SilverBow Resources Inc (SBOW) 2008 Q1 法說會逐字稿

Good morning. My name is Shawana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Swift Energy Company first quarter earnings 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. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor to your host, Mr. Paul Vincent, Manager of Investor Relations. Sir, you may begin your conference.

Good morning, I'm Paul Vincent, Manager of Investor Relations. I would like to welcome everyone to Swift Energy's first quarter 2008 earnings conference call. In today's call, Terry Swift, Chairman and CEO, will provide an overview. Alton Heckaman, EVP and CFO, will review the financial results for the first 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 Bob Banks, EVP and COO, and Mike Kitterman, Senior VP of Operations. Before I turn it over to Terry, let me remind everyone that our presentation will continue 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 risks 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, and have allowed additional time for questions.

Thanks, Paul. Thank you again for joining us for this morning's conference call. Our industry continued to experience higher commodity prices in the first quarter of 2008. Swift Energy received a 51% higher aggregate price for its oil and natural gas during the first quarter of 2008, when compared to the first quarter of 2007. This has resulted in Swift Energy's net income from continuing operations increasing 88% year-over-year, and cash flow before working capital changes from continuing operations rising 62% year-over-year. While costs have increased over the past year, margins have remained strong. We believe that the upward movement in commodities has not been fully reflected in equity values in the energy sector. Certain non-OPEC producers are showing signs of seeking crude oil production. Limited spare production capacity is being demonstrated by OPEC itself, and at the same time global demand for energy continues to be strong.

With these anticipated these capacity and supply limitations, many industry experts are predicting even higher commodity prices. If in this turns out to be the case, then the future could be even brighter for EMP companies such as Swift Energy. At Swift Energy, we have made major commitments to growing our reserves and production to increase our value and profitability, while also helping to meet the increasing U.S. need for oil and natural gas. Swift Energy's 2008 first quarter production increased 1% year-over-year. Production from the fourth quarter 2007 to the first quarter 2008 decreased 8%, slightly below our guidance. This decrease was driven by an 11% decrease in Lake Washington field. The production decrease can be attributed to a combination of natural formation declines in older mature wells and a purposed effort on the Company's part to preserve reservoir pressure in the Newport area in anticipation of a pressure-maintenance program that is now beginning as we start at our West Side facility. We continue to drill deeper wells that have higher flowing pressure and higher associated natural gas content, along with a mix of shallow and intermediate wells. The higher pressure from the deeper wells has increased operating pressure on our production facilities, which we believe has had a negative impact on our older existing wells.

We are also handling higher volumes of produced water and additional artificial lift demand from the more mature areas of the field. In addition to bringing in a number of recently drilled wells on to production, we believe the pressure maintenance activities planned for 2008, and the West Side facility startup will improve many of the production constraints experienced in the first quarter of 2008. We'll talk in detail about these particular items in this conference call. Swift Energy's primary goals for 2008 are to continue to grow production and reserves through the drill pit at reasonable cost. Swift Energy expects to grow production 10 to 15% organically and reserves by 5 to 9% in 2008. We've taken significant infrastructure and operational steps to position ourselves for growth both this year and well in to the future. I'll briefly mention some of these more significant events which have occurred this year that should allow us to deliver on our 2008 plans.

First, our Lake Washington West Side facility was recently completed, and production is now flowing through these facilities from wells on the West Side of the field. This has allowed us to begin a pressure maintenance program in our Newport area, and means that new wells can now be brought in to our production facilities with minimal disruption to the existing system. With eight wells awaiting completion in this area, this additional production capacity was certainly needed. At Bay de Chene, we have tied in additional natural gas take-away capacity. This allows us to reach markets and increase production rates of existing wells, to put newly drilled wells on production and to drill some high-impact development and exploration targets in the field this year. In Horseshoe Bayou, we participated in one non-operated well with a 21% working interest, which is now producing approximately 30 million cubic feet of natural gas per day. This well clearly demonstrates the type of potential within Swift Energy Company's data sets.

We also drilled an exploration well at Cote Blanche Island. This was well was drilled to over 15,000 feet and is currently being evaluated. These recent successes are the result of the long-term planning that Swift Energy employs to manage its business. Our regional focus and technical expertise, combined with an extensive proprietary merged seismic data set in South Louisiana has us focused on several current long-term projects. In South Louisiana, we continue to drill deeper, impactful wells and targets identified through our 3D seismic data base. This includes developing and planning a subsalt exploratory test, most likely early next year. In South Texas, we have begin a seismic acquisition strategy in conjunction with acquiring deep mineral rights over a large part of our AWP field. We believe the strategy we have employed successfully in South Louisiana of using seismic imaging to identify opportunities deeper than existing production can also be successful in our South Texas region. Although industry service costs have risen over the year, Swift Energy's first quarter margins were over $31 a barrel. We are focused on both reducing costs wherever possible, and remaining focused on keeping our margins intact.

Higher than anticipated commodity prices and margins have lead to better than expected and higher estimated full year cash flows. As a result, we are raising our 2008 full-year capital spending budget to the range of $475 to ($525) (corrected by company after the call) million from the previous range of $425 million to $475 million. This increase will allow us to allocate the -- and accelerate the exploitation opportunities in our South Louisiana and South Texas data sets. If results continue to be better than our expectations, we have the project inventory to increase our capital outlays even further later in the year. With several major projects behind us, our operational strategy for the rest of the year can be summed up in one word, "Execution." We have established exceptional operating flexibility that when combined with the most extensive opportunity set in the history of the Company will allow us to grow reserves and production in 2008 and beyond. With that introduction, I'll ask Alton Heckaman, our CFO, to present the first quarter 2008 financial results.

Thank you, Terry. And good morning, everyone. Swift Energy is off to a great start in 2008. As Terry mentioned, first quarter was quite strong as revenues were 199 million, up 53% over 1Q '07. Net income from continuing operations was 49.8 million, up 88%, and diluted EPS from continuing operations came in at $1.61, an increase of 86% compared to first quarter 2007, while cash flow before working capital changes increased 60% to $4.41. Production increased 1% to 2.57 million barrels of oil equivalent. As you know, crude oil prices are very strong, and with approximately a 68% of Swift's current production coming from crude oil and natural gas liquids, this current oil pricing environment continues to have a very favorable effect on Swift's financial results.

With Swift's crude oil price averaging over $99 per barrel in the first quarter, our domestic average realized blended price per BOE increased 51% to almost $78 as compared to approximately $58 for BOE during the first quarter a year ago, allowing Swift to increase its quarterly oil and gas revenues 54% over the first quarter of 2007. As Terry mentioned in his intro, it's a obviously all about the margins. Sector and price-sensitive costs are on the rise, but Swift continues to focus on our controllable per unit cost and metrics. As to the first quarter, 2008, G&A came in at $3.86 per barrel, in line with guidance; DD&A came in at $20.43, also in line with guidance; production costs came in above guidance at $10.28 per barrel, primarily due to certain work-over activity in 1Q '08, which Bruce will discuss further in the operations update. While production taxes increased in tandem with higher prices, but actually decreased as a percentage of oil and gas revenues due to the change in Swift's production mix and location, and interest expense came in at $3.38, the result of higher line of credit borrowings during the first quarter, mainly due to the delayed New Zealand asset sale closing.

We therefore realized income from continuing operations for the quarter of 49.8 million, $1.64 basic, and $1.61 diluted -- again, up 88% over 1Q '07. As mentioned in today's press release, we have agreed to sell the remaining portion of our New Zealand assets for 15 million, resulting in a 12.8 million gain upon closing, expected to happen in the second quarter of '08. We also will close on the sale of the other larger portion of our New Zealand assets before midyear. All in, we expect to realize total cash of between 95 and 100 million from this disposition that will reduce our bank line. Cash flow before working capital changes for 1Q '08 came in at 136 million or $4.41 per diluted share, while EBITDA was 140 million for the quarter or $4.54 per diluted share. CapEx for the first quarter of 2008 of 176 million, along with the delayed closing date on the sale of the New Zealand assets, resulted in borrowings under our line of credit of 223 million at the end of the first quarter. Even with this level of borrowing, we still have plenty of liquidity and resources available for any additional value add in strategic opportunities.

With respect to Swift's hedging activity, we purchased natural gas floors for approximately 45 to 50% of our production for 2Q '08, and 30 to 35% of 3Q '08 production. With respect to crude oil floors, we purchased approximately 40 to 45% protection on our third quarter 2008 production. Please see our website for complete and current detailed hedging information. We have also included additional financial and operations information in our press release, including guidance for the second quarter and full year 2008. This quarter was another great financial quarter for Swift Energy Company, and the momentum continues to build. And with more on that, I'll turn it over to Bruce Vincent for an overview of our operations.

Thanks, Alton. And good morning, everyone. Today, I will discuss first quarter 2008 activity, including our production volumes, our recent drilling successes, activity in our core operating areas, and our plans for the rest of 2008. First, let me talk about production. Swift Energy's production from continuing operations during the first quarter of 2008 totaled 2.57 million barrels of oil equivalent, or 15.4 billion cubic feet equivalent. That was an increase of 1% from the 2.53 million barrels of oil equivalent produced in the same quarter of 2007. As guided during our last quarterly conference call, sequential production decreased 8% when comparing the first quarter 2008 to production in the fourth quarter of 2007.

Now for our drilling results. Swift Energy completed 35 of 36 wells in the first quarter of 2008. The Company completed 34 of 35 development wells for a success rate of 97% for the first quarter of 2007. We also drilled one exploration well at Cote Blanche Island. I will begin briefly to review our activity in each of our core operating areas, beginning with Lake Washington core area. Lake Washington core area includes both the Lake Washington field and our Bay de Chene field. Production during the first quarter of 2008 averaged approximately 16,105 net barrels of oil equivalent, or 97 million cubic feet equivalent per day in this area. That was a decrease of 12% when compared to the fourth quarter of 2007 average net production from the same area. Lake Washington averaged approximately 14,312 net barrels of oil equivalent per day, or 86 million cubic feet equivalent per day. At the Lake Washington field in Plaquemines Parish, Louisiana, activity levels have been high. The West Side facility has been fully commissioned and oil is now being processed by this facility.

We will be working diligently over the next month or so to optimize production in the field, utilizing all four production facilities and looking at the numerous shut-in wells to determine which ones can be brought back on production quickly. It was noted in our press release that one of the primary reasons our lease-operating expenses were higher than forecasted was due to increased work-over expenses. Well, sometimes that's exactly what you want. As an example, in Lake Washington, we performed 10 oil tubing asset stimulation jobs this year, which resulted in an increase in production test rates of approximately 145% after the work-over on these wells were performed. Obviously, with the West Side facilities coming on, and the price of oil, work-overs like these make a lot of sense. We expect to continue this program during 2008. And now with the new facilities now in place, we should see the benefit of these higher rates. We have also begun injecting water into two reservoirs in our Newport area as part of a pressure maintenance project.

But it should be noted that it will take several months before we see a production response from this initiative. Water injection has just begun, and we are not yet injecting at our desired rates into these reservoirs. Swift Energy drilled three successful development wells in the first quarter, and since the beginning of 2008, we have actually finished drilling nine wells in Lake Washington. The wells have ranged in depth from 5,672 feet to as deep as 17,005 feet. And they have encountered true vertical net pay ranging from 54 feet to as high as 423 feet. One of these wells has been completed, but the remaining wells have not, and will be completed and brought on production over the next several weeks. It should also be noted that the well with the 423 feet of true vertical depth net pay was, in fact, the second best well Swift has drilled in Lake Washington. Additionally, while we don't expect to achieve 100% success with our drilling activity all the time, our recent successes as evidenced in 2008 are indicative of the value of the 3D data set that we put together. In Bay de Chene, the previously announced increase in export capacity has been recently completed, positioning the Company to increase production in this area during the remainder of 2008.

The BDCUB Number 150 well, which was drilled to 9600 feet encountered 60 feet of true vertical net pay and is scheduled to be completed and placed on production by the end of this month. We're also planning additional wells in Bay de Chene. We currently have five barge ridges contracted in this area. Four are operating in Lake Washington and one in Bay de Chene. One of the rigs currently in Lake Washington will be released for repairs in the second quarter, although we expect it to come back after that, while two rigs are expected to be added in Lake Washington during the third quarter. We expect to drill 20 to 25 additional wells in Lake Washington this year, and three to five more wells in Bay de Chene. In our South Texas operating region, which includes our Cotulla area and our AWP field, first quarter 2008 production averaged 7,312 barrels of oil equivalent per day. In the first quarter, we successfully completed 11 development wells in the AWP area, and 13 development wells in the Cotulla area.

Additionally, the Company recently acquired deep-drilling rights in the AWP field over approximately 11,000 acres, below the Olmos sands, and we do plan to drill an Edward's test later this year. We plan to have two rigs in AWP during the second and third quarter to continue our drilling program there. We will drill 15 to 20 more wells this year in this area; and we have one rig in Cotulla, and we will drill 15 to 25 more wells in this area during the year. In our Lafayette North operating region, which we previously referred to as Toledo Bend, this area contributed 2,490 barrels of oil equivalent per day of production for the first quarter of 2008. Included in this area are our Brookeland and Masters Creek fields, as well as South Bearhead Creek. In our Masters Creek field in Vernon and Rapides Parish, we were unsuccessful on one well, which was plugged and abandoned after encountering mechanical difficulties prior to reaching its objective horizon. We are reviewing the issues relating to this mechanical failure, and hope to reschedule this well later in the year or early 2009. And South Bearhead Creek in Beauregard Parish, Louisiana, Swift Energy drilled four development wells during the second quarter of 2008.

One of these wells is currently on production, with the other three wells waiting on fracture stimulation to begin production. Additionally, two wells drilled in the fourth quarter 2007 were brought on production during the first quarter. We expect to drill at least two to three additional wells in this area in 2008. South Bearhead Creek continues to perform well, and we will continue to enhance the production profile of this field. In our Lafayette South operating region, which is comprised of Horseshoe Bayou, Bayou Sale, Jeanerette, Cote Blanche, and Bayou Penchant, production averaged approximately 1,760 barrels of oil equivalent per day during the first quarter. In Jeanerette, the [inaudible] Sugar Factory Number 21 was drilled during the first quarter of 2008, and is currently awaiting completion. Our work in this field has been encouraging, and we plan on increasing production and reserves here in the future.

Swift Energy participated in one non-operated development well drilled in the Horseshoe Bayou field during the first quarter. The well encountered 155 feet of true vertical net pay, and is currently producing approximately 30 million cubic feet of gas per day with flowing tubing pressure above 10,000 PSI. Swift has a 21% working interest in this field, and we are pleased with the results of the well, as well as the potential that we see for the area. We will begin drilling another well in the Horseshoe Bayou/Bayou Sale area during the second quarter, with Swift having an approximate 65% working interest. In the Cote Blanche Island area, an exploration well was drilled to a little over 15,000 feet. This well is currently being evaluated. Our plans for the remainder of 2008 call for Swift Energy to drill up to three to five additional wells in this region. Swift Energy currently has one land rig contracted for the area. Thanks for your attention, and I'm going to turn it back to Terry to recap it.

Thanks, Bruce. Before we open the line for questions, we want to reiterate Swift Energy's 2008 operational plans and goals. We are focused on reserves and production growth. Drilling results so far this year in Lake Washington, Bay de Chene and South Texas, provide us with confidence that we will grow reserves 5 to 9% and production 10 to 15%. We are also focused on protecting our margins by managing our drills and operating costs. To review some of the highlights from this morning, first I would like to mention that Swift Energy Company had strong financial results in the first quarter, and we intend to continue delivering on our operational plan in 2008. In the first quarter of 2008, our reserves -- our revenues increase 53% to $199 million.

Income from continuing operations was 49.8 million, or $1.61 per diluted share. And cash flow before working capital changes was 136.3 million, or $4.41 per diluted share. While these results all lead directly to add value and further solidify our strong balance sheet, we believe they will also improve with continued performance of our assets. In the first quarter 2008, we had production of 2.57 million barrels of oil equivalent for the quarter, a 1% increase over the first quarter 2007. We have numerous wells ready to be completed and come on production in the next several weeks, including eight wells in the Lake Washington area, one well in Bay de Chene, one in Jeanerette and three in South Bearhead Creek. While continuing to drill deeper high-impact prospects, Swift Energy has developed a large inventory of lower-risk development opportunities. Additionally, production capacity constraints being removed from Lake Washington and Bay de Chene should set the stage for production growth in the second half of 2008. Finally, our conservative management and financial philosophies have positioned us to continue our duel approach of growing through drilling and acquisitions. At this time, we'd like to begin the question and answer portion of our presentation.

At this time, the floor is now open for questions. (OPERATOR INSTRUCTIONS). Our fist question is coming from Nick Pope with J.P. Morgan, please go ahead.

Morning.

Good morning.

Quick question, I was wondering if you all would be able to -- to split out the production decline you all talked about from Lake Washington. You said it was from the natural declines and like intended reduced production due to pressure maintenance. Can you all -- are you all able to split that number out? How much is due to the pressure maintenance?

We -- we'll try to give you a good flavor for how to break that out, but we really don't have a split of the various items. Let me first categorize them. First of all, in Lake Washington, you do have natural declines that are going along in the wells. That just goes along with [inaudible] field. And when we specifically refer to the natural declines there, we're trying to isolate those natural declines, which we believe across the whole field are roughly in the range of 20% as -- as opposed to -- part of a decline that you generally see is also due to well -- older wells not being able to get in the system, higher pressure wells pushing them out. So in terms of splitting it out, how much of that 11% in Lake Washington is older well decline, you know, my gut feel would be somewhere between a third to half of it. How much of that decline was a result of facilities issues? We're trying to piece that apart. My gut feel there would be that that might be a third of it, something like that.

I also should note that we've just come out of the winter season, and we always experience a decline in -- in these facilities out there because of colder temperatures, it impacts our separating abilities throughout. It impacts out the fluids flow through the lines especially. And that also is part of the decline that we always experience in that part of the year. That could have been, you know, as much as 20% of the decline that we experienced. It's hard to say. But as to the pressure maintenance, we purposed to actually choke back some of the wells in the Lake Washington area around Newport, because they were having higher quantities of gas, and the gas takes up a lot of space in the flow lines. It also creates a problem in terms of export capacity relative to oil going through the facilities.

You really don't want that much gas; when you are actually beginning a pressure maintenance program, you would like that gas to be settled down. We're trying to get the pressures up in Lake Washington. We clearly had to have the West Side facility in place before we could begin the injection into these primary zones. Right now we only have two of the zones that we're injecting in. Just, again, a gut feel might be 20 to 30% of that decline might have been to attributable to us pinching back on some of that production. It's real hard to piece meal it out; I hope I have given you some idea of it, though.

Yes, that's very helpful, I appreciate it. I guess -- another question I had was -- what are you all seeing in terms of -- like drilling costs, service cost trends right now? I know you all are bringing on a bunch of rigs? How do things look there?

Well, we recognize that in some places the rig count is increasing. Fortunately in the areas of our operations, we have not seen that, and so we have not seen an increase in drilling rig rates, nor have we seen a limitation of availability. We have been concerned about that. We have talked about that for sometime, because we recognize with $11 gas and 100-whatever oil, people's budgets are bigger, and people will step up the activity, it improves the economics and lots of things. And we're guarded about that as well, because we want to be sure we have access to equipment to get our projects done; but in our areas, we have not seen that.

We continue to see availability and feel like we're going to be able execute our plan, certainly with regard to drilling rig availability. On the service side -- generally, on the service side we haven't seen a significant change either. I think the one place you have seen some is in steel. One of the things that we have actually gone out and done is preplaced a significant order for tubulars, both recognizing the cost of potential increase, but also availability. We expect the tubular market to tighten up, and we tried to go out and secure a fairly significant order to plan ahead for our activity.

Okay. All right. I appreciate all of the help. Thanks, guys.

Thank you. Our next question is coming from Leo Mariani with RBC. Please go ahead.

Yes, a couple of quick ones here for you guys here. I'm curious to find out a little bit more about this Edward's test you are talk about beneath AWP. Is that the limestone down there you guys are targeting? I'm just trying to get a sense of how you're going to go about it. Are you guys going to drill a vertical or horizontal well, do you just stay frac in that? And any additional information you have on that would be helpful.

Yes, we'll real excited about the Edward's trend. As you are well aware, that trend is a very extensive trend. Goes basically from the Rio Grande all the way over into the AWP area and then even further Northeast of there. In our particular area -- in our areas of operation -- we had that Edward's trend identified both in the AWP area and the TSH Sun area, some of the Cotulla properties. We have done extensive review of our seismic inventory. We have acquired some 3-D seismic in the areas. And we are also in the process of shooting new proprietary data that will merge in with what we already have. We've got extensive well control in AWP itself. There were some earlier penetrations that go back, I believe into the '80s, that actually did test of Edward's production, and in that area it gives us a pretty good calibration point. We don't have all of the rights of the Edwards.

There are other folks in that area that are exploiting the Edward's, and as we understand there's some other drilling going on in that area. There's a well that we might have a partial interest in this year, but we also are planning some of our own wells on our own acreage -- our own 3-D data set. Some of the highs you see in the Edward's -- in the old days they really just drilled the high part of the reef. We're seeing indications in the 3-D that you have got some patch work [inaudible] indications in the stratigraphy out there where you can drill actually off of the primary high, and we believe you can make some really nice wells. We're talking about horizontal wells, we're talking about wells that will be approximately about 12,000 feet; and should these early wells, both the ones that we participate in on a partial interest, as well as the ones we're looking at at 100% worth this year, there could be a lot of extensive Edward's opportunities in the years to come.

Okay. Great. Switching gears a little bit here. Could you guys maybe kind of help to quantify what you think the -- the sort of incremental work-over expense was in the first quarter that kind of drove up your LOE a little bit here?

Hey, Leo, it's Alton. We incurred probably -- and you'll see a breakout in our Q -- but we incurred probably about $3 million in expense work-overs in the first quarter of '08. We had budgeted for and guided about a half million. So the delta on that is about $2.5 million. Clearly, you can see how that had an impact on our per-unit LOE about a dollar per unit produced, and about a nickel on an EPS effect. So that's the effect in the first quarter; but as we discussed, you know, these work-overs are going to add some production into the future. So clearly, at these pricing levels, they were worth the expenditure.

Great. Well, that's kind of the segue into my next question. Could you guys just maybe talk a little bit about the results you saw in terms of, you know, additional production from those 10 work-overs?

We can't. I don't have that specific details in front of me, but I think as I mentioned during the call itself, the 10 collective coil tubing and asset stimulation jobs that we performed in Lake Washington did actually result in an increase of actual production test rates, approximately 145% above the test rates of those same wells prior to the work-overs.

Okay. So basically, you comparing the IPs after the work-overs here to kind of the original IP into the wells?

Yes, so if you had an 100-barrel a day well, just as an example, the -- after the work-over was performed, the new test rate of that well would have been 145% above that. That's the kind of thing we're seeing across the board, and that's why we stepped up the activity. We saw the West Side facility project being on time. You know, I think we've guided all along that that would be ready by the end of the first half. We saw obviously the price of oil, our ability to increase our budget, and so it made a lot of sense to do that. You are basically spending capital dollars to grow -- or to increase production volumes, but because it's LOE it gets expensed.

This is Terry. I want to add to that. We didn't do a good job of guiding there on the work-over side of the LOEPs, and in this morning's call we really need help get a better understanding of that for the folks. We have looked at the price of oil right now, and it is obviously an exceptional pricing environment we're getting, and the folks -- our production operations guys -- have done an excellent job at looking at fields such as the Brookeland field, and other fields where we can take wells that were -- oh, let's just say 25-barrel a day wells, we can take them up to 50-barrel, 60-barrel a day wells. That doesn't have a giant impact, but there's a lot of these kinds of things to do, and so we have given direction to spend another 2 to $3 million, maybe as much as 4 million, if they can find those types of things, during these work-overs. That's going to come through LOE, but it will have important production gains attributable to those costs. They are not capitalized. They generally come through LOE. We want to do them. They'll show up during the second half of the year, and we have actually allocated the money to do that, but with output, we haven't put the production expectation in front of you at this time -- and it wouldn't impact the whole year that much, it would be something that would be more of a momentum thing going in to 2008, 2009.

Got you. Would you expect some reserve increase associated with those as well?

I don't think that that would affect reserves. It would affect the speed at which you get it out of the ground.

Yes, at this time, we're not anticipating that. We'll obviously have the reservoir engineers look at those result, and if there is a basis for a little bit of a reserve uptick there, they'll certainly look for it.

Okay. Great. Thanks a lot for your time, guys.

Thanks, Leo.

Thank you. Our next question is coming from Gary Nuschler with Jefferies & Company. Please go ahead.

Thanks, good morning, guys.

Good morning.

Two questions. You said Lake Washington in the first quarter averaged a little over 14,000 barrels a day. What -- it is still averaging the same level right now?

Bruce, you want to take that? While they are getting the actual numbers, I think it's important to note that we are seeing improvement in the production in Lake Washington, and I'll take this opportunity to note that even though we did have the sequential decrease, a good part of that decrease in our minds was because our newer wells weren't able to get in to facilities, and as we were drilling out there we recognized that some of these wells wouldn't really get into the production mix and increased production. I noted that we have eight wells in Lake Washington awaiting completion. Bruce noted in the more detailed presentation, that there's been some significant pay drilled and brought in to the producing category status, once these completions come in to -- into fruition. I'm going to step out there, and I know that folks need information. We don't have these wells producing right now, but we think we're looking at 3 to 4,000 barrels of production incrementally that could come from these at eight wells, as well as a couple of wells that are drilling right now.

I think that the -- we have -- I don't have the exact net number in front of me, but I know that the rates at Lake Washington are higher than that right now. While we did just put on the West Side facility, and, you know, I think as I mentioned in the conference call in February, it's not like turning a switch and the car starts and you can take off at full speed right away. It will take a period of 30 to 60 days for us to properly optimize the various facilities and figure out what wells go where and what. But with the start-up of the West Side facility and the converting the West Side production, mainly around Newport over to the West Side facility, we did see a significant pressure drop across the field and we did see an initial response increase production in the other facilities. I think gross production today is roughly 16,000 barrels of oil, and another 12 million cubic feet of gas, so roughly on an equivalent basis, about 18,000 gross barrels of production a day, which is above that first quarter average.

Okay. And I guess my second question is, can you give me some idea or maybe some range of where you think Lake Washington production might exit the year?

Well, we could give you that. It really is kind of embedded in the guidance that we provided, but we don't actually give the guidance in terms of a per-core area. I think it's very important to note that the first thing that we're doing in Lake Washington is we're overcoming the production constraints in the field; and to the extent that we had that sequential decline in the field, we believe that we've arrested that. We're already showing some increase. When you look at the overall production guidance for the year, we're talking 10 to 15% production guidance for the year. Without having the numbers right in front of me, Lake Washington itself from the entry point of the year to the exit point of the year ought to be well above that guidance.

Okay. That's all I had, guys. Thanks.

Sure.

Thank you.

Thank you. Our next question is coming from Andrew Coleman with UBS, please go ahead.

Good morning, folks.

Good morning, Andrew.

I had a quick couple of questions here. Looking at Newport, how many injectors do you have here? It is still one? And I guess -- do you have plans to drill some more injectors as you ramp up that water plant?

We do just have one injector well right now. In the first quarter, we drilled two water-source wells, which took up some of our activity, and we do plan to drill some additional injector wells in the area. I think at least two more.

Okay, great. And I guess what remains there at the West Side in the form of startup [inaudible]? Can you walk me through just how we'll get from we are today to full production? Because it looks like going through the rest of your guidance you're probably going to have to get a pretty good production increase to kind of hit that midpoint at the end of the year.

Well, there's -- you know, it's a very complex system, and there's quite a lot involved in both the commissioning process and getting everything started up. A lot of equipment. And it's a very complex field, and now you have four production facilities instead of three. Each one has different attributes, so to speak. The -- the pressure changes depend upon which wells you put in which production facility, and so what we have done initially is we have taken the Newport production area, which is over on the West Side -- we've talked before about how that's three miles away from the 212 Platform -- and diverted it to the West Side facility. And the West Side facility now is roughly about 5, 6,000 barrel a day, approximately. And so now what we have to do is go back to the 122, and 6700 and the CM 3, and the 100 plus wells that are pulling into those various production facilities, and optimize our rebalance the -- both the pressures and the rates and the oil production, the water volumes that are coming from there, the gas production that's coming out of there. the gas-lift system, and the -- minimize the flurrying while you are doing all of that.

And then also look at the many, many shut-in wells we have to determine which ones can be brought on quickly. Obviously, you want to bring them on quickly. But others have to have some various operations done to them to get them on stream. Many of them have been shut in for sometime. And we obviously want to prioritize both the ones that can have be greatest impact and the ones that can be turned on the quickest. And so there's just a lot o complexity and a lot of f little things that have to be done by numerous people to make all this come together, and we estimate that's going to take the next 30 to 60 days to do. And then you combine that with all of these wells that we have finished drilling. We've got eight in Lake Washington alone that will be completed over the next several weeks that will range in probably potential volumes from 100 barrels to 1,000 barrels a day. And bringing those on, being sure they are directed to the right platform, and then what kind of impact that has with regard to the overall pressures. When you bring up a new high-pressure well on production, for instance, that's going to have an effect on the overall pressure of the system. And so we need to find the right optimization of all of the wells and all of the facilities to achieve maximum rates of production.

Yes, I would like to add to that that it's kind of a good thing and a not so good thing. When you have this complexity, if you just had one big well behind all of that system, then you could go to one valve, or you could study one set of fluid-lift dynamics and be done with it, but you wouldn't be very diversified. And what we really have is hundreds of wells and literally many hundreds of formations, because most of these wells have lots of behind pipe at opportunities, and so the total set of opportunities to optimize, really, is in the hundreds, not in the tens or twenties. That means it's very diversified. And the only thing they all have in common is the facilities. And so when you see these kinds of declines that we have experienced, the only thing in common to all of these reservoirs and all of these wells is the facilities. And we have taken care of the largest part of the facility probably by bringing in West Side. We're very pleased with the way West Side is operating. So I think we now got the bull by the horns and it's all just hard work.

Okay. And is -- so it is fair for us to think about this as potentially -- with the extra facilities, you are going to add some sort of like a gas cycling program to kind of keep your gas rates at a manageable level to keep as many of your lower pressure and higher pressure wells flowing?

Not quite sure -- could you repeat that, Andy?

You were breaking up.

Sorry.

I don't think it's your fault. I think that it's the connection.

Yes, no, I was just curious -- I mean, it sounds like perhaps there was like a gas cycling program that is kind of in place, or is about to start up, where you are going to be looking at the gas rates across your multiple wells and trying to optimize which ones bring in the lowest marginal GOR to -- you know, keep your maximum oil rate flowing through the system.

Yes, just to clarify, we don't have any gas cycling projects out in Lake Washington. When we refer to pressure maintenance, we are actually injecting water down to maintain pressure, but we do have gas cycling in the production system by virtue of the gas-lift issues, and there is where you do have GOR issues; and by changing out the amount of gas that's allocated to a particular well to lift that fluid, you can optimize one well against another well, and we certainly have a lot of that to do in the field.

Right. Right. And then, I guess -- last question here then is -- when I look at your deferred tax rates for the second half of the year, it's a going to fall down in to the 80% range. Is that because of the seismic and more facilities expense that is being incurred? Or is there probably some upside in that number?

I think we have guided to conservative side, and -- so I don't know, upside would be deferring more of the taxes, I guess you are asking. But obviously with our current outlook, it looks like we'll be in a tax-paying position this year, and so that deferred portion is going to be going down.

Yes, what I would tell you, that has a lot to do with $120 oil.

Absolutely.

And increased profitability of the Company. As you make a lot more money, you use up some of those credits that enables you to convert taxes, and so you're going to be at a larger cash taxpayer.

Sure. And if I should squeeze one other question in there. Just on South Texas, it like you guys drilled kind of -- you are guiding to about 60 wells total across those two assets for the year, after about 24 in the first quarter. Is there a chance to maybe get some additional wells put in there? Or are there some constraints in terms of pipeline capacity or getting rigs during the back half of the year?

I don't think -- I'm not aware of any constraints in terms of top-line capacity or field infrastructure. And right now, we don't see any rig availability or fracture stimulation services, et cetera. And we have actually added to the budget in both of those areas already, and obviously if the trends continue, it would not surprise me to have us increase our capital expenditures further, and that is certainly one area that we would be doing it in. $11 gas are kind of no-brainer economics. You know, it's great infrastructure, long life, you know, just wonderful properties to continue doing that; and while we haven't -- I wouldn't say we're committing to that, I think as you followed us in the past, we're big believers in trying to spend cash flow, but we want to ease in to it and spend realized cash flow, not some forecasted number.

Sure. Okay, well, thank you for your time today.

Thank you, Andrew.

Thank you. Our next question question is coming from Brad Evans with Heartland. Please go ahead.

Hey. Good morning, everybody.

Good morning, Brad.

Thanks for taking the questions. Could you remind us as to how many wells are shut-in at Lake Washington at this point?

I'll take a stab at that. Lake Washington when we first obtained the field, did have some shut-in wells that were also in what we call a T&A category. We first acquired the field back at a time when oil prices were lower, so some of those wells were targeted on an ongoing plug and abandonment program for the lower -- the shallow-type zones. In total, there's over 100 wells throughout that fit both the category of T&A and shut in. But when you get to the issue of shut-in wells that we know have opportunity for us, I believe that number is about 50 to 60 wells, and the -- when Bruce refers to bringing those wells back on, we're really talking about a sample of 50 to 60 wells.

Okay. And the West Side -- the infrastructure that is now in place at Lake Washington supports a productive capacity of how much in terms barrels per day?

The current infrastructure is capable of processing 10,000 barrels of oil, and --

20

20 million cubic feet of gas and how much water?

10. SPEAKERS OVERLAPPING).

Just the West side, yes.

So the four platforms for the four facilities in total support, what type of productive capacity?

35.

35,000 barrels a day, probably,. [inaudible], and then the West Side facility has got additional footprint that we put out there so that we can expand it and double what is out there right now.

Double the West Side value.

Double --

In other words, add another 10,000 barrels per day capacity.

When will you have to make a decision as to whether you need to put that additional capacity in place?

We're actually looking at that now, because it's not a large capital number. It's probably less than $10 million in terms of capital, but it's probably about a year lead time to, you know, design and order and get the equipment delivered.

I think it's fair -- Brad, I think it's fair to say we've made the decision that we will expand it. The decision is when we're actually going to pull the trigger and start that.

Okay. That's great. It sounds like if production around 18,000 barrels a day gross at Lake Washington -- I realize that is a gross number, but -- I guess I'm just looking at your guidance for liquids production for the second quarter, and it looks like -- I realize that we're at May 8th right now, but it looks like that number might be -- you built in some conservatism there; is that a fair statement?

We would hope to, yes. We want to be sure that we hit our numbers.

Understood, okay.

And to be frank, yes, there's some conservatism, but there's also some unknown in this instance that with the new facility on and the other three facilities understanding exactly what we can do in terms of optimizing the production in that. We have got a bunch of wells that are coming on production, obviously the timing of that, making sure the completions get done and successfully. And so timing is probably a part of that issue as much as anything else.

No, that makes a lot of sense. I didn't catch when -- there was a discussion about the Edward's formation at AWP. Can you disclose or talk about how much -- what your acreage exposure is there in terms of what might be prospective for the Edward's?

I would probably hesitate to actually quantify what prospective --

Well, I'll take a short stab at it. And in the Northern part of AWP, we have two different types of parcels of acreage. We've got one area where we have about a 20% or so interest in the acreage, and then we've got another area in the North where we've got 100%, and in the Northern part of AWP, we're probably looking at -- oh, a couple of thousand acres total, and it's probably roughly split between those two different types. So let's just say in what we might call prospective Edwards in the Northern portion, there's maybe a thousand acres or so where we have got the lower interest, and a thousand acres or so where we've got the higher interest. It's going to take some drilling -- we're talking about prospective Edward's, we're not talking about anything proven at this time. As you get further to the South and you get off of the main structure, the Edwards is going to be there, as are there going to be some sligo and other types of things. And we don't have the specifics of prospect acreage, but we have got a large area down there to work, several thousands of acres, where we 100%.

Okay. Alton or Terry, I guess, can you just talk about -- I guess with the pending transaction in New Zealand, plus, even with your higher capital budget with commodity prices where they are, it looks like you will still -- whether you revise that upwards or not, but you still have the prospect of generating a lot of excess cash flow. Can you just talk about where you hope to see the bank lines over the next couple quarters in terms of -- again, taking into consideration the asset sales?

Yes, I'll take a shot at it, and then I'll let the CFO -- make sure he gets a chance to talk about that, since that is one of his areas of responsibility. But clearly, we're going to have cash flow well above what our budgeted cash flow assumed. We had used a price deck of about $70 for oil and -- $75 for oil -- and what was the gas?

Seven and a quarter.

$7.25 for gas. We had -- even with those prices, we had built in a discretionary wedge. We do try to be conservative in how we plan. It's very clear us to that that discretionary wedge will now not only be fully available, but we're believing that we would see well over $100 million, and we're taking the various steps to look at how to deploy that. Even given that, you have got momentum issues, and timing issues. You have got the cash coming back from New Zealand. I think the bank line as you see it, short of an acquisition that would be strategic -- which we don't have one identified right now -- but short of an acquisition, the bank line ought to be going down very, very considerably over the next several quarters. Alton, you want to --

No, you are spot on, Terry. I mean, basically as you know, we went in to the line consciously in the fourth quarter of '07 to fund the Cotulla acquisition, kind of a prespending of the New Zealand proceeds we expected. And as we've indicated, we're going to get somewhere around 100 million when all of the smoke clears from our New Zealand disposition, so that will go toward paying down the line that, as we said, was about 220 million at the end of the first quarter. So the cash flow that we get will go toward that, and even at a conservative pricing outlook for 2008, we would be paying off pretty much that line in entirety by the beginning of the year. So with these higher commodity prices, we're going to have some free cash flow. We're high grading our projects, looking at prioritizing them, and then ascertaining, you know, what the best avenue is for spending those dollars.

Yes, I'll shoot from the hip -- and I get in trouble for doing that, but I'll do it anyway. Just in terms of the current strip that we're seeing in oil prices -- which we don't want to take that money and spend it before we have it. We know how volatile this oil and gas market can be, so we want the money in the bank; but we're really seeing cash flow above budget expectations in the 30 million per quarter clip, 35 million per quarter clip. So as that kind of comes into the -- into the bank, obviously we'll use it immediately to reduce bank line. But as Alton says, more projects, and we've got things we would could put the money to good use to.

Okay. Great. Thanks a lot.

Thank you. Our final question is coming from from Jeff Robertson with Lehman Brothers. Please go ahead .

Good morning?

I'm showing that there are no final questions.

All right. Well, I think we've used the hour wisely. We appreciate everyone joining us for our conference call. And we look forward to speaking with you again next -- next quarter.

Yes, thanks, everyone.

Thank you.

Thank you. This does conclude today's Swift Energy Company conference call. You may all disconnect, and have a great day.