SilverBow Resources Inc (SBOW) 2007 Q3 法說會逐字稿

Good morning. My name is Cheryl, and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter Swift Energy Company conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to post a question during this time, please press star then the number 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key.

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Scott Espenshade. Sir, you may begin your conference.

Good morning, everyone. I'm Scott Espenshade, Director of Corporate Development and Investor Relations. I'd like to welcome everyone to Swift Energy's third quarter 2007 earnings conference call. In today's call, Terry Swift, Chairman and CEO will provide an overview, Alton Heckaman, Executive Vice President and CFO will provide financial results for the third quarter, and then Bruce Vincent, President, will provide an operational update. Terry Swift will then summarize before we open it up to questions. Also present on today's call are Joe D'Amico, Executive Vice President and COO, Mike Kitterman, Senior Vice President of Operations, and Bob Banks, Vice President International Operations and Strategic Ventures.

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, our industry and the current environment in which we operate. 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 25 to 30 minutes today, and we'll allow ample time for questions following the present -- the conference call. With that I'd like to turn it over to Terry.

Thanks, Scott. Thank you, again, for joining this morning's conference call. We believe that the commodity market, especially the oil market, is setting up very well for Swift Energy Company to take advantage of strategic decisions that we've made over the past several years. The crude oil market has obviously been very strong, and we expect that strength to continue into 2008. Today, Swift Energy has a production profile which is predominantly crude oil, which allows us to benefit from the current crude oil market.

Swift Energy Company has just concluded another solid quarter. Our net income, compared to our record quarter of 2006, decreased 17% to $42.3 million or $1.38 per share for the third quarter 2007. This amount does include a small non-recurring one-time tax write-off item that will be discussed later. Cash flow increased 4% to $129 million for the third quarter again compared to the third quarter of 2006. Production during the third quarter decreased 3% to 18.2 Bcf equivalent when compared to the record quarter in 2006 but increased 2% sequentially from the second quarter of this year.

Swift Energy continues to see some of the best price realizations in the sector. In the third quarter of 2007, we averaged $9.89 per Mcf equivalent for our hydrocarbon sales, and $10.49 per Mcf equivalent for our domestic hydrocarbon sales. Three items contribute to our high realizations, our gulf coast geography and its proximity to premium markets, our liquids-based product mix and our conservative hedging strategy. While we've seen oil field cost increase, our margins have been much stronger. We continue to attempt to maintain our cost structures such that approximately one-third of our realized cost for replacement of the asset or DD&A and one-third of our costs are cash expenses that would be LOE, G&A and interest expense, leaving one-third there for profit or more. This year, our profit margins have been about 40% leading to strong net income.

Over the past several years, we've also benefited from reducing our corporate decline curve and by the technology investments in the oil field and in our headquarters office in Houston and our other offices where we have talented staff. A current example is the Lake Washington west-side facility, which is on schedule to be commissioned in the first half of 2008 and will provide an opportunity for significant production capacity increases from our facilities in our Lake Washington area, and again, this would predominantly be crude oil-based capacity improvement. Our 3-D seismic efforts should also continue to benefit the company both in our development and exploration programs. We have over 4,000 square miles of newly merged 3-D data that should benefit us for years to come.

Further bolstering our production base, Swift Energy purchased three south Texas properties from Escondido Resources which just closed in the fourth quarter. This is another long-life natural gas property that will further strengthen our portfolio. We plan to carry a two-rig program into 2008 in this particular area. We see significant opportunity for reserves and production growth from this south Texas area, much like we believe we experienced in the AWP region. We think we can do similar types of activities in these tight gas sands in south Texas.

We've seen several good wells drilled this quarter in Lake Washington, Bay de Chene and South Bearhead Creek. We have increased our rig activity this quarter and currently have 11 rigs running. This activity should provide nice momentum as we move into 2008.

To summarize, Swift Energy's efforts have once again delivered solid operational and financial results. We understand the challenges of this tight gas market for both products and services, and we're striving to deliver long-term value to our stake holders. All of our efforts go to maintaining our margins and improving the bottom line, as we have demonstrated this quarter. I believe that Swift Energy's quality assets and talented oil and gas professionals will continue to provide a deep inventory of development and exploration opportunities for our continued excess -- success. With that, I'd like Alton to present the third quarter 2007 financial results.

Thanks, Terry, and good morning, everyone. I'm pleased to report Swift has posted very strong results so far this year including another solid quarter. Revenues for 3Q '07 were $181.2 million, up 4% sequentially over Q3 '06. Net income was $42.3 million and diluted EPS came in at $1.38. Cash flow before working capital changes increased to $4.20 per diluted share, and domestic production rose 7% to a record 16.2 Bcfe when compared to 2006.

The continued healthy commodity prices contributed to our strong results. As Terry mentioned, almost 70% of Swift's production for the quarter came from crude oil and liquids, again, quite favorable given the currently relative premium of crude. I should note that we continue to receive improved crude oil differentials both domestically and in New Zealand and expect continued strong Louisiana light, sweet and heavy crude pricing in our south Louisiana areas. We have therefore adjusted our remaining 2007 guidance to reflect this trend. With the current weighting of crude oil and liquids, Swift's average composite realized price for 3Q '07 was $9.89 per Mcfe. Domestic composite prices averaged just under $10.50, up 4% from 3Q '06 and New Zealand composite prices actually decreased 12%, all resulting in a 4% increase in oil and gas revenues over 3Q '06.

While prices stay strong, we're also experiencing increased cost, and as Terry said, Swift remains focused on the margins on the per-unit cost of metrics, which continue to increase sector-wide. As to Swift's third quarter of 2007, G&A came in at $0.57 per unit within guidance. DD&A per unit came in at $2.95. Production cost came in at $1.19 which was above guidance. I should note here, and as indicated in our press release, the comparison to 2006 third quarter should consider that 3Q '06 included a hurricane-related insurance settlement, which lowered LOE in that period by $0.15 in Mcfe. Obviously, production taxes increased in tandem with the production mix weighted more toward domestic crude production and interest expense came in at $0.31, which was in line with guidance.

The 3Q '07 provision for income taxes included a net non-recurring increase of $1.5 million or $0.05 a share due primarily to a valuation allowance for deferred capital loss tax carry-forward, which alone was $2.6 million, all resulting in net income for the quarter of $42.3 million, $1.41 basic per share and $1.38 diluted, again beating first call mean estimate for the quarter. As stated earlier, cash flow before working capital changes for 3Q '07 came in at $129 million or $4.20 per diluted share, while EBITDA was also $129 million for the quarter. CapEx for the third quarter 2007 equaled the $129 million of cash flow in line with our strategy of spending within funds generated.

As of quarter end, we didn't have anything drawn on our bank line. We recently increased our borrowing base to $400 million, and we currently have just over $200 million drawn on our line after funding our previously announced October South Texas property acquisition. However, we still have ample liquidity for any value-added strategic opportunities that may come along and we're always looking.

With respect to Swift Energy's hedging activity, we have purchased natural gas floors for approximately 1.33 Bcf of our first quarter 2008 domestic natural gas production at an average NYMEX strike price of $6.90 per MMbtu. We've also purchased oil floors for approximately 639,000 barrels of our first quarter domestic production at an average NYMEX strike price of $71.22 per barrel. As always, please see our website for detailed hedging information and updates. We've included additional financial and operational information in our press release, as always, including guidance for the fourth quarter and full-year 2007. 2007 is another great year for Swift Energy Company, both financially and operationally, and with that, I'll turn it over to Bruce Vincent for a review of our operations.

Thanks, Alton, and good morning, everyone. Today, I want to discuss third quarter 2007 activity, including production volumes, recent drilling results, activity in our core operating areas, and our plans for the rest of 2007. In terms of production, Swift Energy's production during the third quarter of 2007 totaled 18.2 billion cubic feet equivalent, a decrease of 3% from the 18.8 Bcfe produced in the same quarter of 2006. Sequential production increased 2% when comparing the third quarter of 2007 to production in the most recent second quarter of 2007.

Domestically, third quarter 2007 production increased 7% to 16.2 billion cubic feet equivalent from the 15.2 billion cubic feet equivalent produced in the same quarter in 2006, primarily due to increased production from our South Louisiana region. Compared to the second quarter of 2007, domestic production for the third quarter of 2007, production increased 4% from 15.5 billion cubic feet equivalent due to production increases in Bay de Chene and Cote Blanche Island. Third quarter 2007 is still in production of 2.0 billion cubic feet equivalent, decreased 45% from production in the same quarter in 2006 due to natural production declines and no new drilling activity by us in this region. Sequentially, this area also saw a decrease of 12% from production levels in the second quarter of 2007.

In terms of drilling results, Swift Energy successfully completed 11 of 12 wells in the third quarter of 2007. The company completed all 11 domestic development wells and was unsuccessful on one exploration well in the Bay de Chene area.

Let me briefly review our activity in each of our core operating areas, beginning with our South Louisiana region. Production during the first quarter of 2007 averaged approximately 23,000 net barrels of oil equivalent per day or 138 million cubic feet equivalent per day in the South Louisiana region, which was a slight increase compared to our second quarter 2007 average net production. The bulk of this production came from the Lake Washington Field (inaudible) of 110 million cubic feet equivalent per day or approximately 18,200 barrels of oil equivalent per day.

Also, our Louisiana crude oil quality differentials were, again, strong in the third quarter and had a direct bearing on our corporate crude price differential and margins. In the company's South Louisiana region, Swift Energy successfully completed three development wells, two of which were Newport area development wells and the Lake Washington area. Each of these three wells encountered significant pay intervals, and all are awaiting completion. The first Newport well encountered 266 feet of net pay in four different intervals while the other Newport well encountered 177 feet of net pay in two sands, and at Bay de Chene, the development well there encountered 100 feet of net pay.

Our plans for the remainder of this year call for Swift Energy to drill seven to nine additional wells in the South Louisiana region. We currently have four operated and one non-operated barge rigs contracted in this region. As Terry mentioned, the facility expansion project on the west side of the field in Lake Washington is on track and is scheduled for a first-half 2008 completion.

Additionally, we continue to work on our merged 3-D data set across this region covering approximately 4,000 square miles. We now have the prestacked depth migration work done at Lake Washington and Bay de Chene and are already beginning to see the added value of these new data. We now have an even better picture of the salt sediment interface as well as better imaging of the numerous faults and sand horizons. This will enable us to get further up-dip and closer to the salt and some salt blocks to look for other embayment areas such as Newport and develop potential subsalt place in these areas.

We have also recently completed the fast-track prestacked depth migration work at Cote Blanche Island and are already using this to look for potential salt overhangs for additional up-dip potential at this field. The prestacked time migration merge data set for the (inaudible) area has also just been received which will enable us to get a better picture of the Cote Blanche Island, Bayou Sale, Horseshoe Bayou, Jeanerette, and Bayou Penchant areas. These data are also now being further processed, and we expect to receive the prestacked depth migration for this entire data set in mid 2008.

In our South Texas region, production in the third quarter of 2007 averaged approximately 19 million cubic feet equivalent per day primarily from the AWP Olmos area. In the third quarter, we successfully developed six development wells targeting the Olmos sand in the AWP area. We have three rigs in the field currently and are continuing our drilling program, which may include up to 11 more wells this year.

The $249 million purchase of the three South Texas properties, the Sun TSH Field, the Briscoe Ranch and Las Tiendas from Escondido Resources in the fourth quarter will nearly double our production from this area this quarter. We are particularly excited about the repeatable drilling inventory this property brings and associated reserve growth and production growth. This acquisition includes approximately the 82,900 total acres with 59,370 acres that are undeveloped so we see a lot of potential for growth. We foresee this property as a solid underpinning to our production base very similar to our AWP Olmos area.

This acquisition fits us extremely well from a strategic perspective and will allow us to focus our core competency in tight sands in South Texas, particularly the Olmos in this area. We think this is a good time to buy -- to be buying a gas-weighted project, and this one comes with significant potential for growth that is lower risk and more predictable and in one of our core areas of South Texas. We plan to keep two rigs in this area as we move into 2008.

The Toledo Bend region contributed approximately 16.5 million cubic feet equivalent per day of production for the third quarter of '07. Swift Energy completed two development wells in South Bearhead Creek in Beauregard Parish, Louisiana. We continue to have two rigs operating in the South Bearhead Creek area, and we expect to drill three to four additional wells targeting primarily the Wilcox with at least one well targeting the Cockfield this year. This area is showing good potential, and we are certainly pleased with the results to date.

Our operating region in New Zealand produced 2.0 billion cubic feet equivalent in the third quarter of '07. It was approximately 21.1 million cubic feet equivalent from both the TAWN Area and the Rimu/Kauri area. The third quarter decrease in production was primarily due to our lack of drilling activity in this area coupled with natural decline. For the third quarter of 2007, New Zealand accounts for 11% of Swift Energy's total production. Due to the previously announced review of strategic alternatives in New Zealand, no drilling activity is planned for the remainder of the year. A strategic review is expected to be completed by year end.

Thanks for your attention. We're glad to have you on the call, and I'll turn it back to Terry for a recap.

Thanks, Bruce. Before we open it up to questions, I should note that Swift Energy's focus for the remainder of 2007 will concentrate on reserves and production growth as well as managing our cost. We believe the South Texas acquisition fits perfectly with our strategy and look to showcase the potential in these fields over the next several years. We also expect to have a decision from our review of New Zealand's strategic alternatives by the end of this year.

To review some of the highlights from this morning's call, I'd like to note that Swift Energy had solid financial results in the third quarter. In the third quarter of 2007, our revenues increased 4% to $181 million. Earnings were $42.3 million or $1.38 per diluted share, and cash flow was 129 million or $4.20 per diluted share. These results all lead directly to added value and further strengthen our balance sheet. Swift Energy is drilling deeper higher-impact prospects in our South Louisiana region. We believe these deeper wells clearly demonstrate that material prospect potentials can be derived from our high-quality merged 3-D data sets in our South Louisiana region. Finally, we continue to have a strong and flexible financial position, and we have a highly skilled and talented staff of oil and gas professionals. This allows us to take advantage of future opportunities, whether they be from organic growth through drilling or strategic growth through acquisitions.

At this time, we'd like to begin the question-and-answer portion of our presentation.

Thank you. (OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the roster. Your first question is coming from Leo Mariani of RBC Capital Markets.

Good morning, guys, Terry. I'm hoping you can give us sort of a little flavor on, you know, kind of what your mix is on the drilling front kind of over, you know, for the rest of the year and sort of into '08 a little bit here in terms of, you know, what portion is added to target exploration versus further development drilling?

Well, we've got kind of a mix of that. We -- we've got one exploration well I know that's planned between now and the end of the year. Obviously quite a lot of activity in South Texas, both at AWP and the three fields that we recently acquired from Escondido's. We've got five rigs actually running down that -- or will be running, four right now and another one pretty shortly.

Okay. Could you give us a sense of what your activity is, if there is any right now, on those five BP properties you guys acquired in sort of late '06?

Yeah. The -- one of the wells we plan to spread between now and the end of the year is the Bayou Sale well. That's a big impact particularly on the production side. We had to form a unit with Hunt, which is Hunt Petroleum which is to the north, and that -- we've had that hearing and so that's now done. That welling should be spud before the end of the year.

Okay.

Jeanerette, we're looking at some activity up in Jeanerette. I think we're looking at our reentry and sidetracking a well there, and of course at Horseshoe Bayou -- Bayou Sale and Horseshoe Bayou. We've got the St. Mary well that Conoco Phillips is operating that is currently drilling. We spudded that what, about a month ago.

Yeah. Joe has got a -- kind of a rundown, just a quick recap of where some of the rigs are in South Louisiana. Joe, do you want to just mention that?

We have three rigs currently -- we will have three rigs in Lake Washington. We have two currently drilling in the Newport area and we have another rig coming to drill some of our other probable and possible locations in Lake Washington, and as Bruce mentioned, we have one rig coming for Bayou Sale drill, one of our big prospects there, and then he mentioned the same areas as well from Horseshoe Bayou. We have one rig in South Bearhead Creek. We're picking up another rig to drill a Cockfield test there. Right now, we have two rigs drilling. They're -- we're drilling Wilcox wells. We'll pick up a rig to drill a Cockfield test there. Bruce mentioned in the BP properties and Jeanerette, we have a well we're going to reenter and sidetrack for some really good-looking potential.

And we also, up in Bayou Sale, we did just finish a well that was operated by Hunt that we were non-operator, and it was successful, and it's going to be completed.

Yeah. Just a final little bit of color to that, we're pretty excited about our 2008 opportunities that we're just wrapping up our budget process with our board that's not fully completed in terms of being ready to go out and communicate things, but we are already beginning the momentum movement so that we cross into the year 2008 with a much stronger entry point into the year.

Yeah. One other thing, we see this as a real opportunistic time for us because we tend to be more low weighted, so our cash flow levels are pretty robust, but because of the lower prices we're seeing in the gas markets, meaning the gas-weighted companies have pulled back their capital budgets, so rig availability is the best we've seen it in several years. Costs are coming down on the rig side and they're also coming down on the service side. So we believe now is a good time to step up your activity, take advantage of what we think is some low point -- I mean, it's still high cost, let's not get away from that, but it's a low point that we've seen in the last couple of years. Availability is there. We think the quality will be a little better in terms of the work -- hands that are working on the wells. We've got the opportunity set, the inventory that we've been talking about, and so you can see just on our rig activity we got going right now in the fourth quarter, we've stepped it up and see that stepping up moving into next year.

Okay. Obviously we've got, you know, record-high oil prices currently here, which provides you guys with a tremendous amount of cash flow. Are you still going to be you think in the mode of trying to spend, you know, pretty close to cash flow? Are you going to be really kind of keeping the momentum going here if we continue to have such strong pricings in '08 and maybe step up rig activities more?

That absolutely is the plan. I mean we expect to move into '08 the same way we've done in the past with a discretionary spending wage in our budget, but we would absolutely targeting spending cash flow, but we're ready to pull it back if prices come down, which we don't see happening, quite frankly, but we're ready to step it up if prices move up just like you see us doing in the fourth quarter.

Okay. Can you give us an update on production from the (inaudible) discovery that you guys made a little while back and how that's doing?

I know the well is producing well. I'm looking to my -- some of my guys to get the exact numbers, but it's actually curtailed because of markets. I think we mentioned before, the market there is the Alliance Refinery that Conoco Phillips operates, and they've actually been asking for a little bit reduced level, so it's curtailed in terms of its ability to produce, but I think it's still producing around 5 million a day.

Six and a half

Six and a half million a day

And it has produced up to 9 or 10 million a day.

Up to 9 or 10 million a day.

Those are gross numbers.

Yeah, those are gross numbers.

Okay. Just final question here for you, guys. Your gas production was up pretty significantly in the third quarter domestically versus the prior quarter. You know, where are you seeing the big increases out there?

I suspect that's primarily Bay de Chene but the -- and Cote Blanche Island. Yeah, we recompleted a well in Cote Blanche Island that enabled us to increase by about 5 million a day in that particular area, so those would be the two primary reasons.

Okay. Thanks a lot for your time.

Thank you.

Thank you. And next question is coming from Brian Kuzma of J.P. Morgan.

Good morning, guys.

Hey, Brian. How are you doing?

I'm doing great. A couple quick questions for you. You talked a little bit about looking into '08. Any thoughts about in terms of stepping out further on the risk spectrum using your PSDM data to drill some of these deeper prospects?

Well, we actually absolutely are working on developing deeper prospects, and we've identified some potential subsalt planes at Lake Washington. Those aren't ready to drill yet. We still got quite a bit more technical work that we're doing to develop them further. But we are working that inventory, and would not be unusual to expect at least one deep test in the '08 budget.

Yeah. It's important to also note that to the extent that we mentioned subsalt or some of the really deeper horizons where you're doing two or three strings of pipe, there's no question that we will look at those prospects with a different view in terms of risk profile and be looking for some partners in some some cases. So don't expect us to be drilling, you know, a subsalt well 100% straight up.

Got it. Okay. And then, when -- are you guys -- do you still think you're on track to hit the low end of that 4 to 6% reserves growth rates?

Yes. In terms of our product announcement, we said we were kind of in the low range, and we'll kind of stick to prior announcements, and of course we did have the Escondido acquisition we announced as of mid-year. The reserves on that were about 77 Bcf.

As of July 1.

Yeah.

Okay. Well, that's it for me, guys.

Thanks, Brian.

Thank you.

Thank you. And next question is coming from John White of Natixis Bleichroeder.

Good morning guys.

Hey, John. How're you doing?

Good morning, John.

Nice going on the production. The Lake Washington, you said seven to nine wells likely to be drilled in the fourth quarter?

I think I was referring to South Louisiana region.

Okay. Yeah, that's what I wanted to clarify. And none of the wells drilled -- your successful wells at Lake Washington or Bay de Chene in your press release had been completed yet -- have been turned to sales yet I should say?

Not in the third quarter.

Not in the third quarter based on the wells drilled in the third quarter. I know we're working on a completion of one of them right now.

Okay. So those wells will all come on this quarter.

That's correct.

Okay. That's all I've got. Thanks very much.

Thanks, John.

Thanks, John.

Thank you. Next question is coming from Gary Kennedy of Kennedy Investments.

Good morning, gentlemen.

Good morning.

Good morning.

I noticed that on -- person that's handling your New Zealand sales that the bids are all supposed to have been in by October 11th. Can you comment about how many bids you got and how that's going?

Yeah. We have not received any kind of binding offers at this point in time, Gary, and the schedule hadn't called for that. You know, this is a process that is a review of all of our strategic alternatives in New Zealand, and we're in the middle of that process and we really don't have any comment on the process other than that.

Okay. I understand. The second question I had is, you know, with crude, you're $1 or $2 lower than crude. Can you tell me what Texas crude averaged in the third quarter, so I can get some idea of how much incremental revenue you're going to get in the fourth quarter if these prices hold?

For all average pricing in the fourth quarter -- I know we've got that.

Our total company average for crude oil in the fourth quarter was $76.17. We received $76.20 domestically and $74.92 in our New Zealand operations. In our press release, we give those numbers. We also guide on differentials. Differentials have been stronger out of the South Louisiana region, but we see a little bit of a shift possibly this quarter and so widening out to more of a negative where it had been positive over the previous two quarters.

But basically right now, the way I read that is that you should be getting about $10 a barrel more now than you were in the third quarter at these prices?

At these prices, that's a fair assumption, yeah. I think the one thing that we don't know for sure that Scott was indicating is the actual differential. You know, historically, differentials have always been on the negative side anywhere from a buck to $2.50, and the last couple of quarters they've actually been on the positive side. Some of that has to do with the quality. Some of it what to do with the location in the Southern Louisiana area. Some of it has to do with the disparity between Brent and WTI, the issues earlier in the year that you had at Cushing. So, a lot of factors go into that, and we don't think we should forecast a positive differential 'cause the historic norm has been slightly negative, so -- but we're talking of, you know, a buck or two differential there. It's not -- not as compared to the $10 plus increase in the price of crude oil over the last couple of weeks.

Right. Okay. And the last question I had was, what type wells are you getting in Lake Washington on production-wise? Are you talking about a 1,000 barrels a day or these new wells you're bringing on are 500 or what?

It actually varies depending upon which well we're talking about and how deep it was. You know, kind of the shallower wells tend to be, you know, 200 plus or minus barrels a day, but some of the wells we're drilling in the Newport area are drilling at probably 500 to a 1,000 barrels a day.

Okay. Well, great job. It seems like everything you're doing, we should see your stock price much higher in the near future. Thanks a lot.

Thank you, Gary.

Thank you. And next question is coming from Rehan Rashid of Friedman, Billings, Ramsey.

Morning, Bruce. Morning, Terry.

Hey, Rehan.

Good morning.

On the quarter, just a quick couple of questions. First on the Bay de Chene exploration well, could you kind of walk us through the technical thought process here maybe starting with how big was the target and kind of what did you see with this dry hole and, kind of, how does it affect your exploration program going forward?

The particular well you're referring to was not one of our bigger target exploration wells.

Okay.

We do, however, have several situations in Bay de Chene where we have some nice targets setting up that we have not put in the depth migration analysis in, and we're doing some properties analysis into the seismic. We do think we've got some good targets that are deep in Bay de Chene.

Now, let me say some exceptional targets. The target size, I mean, we're going to be a little careful there because we might actually have some subsalt there, and if that's the way that shapes up then that will be high cost, big target but high risk. We have some medium depth wells that would not -- in terms of exploration going forward that would be more the nature of medium costs. We're talking about 13 to 15,00 foot-type wells and targets that would be in the 50 to 100 Bcf type of range. Those are exploration projects that are still yet to come at Bay de Chene. The well that was not successful in Lake Washington really was the redrill of the 146 in BDC, and --

In the lower --

In the lower zone. We had hit some really nice targets in what we call the E section, and have some nice production up there. We're going for deeper E sands where we had some anomalies and some structure, and as we got down deeper, we had both drilling problems getting to it because of some pressure problems, wading up the mud. We got into the zone and we found that the sands weren't as well developed as we'd like in that particular spot. Again, you go back to now correlating back in what you know from the well logs to the seismic and do your rock properties analysis. Lots of opportunity on this dome. So while we're going to call it an unsuccessful test, we are going to call it a smart well.

Well -- and, in fact, based on the (inaudible) discovery, we have done some further work and with the PSDM data and identified what we think is a potential salt block to the north, and we're currently drilling that right now.

Okay. Okay. That's good. Good to hear that it wasn't one of the bigger prospects unlike the progression here. One last question on the CapEx front and maybe I didn't catch this. Where is the incremental CapEx going? Maybe if you can break it down for me, please?

In terms of '07?

Yes, the incremental CapEx that we're talking about.

Well, I think it's spread out, quite frankly. I mean, we picked up the activity kind of across the spectrum between Lake Washington, Bayou Sale, Bay de Chene, Cote Blanche Island, South Bearhead Creek, AWP, Escondido. All of those fields have activity. Not sure which of those I would classify as the incremental increase versus what, you know, so -- we just see opportunities set across the spectrum. We've been able to get good rig availability at kind of a little bit better cost. We obviously have higher levels of cash flow. I thought it made a lot of sense to step up the activity a little bit and build some momentum moving into '08.

I think you will find that, you know, just in terms of the mix, although it's not a big change in the mix, we are pushing some more activity down into South Texas. Again Bruce noted that we're seeing better pricing on the rig side, on the -- on our services side. So we think it's a good time to step that up and we've made this acquisition. We went into this acquisition knowing we wanted to do some drilling down there, so we stepped that up on the capital side. You'll also find, when the year finally closes out that on the seismic side, we're doing some things with our seismic here in the latter portion of the year to acquire some more data sets and do some more merging activities -- processing activities that set us up very well, I believe, for 2008.

Okay. Good stuff. Thank you.

Thanks, Rehan.

Thank you. Your next question is coming from Neil Dingmann of Dahlman Rose.

Morning, guys. Good color so far. Say, a couple of questions. One obviously would be where oil prices are going? And it sounds like you've been doing a lot of work with next year's budget. Has, you know, current oil prices cause you to change anything or, you know, are you still sort of a (inaudible)?

We are very bullish on the oil market, and to show you how bullish we are, we had been working our budget so we're not ready to have a final final discussion on it. We've been working our budgets around the $70 level, and as we worked these budgets, we've seen, as you have, the prices go higher. We've made sure in our hedging strategy that we leave that upside force. We've not factored into our budget these extra prices being firm in terms of projects that we would absolutely implement. We're going to watch these markets real close. We know it's a very volatile sector, and in that regard, while we do think some of the prognostications we're seeing of oil prices going even higher from this point on, we want to have the cash in hand and available to us before we increment up our budgets.

Yeah. And, you know, it's of interest to me that we were able to put some floors in place in the first quarter of next year at above $70 which obviously helps. But we will continue to work our inventory and develop our inventory so that if -- let's say prices average $90 next year and we have a higher level of cash flow, we absolutely have the ability to step-up activity because we know exactly where we want to place it.

Okay. And then, as far as that capital for next year, how different -- you know, when you look at what you're going to spend next year versus this year, not on sort of an absolute basis, but you mentioned obviously shooting some more seismic. I'm just wondering if you would look sort of where that CapEx is going? Will you look at seismic, exploration, development, et cetera? Is that percentage going to change? Will there be more exploration, et cetera? I just wanted to run that color around it.

I think the big change you'll see in next year versus this year is you'll see a definite step-up overall in capital allocated to the drill bit. This year, we had quite a lot of facilities expenditures as well as quite a lot of seismic expenditures and the acquisition, and when we look at our '08 plan, we're seeing a definite step-up in the drill bit-dedicated capital. In terms of the the split between exploration development I think you're going to see pretty much what we've done in the past, roughly an 80/20 split, somewhere in that neighborhood. We don't see that significantly changing, but we do see a definite increase in the overall capital allocated to drilling activity.

Okay. And then last question. As far as when you look out there at, sort of, activity in looking at acreage or reserves, et cetera, is there -- you know, are you seeing some things, is there maybe some contiguous acreage you could add or is the market hot enough or too hot out there to really make one want to jump into this?

Well, you know, the market is certainly hot in some areas or hotter in some areas than other areas. You know, we absolutely did continue to look to try to expand acreage, but on a -- you know, a rifle-shot basis, not just to add acreage to add acreage for it's sake, you know, but we look to continue to doing that. You know, one of the nice things we've done in South Louisiana by acquiring these old fields, you've actually developed a very large footprint withheld by production acreage in the first place, but in all those areas, we've tended to add some additional acreage. Lake Washington, we've expanded the acres there dramatically since we first acquired it several years ago. Same thing in -- at Cote Blanche Island, the same thing at Bay de Chene.

You know, I'll color that a little bit more. In terms of growth we're always looking at strategic growth opportunities, and I'll first comment by the fact that we purchased Escondido in South Texas with the full understanding and belief that it was very synergetic and strategic relative to our current AWP position and our operations down there. We've had a tall end group of people that for years have worked these tight gas sands, and when you work to play all the way from AWP area over in McMullen County over to the Escondido properties closer to the Rio Grande and the border, you find a lot of the same stratigraphy, a lot of the same geology and some very exciting areas that are relatively open.

Having said that, we acquired a very significant acreage position within the Escondido acquisition that we fully intend to exploit strategically. Some of this is pretty traditional, oil and gas activity. But some of it kind of takes the flavor of a resource play to a certain extent, and as we look at our seismic -- and we will be using seismic in these areas, even shooting some new seismic in these areas and doing the same type of strategy that we've done in South Louisiana where you merged assets and improve the quality of the information available to you, I do believe that there's a little different flavor there in terms of being more diversified in our growth profile. I also would like to note that, you know, we're looking at other areas beyond South Louisiana and South Texas in terms of some potential resource play opportunities, but that's a small -- that will be a very small piece of our activity going forward. We'd be looking three to five years on some of that.

Thanks guys. Great color. I look forward to all that activity in '08.

All right. Thanks, Neil.

Thanks, Neil.

Thank you. Once again, as a reminder, if you would like to post a question, please press star and then the number 1 on your telephone keypad. There appeared to be no more questions at this time. I will turn the floor back to your host, Mr. Scott Espenshade, for any closing remarks.

Well, we appreciate everybody's support out there. We appreciate your attention on the call. We're pretty excited about the rest of this year and really looking forward to 2008. So thanks for joining us.

Thank you. This concludes today's Swift Energy Company's third quarter earnings conference call. You may now disconnect.