SilverBow Resources Inc (SBOW) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Swift Energy's second quarter earnings conference call. At this time all participants have been placed on listen-only mode and the floor will be opened for your questions and comments following today's presentation. It is now my pleasure to introduce today's host Mr. Bruce Vincent. Sir the floor is yours.

Thank you and welcome everybody to the Swift Energy's second quarter conference call. I am going to turn the floor over to Scott Espenshade, our Director, Investor Relations to introduce the call. Scott.

Thanks Bruce. Good morning everyone. Today's call will cover our second quarter results of 2002, Terry Swift, President and CEO will give an overview and Alton Heckaman, Senior Vice President and CFO will provide an overview of financial results for the second quarter. Joseph D'Amico, Executive Vice President and CEO will review our domestic operations and then Bruce Vincent, Executive Vice President, Corporate Development will update our New activities.

Terry Swift will then conclude before we open up to questions. At first I would like to remind everyone that our presentation will contain forward-looking statements based on our current assumptions, estimates, and projections about in our industry. These statements involve risks and uncertainties detailed in our SEC reports and our actual results could differ materially. Reflective presentation will take approximately 20 to 25 minutes and I have allowed additional time for questions. However, we organizing calls in a more important terms of full disclosure and we would certainly be owing to take any questions as long as necessary. Terry..

Thank you Scott. Again I would like to welcome you to Swift Energy Company second quarter 2002 earnings conference call. Swift Energy Company has just completed an eventful quarter with good operating results. Our production has increased, our profitability is improving, our balance sheet is stronger, and we are successfully implementing our business plan, which includes a strategic goal of reducing our overall production decline rate for our base production. We have done this by adding production from completions with more stable production profiles, principally Lake Washington and then our activity in New Zealand principally with Shell acquisition in the first quarter, very stable production being added to the company's production base. I want to emphasize that. With that uprising and lower operating cost, the profitability has been improved significantly, equally important to the second quarter debt and equity offerings had significantly improved the company's liquidity. We viewed that those offerings were really important to us, not only to improve the liquidity but that properly matched the financing terms with the asset relative to the investments.

Our company has implemented its 2002 business plans. We have lots of external forces that have taken hold in the marketplace. If you were well aware of corporate governance, I would respect the term as Swift Energy Company for many years is now in the forefront. We applaud the changes that are taking place in America and particularly in Washington and we believe that these changes will lead to a healthier America and a healthier economy. I want to point out that Board of Swift Energy Company has always placed a high emphasis and put importance on the issue of good corporate governance. In particular, our Board of Independent non-employee directors constitute on majority. The fact that we have maintained an independent majority amongst our directors since 1988. We recently appointed Ernst & Young as our Independent auditor and I again want to emphasize that our audit committee of the Board which is made up of independent directors was very involved from the very beginning and leaving the process, and actually conducted the selection process, recommended Ernst & Young to the full Board and it was a unanimous decision to bring Ernst& Young on as our independent auditors. We are very pleased to have them.

The commodity pricing environment and related purchase for credit, risk issues, and the new challenges, I want to point out that as natural gas and oil prices remain very volatile and due to this instability in pricing and inability to predict these pricing issues, it is very important for the company to continue to have rigid control measures to ensure that our capital spending remains within cash flow and we are doing that. We look at the one exception being the acquisition in the first quarter of the New Zealand properties, which we already have articulated, in the first quarter. Further more we are constantly monitoring the credit profile of the various oil and gas purchases and where it is appropriate we are demanding that the purchaser post the letter of credit. These are difficult times Swift has done a good job in its marketing oil and gas.

We have protected that revenue stream both in terms of how we assessed the credit risk of the purchaser and in terms of doing some hedging which we will talk about, what we call the, the costless colors. We continue to look at acquisition opportunities and of course because of our improved balance sheet we can, however because of the volatility buyers and sellers are having a hard time coming together. At present we do not have any acquisitions to evaluate that we cannot live without. We are continuing to implement the business plan as we have articulated and allocate the capital to projects that we feel have already demonstrated a lot of success this year. In particular our domestic budget continues to be focused and Lake Washington of south South Louisiana. Our success in this development activity is evidenced by our results, we will go into that today in detail again.

Through our cost savings and additional capital allocation within this area, design changes, the kind of this we would be running in this field, and overall reduction in drilling costs or drilling rates. We expect to drill additional wells in this core area this year. We are going to go out of 2002 with a significant amount of activity in Lake Washington. We have once again had significant results and we think this is a good area to accomplish our goals both in terms of stabilizing our production, underline base and building production from this area. Now we have identified over 50 additional drilling locations in this area and we see more on the horizon. Of those 50, all of them relatively shallow types of locations, so lower risk, lower cost types of opportunities. In New Zealand, we are very excited to have begun redrilling of the Kauri-A4 exploratory well. This well is drilling one of the most significant structures left to drill in New Zealand. We will give you a little bit more detail about that later on in our conference here and the Riwi production station was brought on stream, which began commercial production during the second quarter. We are very excited about that. The assets, which we purchased from Shell and acquired, are actually closed in January.

We have now got quite a good bit of performance under our belt. We have integrated that organization into our organization and we are getting excellent results there, infact everything there is meeting our expectations or exceeding our expectations. We will give you some detail on that. We have begun to implement enhancement opportunities in time that are already showing fruit for the company. All in all, we have had a good quarter and we are on track for an excellent year. With that introduction, I will now turn it over to Alton to present our financials.

Thanks Terry and good morning. I will briefly hit the highlights of the extensive financial information included in the press release. As indicated in the release, we are very pleased with the 30 percent increase posted in year-over-year second quarter production volumes to 12.7 Bcfe. The New Zealand torn acquisition in January along with bringing the RPS on screen this quarter, which Terry mentioned and we will discuss further detail later in the call was key to this production increase. Our production increased over 2001 in pricing did not. Although prices strengthen from the first quarter of 2002 and appear to be stabilizing, it did not come close to approaching lofty 2001 second quarter levels especially as to natural gas. As a result, Swift's average composite second quarter price for Mcf equivalent dropped 33 percent from 554 in 2001 to 3 dollars and 2 cents in 2002. Oil and gas revenue was therefore 25 percent lower than the comparable 2001 quarter. Swift realized 3.6 million in net income for the second quarter, which is 13 cents both basic and diluted compared with nearly 15 million in the comparable 2001 quarter.

Cash flow for the second quarter 2002 came in at just over 20 million or 76 cents per share. EBITDA was 25.9 million. We remain keenly focused on two clear concise objectives. Number one, to continue reducing our controllable per unit cost and number 2, striving to live within our internally generated cash flows as to drilling and development activities using further debt and equity if and only if very strategic growth opportunities become available. We achieve both these objectives during the second quarter of 2002 as we reduced our per unit operating cost with more future reductions plan and we maintained our expenditures within our quarterly cash flows. We are clearly committed to this plan. As to our liquidity, as previously discussed based on improved market conditions in early April, Swift sees the opportunity to improve its overall liquidity and leverage with the insurance of 10 year bonds priced at originally filed that a 150 million, the offering was upsized to 200 million based on demand and successfully executed. As a compliment to this dead deal, a tandem equity insurance was accomplished, that too was upsized to 1.725 million shares. Combine these two offerings maybe approximately 225 million which was used to pay down our bank lines, which has been used to form a Tawn acquisition and other strategic CAPEX dated back to 2001.

Our bank line, which was re-affirmed at 275 million just prior to the completion of the offerings, was subsequently reduced to 195 million where it stands now, and we currently have no amounts drawn on that line. To give this plenty of dry powder for any strategic opportunities that comes along. Pricing improvements allowed us at the beginning of the second quarter to lie in some costless collar hedges for the remainder of 2002, while maintaining 60 percent of the upside. Recovered 45,000 bills per month, which we have represent about 20 percent of our current company wide crude production, with an average flow of $21.50 and a 40 percent CAP at $27.50, while the 280,000 MMVGU per month coverage of 15 percent of our current domestic gas production with an average flow of 260 and 40 percent CAP of 430, and when you couple that with the new deal and long term fixed gas pricing that we have, it gives us significant natural gas price protection globally.

Further price improvements will likely allow us to in even more protection in this volatile pricing environment as Terry mentioned. We feel this method of hedging is very much in line with our historical strategy of protecting the downside while keeping upside opportunity. Our significant guidance and the release for the remainder of 2002 clearly reflect our conservative effort to maintain production and control cost. We all are very committed to making this happen. Also in the release you can see that CAPEX for the second quarter was 19.6 million staying within our internally generated cash flow, and we clearly slowed down our activity to match cash flow and continue to high grade our projects going forward which we will elaborate more on shortly.

Finally we concluded a summary balance sheet at quarter end, and it reflects the strong financial position the company finds itself with the balance sheet in liquidities to successfully implement its revitalized strategic plans both domestically and in New Zealand. I like to ramp up my point by equaling Terrys' sentiments with respect to cooperate governance and specifically Swift cooperate culture. So all the negative class the co operations, officers, industries, disciplines in markets seem to get on a daily basis, it is quite a sad state of affairs' when everyone seems to get pain about the same broad brush. I for one am very proud of the profession and the industry in which I work, and having just recently passed my 20th year here at Swift, I feel qualified to say, I have been extremely fortunate to be part of such a great company with such a consistent and well grounded culture. And with that I will turn it over to Joseph D'Amico for an overview of our domestic operations.

Thank you Alton, good morning production for the second quarter was 12.7 Bcf equivalent, an increase of 13 percent from the 11.3 Bcf equivalent during the same quarter of last year and that's 3 percent sequentially from 12.3 during the first quarter of 2002. Production expectations for the third quarter 2002 have been set as 12 to 12.7 Bcf equivalent. 2002's production goals are between and 52 Bcf equivalent. This is a 10 to 16 percent growth level, which we feel two companies will meet this year but greatly reduced capital expenditures. Domestic production declines were flat in the second half of the year. We are flattening the underlying decline program of our production this year and would show more balance in our production output to match the price environment.

During the second quarter, the company drilled eight wells made up of seven developmental wells and one exploration well. All of these wells were completed during this period with two others waiting on a completion rate. One developmental well was plugged and abandoned. All of the company's drilling activity this quarter was concentrated in the Lake Washington field. A completion rate will return in mid August within we will complete remaining wells in the second quarter and additional wells drill up to that time. This brings the company's results of 2002 to 78 percent success rate on developmental wells with 79 development and 104 successful exploratory wells for the year.

As stated earlier, we have reduced our least operating expenses in the second quarter. This is an ongoing process and we are sill working to further reduce our . Our goal is to be a low cost producer. In Lake Washington field in second quarter, we made a significant completion in F sand and CM #187 wells. This interval had a 179 and just over 900 barrels of oil per day. This is significant since it is the F sand completion in our course in the Lake Washington field and probably only F sand completion in the whole field. The CM #188 well drilling next and 187 wells also account the F sand's productive. This well was completed in the 8 cents, which is a lower interval at about 600 barrels of oil per day. We now had in as a target and had mounted over northern east coast of our field area. We have earned these potential reserves of over 40 million barrels and that in just as one cent. Work is currently underway to upgrade our production facilities.

By late August, we will be able to handle over 9000 barrels of oil per day and 10000 barrels of water per day. The gross production at Lake Washington has increased from 1164 barrels of oil equivalent per day in January to 3071 barrels of oil equivalent per day in July. We anticipate production increases over 6000 barrels of oil per day by year-end. One of our corporate goals is to decrease our production decline. With the activity at Lake Washington, we are achieving this goal since we have excess deliverability and several of our new wells and since these wells have low decline rate. Our wells are gravel packed and have a strong water drive. So, we are very careful not to put a large pressure difference on the formation so that we will not have problems with same production or premature water breakthrough, which would reduce our suite deficiency and ultimate recovery. Our drilling completion costs are running at 1.1 million per well and our successful wells of average.

We are running at 1.1 million per well and our succes for wells have averaged 12.9 pay cents per well with about a 160 feet of net pay and an average total well depth of 4802 feet. The finding costs which includes 2 million dollars for a facility upgrade is running between 75 and 96 CF equivalent or 450 to 540 per barell of oil equivalent. We are currently mapping deeper horizon. We have 26 new well locations permissive progress and have a total of 56 locations. Views to say we are excited about our results today and with our inventory filed that we could continue to both production and reserves into the future. I will now turn it over to Bruce to discuss New Zealand.

Thanks Joe. We always felt that 2002 would be a defining year for New Zealand and it is certainly is that as New Zealand contributes 30 percent of our production in the second quarter. This is largely attributable to the Tawn assets, which were acquired from Shell in January. The Tawn filed averaged 40 million cubic feet equivalent per day during the second quarter. This was well above our anticipated production levels of about 35 million cubic feet equivalent per day at the time that we acquired it and is largely attributable to increased demand in New Zealand. We do however expect Tawn and Tawn fields to produce at an average of 35 million cubic feet equivalent per day for the remainder of the year because of lower demand. This is largely result of high levels of rainfall in New Zealand that has increased the availability of hydroelectric power.

Our gas purchaser contact energy has made nominations that these minimum amounts required of the contract to produce the 35 million cubic feet a day through the end of this quarter. Additionally at Tawn, now that we have owned it for a while we have begun various enhancement operations, including such things as smaller tubing strings gas layout and and we are beginning to see the fruits of these efforts focusing primarily on the oil side to get oil production up at the Tawn field additionally we are beginning got evaluate deep potential in that area that we are excited about. Down as we would begin commercial production during the second quarter with the beginning of operations at the Rimu production station it has became operational in April with first oil sales that month and gas sales and natural gas liquid sales began in June as the plant went through its commissioning cycle which should get completed sometime in August.

Average production through the Rimu production station was approximately 1000 barrels of oil equivalent per day with a capacity of over 5000 barrels of oil equivalent per day we expect to get to about 50 to 70 percent of this capacity by the year end from our activity at remove. On going activity at remove right now includes the tracking of the Rimu A2OL which was commenced this week we did get away a good fract and are waiting down to flow back over the next few weeks. Additionally, we have planned some development drilling at remove following the drilling of the Kauri-A4 well done at Kauri. Activity at Kauri includes the drilling of the Kauri-A4 well which is a deep test targeting some significant intervals. This well was spotted in late June and is expected to take approximately 100 days, to the end September to finish going observations. Testing of any potentially productive zones, whether encountered in the well will follow. The well is an exploration well with significant targets in the Kauri sand, the Tariki sands, and Kapuni sands.

Additionally at Kauri we have two shallow wells, Kauri-A2 and Kauri-A3 in the shallow Manutahi sand that will be we put on long-term production tests as soon as hydraulic lift is available. Additional activity in New Zealand zoneincludes some operations on this Ulinga permit to the north of Ulinga in California, where we have a 15 percent participation in this Ulinga 1B well. This is also a deep test of the Eocene and sands and was drilled in casing sets of depth of about approximately 14,500 feet and testing of the potential zones will begin in the next few weeks. In terms of future plans, we do continue to seek out a target, for our Rimu/Kauri area but recognizing that the Kauri-A4 exploration well is targeting some potentially significant horizons, we have deferred meaningful conversations with potential partners in this area until we have completed this well. We do however hope to bring in another partner by the end of the year. We have also completed the processing of recently overall metaprospects on the Rimu/Kauri permit just North of Rimu, which has confirmed structural role over these prospects. We expect to include this exploration well in our 2003 plans. Additionally Swift did participate in the recent box offering in the zone, it closed on April 30th and we expect to find out the results from this box offering later this quarter. Let me now turn it over to Terry to come and wrap it up and then we will open for questions.

Thank you Bruce. I think it's evident that we've had a very active and productive second quarter and clearly the external events that have gone on in this second quarter have been rather intense in the market place. I won't go into all that. Clearly both the volatility of oil and gas processing as well as some of the credit issues out there in regard to purchases of oil and gas had been a particular concern to Swift and we have managed to do that I think in a very respectable and professional way protecting the corporate cash flow stream.

Our second quarter activity though as we look into our internal results and what we have done, I would like to highlight that again we had a significant debt and equity financing that have strengthened the company and provided us with significant liquidity, significant flexibility at the same time we are maintaining very stringent controls on our budgeting process, getting all results, reallocating capital to those areas where we are getting the absolute best economic returns and we are clearly able to do that in a manner that is relatively low risk particularly in our Lake Washington area. Our second quarter activity also included a significant amount of drilling and completion activity and Lake Washington that re-affirmed all of our expectations, in fact goes beyond our expectations.

As Joe pointed out, we had a very significant surprise to the upside and Lake Washington with our F Sands Wells and then we have come back now, we built two additional ones that have begun to give us some understanding of what we got there is up in the North Eastern quadrine of the dome, which was very partially drilled to us taking ownership of the property. We definitely believe that we are on track there and we will achieve our goal to more than double the reserves and production in this area by year end. Also during the second quarter in New Zealand the Rimu production station was broad on strength. That was a long project from our perspective, but from the New Zealand perspective we did that in record time. It's an operational facility, we are very proud of it processing natural gas, the recent natural gas liquids we are selling all those products. Our objective there has been to safely bring the plant on and to be environmentally responsible in doing so, and we have achieved that.

We are now on the course of raising the throughput through that facility as Bruce has articulated the means, we going about that, and we also began drilling the Kauri-A4 exploratory test, a very exciting well for the company, a lot of upside, a lot of potential for the company. We do believe that all be at an exploratory test, it is a world class exploration project and we are excited about that opportunity, if you look at Tariki and Miocene Sands on a very significant structural highlight, in an area where we found hydrocarbon in every well we drill but we are continuing to execute that plan. Finally during the second quarter and not the least we got additional performance out of our TAWN properties in New Zealand and as Bruce has mentioned we are very pleased with the operating success we have had there. The organization that we were able to integrate in New Zealand was a stellar group of professionals, we have done that, we now have our cash flows straining in from that project we are getting better performance in some areas that we anticipated. We have begun implementing an enhancement program there that as already begun at their particularly as regards . At this time I would like to turn our conference call over to question and answer.

Thank you the floor is now open for questions, if you do have a question you may press the number 1 followed by 4 on your telephone keypad. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. We do ask that each participant please limit themselves to one question. Once again that is 1 followed by 4 for any questions at this time. Our first question is coming from Matthew Chyra of . Your line is live.

Good morning guys. Could you just tell us what the media reserves look like and more important we have any have been transferred to the developed column?

I think Joe want to take that question, while he was searching through his information. I think it is important to note that we have stated and we believe we are on course that we are going to be adding about 3 million barrels domestically in the Lake Washington Area at third quarter. As we drilled out this area, we do not on a quarterly basis get a full blown reserve reserve record. That is an annual process, we do review with our outside order tools, the reserves on a quarterly basis, but they actually deliver a final report I think end of every year so the mid year numbers are pretty much estimates when we look at the one exception domestic number and I think we are pretty much on course there. I think our guidance for the year is I think 740-780 and I think we are right on course to be in that range by year-end.

Great thank you.

Our next question is coming from Mark Witokski of Credit Suisse First Boston. Your line is live.

Hello.

Hello Mark.

Pretty good, how are you doing?

Doing great.

Just curious if you guys are going to be spending any money other than Lake Washington domestically?

Yes. Clearly Lake Washington is the highlight force because it is a new core area. It is an area where we have low costs and their shallow wells and therefore will always the old markets of course are very robust. We are focused getting that into production but we also are conducting activity down and we have got some refracts that are going on there. We have been doing some activity that allows us through different filings with the very well commission to drill additional in field wells and suddenly better the locations that is kind of a technical . We have positioned ourselves to go back and drill in some of what we called it as the areas. We also are looking hard at South Texas we have already begun, approved and additional well to go down in South Texas so we are doing some activity. Our master is Creek and . We have no immediate plans to put a rich to work in that area, but we do have some work over opportunities that we are preserving there. Is that pretty much?

That is great. Also could you actually go through the natural gas covers you put in place again, I missed those numbers?

Yeah. We are sure. Basically, we had a couple of tranches, but the average on the oil was we had 45,000 barrels per month covered and it represents by 20 percent of our current company wide crude production to 45,000 barrels a month from May to December with an average flow of 21.50 and a cap of 27.50 but Swift gets basically 60 percent above that cap. So it is 40 percent cap. Again flow 21.50; cap 27.50 and we get 60 percent above that. On the gas, it is ...

at 27.5 and we give 60 percent above that. On the GAAP it is 280,000 MMBtu per month from May to December average flow of 260, the cap was 430 and again that is a 40 percent cap, such as Swift get that 60 percent above 4.30 dollars.

Great thanks a lot guys.

Thank you.

Thanks .

Our next question is coming from Jeff Robertson of Lehmann Brothers, your line is live.

Good morning Terry. Could you all talk a little bit about, two things, one, New Zealand at the Rimu station is production there I think Bruce had said it would be up to full, half capacity year end. Can you give us a feel for, how that compares to the plans, couple of months ago you started to bring those wells on, and then secondly for Joe can you tell little about the U.S gas production decline and at what that will start to flatten out, thanks.

Sure Jeff, Bruce, I will take the New Zealand OPS question. Actually what I said was that we expect the comparison to be 50 to 70 percent as a range. Obviously, that does depend on some of the activity that we have on going. The commissioning process of the plant itself has taken a little bit longer than we thought. We are actually, the entire commissioning process is going to go through August but the plan is up and running and when you are encountering typical kind of startup issues that we had have a plant shutdown for three days in July earlier this month to bring in some new compressors but no particular issues there little, just normal start up stuff. The, right now we have just the Rimu-A1 and A3 wells producing fluid. We did flack the A2A this week.

We did get a very good fract. We need to change off tubing in that and began flowing out back and we will be flowing that back over the next couple of weeks and obviously results of that will have an impact on the throughput for the LPS. The ring of B-1 and B-2 limestone completions deny us sufficient pressure to produce end of the inward pressure of the plant on a regular basis, so we have stop collecting those in there and working on plans to reduce the inward pressure in the plant bring more steady volumes still there. If that proves to be unsuccessful then we will recomplete those or sidetrack particularly the B-1 down to the lower derrick we really encounted the lower derrick and had significant volumes coming out at us and that will probably be done after the drilling of the Kauri-A 4 and then there was also a plan development while it was renamed A4 that following that all those will get down this year and we think the will be in that range we had indicated.

Bruce do you think any of those wells that will have an impact on what you are all carrying for the book reserves at least at the end of last year?

I would say it is probably a little early to say on that at this point and Jeff I don't think so.

Okay.

Yeah okay I could, I think we were conservative in how we booked originally. Obviously you keep getting new data and you have to honor that data as it comes in. I think we took some flak certainly a year, year and a half ago, there were people who wanted to just book a lot more and we didn't. So in that respect I think we have been conservative so I don't anticipate any surprises there. I want to reiterate what Bruce was saying you know, the B limestone was a nice surprise, the Rimu B padlimestones were nice surprise when we drilled into them, we have got a lot of production out of them in terms of rate, but they were fractured limestones apparently and they really are lower rate types of wells as Bruce mentioned, we stop and now they are probably would do very well with a lower pressure entry pressure to the plant, but that's not what we are after in there.

Originally, when we drilled the B pad well, the B1, we went into the lower plate Tariki and we found the really nice lower plate Tariki zone, we were unable to get a completion in that we, because we arrived at the thrust right were the sand hits the thrust, we backed off and side tracked. We didn't sidetrack, we drilled another well the B2 to go actually go after the lower plate Tariki, so we had another limestone fracture and we were unable to get all the way down to the Tariki there. We know there is significant Tariki sands over in that area that are lower plate and in that regard there is not really any bookings to speak of. So one of the things that Bruce articulate that we are going to be doing this year is going on down, now we have got some good engineering data, good geology data, production from that limestone, we couldn't much understand it, so we ought to be able to get through and get down at lower plate Tariki and we are pretty optimistic that we are not only going to get some good production from them, but they would be able book additional reserves as a result of that restarts our plan.The domestic production is going to decline about 3 to 6 percent in the third quarter, but we are going to flatten it out in this quarter and as we exit third quarter it will be going back up and it will be flatter up in the fourth quarter.

Joe is that due to some of the reworks at AWP that you are planning?

Reworks and wells waiting to be completed at Lake Washington.

Okay. Thank you.

You know what one final comment relative to what Joe is doing here at the company. He is re-establishing our efforts down in Garcia Ranch. We spent a lot of time re-evaluating the sizement down there. This has been a good time you know when you are forced to pull hold on your you get a lot more technical and rigid review of what should we have got some excellent wells, which already been drilled down there in the Garcia Ranch area. We have got one that should be spreading in the next September really in September on the gas side as to Garcia Ranch area; we have really not performed there. We don't have to perform very much gas coming in this year because the timing obviously will work in diligently to push that ahead of timing so that we could get sometime in this year.

Yeah I mean two things are really drove our strategy is, one, we wanted to flatten the overall production profile of the company and we are doing that really by doing two things, reducing your activity in the high durability areas like Manchescreek and Burk land and increasing the activity in the production profile areas Lake Washington. The other with our view at the markets which thus far has proved to be correct, we wanted to focus more on our way in the Natural gas, but we felt that the pricing environment was better that way and those two things really had driven the activity towards Lake Washington and away from gassy areas so we are really focused on our domestic production really you know may be a slight decline of third, but flat and possibly up by the end of the year. But doing that are you building that on a better base so that your corporate decline curve at the end of the year would be much flatter than it was in the beginning of the year and you will be starting to grow production on top of that.

Yeah I have got to that in terms of natural gas. We are still very committed to the natural gas fundamentals in this country. We believe that the marketplace is improving significantly you know the 12 months growth for natural gas yesterday closed at about 3 dollars and 40 cents but that is a great number. There is very reason to believe that that number may be going up but we have got a significant inventory of natural gas projects that are extremely profitable at the free dollar level so you know we are focusing back on those issues as Bruce noted, you this was hard that we have been threw as an industry, you just did not want not be out there doing this invalidating gas last falls so you changed your some of your plans around. In the Lake Washington, It think it is really important that we make sure all our investors know what is gas opportunities in Lake Washington also. We are focused in the shallow area because it is a low cost but as we continue to develop this area, we are getting good geological information with scientific programs out there, some significant potential and Lake Washington as well. Well the nice things about all of our core area is that we have an excellent inventory of projects not just projects but probable targets if we can allocate capital to depend upon both our available cash flow and the external environment. The next question

Once again, if there are any more further questions you may press the number one followed by four on your telephone keypad. Our next question is coming from Weid Silky of JP Morgan Securities Inc. Your line is live.

Good morning.

Good morning. How are you doing?

How about yourself?

Feeling great.

Alright. You guys just mentioned that 740 to 780 in 2002 reserve debts. Did I hear that correctly?

740 to 780 is the total reserve and we would expect year-end 2002 reserves to end somewhere between 740 billion cubic feet equivalent to 780 billion cubic feet.

But how much of that do you expect to come from New Zealand in the reserve debts?

Well, New Zealand is about 25 percent of the company's reserve base and we kind of expect that proportion to stay pretty much in line with that. Obviously, the significant reserve change in New Zealand could come from those while that we were drilling, it is the one with big, big targets, multiple targets, both in the Kauri sand and Tariki sand and the sand. We would have drilled it and tested it now, whatever we do find there will certainly going to be very very conservative in terms of booking, but that's where you have a more significant one. We are also doing some additional work at Tawn were we believe that we cannot just add production for somebody workovers, but also increase reserves there as well.

Alright. Thank you.

Thank you.

There is an other reminder, if you do have any further questions or comments, you may press the number one followed by four on your telephone keypad. Our next question is coming from Jeffrey Robertson of Lehman Brothers. Your line is live.

Joe a follow-up for you on Lake Washington. I think you mentioned 40 million barrels of a potential in the sand?

Thats right.

Is that an addition to some of the numbers you all have talked about before or did those numbers include some component for the possibility of F reserves?

No this is an addition to numbers we used before.

Yeah we didn't have the F sand map before, Jeff because it had never shown to be productive in the sales, and now we have 3 well bores with that productive.

In fact full to base, do you have any we will contact you.

Okay is it something Joe that just didn't show up on loss before?

It set wells laid down dip that were wet and the sands that were driven for previously were the DNE sands, which were above the F sands, which were close to the south, so they drilled a bunch of wells for DNE sand and then they drilled for some deeper horizons way of the flank of the dome and so they never drilled any kind of intermediate wells where the F sand does occurs near the south.

How many of the wells you planned in the second half of the year? How many times would you expect the see the F sand?

It is everywhere we drilled down, I would say, at 2 out of 3 wells we are going to drill and in future, we will have an abstain objective.

Okay. Thank you.

Thank you.

Thank you.

Right Jeff.

Our next question is coming from of First Albany. Your line is live.

Hi, how many wells you are planning for this year at Lake Washington and it's reserve target with the Kauri-A4 well this year?

Well, I think that Lake Washington originally in our budget, we had 22 wells; 2 exploratory and 20 development wells. Our drilling costs are running below our original budget estimates. So, we can probably with the same amount of dollars, drill out additional 2 to 3 more wells and with our cash flow running above but we had original budget, we probably will increase the number of wells we drilled in Lake Washington, may be 5 or 10 more.

Okay and do you have a reserve target on this exploratory well in New Zealand?

Yeah. The number that we have used for some time and continued to use for the Kauri structure really encompassing both the Kauri Sands , Tariki Sands, and Kapuni Sands as it had potential reserves of over 200 million .

Thank you.

Gentlemen, there are no further questions at this time.

Well, thanks everybody for joining us on the conference call. If you have any further questions please feel free to follow up on a one-on-one basis.

Okay. Thank you.

Thank you.

Thank you, this thus concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.