SilverBow Resources Inc (SBOW) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Swift Energy Company Q3 Earnings Conference. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. It is now my pleasure to hand you over to your host, Mr. Scott Espanshade, Director of Public Relations. Sir the floor is yours.

Thank you Mandy. Welcome everyone to Swift's Q3 conference call. Today's call will cover our third quarter results for 2002. Terry Swift, President and CEO will give an overview and then Alton Heckaman, Senior Vice President and CFO, will provide an overview of the financial results for Q3. Joe D'Amico, Executive Vice President and COO will review our domestic operations and then Bruce Vincent, Executive Vice President Corporate Development, will update our New Zealand activities, and Terry Swift will then conclude before we open up to questions.

But first I would like to remind everyone that our presentation will contain forward-looking statements 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 have allowed additional time for questions. Terry.

Thank you Scott. We welcome you again to Swift Energy Company's Q3 2002 earnings conference call. I would like to start out by saying there is no question that our equity performance has been disappointing recently, and that we, as a management team, believe that our equity is undervalued. We will go into some of those reasons in this presentation. We are implementing our 2002 Business Plan, which was communicated at the beginning of the year, and we do believe we are going to be able to deliver visible production growth and perform at the bottom line, and that of course is the objective, the financial goals for the company.

Swift Energy Company has completed another eventful quarter, with lots of positive operating results that we want to communicate to you. Production has increased from a year ago. Lake Washington, one of our emerging core areas, is developing very nicely. Our bank group has reviewed our asset base and reaffirmed the borrowing base at $195m. We continue with our strategy to replace our higher decline production profiles with lower, more stable production profiles. That's been a very important strategic objective for us, and we are having a lot of success there.

Our domestic budget remains focused in Lake Washington, a field in South Louisiana. Our success in the shallow development drilling project continues to provide us with a lot of visible production growth, a lot of good results, a lot of high quality types of reservoirs that we are encountering there. And we are making plans to add an additional rig to this area. We will go into that in more detail later.

We also have plans to add drilling activity in AWP in our Brookeland Field and in Masters Creek as we go into 2003.

In New Zealand, we actually had tested, or done preliminary testing in the Kauri Sands and the Kauri A4 exploratory well. We were encouraged by those initial results. We will give you some more details on that. There is no question that with the Tariki Sands we have had some concerns in the past about formation damage. We have had some more recent information that leads us to that particular conclusion, and as a result of that, we have contracted the services of an international firm to review all aspects of that reservoir development and we are encouraged with some of their preliminary findings.

As for the TAWN assets, which were acquired in January from Shell New Zealand. They have continued to give us excellence performance. We are implementing numerous exploitation projects in TAWN, which should also give us reserve growth in production growth in that area.

As we look at 2002, we are on track. Our outlook for this year is we expect about 49 BCF equivalent in production. We expect our reserves to be between 740-780 BCF at year-end with an improvement in the proved developed producing, proved developed category up to 55%, maybe 60%. We need a lot of work done as we go through our year-end assessment. We've had a lot of penetrations in Lake Washington, a lot of production coming in, in Lake Washington, so that work is ongoing. We expect our finding cost to be between $1 and $1.20 per Mcf equivalent this year. Those are all strategic objectives that we are on track with. Lake Washington, we've noted we do have visible production growth there and we currently are looking at about 4,500 barrels a day, equivalent that we expect in the very near term there.

Going forward into 2003, I want to stress that we expect to have 10% production growth in next year's budget. We are close to the point of being able to communicate the details of that to our public. The primary driver in next year's growth will be low risk development in Lake Washington. We have identified approximately 50-60 drilling locations with very specific geologic targets. We plan to continue our evaluation of the reservoir characteristics and work aggressively in New Zealand, looking at the Manutahi, the Kauri and the Tariki Sands and add some reserves and production growth there next year. We are looking forward to the results of the study that have been conducted, or are being conducted. We will continue to exploit TAWN. It is providing us with numerous opportunities there, and we will be focused on reducing our cost.

With that introduction, I would like to turn it over to Alton, to present the financial results.

Thanks Terry, and good morning. I will touch on the highlights of the detailed financial information, which we have included in our press release. Swifts' Q3 2002 production volumes of 12.2 BCFE, increased 4% over the same quarter in 2001 although down from the most recent quarter. Domestic activities contributed two-thirds of the production for the quarter while New Zealand contributed the remaining one-third. As previously noted, domestic production was impacted by the end of quarter shut-in of our Lake Washington production, due to the September tropical storms experienced. New Zealand production however, exceeded our guidance for the quarter as the TAWN acquisition continued to produce excellent results.

Although production increased over 2001, Swift's realized overall pricing declined. Swift's average composite third quarter price per MCF equivalent dropped 11% to an even $3 for 2002. All the gas revenue was therefore 7% lower than the topical 2001 quarter. Swift realized just under $2m in net income for the quarter, $0.7 both basic and diluted, compared with nearly $7.4m in the comparable 2001 quarter.

Cash flow before working capital changes for third quarter 02, came in at $16.6m or $0.61 per diluted share. EBITA was $23.1m.

As Terry said in his introduction, we remain focused on reducing our controllable per unit cost. All of which came within our guidance for the quarter with two exceptions. Domestic lease operating costs came in higher than our guidance, as certain expense work over and remedial well activity caused a jump in this category for the quarter. We incurred about $1.1m of such cost in the quarter, mainly on our Masters Creek area. Depletion expense per unit however, came in below guidance for the quarter, as reserved additions from our recent domestic drilling, which we will talk about in a minute, exceeded our expectations.

As to our liquidity and as previously we have discussed our tandem debt and net equity offering in Q2 netted the company approximately $225m. Along with our bank line, which we announced yesterday, and which Terry mentioned in his introduction, which was re-affirmed by our bank group at $195m, Swift is in a strong financial position. Recent pricing improvement has allowed us to layer in some hedges for the remainder of 02 and into the first quarter of 2003 in the form of participating collars and floors for both oil and natural gas. We recently began posting our price risk management position on Swift's website. You can look there for the details.

Further price improvements will likely allow us to layer in even more protection in this volatile pricing environment and we continue to feel that this method of hedging is very much in line with our historical strategy of protecting the downside without giving away upside opportunity.

CAPEX for the third quarter was $31.9m, which included $5.6m the acquisition of our New Zealand remaining minority interest owner, which we closed in September. Additionally, in the press release, we have included a new page, which compares current quarter operational results to the most recent quarter, at the request of folks that follow us. And finally, we have included a summary balance sheet as of quarter end, which reflects the company's strong financial position, with the balance sheet and the liquidity to successfully implement our business plan, both domestically and in New Zealand.

And with that, I will turn it over to Joe D'Amico, for an overview of our domestic operations.

Thank you, Alton. Good morning.

Production for the third quarter 2002 increased by 4% from the third quarter 2001 to 12.2BCF equivalent, an average of 132.7 million cubic feet equivalent per day. This was a 4% sequential decrease from production of 12.7 BCF equivalent in the second quarter of 2002. Domestic production totaled 8.1 BCF equivalent for the third quarter, an average of 87.7 million cubic feet equivalent per day, which was reduced by approximately 69 million cubic feet as a result of production being shut in due to tropical storm Isidore. Natural gas represented 49% of the domestic production and 55% of the total production.

Total production expectations for the fourth quarter 2002 have been set up between 11.7-12.25 BCF equivalent. Total 2002 production will be approximately 49 BCF equivalent, which is an approximately 8% growth rate. Domestic production will begin to increase in the first quarter of 2003. We have flattened the company's underlying production of the client curves this year.

During the third quarter the company drilled 10 wells - 9 development wells and one exploration well. 7 wells were successful. All of the company's operating drilling activity this quarter was concentrated in the Lake Washington field. A completion rig is in the field to finish completing the remaining wells from the third quarter and any wells drilled up to that time. We have put two wells on production last week and currently have two wells completed waiting on flow lines and five wells waiting on completion, and one currently being completed. Moving to South Texas, we have a non-operated well drilling in Garcia Ranch field and Kennedy County, Texas. It will take approximately 20-30 more days to complete drilling and evaluation of this well.

Swift has a 30% working interest. This brings the company's domestic drilling results to date for 2002 to a 77% success rate on development wells. We have 17 and 22 being successful and 2 or 5 successful exploratory wells for the year to date.

During the fourth quarter we plan to drill 8 additional development wells in Lake Washington. In Masters Creek we had several workovers to replace part of our production strings. This increased our LOE in the third quarter and we continue this work into the fourth quarter. Additionally LOE costs will be incurred in the fourth quarter at Lake Washington as Swift upgrades its shore facilities.

Looking at 2003 in our core areas and Lake Washington we will be starting a 50+ well program in 2003. We will continue to drill the shallow sands, but we will start to look in more of the deeper sands. Which I mean by deeper, is below 3,000 feet. This is the FHIK and 8,400 foot sands. Swift has currently over 23 drilling permits, 20 flow line permits and one saltwater disposal permit approved. We have over 40 additional drilling and associated flow line permits in progress. Swift will be capable of handling its own water disposal in the first quarter of 2003, which will lead to some cost saving in the field.

In Masters Creek next year we are in the process of forming a super union in the field so that we will be able to drill an inshore well in the second half of 2003. In Brookeland we plan to drill a development well next year. In our South Texas area in AWT we expect similar activity next year. Oil drilling jobs, refrags, plus the company will have a rig in the field for a small drilling program. We received an ECT for density permit in AWT, which removes the internal lease lines on the Bracken lease and has allowed Swift to high grade its FUDS so that we can drill more in the sweet spots. With that, I will turn it over to Bruce to talk about international operations.

Thanks, Joe. In terms of New Zealand, I am going to cover first the TAWN area and then give you an update on the Rimu-Kauri activity, and then lastly talk a little bit about what our plans are for next year.

Up at TAWN, which was an acquisition that we closed in January of this year - four fields - that continues to perform exceptionally well. It produced an average rate of 36 million cubic feet a day in the third quarter, which was down somewhat from the second quarter, but down as we had forecasted it, because of lower demand due to greater availability of hydro-electric power. The facilities however were tested in the third quarter as are currently configured for the ability to product gas through to facilities at a rate up to 45 million a day, whereas they had been producing in the 27 million, 30 million a day range. We are hoping to increase deliverabilities out of TAWN next year, and we are working on that.

For the fourth quarter we expect production in this area to average about 40 million a day. We expect it to be up a little higher than that in October and November, but down in December, which is normally a reduced demand month in country. These facilities are currently down for about a two-day maintenance shutdown, but expect them back up on production later this week. We will continue to work on the exploitation in these fields as we have done during the third quarter. And we are continuing to evaluate the deep potential in the area, where one of the first wells in the Waihapa field was drilled to the Kapuni sands and did have a production test that tested over 3 million a day.

Further to the south, in the Rimu-Kauri area, the third quarter production volumes averaged approximately 1000 barrels a day equivalent, which was what we had forecasted and this included a three-day shutdown in July. We expect the production through the Rimu production station to continue to average at these rates through the fourth quarter. We had hoped to increase throughput to the plant by year-end, through fracture stimulation efforts of certain wells and a new development well, but we don't see that happening yet.

A fracture stimulation was performed on the Rimu A2A during the third quarter and this proved to be unsuccessful and in fact it reduced the productive capacity of the well. We believe that this stimulation and the way it was done further damaged the formation. As a result of our continued concern over possible formation damage in these formations and the production that we're seeing out of them don't correlate with the rock qualities that we see, and particularly the original test results in the Rimu A1, we recently contracted with a world renowned consulting firm to review all aspects of this reservoir development. We expect this study to be completed early next year and as a consequence we suspended further drilling and work over activities until we have had a chance to review the results of this study and determine the best way to go forward.

The early work that they have had a chance to preview with us is confirming damage in the formation. And what we are in particular working on are ways to remediate the damage that exists in the hope that we can fix the current wells that are there and increase productive capacity, as well as determine better drilling and completion operations, to prevent the damage in future activities. And we have a positive outlook based on the results today of the study.

We also plan to continue to do further work, later this quarter to continue the evaluation of the Shell and Manutahi sands by utilizing hydraulic lift and do plan on drilling an additional development well, although this may not get done until early next year.

Of significant note though, we have recently completed some initial testing of the Kauri sand in the Kauri A4 well that was recently drilled. This tested at over 2 million a day and 76 barrels of condensate over a 100 plus hour test. The preliminary test data, along with the initial information from the pressure build-up, are quite encouraging. However I do want to point out that they do require further evaluation. We are still trying to retrieve another pressure build up bomb in the bottom of the hole and evaluate that data, and then we will decide what the next step may be. But we are encouraged by it - this penetrated large anomaly in that area.

Next year, our plans are really devoted to several areas. Up at TAWN, we continue to plan to do further exploitation work and hope to increase production out of the existing fields both through this effort, but also in increasing the takes to the market in New Zealand. We also plan to continue development of the and Manutahi sands as well as further evaluation of the Kauri sands and then a review of this study on the Tariki sands and then determine the best steps to take, moving forward from that.

I am going to turn it over to Terry, who will wrap it up before we open it up for questions.

Thank you Bruce. Again, and in the summary here, we want to afford a lot of time for questions, q and a. We are very disappointed in the performance of the equity as of recently, and we understand that we have to deliver production growth, and that we have to perform in the way of delivery of financial bottom line results. We expect to demonstrate at year-end that we've made significant progress towards this end, and I think as a result of where we are going to be a year-end, our assessment that we are undervalued will be agreed upon.

Looking at 2002, our production growth is on track and we are going to meet our production guys and set the lower end. 2002 CAPEX budget has allowed us to focus on acquisitions and development of long life reserves with a flatter production profile. This was our strategy at the beginning of the year. We have continued to implement that strategy. The acquisition of the TAWN properties are clear evidence of very stable, high quality, lower decline type of property. The development drilling at Lake Washington is further evidence of visible production growth, lower decline types of properties there. We are pleased with what we are finding and what we can show going forward.

Looking into 2003 I think it is very important to demonstrate that we have visible production growth and we expect about a 10% growth in production next year, through our development activities, principally in Lake Washington. But also the rig activity that we are going to be putting together in AWP as well as some of our horizontal drilling. I want to stress that that visible production growth we can see right now. We had some minor setbacks in Lake Washington as a result of storms and some other things. Those tend to be used as just excuses. We don't want to give any excuses, but we see the visible production growth. We have tested the wells. We know where that production is coming from and we are obliged to inform you of that. In fact, we have strong evidence through our tests and our activity in Lake Washington that we should see that growth in the first quarter of 2003 and beyond.

Lake Washington exploitation has unlocked more reserves than we had originally anticipated. We have ongoing geologic and engineering studies as we have drilled into numerous pay-zones that were much thicker and much more oil saturated than we had even anticipated. It is hard to talk about the actual potential numbers until the work is done, but we clearly believe that we have potential in excess of 40 million barrels there. I stress the word 'potential'. I also want to stress that we will evidence this year significant proven reserve growth in the field. We know that. We have got the test data and we have got the production already established.

Swift Energy Company has identified 50 to 60 wells and with every new well we drill we are finding more good geologic results. Joe gave a pretty detailed review of the number of permits that we have already acquired for various types of activities from drilling to flow lines etc. We are clearly positioned in terms of our contingency planning, getting ahead of the curve in terms of the operating problems that tend to exist in this type of operation. We are very confident that we can deliver the production.

New Zealand will continue to develop. In particular the Rimu area and the throughput of the RPS is a very critical and important issue to us. And we just judge it as the proper approach to let these studies be completed before we resume any sidetrack operations that we might need to do, any remedial work that we might need to do. One of the development wells, whatever has at the end of the day caused the formation damage, we want to assure ourselves that we don't do it again. When you look over the Kauri structure, we are having encouraging results there. We want to be very cautious though. Initially it looks like we've got some kind of gas reservoir. As to the commerciality of it, it is premature to make any particular assessments. As to the anomaly that we drilled for, that is where we are finding the gas. As to the size of that anomaly, it has not changed. As to the thickness of the anomaly it has not changed and structurally it was of course high. So a lot of the geologic expectations have been met, but we have got to turn that into some sort of final result and we are of course hopeful that it will be a commercial type of discovery, though it is premature to say that.

We have focused hard throughout the year on our balance sheet and as Alton reviewed with you, in great detail, we feel like we are in a comfortable position. We want to be bringing our debt down as a percent of our net asset value, with our strategic plan going forward. That is one of our key objectives. Yet at the same time having our borrowing base reaffirmed by the bank group is a very positive step for the company in maintaining its liquidity and its financial resources.

At this time I would like to turn it over to question and answers.

Thank you. The floor is now open for questions. If you have a question we ask you to please press the numbers 1 followed by 4 on your touch-tone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the £ key. We do ask all parties to please pick up their handsets while posing their questions to ensure optimum sound quality. Again, that is 1 followed by 4 on your touch-tone telephone at this time. Please hold while we poll for our first question.

Thank you. Our first question is coming from Van Levy of CICB World Markets. Please state your question.

Morning, Terry and crew, how are you?

Hi Van, we are doing great.

Good. Good news that the reserves are going up and the proved develop, if I heard this right were going up to somewhere around 55%-60% or I guess the proved undeveloped would be going down, and I would like to focus domestically if I could. Domestic I think last year the proved undeveloped was around 47% and within these numbers, I know they are kind of loose right now, where do you see that moving to?

Well I think I want to speak to the volumes so that we are clear about the distinction on how these percentages are developed. I think that the number you are quoting is a volume number and of course if you look at a value number, the actual of percentage of PVT and of course, different people are going to use different price tags. I think the number was actually lower on a value basis. But when we said that 55%-60%, what we are saying is we expect the proved developed portion to, on a volume basis, to move into that 55%-60%, right?

Which means your deposit would go down to 40%-45%?

Reserve basis.

Ok. Obviously your stock has been hammered pretty dramatically and I am looking at my net asset value, which I am coming up with around $26 a share. Now clearly part of this is New Zealand. If I make the assumption that the Rimu area and all the money that you have in that area is worth zero, the TAWN acquisition, it sounds like it is producing cash flow. That drops my net asset value down to $21 or so. Even if I throw out the TAWN completely and say it is worthless, my asset value stands at about $17, so something clearly is awry with your valuation. You know, based on this kind of, you know, logic that I am going down, could you speak to either the market is right, and your existing domestic reserves are worth quite a bit less? Which I would hope that you could go through your key assets domestically. The production that you had year-to-date, you should be, I am sure updating your monthly production forecasts as it relates to your year-end reserve base and look at over-performance, under-performance. And I am hoping that you can go through some of the key assets - AWP, Brookeland, Masters Creek and now that Lake Washington - and give me a sense of performance and how risky this area is. And again we could kind of gauge whether my net asset values are way off because the market is right, or you know, we indeed have a buying opportunity here?

Well, I will start with that question to see if I can get through it all the way. Bruce has been taking some notes so he may want to chime in here. But I clearly think we are undervalued. And probably the best way to start is with New Zealand and address that. There is no question in our mind that there have been some reviews or pundits or however you would look at it where New Zealand, particularly the Kauri well that we have drilled - I think that there was too much emphasis in terms of news or event on that well towards a downward evaluation of those assets. There is no doubt that New Zealand is profitable right now in the totality and TAWN is the key element of that profitability at this point in time and there are significant assets there. They are producing. It is a revenue flow. It is demonstrable. It is visible and to write that off and say it doesn't exist is simply to ignore the actual production.

Beyond what you can see in the actual production, there is significant upside in TAWN. There is deep reserve assets that we are working on there. There are exploitation projects we are working on there. So even beyond a visible production you see in TAWN there is additional asset there that we are continuing to work and provide capital allocation to.

When you move over to the Rimu field and Rimu production station, we have had some setbacks there. We have had disappointments there. They have been slow. When you work international, things just don't tend to happen as fast as you would like them to. It was very unfortunate with that frag job that we didn't increase production. It is very rare that you do a frag job and actually decrease production, so that was more or less a signal to us that we ought to bring in some experts and have some other people look at it. And we have done that. And so in that regard, that may also be sending somewhat of an overly negative signal. We do believe that there is still significant reserves there. As to how any revisions will come forward in the Rimu area, we need to let these engineering studies and geologic studies be completed. We need to listen to the third parties.

This we have already got as Bruce noted, some preliminary indications that some of the problems we see there may be solvable with some sort of remedial operation. We are just not prepared to say what that is, right now, but certainly with our year-end numbers, I would expect in that area, we will have some downward revision, but it won't be to zero. We have got production there right now. We have other reserves in that area that we do have high confidence in. The Manutahi is a very large oil accumulation that presently we haven't fully explored it or evaluated, and we have activity there right now, through year-end, that could significantly add reserves on that project.

So, I think it is way too aggressive to just simply say New Zealand has lost its potential, has lost its revenue flow, has lost its assets. That's overly aggressive.

ok. And Terry, real quick. Roughly for the quarter, what was the EBITA from New Zealand?

I think they can pull that up while I move onto the domestic. Domestically, we had a purpose strategy. We communicated our strategy throughout the year and that was to not have an emphasis on the higher decline of production profiles in terms of our capital allocation and to focus our capital allocation on the lower decline production profiles. What that means is you are going through a transition. And in that transition, as you let the higher decline properties come to a lower level, you are replacing that production with the higher quality, more predictable, more certain lower decline production. And despite the storms and some of the other flow line permitting setbacks we have had in Lake Washington, we are accomplishing that goal. And it is visible and you know, you can talk to different people about what they need to see to prove to them the visibility. But we work with a lot of industry experts and in that regard I think we are going to prove, beyond a shadow of a doubt, that those reserves are more than we expected in Lake Washington. And that the production is more than we expected in Lake Washington, and first quarter of 2003 we should deliver substantial results in the form of production. I think that's an important material aspect of what we are doing.

In AWP we have focused this year in getting some regulatory things done, so that we can focus on the best locations to be drilled. That's been accomplished. We are putting the rigs back to work, both in some of our horizontal activity as well as AWD, and so if you look at the production there, you know, it is there. These are good, solid, long-term assets that are going to be there long after we have had our careers in this business.

Van, of the approximate $23m of EBITA in the third quarter, approximately $5m came from New Zealand. I think I will just add to what Terry said. I know some of the concern has been the dropping off of our domestic productions, sequentially quarter to quarter, during the year and we see that again happening in the fourth quarter. But let me take everybody back to January when we reiterated our strategy for the year. We came out of last year recognizing that we had failed and we had a plan this year to turn things around and to change that. And part of that plan was to focus on latter decline, all property in Lake Washington that was also lower risk, lower finding cost, because we knew we needed to come out this year with a significantly reduced finding cost. And we believe our finding cost is going to be below our five-year average.

Secondly, part of that strategy of flattening the corporate decline curve was to back off of drilling activity in the high deliverability areas, which happen to be Masters Creek and Brookeland in particular, but AWP to some extents, which happen to be gas properties. Also, in January of this year, when we developed our strategy for the year, we felt that the pricing environment would be much better for crude oil than it would be for gas. We also knew that we would be bringing on the TAWN acquisition in January, and the Rimu production station in the spring of 02. So our strategy was really to allow the domestic production to drop off. But in doing so you build a better foundation moving into 2003. We think we will move the corporate decline rate, which probably even in last year was 35%-40% ought to be down to about 25% as we move into next year, and we think we can drop that further down to about 20%, during next year. We do see domestic production turning around immediately moving into the first quarter of next year and we see it growing sequentially quarter-to-quarter, throughout the year. The primary driver domestically, obvious in terms of growth, is Lake Washington. Although we do plan some continued work in AWP, now that we have this Entity for Density permit, and we would expect to keep that production relatively flat during the year.

And our current plans is allowing a continual, small, run-off in Masters Creek and Brookeland, which we think is a good thing, but we do plan further activity later in the year. In particular, as Joe mentioned, we are trying to take two units and enlarge them into one. That will allow us to start moving in and infilling the sweet spot of the Masters Creek deal where some of those wells have produced already, over 2 million barrels per well bore and are projected to produce probably as much as 3 million barrels out of one well. And that's the kind of stuff you want to infill when you've done your regulatory work to allow you to do that.

So again starting where I started 5 million in a quarter in New Zealand, let's talk about TAWN, which most of this is TAWN. It is 20 million a year. It is a 10 or 12 reserve life. Let's put a five multiple. It is worth $100m. The US reserves again, I value after development costs of approximately $200m, be worth about $764m, you come up with a $21 asset value, so unless contrary to what you are saying, and we are going to have at year-end, degradation reserved write downs. And I think what the market is looking as production declines as a way to, they are taking from the production declines the notion that you are going to have degradation on these assets. It still seems like a huge spread between you know the private market value of these assets, and where the stock is trading.

One of the reasons we reiterated our expectations for this year in terms of reserves was to obviously add some comfort to that concern. You know we have a high level of confidence our reserves will be in line with our guidance that we put out in January of this year. In January of this year we said reserves we expected to be between 740 billion cubic feet equivalent and 780 billion cubic feet equivalent at year-end. We continue to see that possibility. In fact we have a high level of confidence it will be within that range. I mean that obviously tells you there is not a degradation in assets of the company.

Okay, thank you very much.

Thank you. Our next question is coming from Adam Light of Credit Suisse First Boston. Please state your question.

Morning guys.

Hi Adam, how are you doing?

I am still writing down the notes from the first part of Van's question.

That was a conference call in itself!

Just a couple of things on the first of all, on the domestic production profile. Just, if I recall correctly Lake Washington production per well is kind of in the 125-150 barrels per day per well range? Is that a correct number?

Probably about 200 barrels a day on average.

And the timing of drilling the wells that you have planned for next year, what's kind of going to be the average of incremental?

Well, we currently have one rig working in the field and we drill a well a week. Or about three and a half wells per month. And we plan on picking up a second rig to start drilling in January, so we will have two rigs working continuously in the field in the first half of the year, and maybe for the whole year.

And is there any facility increase that needs to be dealt with, or can you bring on that production?

We have dealt with facility problems this year. We have spent money upgrading our facilities and currently we can handle 9,250 barrels of oil per day and 9,250 barrels of water per day production. So we can increase our production considerably before we have any facilities constraints. And we have added on to our platform so that with a little additional work we can increase our facilities' throughput to about 14,000 barrels of oil per day.

And there has been one other. We were, or currently and have been taking our production through Phillips, where there is a current limitation of about 4,000 barrels a day. But we are a few weeks away from moving that directly into Exxon system where we won't have that limitation.

I want to add also that while we have developed what one might call a statistical program out there - 50-60 wells with two rigs running - and we have planned in terms of facilities, to upgrade those facilities even further next year. One needs to remember we actually have identified every location we are going to drill next year, so in that regard, it is not statistical. And one does need to remember that we have already drilled 20-30 wells out there and we already have some pretty good understand of what different formations contribute. We have wells that have been stinkers out there, and we are not going to want to drill those kind of wells. But we also have wells that have been in the 500-900 barrel a day range and we clearly are going to focus on those kinds of wells. So, when we talk about our program, we are using a statistic. We are building in there a significant 25% dry hole rate. We don't expect to have that rate, but we are being conservative in that and we have built in a statistical production rate, but we are clearly going to focus on higher quality rocks. We have already found at least five reservoirs, or five different sands that are of exceptional quality. Well over 100 feet of oil column.

And the average NRI here is seven-eighths, is that right?

Low 80%. 82%. It is 82.67% is the average, to be exact.

As Bruce said, we have a physical constraint through Phillips right now of 4,000 barrels a day. But as I said earlier, we have 8 wells being completed or in the process of being completed, so that once we go into this Exxon system, we will have those wells completed and on production.

Exit rate for fourth quarter you have given us an average I presume. The average is brought down somewhat by repairs and storm activity etc. What would you expect the exit rate US to be fourth quarter?

Well in Lake Washington we have been talking about an exit rate of about 4,500 barrels a day. Clearly trying to set an internal goal greater than that. Bruce is actually making an effort here to calculate that exit rate. The only increase that we are going to be able to speak to is going to be Lake Washington during the fourth quarter, but it is material and that is what we are trying to represent here is that it is material.

In terms of AWP, I also want to emphasize, we planned to put another rig out there this year. But because of the success we have had in Lake Washington, we actually continued the Lake Washington activity beyond the original budget. Put more capital allocation in Lake Washington, both in the way of expanding facilities and adding some additional wells this year. So we have got a lot of momentum in Lake Washington, both because of the original drilling in the field and this additional capital allocation that we took from some of our other properties like our horizontal and our current assets and kept applying that capital to Lake Washington.

I am trying to get the actual exit rate, Adam, but I think what we are looking at right now in the first quarter we expect domestic production to average in the first quarter above 15,000 barrels a day equivalent or above about 90 million cubic feet a day equivalent in terms of an average daily rate.

So if the underlying decline rate away from Lake Washington is at 30%-35% the other drillings are going to bring that down to, I haven't done the math yet, what do you think? Away from Lake Washington? Net of adds.

Could you repeat that question Adam?

If your underlying decline rate away from Lake Washington is in the 30%-35% range annually, I am assuming that is in the ballpark, and you are going to be doing some drilling Masters Creek, AWP etc, what do you think the--?

Well, we probably ought not do - put some number out here that we are not real comfortable on concerning first quarter of 2003 underlying decline. We can work on that and get back with you, or get back in some other format. But you know, AWP is not declining that fast and you know what you have is certain areas that were declining faster than others. Masters Creek was declining I believe, faster than Brookeland. And Brookeland was declining faster than AWP. And then we have some other properties in the Giddings area that are non-declining at that rate, or some of our South Texas property, so it is not as simple as it was a certain decline, and therefore it is going to stay that way.

Lastly the borrowing base looks like you've got it all available. Are there any covenants for other restraints that would limit you to less than the $195m that you have?

We've done some work obviously looking into next year and we don't see any constraints at all with covenants from any of our debt agreements.

Okay, I will yield the floor. Thanks a lot.

Thank you, Adam.

And to our next question coming from Eric Sypersland (pf) of Lehman Brothers. Please state your question.

Eric Sypersland (pf): Good morning. You were talking about 10% production growth next year. What sort of a CAPEX level do you anticipate to get to that 10% level?

We don't really come out with our budget for the next year until January Eric, the official budget. But what I could tell you based on the preliminary work we are doing is that we see a total capital budget less than this year's budget, because this year it had the TAWN acquisition and the acquisitions of the buying [Antrim] interest. But the actual drilling budget will increase over the drilling budget of this year.

Eric Sypersland (pf): Ok. And also with your higher lifting costs that you discussed in the call extending into the fourth quarter, should we be using about $0.90 per MCFE for total lifting costs in the fourth quarter and what do you think is a good number for modeling for 2003.

Really after fourth quarter we went to a lot of effort to put out the guidance that was then released and also actually posted on our website and we clearly do not quote a all-in per unit number. We actually split it up between the taxes and between the controllable costs, so I would point you toward that guidance and tell you that we clearly updated the fourth quarter for the expected additional cost for some work over and remedial type activity.

Eric Sypersland (pf): Okay I'm sorry I guess I hadn't seen the 2003 guidance.

That was just fourth quarter of 02. We have not put that out officially Eric but we do expect the LOE's to come down next year.

Eric Sypersland (pf): And also just a last question here, on your hedges. Obviously you posted the hedge information on the website as well, but you know, what would it take for you to lock in additional hedges for 2003. Can you discuss what you are looking for?

Well, as you know as you go pretty far out into the market, your flexibility is diminished. Our strategy has been to do collar transactions where we actually put a floor around about 50% of our production and then we have a ceiling, but we retain 60% of the Exxon beyond that ceiling. If you try to take that transaction out to a whole year, you would pay a pretty heavy premium so we have typically only had a two-quarter outlook in implementing that strategy. We of course are going to be looking at that harder and as we move forward, there might be a situation develop, where we might do some swaps. And typically if you are going to try and do a whole year, I think you need to be looking at swaps, because that is where you don't really pay the heavier premium to do that. But right now that is not part of our strategy.

Eric Sypersland (pf): Okay well thank you very much.

Your next question is coming from Phil Juskovitz of First Albany. Please state your question.

Yes. Your 2002 reserve estimate. Does that include New Zealand and the formation damage there, and you know, when the evaluation study gets done in early 2003 would you then possibly lower your reserve estimate?

I think that the best way to say that is we look at everything in the aggregate and our guidance that we are giving is net of all the aggregate changes that we can anticipate at this point in time. So I think it is clear that with the information that we have right now one would anticipate that there are certain project areas, principally the Rimu area, where we expect some sort of downward revision and we have built that into our guidance here. But as to the actual work that is not completed, we will have to see how that comes forward. We additionally have areas where we expect some increases, so but that is a long answer to your question, saying yes, in our current guidance we have built in some expectations there.

ok. And also I missed the numbers before. Can you just comment on your South Louisiana production decline rates where they are right now?

Well in terms of the overall growth of production there, Joe may want to speak about. But this is typically water drive reservoirs and I can say with great confidence right now that what we have been experiencing there is more of a managed production. That we have some few wells that are on some natural declines and I will have Joe speak to that at present. But the bigger wells that we have brought on recently that have pretty much tapped the capacity out there. We have had to manage that production to keep it at the capacity until we get these facilities and these flow lines and permits all in place. Joe, do you want to speak about the underlying declines?

It is hard to say what the underlying decline is since we are at a facilities restraint in our production right now. We have wells that are capable of producing a higher rate that are producing at lower rates right now. With the water dry sands, these wells typically have enough energy that they produce at a fairly constant rate until they start making water. And even when they first start making a little water we have gas lift to lift these wells, so we can maintain the producing rate for quite a while. So that typically a well in this area would have its production constant for a third of its reserves and then start declining out. Some of the older wells in the field are probably declining at probably 15% or 20% due to increasing water production.

I think it is fair to say that in our modeling as we look forward all we can do is kind of take some analogies and look at some of the older production out there. And we have been using about a 20%-25% type of decline in our modeling, but as Joe says but with water dry reservoirs in the gas list operations you do have the opportunity to manage some of that production in its early life.

Okay thank you.

Thank you. Your next question is coming from Greg Anderson of Bank One. Please state your question.

Thanks. I just had a couple of questions. The first of which is with the re-confirmation of the bank lines. Was there any other changes to the bank lines as far as covenants or maturity, or anything else that might affect those lines?

No, nothing at all. This was an agreement that we re-negotiated, I guess, last fall for four years and this was the normal semi-annual base re-determination and we just asked the bank to reaffirm it. We didn't try to get any different numbers and it is a fairly easy routing process and it was reaffirmed without any issues whatsoever.

Great. Is there any word on when the study for the reassessment of the reserves in Maui field might come out? It seems like we are getting towards a time frame when it was supposed to be released.

The Maui field?

Yeah I think Netherland [Sul] (pf) is doing a study on Maui. I mean we are not privy to the details of that, Greg. As I understand I think Netherland [Sul] (pf) is doing a study of the Maui field reserves for a gas re-determination that is going on between the operator of the Maui field and in the by-purchases of the gas.

Right. Do you think that might have a little bit of effect on your focus in New Zealand?

Let me just take off from that question. We see the gas markets and their concerns for the future gas supply in New Zealand tightening up quite a bit. The end users of natural gas are becoming quite concerned over where they are going to get the gas from and we definitely see upward movement in the price for natural gas in New Zealand. There is no doubt about that whatsoever.

When Maui falls off a cliff, it falls off a cliff.

And my last question, you may have answered, but I might not have caught it was do you have an LOE for the Lake Washington field that you can give us for the third quarter?

I don't think we have broken down about fields, at least with this.

Right, thanks.

Thank you. Your next question is coming from Frank Bracken of Jefferies. Please state your question.

Hi guys. Actually it is Steve Zachoritz and forgive me I had to step out for one second, so some of this may have already been answered. Turning back to New Zealand. As far as reserves go there looking at this study and will you have enough knowledge prior to year-end to determine whether or not you need to take another, make it a revision here, or not? That's the first question.

Obviously it is premature to answer until we have the status. But we do expect to have sufficient information from the study that may affect how we calculate reserves and obviously we would have to review that with our outside independent engineers in terms of taking that into effect and the determination of reserves in Rimu. You know based on what you know today, I think we would expect some revision in the Rimu/Tariki reserve, but also based upon what we know today, we would expect increases, particularly in the TAWN area, in terms of reserves. So overall there is the element that we are not sure at this point in time, although it is premature to say, whether we will have any significant changes to the overall New Zealand reserves.

I think the other thing that obviously could be material, is the continued testing of this Kauri sand and the Kauri A4 well. The testing is not complete. Awaiting data and we may do some further testing on the well and that could have a bearing on whether or not you decide to book it in reserves there.

So pending out from other study you are only suspending testing operations in the Rimu area and not in the Manutahi or the Kauri sands.

Just in the Tariki sands.

Just in the Tariki. Ok, all right. And then any kind of guidance on how LOE is going to look in the first quarter? You said it was going to come down next year. Do you have expenditures planned somewhere in the fourth quarter levels for Masters Creek?

Well, do you have any --- I don't know what work over expenditure we have.

We currently have one work over being done in Masters Creek right now. And last quarter we had several and hopefully we will just do this one this quarter. If there is not any complications, yes, you know the cost for work for workovers will go down.

When you have, particularly in Masters Creek, where you have some of these workovers and one well in particular, is a prolific producer, producing over a 1.5 million a day. So you lose the production and have the cost and so you kind of get a double hit, which we see moving into the first quarter of next year increasing production and reduced costs. So we do expect to bring them down at the beginning of the first quarter.

ok. Thanks very much.

For any further questions ladies and gentlemen, you may press 1 followed by 4 on your touch-tone telephone at this time.

Our next question is coming from Ken Kother (pf) of J.P. Morgan. Please state your question.

Good morning. Just a quick question on Lake Washington. I know that you know much of the drilling that you've done there to date, has been on the eastern side of the salt dome, and there had been some talk perhaps that there maybe some targets over on the western side. Does that remain the case or do have any plans as far as next year going over to the western side?

Listen, I am going to turn that over to Joe. Joe D'Amico is an expert on where we are drilling there and he is excited about being able to answer that question.

During the first quarter of this year and really last year we drilled on the eastern side. But so far this year we have expanded to the north side of the field further out of the dome on the northwest side of the field. We have had terrific success. We have drilled on the west side of the field and we have had success. We've started drilling wells on the south side of the field and southwest side of the field and we have had success in those areas also. So we have been very encouraged by the results we are finding going around the dome. We have been able to prove that some of these sands continue from fault block to fault block as you surround the dome, so we have been very encouraged and we are finding some of the deeper pay sands are also expanding around the dome.

So now as far as next year, if you were to look at it, what would you expect of the wells that you are planning on drilling, you know, location wise?

Well they will be scattered around the dome. We will probably use one rig to drill the deeper horizons which is kind of a misnomer, - deeper meaning 3,000 feet deeper, which is the F sands, the A sands, the I sands, the K's and really the 8,400 foot sands. These have greater deliverability than the D and E sands are a little bit shallower. So we will probably focus as I said won't really drill in those horizons. But before this year we didn't have an F sand as a pay sand. We found it in one well this year with about 200 feet of pay and we have now found it moving around the dome in three other wells. So we are awfully encouraged by the results we've found so far and we are finding even deeper pay sands as we move around.

A lot of the work this year has really been opening up new fault blocks for development. And what you will see next year is really a rig that continues to do that - open up new fault blocks for development. But the other rig come in and intensely drill out the fault blocks, where you made these discoveries of large thick sands with the significant hydrocarbon accumulation.

Great, just one last question with regards to New Zealand. You know prior to the drilling of the A4 well, you guys had talked a lot about bringing in a partner there. Obviously I would assume that has been pushed back now with the study you are going to do, but is there anything new, just on the partner front?

Yeah, we continue to expect to bring in a partner in New Zealand but you really have to do it at the right time. We had obviously deferred it based on the drilling of this well and it needs to continue to be deferred until you have the full value. Ways to the Kauri sand and the completion of this study and evaluation of the formation damage in the Tariki sand and our ability to go for a mediator and also develop a better program for drilling and completing future wells. At the same time we will also be evaluating the Manutahi sand. So you are going to be doing a lot of work, probably over the next six months to determine the full scope of New Zealand. And to the extent that some of those prove out to be very favorable, may vary depending on the kind of potential partner that you want.

We have had people make enquiries and we have casual conversations going on, but we have essentially told them that we need to continue some work before we engage in a more in-depth discussion.

Thanks, and I guess just one last one. With regards to the study, have you any idea one what the cost of that and how does that show up? Does that show up in CAPEX, or is that going to be in LOE cost? How exactly does that show up?

I am going to answer that, this is Terry. In terms of the study we have actually involved this organization in more activity than just the Tariki sands. They are doing some other work for us in New Zealand and they are doing some domestic work. More than likely that work won't actually be finished until middle of the first quarter of next year. I would anticipate that the actual booking of that as to whether it is expensed or capitalized rather, that's for the accountants to look at, as those projects are completed. I just don't think it is appropriate for me to comment on that until they've done their work.

Thanks. Appreciate it.

Thank you. Our next question is coming from Andy Parr of Loomes Sayles. Please state your question.

Hi guys. Can you just remind me I guess what kind of I guess risk to total risk to reserves are we talking about here with the renewed Tariki provisions? I am not looking for an estimate of what you think the revisions could be, I am just looking at what I guess you have booked at the moment, in those damaged areas?

I think we have booked reserves in New Zealand of around 170 BCF equivalent approximately, it is in that range. I think that is broken down a little over 100 I think is in Rimu and then a rough estimate 60-70. So 60-70 is in TAWN, something like that. And let me take that back a 100 million is in Tariki sand and the Manutahi sand. I mean that's not just Tariki sand. It includes the Manutahi sand as well.

And we need to keep everybody focused on the fact that we are producing from these rocks, and producing at approximately 1000 barrels or equivalent a day. So you know, even though you could have some downward revisions, and based on the downward we have in that one area, we expect to have some. You still have a commercial reservoir there.

And there has been a lot of work done at TAWN, both in terms of productive capacity and production history, exploitation work on some other wells, work over work both gas lifts, velocity strings and things, that we would expect an increase in reserves in the TAWN area. And that's why overall we don't expect a material change in New Zealand, but there is still work that needs to be done in order to come to a final conclusion.

Good. Thanks.

Thank you. Your next question is coming from Adam France of Sherlock Capital. Please state your question.

Yes. Good morning guys. I was curious, you know we have heard a lot of talk as to what potentially the NAV of the company is. Terry or Joe could you just speak to, that we haven't seen much in the way of insider buying. Obviously there are windows when we can and cannot operate. Would you expect to see executives and/or directors step up and buy the stock down here on under Apox?

You know, that is a great question and of course we do have some very stringent rules concerning blackout periods, and we are in one right now. And so we are going to clearly stay within all those rules and err to be conservative towards any transactions that we might undertake. I would say that I had a small transaction in the middle of the year. I believe in the stock and I still have a significant position in the stock so to the extent I am an insider, and you know, talk about the stock. I am positive and you know I really shouldn't speak to what trades I might do going forward, but I think this stock is undervalued.

You may want to make some recommendations to your Board members to step up as well. I mean if they have got some money lying around. I know in a deep value situation that you are in right now, there are a lot of folks out there that look for that, before getting interested in the company.

I think that is a very appropriate statement to make and certainly our Board members are supportive of everything we are doing and that would be yet a different way to show support. But each of them has their own particular financial situations and they will have to deal with that individually.

Thank you.

Thank you. For any final questions or comments we ask you to please press 1 followed by the number 4 on your touch-tone telephone at this time. Please hold while we poll for final questions.

Thank you. Our next question is a follow up coming from Van Levy from CIBC World Markets. Please state your question.

I will try to keep this short as I don't want to upset Alton.

Oh, I think he liked your question, it was a great question!

Very quickly. The breakout in CAPEX for 2002 by category, acquisition, unproved property, exploration and development?

You know, Van, that sounded like more than one question, but, and the guys have had to look for the numbers, because we don't want to say anything that is misunderstood.

I don't know that it is significantly different from what we posted on our last presentation which is on our website. I mean it might be a dollar or two but not of significance.

Roughly what was the TAWN acquisition dollar amount?

I think the net number was around $53m, approximately.

And the interim?

The interim applied together Van, probably $8m or $9m. Of course there was a stock component. Better incorporate that. The latest numbers in our presentation were about $140m total CAPEX. Net acquisitions and dispositions; because there are also some dispositions that we had in both the third quarter and planning for the fourth quarter of total about $55m. Total domestic was about $43m. Drilling activity, exploratory and development was 95% of that being development. And prospecting costs of about $13m, $14m in New Zealand was about $28m.

And then I know you haven't announced 2003, New Zealand, do you expect that to go down? And if so, roughly half, or can you give us a sense of that?

Yes it will probably go down to roughly half. I mean it obviously depends on a number of factors on the work that we are doing right now. But I would say at least half of what this year's number was.

Okay, and then your comment on production being up 10% next year, does that contemplate New Zealand kind of flat with this quarter? So domestic would essentially drive the rest of it?

We are forecasting New Zealand being up about 10% also. Some of that obviously is we will have TAWN for the full year, and we do forecast some production coming out of Manutahi right now.

ok. Thanks a lot.

Thank you. Our next question is coming from Brad Evans, of High Rock Capital. Please state your question.

Hi guys, good morning. Just curious the reserve write-down potentially coming out of New Zealand. Will that have an impact on the bank borrowing agreement?

No, not at all. The banks know and see the reserves as they currently are and they have all the existing information. The additional information we will get from the study, which is a positive impact, would be a positive, not a negative. So I mean the banks have taken all the current situation into account. And let me also reiterate reserve write down, the words you use is you know we do expect currently based on the information that we have today, that there is new information that we will get before we make final determination. We will probably have some negative revision in the Rimu Tariki sands. But we don't expect any negative revisions in the Manutahi and in TAWN, we expect a positive revision, in terms of adding reserve. Overall we don't expect a significant change, plus or minus from the existing New Zealand reserve base.

Just to dovetail Adam's question. If I read the proxy correctly here, I am looking at you know, the majority of directors leverage to the stock is in the form of options. So I guess I would implore directors that don't have a lot of direct skin in the game to consider the stock at this level as well because it seems like, there is a crisis of confidence here, with the direction the company is going in. So I just would, that's more of a comment than a question. Thank you.

Sure Brad thanks. Thank you for your comments.

Thank you. At this time we are showing no further questions in the queue.

Thank you Mandy, and with that we will adjourn today's call.

Thank you for your participation ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and we hope you have a wonderful day.