SilverBow Resources Inc (SBOW) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Swift Energy Company fourth quarter earnings conference call.

[Operator Instructions].

It is now my pleasure to introduce the Mr. Scott Espenshade, Director of Corporate Development and Investor Relations. Sir, you may begin.

Thank you. Good morning everyone. I'm Scott Espenshade, Director of Corporate Development and Investor Relations. I'd like to welcome everyone to Swift Energy's fourth quarter and year end 2004 earnings conference call.

Terry Swift, CEO will give an overview, Alton Heckaman, EVP and CFO will review the financial results for the fourth quarter, Joe D'Amico, Executive Vice President and COO will cover our recent domestic activity and then Bruce Vincent, President will update our New Zealand operations. Terry swift will then recap before we open up to questions.

I'd like to remind everyone that also, Swift is hosting our annual analyst investor meetings next week and they're going to be held Tuesday February 22 in Houston, Wednesday February 23 in midtown Manhattan, and Thursday, February 24 in Boston. Details of the meeting locations were listed in this morning's earnings release.

Before I turn it over to Terry, let me 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 risks and uncertainties detailed in our SEC reports and our results could differ materially.

Also, Swift has not completed our 2004 audit nor Sarbanes-Oxley 404 procedure testing. Swift expects to file its audited version of the financials in its 10-K report, which should be filed with the Securities and Exchange Commission by March 15, 2005. We expect our presentation to take approximately 20 to 25 minutes and will allow additional times for questions. With that I'd like the turn it over to Terry.

Thank you, Scott. And once again, we'd like to thank you for joining our year-end 2004 conference call. It's only fitting that Swift's 25th anniversary year has become one of our best financial years on record in many accounts. We'll go over that today. We certainly enjoyed a robust commodity market, benefited from that and the indicative of the fundamentals of this crude oil market and natural gas markets; we think that's going to continue. But we also enjoyed some record production levels in certain of our areas and we have a lot of momentum in the company that we want to explain to you and we want to remain excited about the opportunity sets and go into that with you today.

The company had $68 million in net income in 2004, a record year. Less than ten years ago that was the company's total oil and gas revenues for the entire year. In fact, in the fourth quarter our net income of $26 million, again, was a record that equaled the total revenues of the company in 1995. Alton is going to give us a full review of the accounting and some of these financial details in a moment.

Just as I've started many of our conference calls, I've talked about the oil and gas markets and some of the pricing levels. We follow the Nymex market very closely. We think we've done an excellent job in realizing as strong of values as we can from these markets. March crude oil from 1995 pulled back a little bit here recently but it's rallied about $48 a barrel, which is a very premium price and we intend to capture as much of that as we can. It's certainly substantially higher than our internal price decks on which we build our budgets and the economics on which we base our projects. We'll go into that a little more today. We have a consensus crude oil deck that I'll explain later.

Natural gas also very strong although it's pulled back somewhat because of the winter being a little milder than expected. But still we have to look at it as a robust market. Nymex natural gas over $6 for the March contract and the 12 months through, currently over $6.50, again, very strong pricing.

As we noted in this morning's press release, the company has continued to implement our prosperous management strategy. We layer in protection but we really don't give up the upside, that's one of our strategic objective to maintain all or essentially all of the upside. We do have some floors. We posted those with some of them have backed to $7 floors. Clearly we wish we had more of those right now but we still have very good pricing. So we're encouraged by that market.

With the higher price decks, though, we don't want to be complacent. We realize that we have to meet our metrics; we have to perform on our objectives and goals. We know that higher prices alone don't add value but certainly as we do receive more value for the higher prices we have to look at the pressures in the marketplace in terms of pricing of our services and some of the other aspects of the LOE, G&A, we will go into that today. We are focused on controlling these costs. Although we must recognize certain of these costs are rising in this very premium commodity market.

The company has instituted financial controls that we think are robust in reviewing and monitoring our ongoing budget. We have budgeted for about a 10% increase in the actual drilling costs that will be foreseeing going forward. We built this into the budget. We also have built into our budget what we call a discretionary wedge into the capital budget. We're going to look again at mid year and make sure we've met our performance goals operationally, we are going to look at midyear and make sure we have got the pricing environment that's giving us the cash flow and we anticipate that our 2005 capital expenditures will be between $200 and $220 million, very close to the expected cash flows for the year using a price deck of $5.75 per Mcfe equivalent and about $40 per barrel.

We also want to deliver extreme value through our operating results. I think as you look at Lake Washington you can see that we've performed; we will continue to perform there. 2004 our production increased 10%, despite only storm down times in the third quarter. Our fourth quarter production was 15.9 Bcf equivalent. That represents a 14% increase in production from the third quarter of 2004 and 19% increase from the same period in 2003.

The focus on production has allowed the company to capture a lot of this high value that we're seeing in commodity markets. We're very focused on realizing these commodity prices through production gains. The company's earnings and cash flows are higher as a result of these efforts. And we're very pleased with these financial results. We positioned ourselves throughout the year to have some higher impact projects both exploration and exploitation in 2005, and while most of our goals were met in 2004, we did not meet our reserve growth goal.

We'll talk a little bit more about that and some of the particulars of how it impacted buying costs later in the presentation. But I'd want to emphasize that we did focus on a lot of the intermediate goals in 2004 such as our 3D acquisition in our facilities projects in Lake Washington, and these activities did force us to reduce our drilling pace in the field. A large portion of that reduced drilling activity was developmental in nature, developmental drilling. As we all know can add reserves but doesn't necessarily usually moves reserves from the undeveloped category into the producing category.

We had expected our lower drilling levels to deliver both exploitation and exploration reserve adds but they just simply didn't. Our reserves actually dropped 3% on the year. But as I mentioned earlier, we're in a position to add reserves in 2005 in large part because of the opportunities sets are expanding for us and because our drilling activity is increasing in these areas where we have the opportunities. Again, the shareholder value that's been added, we are very optimistic about the 3D that we shot.

We see a lot of opportunity. We built a database that we call a strategic database in and around Lake Washington. Complimented that with 600 square miles of seismic coverage in South Louisiana, added some significant properties to our play fairway area and we currently have got some very high impact types of projects that we'll be bringing forward both this year and in the years to come. South Louisiana will be a very important and meaningful part of our 2005 activity. But New Zealand will also be important. We have got some very meaningful exploration projects in New Zealand. But I should stop there before we go into all the detail in my part here and let the guys talk about what we've accomplished in '04 and what we plan to do in'05. But first let's start with the financials. Alton.

Thanks, Terry and good morning, everyone. As Terry mentioned Swift had a record setting fourth quarter. Revenues were 99 million, up 86%. Production for 4Q '04 rose 19% to 15.9 Bcfe. Net income was just under 27 million, which is up a 182%. Diluted EPS came in at $0.93 while net cash flow provided more than double almost to $2 per diluted share. Swift's full year 2004 results were also quite impressive. Revenues were up 49% to $310 million. Production was a record 58.3 Bcfe. Net income before the debt retirement cost was 74.6 million up 118% resulting in diluted EPS of $2.63 for the year.

Our net cash flow provided by operating activities was $6.44 per diluted share, up 60%. Swift's domestic production increased along with commodity prices received for both the quarter and the year led the way for a record setting results. US production rose 28% for the quarter and 25% for the year when compared to 2003. Primarily the result of continued Lake Washington success, which Joe will get into. 65% of Swift's domestic production for 4Q '04was crude oil, which in this current pricing environment is quite favorable. With the current waiting of crude oil in the equation Swift's average composite realized price for 4Q '04 increased 57%over 2003 to $6.23 for Mcf equivalent. Domestic composite prices actually averaged $7.17 for the quarter, up $2.58 from 4Q '03.

And New Zealand composite prices rose 41% to average $3.93. Oil and gas sales revenue were therefore 86% above the 2003 comparable quarter. As Terry mentioned high prices are great but we can't take our eye off the ball regarding our per unit cost which remained key focus for everyone here at Swift. After results for the fourth quarter of '04, G&A came in at $0.33 per unit, which was in line with guidance as continued Sarbanes-Oxley compliance costs are incurred. I should note here Terry mentioned it. We've been very pleased with the progress of Sarbs 404 initiative and based on the dedicated hard work of many we'll complete this year's process in conjunction with the filing of our 10-K on or before March 15.

DD&A per unit came in higher than our guidance at a $1.51 primarily as a result of the year-end reserve numbers as Terry mentioned. Production costs came in slightly above guidance at $0.71 and our production taxes increased of course in tandem with the higher prices in the production mix. Interest expense came in at the low end of guidance at $0.40 per unit. Swift does realize net income of 26.8 million, which on a per share basis equates to $0.96 basic and $0.93 diluted, beating consensus first call estimates.

Cash flow before working capital changes for 4Q '04 came in at 64.7 million or $2.25 per diluted share. While EBITDA was $72.3 million for the quarter both well over the 2003 comparable amounts. Swift's full year numbers for 2004were equally as impressive for virtually the same reasons as I just described the fourth quarter. You can see these results detailed in our press release. Swift's Bank line remains virtually untapped. We have 7.5 million drawn at year-end 2004 providing us with plenty of drive power for value adding strategic opportunities that we see in the future.

With respect to swift's hedging activity we continue to layer in both oil and gas floor protection in this very strong commodity market, as we continue our diligent price risk strategy as Terry articulated. Details of our specific price risk positions are posted and updated on our website. CapEx for '04 was 192 million inline with our full year cash flow allowing us to stay basically cash flow neutral for 2004, which was part of our strategy. As always we've included much more in additional financial and operational information in our press release, including the initial guidance for the first quarter and full year 2005. 2004 was a great year for Swift but even more excited about what we feel 2005 and beyond has in store. And with that I'll turn it over to Joe D'Amico for an overview of our domestic operations.

Thanks, Alton. Good morning, everyone. It is with great pleasure that I report for 2004 total production increased 10% to 58.3 Bcf equivalent from 53.2 Bcf equivalent in 2003. Domestically 2004 production increased by 25% to 42.1 Bcf equivalent compared to 3.8 Bcf equivalent produced in 2003.

New Zealand accounted for 28% of corporate production with16.2 Bcf equivalent produced in 2004, a decrease of 16% for the 19.3 Bcf equivalent produced there in 2003. In Lake Washington, Swift surpassed its year end exit rate again this year of 12,000 net barrels per day in October. Swift's 2004 exit rate was 12,800 net barrels oil equivalent for a day of production of over 15,500 gross barrels per day. I should note that the colder waters in Lake Washington and compressor down time has limited our production in this area in the first quarter.

Domestic proof reserves increased at year end 2004 to 653 Bcf equivalent. Driven mainly by the reserves increase in the Lake Washington field, which increased 5% to 272 Bcf equivalent or 45 million barrels of oil equivalent. Up from 261 Bcf equivalent or 43.5 million barrels of oil equivalent at year end 2003. Domestic proof reserves at year end were 52% crude oil, 36% natural gas, and 11% NGL's. Domestic proof reserves making up 82% of total crude reserves at year end 2004 are located in Lake Washington area, which contains 34%. AWP Olmos area is 24%, Masters Creek area 7%, Brooklyn area is 6%, and the recently acquired Bay de Chene and Cote Blanche Island area is 6% of total reserves. Another domestic properties make up 5% of our total reserves.

We believe that our newly acquired 3D seismic data, our producing property acquisitions in the Cote Blanche Island and Bay de Chene area and our increased production capacity in Lake Washington we have positioned the company for 2005 reserve growth in the range of 7% to 12% from our core areas along the gulf coast.

It should also be noted that Swift Energy recently acquired interest at Cote Blanche Island are currently shut in but expected to resume produce early in the second quarter. This field was shut in just prior to the acquisition due to a supply disruption of natural gas for the gas lift systems. Efforts are underway to restore this gas supply as well as a range for additional markets for future natural gas production in excess of that needed for gas lift.

Swift Energy also shut in Bay de Chene field for approximately 2 weeks immediately after closings for certain facility upgrade that were deemed important with respect to safety and environmental risks. The Bay de Chene field is back in operation while Cote Blanche Island field is awaiting restoration for the natural gas for the gas lift operations on the field. Production from these areas will be negligible for the first quarter.

Looking at our 2004 drilling results finds that Swift Energy successfully completed 52 of 66 wells in 2004. Domestically the company completed 37 of 44 development wells for success rate of 84% and completed 4 of 10 exploration wells. A total of 30 wells were drilled in Lake Washington area and 15 wells in the AWP Olmos area. Swift Energy currently has 2 drilling rigs operating domestically both drilling for oil in the Lake Washington area and one will be back in AWP Olmos area next week. Now I'll turn you over to Bruce to talk about our news in New Zealand.

Thanks, Joe, and good morning everyone. I'd like to cover a few things in New Zealand this morning. Talk first about reserves and cover production and touch on pricing and then finish it up by bringing you up to date on our drilling activity. Let me first start with reserves in New Zealand.

In New Zealand 2004 year end crude reserves decreased 16% to 147 billion cubic feet equivalent, 58% which was categorized as crude development reserves. The decline in the reserves were primarily attributable to production during the year and negative revisions in the Manutahi sand and renewed Tariki sand. New Zealand reserves constitute 18% of the total company's crude reserve, with 13% of the total attributable to the renew Kauri area and we have both the Manutahi sand, the Kauri sand and the Tariki sand, and then 5% to the TAWN area. New Zealand crude reserves consist 55 of natural gas, 35% of crude oil and 10% of natural gas liquid.

Moving on to production during the fourth quarter 2004, New Zealand production of 4.6 billion cubic feet equivalent increased 1% from production the same quarter of 2003 but increased 23% from levels in the previous quarter. The most significant change was that production in the Rimu/Kauri area averaged just over 22 million billion cubic feet equivalent per day in the fourth quarter, which was up 111% production in that area in the third quarter of '04, mainly, from the success in the Kauri sand. This added production from the Kauri sand now has the Rimu production station at capacity and plans are currently underway to increase its capacity for processing natural gas.

At the TAWN field, production averaged about 28 million cubic feet equivalent per day in the fourth quarter, which was down slightly, about 9% from the third quarter of 2004. These fields will continue to decline through 2005.

As we talked about before, another bright spot in New Zealand is the improving pricing environment for natural gas coupled with the stabilized and improved value of the New Zealand dollar. Both of these factors have led to an improved net realized price for Swift Energy over many of the previous quarters and we've mentioned this to you to expect.

Currency rates did strengthen again in the fourth quarter, which aided by increased sales of natural gas under our newer long-term contracts for the Kauri gas, brought an increase in the average natural gas price to $2.86 per Mcf for the fourth quarter, which was a 29% increase over the $2.21 per Mcf received in the third quarter and a 33% in the fourth quarter of the prior year.

Also in New Zealand, the sales price of our McKee blend crude oil averaged $47.57 per barrel, a 53% increase over the prices for the same period in the prior year. Additionally our contracts for natural gas liquids yielded an average price of $18.63 per barrel for the third quarter of 2004. New Zealand natural gas and natural gas liquid price contracts are denominated in New Zealand dollars, which strengthened compared to the same period of 2003. Currently Swift Energy is drilling the Kauri-E8 well.

During the quarter recently during the first quarter of this year we also plugged in to abandon the Karaka-A1 well, which was drilled in permit 38742 that we had recently farmed into during the fourth quarter of 2004 with balanced Agri-nutrients, which is a New Zealand fertilizer producer. The Karaka well was designed as a shallow test of the mount messenger formation but it was also designed to give our traditional geologic information that should benefit us in the pursuit of deeper prospects on this permit.

We did encounter the sand but it was wet. We will continue to work the geological and geophysical data on this permit and possibly drill in an additional well on the permit before the end of the year. As Terry mentioned, Swift Energy believes that we are close to having a partner in our 2005 Terrat (ph) thrust exploration campaign. Much of the last 2 years, as we've talked about, we've focused on development and exploration primarily in the Rimu/Kauri area to get the production levels up there to replace the expected declining production up at TAWN. And we have been successful at doing that.

Now it's time to turn to exploration in New Zealand. Swift plans to drill a total of 3 to 4 additional exploration wells in the Taranaki Basin this year. This program could be very meaningful to us and we're really excited about it. In summary let me tell you that we continue to be excited about our position in New Zealand. We continue to see the impact of the Taranki natural gas market there and we believe that we are well positioned to take advantage of it with a significant onshore position of exploration acreage. We have several exciting exploration prospects that we hope to drill in order to evaluate this potential over the next 2 years.

We believe that our Anchorage position, our experience in having drilled more wells than any other operator in New Zealand in the last few years, along with our significant position and infrastructure assets will allow us to exploit the opportunities of this market in this basin. Thanks for your attention. And I'll turn it back to Terry to recap.

Thanks, Bruce. Before we conclude and go to the Q&A session, I want to give you a summary here once again. The company had an exceptional year. Commodity pricing environment was very, very strong. It remains strong. The financial results of the company very, very strong. The operating results very improved and improving in many ways. We've talked about that. We believe we're going to be increasing production again and we believe we will increase reserves in the 7% to 12% range in 2005.

We've got a very robust and detailed presentation that we call our annual analyst presentation that we'll be presenting a lot more detail next week, I believe it starts next Tuesday. In the company's 25-year history we've seen lots of changes in the commodity pricing market. We're not letting our guard down here. We certainly want to continue to control costs and we've got our eye on the ball there. But oil is above $48 a barrel. Gas is over $6 in Mcf and we're increasing production. Again, Lake Washington, as Bruce mentioned, is one of our most wonderful core properties. We have just completed the seismic shoot in 2004.

It's been a very, very successful shoot great data that we're looking at. We believe that the prospects that are already coming out of there are going to add a lot more growth opportunity for the company. We had a 12,000 barrel per day net exit rate goal for 2004. We're now at about 12,800 barrels a day there. So, again, very good and improved operating results in that area. And we think they're going to get even better. We're also encouraged in New Zealand. In particular as Bruce noted the Kauri sand has been a very, very successful activity for us.

We're increasing production there. We're filling up the plant at Rimu and we believe that we will do more of that in 2005. Of also particular interest is the exploration program that's ongoing in New Zealand again a place where we think we can add significant growth to the company. Although there are rank wildcats in some respects, they're also very important targets for us and we have that underway for 2005. The company has excellent financial position. The balance sheet is in great shape. We're ready to execute on our drilling plans and we're flexible in the sense that any acquisition opportunities that could come along that are strategic in nature, we're ready to look at that and be able to execute properly.

At this time I will turn it over to question and answer. But again, I want to emphasize that we have a very detailed set of presentations that will focus on a lot of the operating aspects and growth aspects for 2005 that starts next week on Tuesday.

Thank you.

[Operator Instructions].

Our first question is coming from Phil Pace from CSFB. Please go ahead.

Hey, guys, how are you doing?

Fine. How are you Phil? Thanks.

Fine. A couple quick questions. The -- is that 9% decline at TAWN in the quarter, is that indicative of the decline rate or will that thing level out? I guess what do you expect for that piece of the production. And secondarily, with only 7 Bcfe of reserve adds in '04, I notice there was a bunch of money spent on development but you also had 28 million on leasehold and prospect cost and some decent exploration expenditures. I guess with the investment in leasehold, where was that -- most of that money spent and is that where you -- where you gain your maybe your optimism to have better reserve adds in 2005 and how much of the budget will be spent on exploration versus development spending this year?

This is Terry. Let me take that first off answering it kind of backwards and then we'll have Bruce comment on New Zealand. We did spend a considerable amount of money and time and change the good bit of the activity to focus on the seismic acquisition in Lake Washington last year and to focus on some acreage adds as well as a larger seismic grid to the west and northeast of our main acquisition. We have brought that into the shop. We've got processing that's been ongoing with that.

We've got GNG effort both in terms of human resources as well as the normal types of processing that are done by third parties in some contract relationships. But we've already begun to see a lot of prospect opportunity come out, some of it we're preparing to drill as we've noted. That's required some acreage. We also have some significant positioning that we did over in the Bay de Chene and Cote Blanche Island area that is absolutely consistent with the overall Lake Washington plan. While we can't -- we surely can't guarantee that we're going to be able to have a Lake Washington -- another Lake Washington success in either of those 2 areas, we're certainly putting together those opportunities so that we could have that kind of success. Bruce, you want to comment further on that?

Yes, Bill, with regard to TAWN, the 9% decline, the TAWN area is declining. There are 4 fields in TAWN. Various stages in their life and they're all on decline. 9% decline quarter to quarter is really not indicative of the true decline at TAWN. But it is declining and we built that into our guidance. The TAWN area and the Rimu area have pretty much flipped now in terms of the contributing production.

Current production at TAWN is closer to what Rimu averaged and Rimu is closer to what TAWN had averaged and we would expect to see that continue. And that, as we mentioned before that's been our focus is to try to build the production up in the Rimu carrier to replace the declining TAWN. A couple of these prospects we'll talk about next week are in the TAWN license areas. One of the nice things with our infrastructure with some success we can get some of these things on production fairly quickly. That's a real competitive advantage we have in New Zealand compared to some of the onshore permit holders serving offshore.

Thanks Bruce. Is there a big shift in the budget for '05 to exploratory work -- reserve that kind of work away from the heavy weighting towards development or what is the mix this year?

The majority of the money will still be spent on development but there is a larger component of exploration in the budget. We'll detail all of that next week. But you clearly see more of it spent in exploration both domestically and in New Zealand. Although one of the things that we are working with in New Zealand is trying to bring in a partner, which will help reduce our actual capital exposure but still get a number of wells drilled. That is not finalized, so we're not in a position to tell you too much more than that.

But we're pretty far along in talks with someone we think is going to be a really good partner and we think that will get flanged up here in the near future and we'll be able to talk a little bit more about the details but this is going to really help us, essentially we get more bang for our buck, leveraging ourselves into more wells that we can do on our own. Much of the exploration capital obviously domestically will be spent at Lake Washington particularly drawing some of the deeper 3D generated targets and we'll show you some examples of those next week. But also potentially doing some additional drilling at Bay de Chene and Cote Blanche Island.

That's helpful. Thanks.

This is Terry. I'll sum up one of the comments that Bruce had given some detail on. We will be focusing more on exploitation and exploration in terms of a lot of our human resources in 2005. Although the capital budget itself won't be all that much higher as a percentage towards that effort. But certainly in terms of our manpower there, I think it's a larger proportion. And as Bruce mentioned a good number of the targets are deeper so we're moving away from somehow what we have been call on the low hanging fruit or the shallower zones and we'll be getting into some of the larger impact and some of the higher cost things that one can do in south Louisiana.

Thanks, Terry.

Thank you.

[Operator Instructions].

Thank you. Our next question is coming from Monroe Helm (ph) of Zimmerman Capital Management (ph). Please go ahead.

Just following up on the line of question that Phil had can you tell us what percent of CapEx in '04 went toward drilling PUD and what percent that might be in '05?

I think we -- we'll have to shovel through some numbers here to come up with some general answer to that. But I think the actual answer; it lies in next week's presentation. We'll get the details of the 2005 capital budget, which is allocated -- it's presented at that time but various core areas and various functional activities in those areas. That's kind of the short answer.

Okay. I can just wait until next week then.

I mean, Monroe, I don't have the capital number but about 34 of the 54 wells domestically were PUD conversion wells and all of our wells except for one exploration well in New Zealand were PUD conversion wells.

The amount of capital for the exploration well is maybe half a million dollars. Pretty small amount.

Okay. That's helpful. Thank you.

Our next question is coming from Andy Pargh of Andover. Please go ahead.

Quick housekeeping question. Can you give me the realizations before hedges for domestic oil and gas?

Do we have that handy?

We'd have to do some r research.

Andy, that -- our hedges are basically reflected in the pricing. I don't really think we have that at hand here.

All righty. Catch up with you later. Thanks.

Thank you. Our next question is coming Adam Lake (ph), CSFB. Please go ahead.

Could you just give us a sense in terms of the PUD percentages still fairly high in general whether what is still booked as PUDs as a development plan and in New Zealand I'm presuming that most of the PUDs are in carries that have a proportionality.

In New Zealand, I think they're all in the Rimu Kauri area. I don't believe there are any PUDs in the TAWN area right now. And we do have development plans for all 3 sands, the Rimu, Kauri.

This is Terry. I would say we have fairly rigorous plans for '05, '06, and'07 in terms of how you bring forward that asset value. And next week I believe we'll show in the analysts presentation we'll show a lot of detail about some of the -- if I'm not mistaken the vast majority of those undeveloped locations were in the 2 to 3-year plan as they -- is that?

Yes. Most of the PUDs, the largest percentage of PUDs are at Lake Washington where we're spending the vast amount of our capital. Clearly we're trying to balance PUD. Development, getting production up, facility infrastructure growth, and exploration. The second largest area of PUDs is ADDP where we have an ongoing program trying to balance capital down there and keep that production going in a relatively flat to modest decline area. Drill 10 to 15 wells down there again in '05 and we would expect to do the same thing in '06. Those are the 2 largest areas of PUD reserves. Toledo bend is the third primary area and we do have plans for 2 to 3 wells in that area. And like I said earlier, in New Zealand they're all in Rimu/Kauri area and we do have development plans in those sands areas as well.

In Lake Washington and I guess in general in the U.S. How much of the PUDs are attributable to other zones within the same existing well versus kind of new wells, new locations?

Yeah, that's a good question. I think the short answer is that the PUDs in Lake Washington are highly diversified in that they're in many, many different fault blocks and many, many different sands and that's a great question and maybe we can have a better answer next week. But it is diversified. I would say that. I'd use that characteristic right now.

And then the other place, of course, of substantial amount of new PUDs is in the Cote Blanche Island and Bay de Chene areas which we'll go over in more detail next week. And obviously we do have plans there, the plans were built into our economics at the time that we evaluated the property and bought it.

Thank you.

[Operator Instructions].

Our next question is a follow-up coming from Monroe Helm (ph) of Zimmerman Capital Management (ph). Please go ahead.

Sure, thanks. I may have missed this but Joe can you give production guidance for '05?

Yes, sir, the guidance for '05 full year is 7 to 12% increase of the '04 numbers.

I thought that was reserve growth. That's production?

Both.

Both. What kinds of excess rate are you seeing in the exploration program to get that or do you not assume any impacts from exploration wells in '05?

The big impact of reserve growth is from development drilling in '05. And we probably use a 75%success rate. And we've been running 84% this past year.

And in terms of production, the primary driver of production is as much the facility infrastructure projects we have underway, primarily Lake Washington and development driven. It's not driven by development success.

Okay. Thank you.

Thank you. Our next question is coming from Alizandro Norgio (ph) of Nart Partners (ph).

Good morning, guys.

Good morning.

Two quick questions. The first one relates to production. And I understand you said the gas compressor is down for the first quarter. Could you maybe give us some sense as to what we should expect as we get into maybe the second or the third quarter or when is that going to get resolved?

Are you talking about production domestically in New Zealand?

I guess domestically because, I mean, I'm seeing--

Domestic issue is primarily driven by facility infrastructure limitations in the Lake Washington field. There are several there, several things that limit it to some extent. One is that I think Terry or Joe mentioned was the colder weather affects it. But there are 3 platforms in Lake Washington. One is CM 3platform which processing the sour production is that capacity and the gas lift system, which affects the whole field. Our wells are gas lift.

The compression capacity we have out in the field is pushing its limits. You do get some downtime that affects it. But it's not able to run really at peek capacity. We have several projects underway that will be completed at different times between now and in the middle of the third quarter, the bulk of them will be finished up in the third quarter that will significantly improve our capacity. It should take it from a rating capacity of about 20,000 to 30,000 barrels a day.

Okay. So just making sure that I'm understand all the profile is going to shape up, as I look at domestic production I should see a relative maybe modestly increasing profile over the next couple of quarters and a bigger bump in the third and the fourth quarter.

We expect a modest increase in the second quarter but bigger bumps in the third and fourth quarter. There are multitudes of projects. We'll go over them a little more detailed next week. But they revolve around one making the gas lift system more efficient, adding significant complexion, and our biggest delays there is getting compressors.

We actually ordered them last fall and they've been, you know, had 6 to 8-month lead times. Then we're also adding processing capacity in the ways of aiming facilities and dehydration facilities as well as compression of the CM 3 platform to essentially take that from 5,000 to 10,000 barrels per day per sour production. That will also allow us to continue exploiting some of the shallower sands which we avoided drilling because we didn't have the ability to produce them.

Okay. That's good. And then just another side question. Why is your operating cost going up in a fair amount, I guess, domestic operating cost for '05? Going from $0.70 to like $0.82 to $0.87. Am I missing something there?

I think that you're including some of the variable costs relative to taxes and that would be an all end cost. And obviously with the pricing environment that we're in, some of the costs are actually going up. But you know, we also have some new fields that we're entering into that you're going to have some upfront costs associated with that, just as we did in Lake Washington. So I think you have to look at the entire spectrum.

Yeah, that's correct. There are a couple of things going on there. With a lot of the facility projects, some of those costs can capitalize but some of those really get costed out as operating expenses. Particularly an older field like Bay de Chene and Cote Blanche Island. Just as we did in Lake Washington, initially it has high operating costs; you go in and make them higher because you need to spend some money to fix them up correctly. But then you enhance the production and you drive down the per unit costs pretty dramatically. We've done that at Lake Washington. We expect to do the same thing at both those fields. We'll give you a little more insight into that next week as well.

Okay. That's mostly related to what you're doing to Lake Washington.

Yeah. And you can see that even if you look at our first quarter guidance compared to the full year guidance. Clearly we expect to drive it down through the year.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Eric Haulmark of Wachovia Securities. Please go ahead.

Good morning, guys. Do you have the changes in discounted future cash lists done and if so could you give us the previous estimates and numbers please.

Actually we don't have that done but will be completing that at the not too distant future and obviously will be released in our K.

Okay. Thank you.

Thank you.

Thank you. There appears to be no further questions at this time. I'll turn the floor back over to you.

Well, thanks everybody for joining us. We look forward to seeing many of you next week. We're pretty excited about the opportunity to go over our projects in much more detail. We're excited about 2005 and we thank you for sharing it with us.

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