SilverBow Resources Inc (SBOW) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Swift Energy Company third quarter earnings conference call. At this time all participants have been placed in a listen only mode and the floor will be open for questions following the presentation.

It is my pleasure to turn the conference over to your host, Scott Espenshade, Director of Investor Relations. Sir, you may begin.

Thank you Maria. Good morning everyone. I'd like to welcome everyone to Swift Energy's third quarter conference call. I'm Scott Espenshade, director of Investor Relations.

Today's call will cover our third quarter results for 2003. Terry Swift, President and CEO, and Alton Heckaman Senior Vice President and CFO will review the financial results for the quarter. Joe D'Amico will cover our domestic operations and Bruce Vincent, Executive Vice President and Corporate Secretary will update our New Zealand operations.

I'd like to remind everyone that our presentation will include forward-looking statements based on our current assumptions estimates and projections about us and our industry. These statements involve risks and uncertainties detailed in our S.E.C. reports and our actual results could differ materially.

We expect our presentation to take approximately 20 to 25 minutes this morning, and have allowed additional time for questions. Terry.

Scott, thank you very much. Again I'd like to welcome you to Swift Energy Company's 2003 third quarter conference call. We put out our press release this morning. We are very pleased with our results this quarter, and we believe we're showing material progress towards our goals this year both in terms of commercial objectives as well as strategic objectives.

I'd like to just take a moment to clearly recognize that while we're very pleased with the pricing environment and that has clearly been a significant and material part of our success, cash flow, and we certainly are glad to see these pricings holding up, the real effort at Swift Energy Company has been at Lake Washington. This is where most of our capital has gone, most of our effort and I think a little bit of reflection is important before we get into the detail this morning.

We're going to talk about all the other areas and the overall results of the company. We are a very diversified company today compared to where we were two years ago. Yet, as I noted, Lake Washington is where our focus has been. We've clearly took an old, tired oil field, and we've revitalized that oil field.

We put a lot of effort into the early planning of this field geologically, engineering-wise, and we saw opportunity there and we knew there would be challenges. In fact, we ended up with more opportunity as we began to drill out of Lake Washington than had originally been anticipated, which meant we had more challenges bringing the hydrocarbons to market.

We had hurricanes, facilities in the early part of this because it was an old, tired oil fields. As a result of efforts made by this company by a considerable number of professionals that we're very proud of, working with consulting firms that have made a material positive impact with us, and the vendors that we use in the field, we have overcome those challenges and we're going to report to you today where we're at with those major changes.

Of particular importance was the fact that we had two markets when we came into this field producing into those markets as very low rates originally, and over time, we of course increased the rates in the field, and tested those markets. And earlier this year, we temporarily lost one of those markets to the pipeline. And this organization has responded very appropriately to get this company's opportunities realized in a commercial sense.

And I specifically want to emphasize that we gave instructions to do it right. And right doesn't always mean that the cash flow comes immediately. Right means that you do your planning, that you do it in a safe way, that you pay attention to your environment, your permits, and you look beyond today's opportunity and you build enough capacity to give you some running room into the future.

We have had significant capacity upgrades in Lake Washington that have been going on. I believe this organization has done it right. We're coming to the conclusion of this phase of the buildout during this fourth quarter, and we expect to have capacity of more than 20,000 barrels a day available to us in Lake Washington to continue our development activities there.

We're on track that by the end of the year, we believe we'll exceed our 10,000 barrel a day gross goal for Lake Washington, which is approximately an 8,000 barrel a day net goal, and be able to show that on a sustained basis. The facility buildout, as I mentioned, is for crude oil--20,000 barrels a day. We actually expect most of those facility upgrades to be completed this month.

In New Zealand, we had additional progress, particularly in our gas marketing effort, and development of the gas field there in -- at the Kauri (ph) field. We'll talk more about that in the conference call. Very significant contract was signed with Genesis that will help us realize more value in the reserve base as we produce it going forward.

We had some success in the Kauri area with the Kauri A-4, the Kauri Sand, also drilled the Kauri E-1 and E-2 wells. Some of them have come in better thank expected some not as good. We'll talk about those results specifically.

As for 2003's capital expenditures, we're on course, we expect to come in at approximately $150 million for the year. Our strategic goals for the year, we expect to meet, just to kind of reiterate some of those goals. We expected reserves and production growth to be between 7% and 12%. We expected our finding and development cost to be at about $1.25 per Mcf equivalent range, which is in line for our five-year average finding and development cost.

We recognize that one of the areas we need to work on is lowering our per-unit production cost or what would be referred to as the LOE cost. That is showing up as a weak spot right now that we are addressing. The facilities upgrades in Lake Washington will help that considerably because of the increased efficiency of being able to bring that product to market. We have also made a commitment to reduce the developed percentage, we believe we will be able to make progress there, bringing the percent of developed reserves above the 60% and to the 60% to 70% horizon there.

And as we do all this, of course we are focused on maintaining our financial integrity, liquidity and keeping the balance sheet strong. Looking forward into 2004 we see a relatively strong pricing environment continuing there but we are building our budget on a more conservative basis. We're going to continue to build the budget around the $3.50 level as well as the $25, $27 oil level. But that work is still in progress. We'll be bringing forward to the marketplace in January at our 2004 investor analyst meeting -- that's January the 26th to 28th -- we'll show where we plan to put all of our capital effort next year.

But I can say at this point that we do believe that through the drill bit and the drilling plans into 2004, we can continue the production and reserve growth, and in particular, production growth ought to be in the 10% to 15% range next year, with a fairly modest drilling program going forward next year, something similar to what we've done this year. With that I'd like to turn it over to Alton so he can talk about the overall financial results of the quarter.

Thanks Terry and good morning everyone. I'll quickly highlight some of the financial information included in our press release.

Swift set another record by posting 13.6 Bcfe, an increase of 12% over the same quarter in '02 and 3% over Q2 '03. Domestic (inaudible) activities contributed 64% for the quarter. Domestic production rose 9% over the prior year quarter primarily the result of continued Lake Washington success.

New Zealand actually rose 18%, thanks to continued excellent results from the TAWN properties along with increased remove calorie production. Both increases were in line with guidance.

Swift's average composite realized price for the quarter increased 27%, to $3.82 per Mcfe. Domestic pricing actually rose 29% to $4.56, while New Zealand which has a lower relative gas component increased 26% to $2.48. Oil and gas revenues were therefore 42% above the '02 quarter. Total revenues for the third quarter totaled $51.6 million, an increase of 41% over third quarter of '02.

Swift thus realized $7.1 million in net income, 26 cents both basic and diluted, exceeding FirstCall estimates. Cash flow before working capital changes for 3 Q '03 came in at $27.7 million or $1 per diluted share, while EBITDA was $34.2 million for the quarter.

As Terry said, Swift remains keenly focused on reducing our controllable per-unit cost. And as to the results for the third quarter of '03, G&A came in at 27 cents per unit, which is on the upper side of our guidance. The result of continued corporate governance cost along with significant administrative cost associated with Lake Washington upgrading and enhancement projects as Terry mentioned.

[ DD&A] per unit was in line with guidance at $1.18, domestic production cost came in slightly below guidance as economies of scale and cost control measures at Lake Washington continued to be realized. New Zealand production cost came in slightly above guidance due to startup cost related to several new wells coming on stream during the quarter. Production taxes obviously increased in tandem with price and production increases and in line with guidance and interest expense came in at 49 cents per unit also in line with our most recent guidance.

Terry mentioned liquidity. Our bank line remains virtually unused. We had about $ 12 million drawn at the end of Q3 03, providing us with flexibility if the need arises. As we discussed in the release, at the regular semiannual review of [barring] base by our bank group, the basis was increased from $195 million to $250 million, while the commitment was maintained at the $150 million range. We remain in strong financial shape to continue implementing our strategy toward a record setting year.

The three Q '03 pricing environment also allowed us to continue layering in strong hedges in the form of floors, for the remainder of '03 and some initial [tranches] for the first quarter of '04. Our actual detailed price risk management position is always posted and updated on our Website. We're committed to this method of hedging, which is in line with our historic strategy of protecting the down side without giving up the upside.

Capex for the third quarter was $39 million, which is on course as Terry mentioned in his intro. And finally we've included additional financial and operational information in our press release, a summary balance sheet, a summary of the income statements with some per-unit metrics, consolidated statements of cash flow, the required reconciliation of GAAP to nonGAAP measures, quarterly operational and financial comparisons, both sequential and year-to-year, and updated guidance for the fourth quarter and for the full year of 2003. And with that I'll turn it over to Joe D'Amico, who's going to give us an overview of our domestic operations.

Thanks Alton. Good morning everyone. Total quarterly production of 13.6 bcfe equivalents included both domestic of 8.7 Bcf equivalent and New Zealand , a 4.9 Bcfe productions, (inaudible) reached record levels. This is an increase of 12% from the 12.2 Bcf equivalent, broken down between 8.1 Bcf domestic and 4.1 Bcf New Zealand, reported in the third quarter of 2002. Production growth in the thirst quarter 2003 resulted predominantly from additional production at Lake Washington and New Zealand.

Total production in the third quarter 2003 increased 3% from 13.3 Bcf equivalent in the second quarter 2003.

Let me start in Lake Washington, where there has been considerable activity over the past two months as work crews have been installing additional equipment and platform decking space on our three existing production platforms, new compression for the gas lift system, plus a new oil delivery system and a new permanent barge loading facility. Due to all of this activity, production in the field has averaged over 6700 gross barrels a day, which equates to 5500 barrels per day net for the past two months.

As Terry mentioned, we will be taking the facility's crude oil capacity to more than 20,000 barrels per day later this month which will give Swift plenty of room to grow production. We currently have just over 50 wells producing in the field and approximately 15 wells that are waiting on flow line connections. We have begun the preliminary planning for a 3D shoot in Lake Washington field for next year. We are currently going to focus the survey open the intermediate depths for the sharpest image of the salt.

But the 3D will benefit for the deep horizons in Lake Washington as well. The current plan is to take the first half of 2004 for the field work and then process the data, so that the 3D information is available for our planning process for the 2005 budget. We believe that the 3D will benefit our 2005 drilling program in Lake Washington.

During the third quarter lease operating expenses increased by 5% to 64 cents per Mcf equivalent compared to 61 cents per Mcf equivalent in the same quarter 2002. The main reasons for the increases in LOEs continue to be the increased activity in the Lake Washington area. We have had several (inaudible) and many cases one time charges associated with the increase in facility capacity. We are confident however that we will be reducing our lease operating expense necessary 2004, declining on a per-unit basis, as production volumes increase and elimination of these one time expenses associated with the facilities upgrades.

And now third quarter drilling results. Swift Energy successfully drilled 13 of 17 wells domestically in the third quarter of 2003. 12 of these wells were development wells and five were exploration wells. In Lake Washington, the company successfully drilled 9 of 11 development wells and, with 100% success rate on three exploration wells. In other operated areas, Swift Energy has successful development well in the Wilcox Sand in South Texas, which is expected to be completed and placed in production during the fourth quarter of 2003 but had two unsuccessful exploration wells in the Garcia Ranch area. For the first nine months of 2003 the company has successfully drilled 45 out of 55 domestic wells, which is an 82% success ratio.

Currently, Swift has two drilling rigs in the Lake Washington area, however we plan to release one of the drilling rigs for several reasons including to get ready for the 3D shoot, focus on year end reserve estimates and also the rig needs to go about a back is a the yard for routine maintenance. In the fourth quarter, we plan to drill up to 13 development wells in Lake Washington, we plan to have 2 rigs this month in the AWP Olmos area in South Texas to drill up to 6 entity for density development wells in the fourth quarter, we will finish drilling the Brookeland area in the Austin Chalk area later this month, and are currently moving in a rig into the Masters Creek area to [spout] an Austin Chalk well there.

Lastly, I want to reiterate that Swift is keeping a keen eye on LOEs. We plan on reducing our operating expenses in 2004 as production volumes increase and facility upgrades in Lake Washington are completed.

And now I'll turn it over to Bruce Vincent for an overview of our international operations.

Thanks Joe and good morning everyone. As we are with our domestic operations, we're also quite pleased with everything that's going on in New Zealand, where we have two core areas, both the TAWN area and the Rimu/Kauri area, which I want to cover and I want to spent a couple of minutes updating you on current market conditions in New Zealand.

Up in the TAWN core area, this area produced above our expectations the third quarter, primarily due to hire market demand, and some of the changes that we made at the facilities earlier in the year that allowed us to produce at higher levels. Over in the fourth quarter, we expect market demand to be down slightly, and this is based upon the nominations that we're getting from the current gas purchaser. The TAWN fields averaged about 80% of the daily volume in the third quarter, slightly more than about 42 million equivalent average -- daily average -- during the quarter.

In addition to the producing properties there, we continue to look at exploitation opportunities in the TAWN core area, including a possible development well in the Tariki area that we will consider next year.

Down in the Rimu Kauri area production averaged about 10 million cubic feet per day during the third quarter. Now, this compares to an average production of approximately 6 million cubic feet equivalent per day during the first half of 2003. Average production there increased to approximately 7.5 million cubic feet per day in July, and up to about, 8 million cubic feet in August and was close to 15 million cubic feet per day in September.

This increase primarily resulted from the bringing on of the Kauri A-4 well which began producing into the Rimu production station in mid July, as well as the drilling and completion of the Kauri E-1 well and the Kauri E-2 well, both drilled during the third quarter, both encountered the Kauri Sand, both wells were fractured stimulating in late August, and began producing into the Rimu production station.

The fract of the Kauri E-1, however, was Disappointing, and proved unsuccessful and we're investigating what other actions to pursue with this particular well. On the other hand, though, the Kauri E-2 well came in much better than anticipated. In fact it closed to twice the anticipated rate. So between the two wells we ended up getting the anticipated production volumes from the Kauri Sand.

Based on the success that we're having in the Kauri Sand we plan to beginning to drill another well targeting the sand before the end of this year, and expect to drill additional wells in the area in 2004. The wells producing in the Manutahi sand, which is the shallow oil sand about 4,000 feet continue to perform expected. And additional drilling activity is also anticipated in this area in 2004.

In terms of the fourth quarter production, I mentioned earlier that we expected market demand to be down, in fact nominations at TAWN are down. But in terms of the Rimu Kauri area we expect it instead of producing about 20% of the New Zealand volumes in the third quarter, it will be closer to 25% to 30% of the volumes in the fourth quarter.

Some additional comments on the New Zealand markets. I think as many of you are aware that the recent news on the Maua, Pohokura delineation drilling results, these have caused the natural gas markets in New Zealand to improve substantially. We believe that ultimately the market will move to a fuel oil equivalency price, which will certainly improve our economics over there as well as our margins as well as the asset value of our assets in New Zealand.

During the third quarter, our subsidiary Swift Energy New Zealand, entered into a new agreement with Genesis Power for the sale of gas coming out of the Rimu Kauri area. This is primarily to incentivize us to further develop new gas in the area from the Kauri Sand, [our] other new gas coming out of the potential horizons in the Rimu Kauri area. Additionally, the impact to our results is the New Zealand dollar has continued to strengthen against the U.S. dollar and this has certainly contributed to our improving margins in the area.

Thanks for your attention. I'm going to turn it back to Terry, who will wrap it up.

Thank you, Bruce. I'd like to wrap it up by making note of the fact that while we do have expenditures that sometimes appear to be what I call a one-off, that aren't necessarily repeatable, and we sometimes lament over the fact that we have to make those expenditures.

Truly in Lake Washington that's been a good investment even though it's been an expenditure. I'll be careful about that word. Sometimes have you to do those things that cost money and they do come through the LOE but they are a very, very good use of money, as Joe had mentioned. The facilities in place will make us more productive on how we're able to bring product to market. Also, in terms of corporate governance, yes, we've had more costs there, but that has been, I’ll use the term ‘a good investment’ in our time. The board continues to be focused on corporate governance. And I can also say that as that focus has been put into place, years and years ago, we did not find ourselves where we weren't doing the things that should be done. In fact, we were ahead of the marketplace. And we're proud of many of the blue ribbon recommendations that we already had in effect with our board.

But clearly, there have been new requirements to see that we are in full conformance with all the new regulations and needs of the marketplace. The board is 100% behind this management team, and what we've done this year, we do not have unlimited capital, and we're never going to act like we have unlimited capital. We had to make decisions last year, in 2004, to focus in Lake Washington, and that was a good decision. We've continued this year to focus in Lake Washington. That's been a good decision. For 2003, we do expect our organic growth or that growth that typically comes through drilling types of operations to be in about the seven to 9% range, and reserve growth to be at about in the 7% to 12% range, approximately.

And preliminarily, as we look forward to 2004, we remain very optimistic that we can continue the path of growth and use the drill bit to achieve that with our drilling operations. I believe that we can achieve the 10% to 15% growth in production next year.

Lake Washington, we are focused on our year end exit rate and making sure that our facilities are in place and that we've done it right both in terms of safety, environment, as well as the actual design and efficiency of these facilities. We do expect to be able to achieve all of that. And by year end, we certainly think we will have more than doubled the production from Lake Washington and achieve a net exit rate in excess of 8,000 net barrels a day. We are optimistic that we achieve that before year end, that's been our goal and we're going to make that goal.

New Zealand is clearly one of our core areas. We are very pleased with improved gas market there. The (inaudible) station in New Zealand has taken great effort to recognize the changes in those markets and try to provide products to those markets and work the commercial side of that to see that the value is recognized. They've done a good job for us there. We look forward to making a positive difference in the New Zealand gas mark and it will take drilling to do that. We recognize that both currently and prospectively. The company remains in good financial shape. We want to stay flexible for opportunities that come ahead of us either in the way of new drilling opportunities or acquisition opportunities.

And as a result of the recent review of the borrowing base, we're in excellent shape there. The liquidity certainly is improving as both the production base has become more diversified, and grown, in addition to the good pricing that we've seen.

At this time, I'd like to turn our conference call over to question and answers.

Thank you. (Operator’s instructions) Your first question is coming from Shannon Nome from J.P. Morgan. Please go ahead with your question.

Good morning, just a few quick ones here. Alton, I think you and Terry alluded to planned LOE reductions, which is always welcome news. Can you bracket in at all, any quantification in '04 or is that going to depend on your budgeting process over the next few months?

We are going over the budgeting process, Shannon and as all three of us mentioned today, in Lake Washington we have had costs that tend to be repair and maintenance cost that come through LOE. A lot of that is one-off. We will be putting out 2004 guidance in the not too distant future and I think we'll clearly have all that factored in.

Okay, great. And then I guess for Bruce, you went through the performance of the Kauri E-1 well, and I guess pretty impressive sounding production out of there. Do you think that type of rate can hold, or given we're dealing with tight rocks? What kind of declines are you anticipating on those wells?

The -- you're right about the fact that it is tight rock, clearly the month of September had a lot of the flush production come from the immediate post-fract. What we're forecasting for the fourth quarter I mentioned was around 25% to 30% of the total volumes. If you really want to look at that in terms of daily rate, that's probably going to average during the quarter between 12 and 13 million coming from the Rimu Kauri area.

This is Terry, good morning Shannon.

Good morning.

I'd like to add to that in New Zealand, we're in an appraisal process with the Kauri gas discovery. And I think we're going at it at the right pace. By my judgment, we put small fracts on these wells, but they were very highly designed fracts in that they were diesel fracts. We're kind of puzzled by why the E-1 didn't respond as well as the Kauri, was it A-4.

But I am hesitant to say we're puzzled, but very pleased that the E-2 responded better. So we've got our work cut out to determine why those differences occurred. And also how we can do better in terms of designing either larger fracts or changing some of the way we do the fracts.

Uh-huh, okay. I guess also for Bruce, Bruce, seems like we picked up news that Genesis or some entity in New Zealand as I recall was considering an LNG import facility. Have you heard anything to that effect and what do you think that could mean near term and long term if plans like that were to proceed?

There is a lot going on in New Zealand in terms of the energy markets in general and the natural gas markets in particular. You know, they're heading towards a very severe Very acute shortage of natural gas deliverabilities in the country and they're very well aware of that and they're looking at lots of options, you know, including LNG. There are people that have talked about I think Genesis and contact even formed a joint study group and Genesis and Contact are the two largest gas users and energy providers in the company. They got together and formed a joint study group to look at possible LNG terminals to bring LNG into the country.

Our view, certainly, is we're happy to compete against LNG, we think we can compete very effectively. What they're talking about in terms of landed price of LNG in New Zealand about $4 U.S. (inaudible) per Mcf, and we'd be happy to compete against that price. So there is a lot going on. There is a lot publicly that people can read to confirm what we've said about where we think the gas market's going to. And I think we publicly said that we think it will be between $3 and $4 U.S., there are a number of people talking those same kind of numbers.

Just to make sure this point isn't missed, as Bruce uses the U.S. dollars, everything that you will read in New Zealand is going to be kiwi dollars, and right now the kiwi dollar is very strong relative to the U.S. dollar.

Thanks.

Frank Bracken of Jefferies. Please ask your question.

On the same question, Kauri Sand well development, can you give us a handle how many wells you have in your budget either by range and then to the extent you can, when do you think you will get back to drilling there in terms of well activity?

Well, I'm going to answer those in reverse. In terms of well activity we have a Kauri sand well planned that we should spud before the end of the year. We're -- don't have the rig contract yet, but we know the location, and we're ready to go with it. And like I said so we should spud it before the end of the year.

We have -- in terms of a preliminary look at '04, we clearly planned to drill several wells in the Kauri Sand to further delineate that. We've been real pleased with what we've seen, as we mentioned before, it comes up as a seismic anomaly that we're targeting. So it's a more mappable event than some of the more deeper opportunities we had particularly in the Tariki sand. And we'll clearly be drilling several Kauri Sand wells in 2004.

And then in January at the analyst meeting that is when we'll come out with our full budget with all the details of how we'll allocate the capital.

Okay. Thanks.

Thank you. Your next question is coming from Kent Green of Boston American Asset Manage management. Please go ahead with your question.

Great quarter guys. For Joe, Lake Washington, as I recall you were going to drill in the back side of the salt dome in a couple other areas. Is there any -- you know, any results of that endeavor?

I'm going to step in for Joe on this one. Joe wants to answer this quite aggressively, and I need to emphasize that we have been drilling exploratory wells out there and I'll let him toll you about the exploratory wells. But they're still -- are some you know competitive issues and we do want to be conservative in some of the expectations out there. But with that understanding of our strategy, both in terms of competitive issues, as well as wanting to be conservative, I'll let Joe tell you about the exploration wells he's drilled.

Kent, we drilled exploration well on the southwest side of the dome. And I think we down to about eight or 9,000 feet directionally about, maybe 7,000 to 7500 feet vertically. And we found a number of productive sands. And we're preparing to drill delineation well sometime in the fourth quarter. We drilled another prospect in the south side of the dome, and found numerous sands in it, and we're planning on drilling a delineation well for it.

And then on the southeast side of the Dome, we had another discovery where we found one sand and we drilled a delineation well and found a couple other sands. We're quite pleased with our activity. As you know most of our drilling has been on the north, northeast northwest side of the dome so we've been following the sands and mapping them around the dome and finding them productive. We're quite excited about that.

And then just a follow-up question. The -- do I detect that you're going to slow down, you know, the process a little bit, until you get a little more information off of the 3D, and when is that going to pick up again? Is that the second half of next year or is it just going to wait until you know, you get 3D into 2005?

We should have our first look at the 3D sometime in the third quarter, have it processed. And depending on the timing and everything if everything goes correctly, it will have a definite impact on 2005 drilling activity in Lake Washington. If things work out, it may have an impact on the end of 2004 activity.

That also can be impacted by the environment next year, particularly in terms of pricing. One of the things that we did in '03 that was very successful for us, was really create discretionary spending wedge in our budget activity. You may recall we started out the year with a budget of around $115 million to $130 million and ultimately we spent $150. And that's because we ended up both performing above our budgeted expectations both in terms of volumes and prices, and so we were able to spend more money.

We have the same situation going into '04. We want to be conservative on the front side, live within cash flow but we also have targeted opportunities that, given additional cash flow, we know exactly where to spend it to create momentum going into '05.

Final question on reserves, we're starting to approach year-end. Any preliminary comments on how many months reserves you're going to book besides having more proven development percentage, instead of puds?

I would just reiterate the comments we have been saying every year, we believe reserves will increase from 7% to 12%. We continue to be confident that we'll hit within those ranges and we also continue to be confident that we'll have a finding cost of $1.25 or better. I think you can put that information together and put together where you think we're going to be at.

Thank you.

Next question is coming from Arnie Rabb (ph) from Hampton Capital.

Question for Bruce. Just wondering the TAWN area of New Zealand, I understand that production there is higher than historically has been. Can you shed a little bit of light on your depletion rates in that area? And as a follow-up, do you anticipate growth in protection from that area coming from acquisitions or from exploration?

I probably ought to handle that. I don't think there's any doubt that when you produce at a much higher rate you do deplete at a higher rate. And we did purchase as part of our strategic operations since we bought the TAWN properties to be able to produce at a hire rate. And the New Zealand organization has not only achieved higher rates, but they achieved rates higher than we originally anticipated.

That does decrease depletion. They're going through that process of determining exactly how that will impact '04. I think the preliminary information is that we are going to be looking at more exploitation activity, we are going to look at more drilling. But it is just too premature for us to actually put any final numbers out.

Again, depletion planning is a real timed event. And there is some future compression being added in the TAWN area that will have an impact on what those depletion characteristics will look like. We haven't completed that work.

So, I anticipate that really we'll be in great shape to answer that question with great detail in January. But at this point in time, they're going through their depletion planning which includes what they'll drill in 2004. There will be some drilling necessary to continue the profitability at the levels that we want. And there is some compression that's necessary in the very immediate term that they're installing this quarter.

Thank you.

Your next question is coming from Van Levy of CIBC World Markets. Please go ahead with your question.

Good morning gentlemen, how are you?

Good, Van.

Good. Over the past year Swift had been the subject of pretty intense criticism and obviously you saw that in your stock price. And I think it came in two forms. Number one is that historically, you overspent New Zealand, you had little results, and number two is that the company lacked franchise value, AWP was long in the tooth and you couldn't come up with new play. My question to you is on the New Zealand area, what have you learned from core labs, how are you going to apply it William what are the governors to make sure that capital expenditures versus results are more in balance?

And then finally there was a notion that there could be as much as 50 to 100 million barrels of upside there. Where is the -- where are you on the notion that that could be recovered?

On the second franchise question, obviously you've answered part of that with Lake Washington. You found a new play, you're doing well there. Is there something else on the horizon that could materialize to be similar to the Lake Washington field?

Well, this is Terry. I'm going to attempt to address the questions, and I may go at them in reverse. We're always looking for new core areas, either through acquisitions or an ongoing geoscience earth with various drilling place. But we are focused to stay in the areas that we believe are areas where we have core competence, where there's good markets.

So the answer to your last question is yes, we're on the hunt. We're looking for the next Lake Washington type opportunity. But clearly, we don't believe we're through with Lake Washington. And the effort that we're putting forward there I think particularly as it relates to some of the deeper horizons could yet give us a lot more running room out there, that's not a certainty, but it's an effort that the company is making.

As relates to franchise value and the pressure that the stock was under, there's no question that the company's equity value, in my judgment, was undervalued through what I think is a transition period in the entire marketplace. We don't want to make executions about what the full marketplace looked like, but we also don't want to ignore the fact that we -- we were, at least in part, dependent on the entire equity market, and I don't want to revisit all those issues. But the external did affect us and we did have poor results in 2001.

We admitted it in 2001, we admitted it in 2002, we admitted it in 2003. And we'll probably admit it in 2004. But at the same time, we need to point our investors to 2002 operating results. We started the year with very specific results, or objectives, and got those results. We started 2003 with very specific objectives. I think we're going to get those results. We're going to repeat that in 2004, as our model for going forward. We'll come out again in January and show you strategically and commercially what we believe we can achieve, and we'll monitor that in real time and report to you in real time how we're doing.

So I think we've got excellent commercial processes here. I think we have much improved opportunities in front of us. There's no question that we are a more diversified company in terms of the different core areas we have. And finally, as I speak of New Zealand, there's no question that New Zealand's important to us. But it's a smaller piece of our business than one might imagine, given the number of questions that you have about an international type of operation.

Clearly, there are in our judgment a lot of upside still in New Zealand. Upside has to be quantified. And other than quantifying it, the market is certainly is not going to be prepared nor would a expect the market to give you much value there. But do we have the team in place to quantify it? Yes we do. Are we going to put the capital in place to go about it commercially correct? Yes, we will. We're still committed to New Zealand, both in terms of manpower and proper capital allocations. And we believe it can bring us forward some good results in the future and be a good part of our mix. We're doing that domestically as well.

As to the specifics and what the consulting reports might have shown us in one area versus another, yes, we did get a lot of benefit out of the core lab reports. And that's a whole conference call all its own, if we wanted to go that route. And if I've been accused of anything in the past it's being too detailed on the technical side. So I'm going to avoid getting into that kind of a conference call. But I can say that the Kauri sand exploitation that we're doing has been benefited greatly from the core lab efforts that's going on.

Last question, Terry, 2004, will capex be above cash flow, and if so, roughly how much?

Well, as we noted, we're going through the process of how we would actually allocate all the specific capital next year, and we'll go into that detail right down to our pro formas, starting in January, where that (inaudible) allocation was-- As Bruce noted, the (inaudible) we took was to have (inaudible) based on cash flow and results, we would tap into that discretionary wedge.

This year, as Alton noted, we have barrel barely tapped the bank line liquidity. So I think that is a very positive reflection of how we went into the discretionary wedge of spending, how we did increase the budget. We're monitoring in close to real time our actual results with the drill bit to see how that impacts our asset value.

And as our debt relates to asset value, we're very, very comfortable. I think it's clear that the banks have given us a vote of confidence in the most recent review increasing the borrowing base. We will be conservative next year. We'll take the same approach. We're not going to let cash flow get out of whack with our expectations or our spending get out of whack with cash flow.

But at the same time, we're not going to be afraid to add value. And so you know, that's the balancing that goes on. We need to continue to see a good healthy pricing market and we need to continue to see the kind of operating results that we are having right now.

Great, thanks, Terry.

Thank you. Your next question is coming from Greg Anderson (ph) of Bank One. Please go ahead with your question.

Hey guys, good quarter. Most of my questions have been answered. Just a couple of follow-up questions. On the last call, you alluded to the fact that Lake Washington had plenty of capacity for current production coming out of barging and the (inaudible) pipeline.

But you were also exploring a further option, possibly a pipeline in the south. I wondered if there's any more news in that and what's your -- at what capacity levels that you would need to add a third option or look at a third option. And I also had a question on fourth quarter capital expenditures.

I'll take the Lake Washington question. We clearly began the year building some facility upgrades, and I think at the initial estimates, we were looking at about 9,000 barrels a day of capacity that we were trying to build out there. And admittedly, we had challenges with the pipeline incident earlier in the year, which created some marketing challenges going forward.

But we also had a lot of success in the types of wells we were drilling, the tests we were getting that mandated in our judgment that we get more capacity out there. And as we've discussed this morning, we're going to have about 20,000 barrels day of of gross oil capacity in the field we believe is going to be in place this no.

As to the markets that that goes to or that that capacity is tied to, now, clearly you have that capacity we need to make a clear differentiation that the production that we anticipate is going to be in excess of 10,000 barrels a day gross. So we anticipate production to be a little over 50% of the capacity we will have built. But the markets we have barging market we found to be extremely effective. We brought it in as a response to the pipeline incidents, and it's been such an effective market that we're not going to let go of that market. We also are going to hook ourselves back up to the pipeline and that process of getting back into the pipeline though, it hasn't been completed. We're very optimistic about that market.

So having established two markets that we believe are going to be high quarter markets at year end, it does take away some of the concern or need for an additional pipeline market. But I wouldn't want to say here on -- that the company would not pursue that. I think it's all a question of commercial economics. And what value can be added.

So while it's not a high priority at this moment, certainly, it's not something I would take off the table. And in terms of the constraints, the constraints will really be our facilities, not the market outlets.

Oh, okay, terrific. The other question I had was, your capital expenditures run rate has been, you know, below budget, or below what you'd expected to spend for the year, which is great. But it appears that fourth quarter's going to be a big quarter for you folks. Can you walk us through those numbers, or is there anything that's back-end loaded that we -- would stand out?

Well, I mean the big items there, couple of things. On the facilities side, a lot of the work's taking place in September-October-November. So a lot of those capital expenditures are coming in in the fourth quarter. Additionally, we picked up drilling in the Chalk, we had the one well drilling in the Brookeland field, we added the second well in the Masters Creek, so you can have two wells drilling at the same time. And then down in the AWP, we originally planned single rig for those six wells, but because of weather and flooding, we actually bringing two rigs on at the same time so we can get the women's wells drilled this year. So you'll have an aggregation of those expenses in the fourth quarter.

All right, I appreciate it.

Our next question is coming from Brad Evans of High Rock Capital.

Good morning, everybody. Congratulations on execution everybody. Terry, I wanted to ask you about Garcia Ranch, those two dry holes, what does it tell you about that play?

Tongue in cheek, we missed two targets. Garcia Ranch we're still pretty excited about. It is clearly an area we have to put more focus on. And you know, the exploratory success rate in that type of play, is a lot lower and should be expecting to be loafer lower than say for example the exploratory wells we're drilling in Lake Washington.

We have some pretty good sized targets in Garcia Ranch and have put some additional effort in the analysis of the 3D, which is there which is a very important tool in going at Garcia Ranch. I do expect a fair amount of activity there next year and the year after because there's a large enough inventory of prospects yet to drill. But two dry holes is not fun. So we missed two targets.

Those were Wilcox tests, correct?

Freo (ph) test One was 10,000 feet which was nonpressured and one at 12,000 which was pressured.

Follow-on question I guess in terms of the natural gas production here in North America, Terry, do you hold out hope that at some point we show growth there or do you think that is a zero sum gain there at that point?

I am glad you asked that question. We're committed to the natural gas market. That's a great question. As we're looking at acquisitions or as we're looking forward at new drilling opportunities, clearly internally and we do need to communicate this better, we're focused on natural gas. And the Garcia Ranch play, I don't know that the two dry holes that I don't want to talk too much about, but we did have some success there and we got some natural gas in the Burns wells this year and we've also had a recent completion of natural gas --

Wilcox well.

We're focused certainly in terms of new core area expansion on natural gas. But I also want to emphasize that we do believe Lake Washington and what we call this more exploratory effort that the 3D will bring forward, that as you get deeper in Lake Washington you're much more likely to have natural gas.

In fact we have one natural gas well in Lake Washington that's producing.

Do you think you're going have to make acquisitions to grow natural gas on the domestic front? Or do you think you can do it organically? From 34m a day that is a base that I think you should be able to develop internal prospects from which to grow that level. Would you agree with that?

I think the near term focus, and Brad just to be very clear, the near-term focus is not to grow natural gas. It's to get the best commercial value for the shareholder. And you're trying to balance both these objectives because you do believe in natural gas, I do think that's where you're going to have good pricing. So that does tend to be an area where you think you're going to get the best commercial value for the shareholder.

So I -- there's no question you got to focus on natural gas, to tap that value. And in our inventory of drilling activities from AWP, which is a development type of inventory, to Garcia Ranch which is a exploratory type of inventory, to deep Lake Washington, which is still not even really on the horizon, but all those are gas. And whether I would go putting a more intense amount of capital towards gas there, or in acquisition of gas, would have to be based totally on the commercial results there.

That's a good answer. I guess just with respect to just New Zealand, at this point, I guess listening to as you talked to some of the large gas buyers there, I guess I'm just -- I've been surprised that we haven't seen more deal flow there in terms of either farming activity or doing venture activity. Is that something we should be on the lookout for you think as buyers are concerned about availability of gas here going forward?

That's another good question. I've been accused of enjoying hypothecating, and I do. And I think you're right. I think you'll see more farm-out types of activities and maybe even some joint ventures to accelerate some of the exploratory drilling, sharing the risk going forward, to get things done a little bit faster.

Do you think -- is that something that you participate in do you think?

That's something we would consider in that high-risk portion of our inventory, yeah.

Is that something we can hear about in the next 6 to 12 months you think or is that an aggressive time frame?

You're making me hypothecate a lot. I think it's something certainly over the next 12 months if we're going to do it William we would put some plans forward. We don't have any specific plans that we could communicate or any deals of such nature that are being done. But we're certainly looking at that as a -- as a viable way to spread the risk and be able to accelerate some of the activity that is in that higher risk category.

I mean without getting the specifics there have there been discussions in that regard, at an early stage would you say?

Brad, I'm going to decline to comment on that because it -- anything that we're in discussions on in early stage might get into some competitive issues. So I'll just decline to comment on that.

Fair enough. Good luck you guys.

Thanks Brad.

Gentlemen, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments.

We appreciate everybody joining in this morning. And we look forward to talking with you further, if you've got any additional information you'd like to get from us.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.