It's a pretty complicated plan. It took $25 million to build and nine months to construct. It has a lot of pieces of equipment. You start, obviously, by going through and checking all of your fittings, your electrical connections. Then really open it up through the oil processing component. And that has been done. Then you actually start producing oil from the wells. Then you're flaring the gas [INAUDIBLE], and then you start checking it downstream. From that you move to your natural gas processing part of it, and your liquid's part of it. That's where we're in that process now of actually, we had a shutdown of the plant to check everything out yesterday. They are going to be processing liquids today and tomorrow. And they do is -- there are four different bullets for propane and butane and they will actually wash those. They will process liquids and wash each one of those bullets through to clean them out and then have to reprocess that liquids to get out the impurities, and then you'll be able to start loading the specific ones with propane and the others with butane. So you can fill them separately as opposed to a combined natural gas liquid. We expect gas sales to take place probably late next week, first gas sales, is our hope and then liquid processing will obviously be stored in the bullets and when they're full we'll start actually filling the liquids which will probably take place in early June, will actually be the first sales. That's kind of a process that you walk through. And then obviously once the plant is up and running, then you can provide more steady volumes. We have several wells that have productive capacity. We currently opened up the plant just producing the Rimu A1. Obviously, you don't want to produce a bunch of oil and flare a bunch of gas, initially. So, you want to wait until all those facilities are commissioned and you are processing. We have both the Rimu A1 and A3 wells and the Rimu B1 an B2 wells. Those wells have different mixtures of the amount of gas and oil that they can deliver. And as we move through this process, certainly in the near term, we are going to be kind of mixing and matching those different wells to better understand their productivity as well as to see its impact on the plant and volume of oil, liquid and gas sales so we can find a more optimal mix. We also drilled the Rimu A2A well. And we do plan to put a fairly large fracture stimulation on that well. It should take place in late June, early July. We believe, as we have talked to others before, we believe that those [INAUDIBLE] Sands will need to be fracture stimulated. We did a small fracture stimulation, about 70,000 pounds of sand on the Rimu A3 well and did find about a three-fold increase in production. So we believe a larger one, in the 300,000 pound range is going to be much more effective. And obviously until that is done and we see the productive capacity that it provides, we can't really give you more guidance until we get some history there.

This is Terry. I'm not a processing engineer, but I am a chemical engineer. I can tell you that when we were in New Zealand just a few months ago sitting down with all the processing people, we visited the Rimu area, and we visited over at Tawn. We have one of the best groups of processing professionals in all the industry. We have got some incredibly expert people. As I was going through what their processes are, literally, all of this is computer automated. They have a simulation process to start up every single vessel in that facility and to shut down every single vessel in that facility. They go through a pretty rigorous computer simulation. That's a computer simulation. What they need to do in the commissioning of the plant is ensure that the actual liquid volumes and pressures and temperatures and the actual construction design matches that computer simulation. So, they are doing things right now with each individual vessel in terms of changing pressures, temperatures and flow rates that they wouldn't normally do in the course of business, just to ensure that they have proper startup and shutdown procedures for the future. In fact, it's not unreasonable to contemplate that we may go through a temporary shutdown and startup later in the year to ensure that that process is working exactly the way we want it to. Clearly, our environmental responsibilities here, safety responsibilities are very important to us. We want absolutely good procedures. This is a brand-new plant. We are going to let them commission it the way these professionals have deemed appropriate. Having said that, going over to the production volumes. The plant's capacity is built at this moment in time, assuming all commissioning work is as planned to go to 3500 barrels a day. As Bruce noted, we will be cautious about how we bring that on. We do have tests on all of our wells out there. And those tests range from in some cases 45 days of testing to as much as 90 days of testing. We weren't able to test any well really beyond 90 days due to government restrictions. You're only allowed to test about 90 days because of the flaring and what the call the black smoke issues. We want to also be monitoring every well during this early production stage of the facility so that we know where our opportunities are and where we will know where our problems are, our complexities. In particular, we have got two very stout wells, that are limestone wells. We haven't booked very much reserve on it at all. But ast least it makes deliverability-sense. They've got allot of deliverability they're fractured limestone wells. We don't deem it proper right now to pull the wells as hard as they can go. Actually we are not going to produce the wells at a significant amount in the first 90 days of production of this facility. As Bruce noted, we've got some other operations under way, the fracturing. We have another well planned to be drilled in there. We are pretty optimistic about the production coming out of Rimu, but we are also going to be very cautious, both in terms of safety and environmental issues as well as just making sure that we drill the right kind of wells going forward.

Terry, when would you expect to be finished with the commissioning process and be able to start connecting some of these other wells to get the history?

Formally, the commissioning process is about six weeks. The formal ending of the commission process is probably in the next two weeks or so.

We are looking at two or three weeks.

The formal ending of the commissioning process will be another couple of weeks. But then we will operate the plant over the first 90 days at what I would call "variable volumes." What happens is, the handover commissioning, you go from those who constructed the plant being responsible charge of the vessels and these things to the organization of Swift Energy New Zealand being in total responsible charge. There is a commissioning after the commissioning that really I refer to as that start-up period, the first 90 days of us being in total control of the plant relative to the designers and construction people being responsible at this moment for anything that goes wrong. They have to get in there and fix it at that moment. That should end in the next two to three weeks. Our people will be running everything virtually 100% after that.

Thank you. The next question is coming from Frank Bracken of Jeffies.

Hi guys. Actually, it's Steve [INAUDIBLE] standing in for him. Just a follow-up to that question. Are the initial test rates on these wells, are they fairly indicative of how hard you are going to pull them, or are you going to pull them less than that? It sounds like you are going to go slow enough to ramp up to a 3500 barrel rate by year-end sometime. Is that a fair assumption?

Well, I think that the test rates are indicative of what the wells can be produced at but not indicative of what we intend to produce them at. Obviously, that's a process that we are going to go through to check the variable productive rates of the wells, as well as the processing issues through the plant. But I think our intent is to be conservative there. Because we are trying to be sure to build this for long-term and not do something for the short-term.

Okay. Do you have anything from the Rimu area that you are evaluating besides these [INAUDIBLE] wells currently? Do you have anything that you are going to announce a test rate on sometime in the next quarter?

In the Rimu area, of course, we will be bringing these different wells on production and fracing the Rimu A2A Then we do intend to drill another fourth well off the A-pad, the Rimu A4 well which is sometime in June, and obviously will take June and July to drill. But that's the plan work in the Rimu area.

Okay. But the productive capability, what you are saying is, these four wells will satisfy the initial capacity of the production station?

Yes.

Okay.

And then just a follow-up question to Shannon's question; it looks to me like you are opting domestically to strip out more liquids. Is that the reason for the lower than expected gas prices? Can we expect that going forward, or is there another reason behind that? And also on your liquids pricing, are we seeing an NGL blended with oil price there?

That is correct, Steve. Because of the way we have changed the marketing of liquids, or as they were previously marketed in the gas stream to marketing liquids, and with knowing that we are bringing on New Zealand which has a significant liquid component at Tawn and Rimu, we have started showing liquids separately and marketed them separately. So that is part of the explanation for the lower gas price that you see and the liquid prices are blended in with the crude oil price now.

Sure. Any chance that you will be doing a three-stream reporting to us?

At some point in time we will be doing three-stream reporting. We didn't do it now because you don't have the good comparable information with last year.

Got you. Okay. Thank you.

This is Terry. I will follow up one more time on the Rimu production station because I think it's important to answer that as regards capacity and the initial rates. We need to remember that the objective of the Rimu production station is to have flat, stable production. And knowing that that's the objective, you would not, and we do not plan on producing the individual wells in the field at maximum rate. Because what you really want to do is produce the production station at a stable, flat rate. So, that's part of the first 90 days that we will be 100% responsible charge for that facility. We will be trying to determine what rate we should produce each well at in order to achieve a flat rate through the production station.

Once again, if anyone does have a question or comment you may press one, followed by a four on your touch-tone phone. Gentlemen, there appear to be no further questions.

All right. Well, thanks everybody for listening. We are available for a follow-up with anybody if you have further questions.

Thank you. That concludes today's Swift Energy first quarter conference call. You may disconnect your lines at this time. Have a wonderful day.