SandRidge Energy Inc (SD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 SandRidge Energy earnings conference call. My name is Lacy, and I will be your coordinator today. At this time, all participants under a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions). This conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Dirk Van Doren, Chief Financial Officer.

Thank you, Lacy. Last night the Company issued a press release detailing SandRidge's financial and operating performance for the third quarter of 2009 and also filed a 10-Q. If you do not have a copy of the release,you can find it on the company's web site, www.sandridgeenergy.com. Also, you can sign up for all releases that will automatically be sent to you. And this is located under the investor relations tab.

Now to the forward-looking statement. Please keep in mind during today's call, the Company will make forward-looking statements which are subject to risks and uncertainties. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning risk factors that could cause such differences is detailed in the Company's filings with the SEC.

Today's presentation will include information regarding adjusted net income and adjusted EBITDA and other non-GAAP financial measures. As required by the SEC, the reconciliation to the most direct comparable measures are available on our web site under the investor relations tab. Now let me turn the call over to Chairman and CEO, Tom Ward.

Thank you, Dirk. Welcome to our third-quarter conference call. We also have on the call today, Matt Grubb, our COO, and Kevin White, our Senior Vice-President of Business Development. I'll have a few brief remarks, then turn the call over to Dirk to discuss the quarter's financial results.

Our primary focus for 2009 has been to raise capital and strengthen our balance sheet in preparation of the Century plant start-up next year. As a result of the various capital transactions and asset sales we announced, along with being disciplined about managing our capital program during a time of low gas prices, we were able to exit the quarter with nothing drawn on our $895 million bank revolver.

The single most important goal which we have accomplished is to maintain the financial capacity to execute the growth strategy that we have mapped out through 2012. We call this our Road to 2012 Plan. This plan leads us to producing over 500 million cubic feet a day of gas in two years, primarily by ramping up development of our high CO2 gas in the Pinon field when the Century plant comes on line next summer.

Keep in mind, we can grow as fast or faster than any company in our industry. In fact, during 2008, we grew production 58% and grew by 72% the prior year. The primary reason for us being able to achieve this growth rate was having the available CO2 plant capacity to drill our Warwick Thrust wells. The Century plant will again give us the ability to grow as we did in past years, but on a much larger scale. At year end 2008, we had only 315 million per day of CO2 treating capacity. We currently have 375 million cubic feet per day. By 2010, we plan to have 775 million per day. And by late 2011, we plan to have 1.2 bcf per day of treating capacity.

This is the key for us to successfully execute our Road to 2012 Plan and is the catalyst for growth in the coming years. As for 2009, we made the decision to not grow just for the simple sake of growing, but rather to focus on a two-year plan that would allow to us achieve sensible, profitable growth and value expansion. During the third quarter NYMEX gas averaged $3.17, and WAHA gas dipped below $2. At these levels, it was uneconomic to grow production and would have had no material impact on our EBITDA. We always manage the business to maximize cash flow and value, not just production growth. The correct time to grow production is the time of higher prices which we anticipate will be in 2010 and beyond.

To this end, we have shut in production and curtailed drilling, and as a result deferred 5bcf of gas, thus making our new guidance 105 bcfe, which is a growth rate of 4% over last year. With the new production guidance, we see little to no impact in our projected year-end earnings. As we look forward to 2010, we have begun to increase our activity. Starting in October, we began to increase our rig count and have nine rigs operating today. As we move into 2010, we plan to continue to ramp up the drilling program to 26 rigs by mid-year and start start our exploration program by drilling six distinct structures in the west Texas overthrust. Our production guidance for 2010, excluding any expiration success, is 120 bcfe of production and $750 million in capital spending.

Of the 26 rigs we plan to run in 2010, 21 of those were planned to be drilling Warwick Thrust high CO2 wells. One rig is planned for exploratory drilling in the west Texas overthrust, and four rigs are allocated to the Central Basin platform, east Texas and Oklahoma. These plays will compete favorably if natural gas prices stay above $6 NYMEX. However, we continue to be fluid with our budgeting process and rig allocation and will not ramp up outside of Pinon unless we see continued improvement in prices that justify the drilling.

2010 will be a very exciting year for SandRidge. Every quarter that goes by brings us a quarter closer to turning on the Century plant. The plant construction process is going well and we anticipate phase one start-up in July 2010. With the work that was performed this year on the legacy plants, our CO2 treating capacity has increased from 315 million cubic feet per day to 375 million cubic feet per day currently. Century plant phase one will add an incremental 400 million cubic feet per day, bringing the total capacity to 775 million by next summer.

By this time, we anticipate having 21 rigs running in the Warwick Thrust, developing high CO2 wells, and full in-plant capacity. Phase 2 is planned to be completed in 2011, bringing on an addition 400 million per day treating capacity for a total again of 1.2 bcf a day. Once full in 2011, we will only need 11 rigs to continue to keep the plant loaded for the next 30 years if no additional capacity is built. The continued success of the Warwick Thrust development program coupled with the Century plant makes the road to 2012 and 500 million a day of net production achievable.

Another reason to be excited about SandRidge in 2010 is exploration. The geoscientists have now developed 30 distinct structures from the 1300 square miles of seismic in the WTO. As I mentioned earlier, we plan to drill six of these structures in 2010, beginning with two rigs in the first quarter. Considering that Pinon will produce over 15 bcf of gas including CO2 from under only 50,000 acres and that the structures we're targeting are similar in size to Pinon, a discovery would change the company in a manner not contemplated today or in our Road to 2012 growth strategy. I'll now turn the call over to Dirk.

Thanks, Tom. Since our last call, we achieved our financial goals and are now in a position to move the company forward on a plan for growth over the next few years. Our internal model was projecting $130 million of EBITDA and the actual was $131 million. We projected $100 million of capital expenditures and the realization was $98 million. Nothing was drawn on the revolver at quarter end. Additionally, in October we successfully redetermined our $985 million revolving credit facility.

Looking at a few of the numbers for the quarter, our production taxes were very low on a unit basis because of natural gas severance tax credits. These credits are positive to our financials, but difficult in terms of guidance because of the uncertainty of timing of the credits quarter to quarter.

Turning to capital expenditures. Our GAAP expenditures were $98 million for the third quarter and $542 million for the nine months. We used GAAP numbers in our internal model. We had $120 million accrual at the beginning of the year which had declined to $34 million at the end of the third quarter, making our capital expenditure numbers flow through the cash flow statement slightly higher.

Since our last conference call, we have not been very active in the derivative market. We have added one basis swap in 2013 at $0.48 cents. Moving to the capital structure, compared to the first half of the year, the third quarter was relatively quiet. Our goal, as we stated earlier, was to have nothing drawn on the revolver at the end of the quarter, and that was achieved, along with a cash position of approximately $15 million. Currently, our net revolver position is undrawn with a few million of cash which is positive, given a large interest payment this month, and matches our internal plan. We were in compliance with all our financial covenants at the end of the quarter.

Another area to discuss is guidance. We have lowered production guidance, which Tom discussed. Looking at our analyst investor slides from a March presentation shows we thought EBITDA would be $595 million at a NYMEX natural gas price of $5. Please reference page 94 of the presentation. So far this year, NYMEX has averaged 383, down 23% and our 2009 EBITDA performance should be a few percentage points below the March guidance. As for capital expenditures on a GAAP basis, we will be under the $700 million high end of the guidance range.

Looking forward to our conference call schedule, we are now listing it on the back of the press release for November, December, January and February. We plan to release our fourth quarter and year end numbers on Thursday, February 25 after the market closes, and have an investor call the following day. Additionally, we have scheduled our investor analyst meeting for the morning of March 3 in New York City. That ends our prepared remarks. Lacy, we are ready to open the call up for questions.

Thank you. (Operator Instructions). Our first question will come from the line of David Heikkinen with Tudor Pickering. Please proceed.

Good morning.

Good morning.

Thinking about 2010 guidance, just want to be clear as you think about that. Either with or without the Crusader acquisition, the thought is you can make that number. Is that --

That is correct. We don't know whether we'll have Crusader, whether we'll make that acquisition or not and won't know until mid-November.

Okay.

So in our guidance, what we did was to make sure -- we added Crusader in our guidance as we looked at our internal model anticipating the acquisition, but felt comfortable that we'll make the 120 bcf either way.

Let's say Crusader doesn't happen, do you fill the production that is non-Crusader with increasing capital or do you buy something else or how do you make up that 7, 8, 9bcf depending on where Crusader is producing now?

We already have the capital in our budget projected for Crusader, so we'll just move that.

So basically the $750 million budget includes the capital for Crusader, so you'd shift that to east Texas or Oklahoma or west Texas is the way to think about how you get to 120 bcf?

That's correct.

Okay. As you think about --

And we also feel like we have enough room in our model that even if prices were lower and we needed to go back through a time of -- let's assume we had a warm winter or if prices got back down to a point that we don't make any EBITDA or cash flow by producing wells or drilling, we believe we have enough in this budget to be able to defer.

As you think about the timing of Century now in the second quarter, really ramping activity mid-summer, are you thinking June, July start for Century? What's the most recent update?

I think that I've been consistent in saying either in the last part of June or the first of July and that weather could either move that up or move it back by a couple of weeks.

No change.

Really in July, I think,is a fair --

So it's really just rain or winter that slows or speeds things up is the only thing? Nothing on the track of deliverable items?

Oh, no, no. Everything is fine with moving forward with building. It just is trying to narrow down a project of this scope. It is the second largest construction project in Texas. It does -- trying to get it down to one day is a little bit difficult. I think we're doing a pretty good job covering within a few weeks.

Then as you think about the second quarter to third quarter volumes, the curtailment, can you walk us through kind of area by area production second quarter, and where it was in the third quarter so we can get an idea of kind of at this lower capital level what your production actually did sequentially?

I'll take that. Yes, David. As you know from Q2 of 2009 to Q3 of 2009, we went from 319 -- I'm sorry, from 292 to 274. About a 6% decline. And what's not very explicit or visible here is that as we talk a lot about the Century plan and talk a lot about our historical growth, it's really all been driven by the ability to process CO2 gas, okay?

So even though we had a decline there from Q2 to Q3 in total corporate production, we actually had an increase in production of 19% from our high CO2 gas. And just to expand that time frame a little bit. If you look through the first nine months of this year versus last year, corporately we had a 9% growth, but about 112% growth in high CO2 processing. And so, what it tells you is that really what we're limited right now, the only thing that's limiting our growth is plant capacity.

We always have right now with the fixed limited capacity number as we drill new Warwick wells and when we find good Warwick wells that are 50%, 60% CO2 or 40% CO2, you may have to shut in a well that might be 70%, 80% CO2 so you can produce this particular new well and get more MM btu's processed, okay? So you never realize the full benefit of new wells and you always have some production shut in that are of poorer quality.

So that's really the issues we've been faced with. And then with the low price, we just can't go out there. It des not make any sense go out and drill a lot of other wells outside Warwick at this time. So really that's the main driver for the decline in growth. But I think the point I want to make is that our past growth has always been driven by high CO2 processing. We have not had a quarter where we have had a decline in methane sales from the high CO2 gas.

We were flat in Q1 of 2008 and Q2 of 2008 mainly because we were plant limited. As we continue to work on these plants, we continue to increase capacity. As we increase capacity, we've always been able to load them with very minimal drilling. Today, we had 375 million a day of treating capacity from our legacy plants but just in Q2, we had about 315 million a day. And with only five rigs running in Q2 and Q3, and sometimes four rigs running, we've been able to keep the plants not only loaded but had actually shut in some production because we had too much and we're just maximizing methane depending on the content CO2 and the gas.

Going into Q4, right now we have a compression project that we're working on to lower some pressure. We have a couple of wells that we're bringing online. So we're going to go from about 315 million a day that we're treating today. That's our current high CO2 throughput, up to 345 million a day in about 30 days. So I look as we exit 2009 , I see us filling our plants completely to 275

As you think about the high CO2 volumes for third quarter, I thought about Pinon as a half of your total production, just rough numbers. Maybe I need to dissect that a little bit. How much of that is high CO2 and how much of that is the sweet gas that you haven't really been drilling?

In Pinon, our net production, probably 60%, 65% of that is from high CO2.

Okay. So as you think about the rest of the business.

Keep in mind we have not drilled any -- .

The Dugout Creek at all.

It's all been in the Warwick.

So really what happened is the declines are a combination of your Dugout Creek, east Texas, Oklahoma, really you're growing some west Texas oil. But everything else declined to make up that total company 6% decline is the way to think about this?

That's right. And what it shows is at a time whenever -- of low prices we didn't want to drill high (inaudible) wells.

Just from a snapshot inside of SandRidge gas macro, we're getting a look at conventional low rig count activity and how much that declines every day, aren't you? I mean, kind of just taking a step back. So that was all that I was thinking through.

I don't think there's anything --

Different about SandRidge than any other asset.

Other than our high CO2 Warwick thrust, we would decline much like any other reservoir in the United States.

Thank you. I appreciate the time.

You bet.

Our next question will come from the line of Dave Kistler with Simmons & Company. Please proceed.

Good morning, guys. I want to follow up a little on Dave's comments as well. If I just look at -- as Matt outlined the uptick in profit and capacity to 375 million and then having another 100 million coming on in, let's ay, July, just by ramping up in there, you can get pretty darn close to delivering that production growth. Is that fair or is the decline that you mentioned outside of that portfolio high enough that you're going to have to drill outside of Pinon as well?

No, I think that's a fair statement. If we had Century plant today, we could outpace decline in other areas, just growing the Warwick thrust. So I think we can continue to grow production just drilling Warwick. What drives drilling outside of Warwick is mainly pricing. So it depends on what happens over the next three to six months, we can ramp up and we'll beat our 120-b's guidance if pricing stayed kind of where they're at. I think we'll be flat going into Century plant. And once Century plant comes on, that gives us the adequate capacity to ramp up Warwick drilling and outpace decline everywhere else.

We had capacity even this year with nothing drawn on a revolver that we could have had still an aggressive program and very good reservoirs outside of Pinon to drill. What we've looked at are rates return in excess or can compete with any of the best plays in the United States. But we have chosen to not really want to expand those at a time when you don't make any cash flow or EBITDA from that activity.

That's helpful and kind of following up on that, what commodity price would you need to accelerate in, say, east Texas, Oklahoma, et cetera. And my thought there is that's probably emblematic of where the commodity price needs to be for people to get after some of the more conventional plays.

We target $6 NYMEX.

Can you tell me what kind of rate of return that with throw off of that?

You've got that, Matt, don't you? I think basically, we were in the -- Matt can come up with the specific number, but those plays at $7 NYMEX, I know we were up in the close to 60% rate of return rate, so I think it's in the 35% to 40%. I can get an exact number on it.

That would be great.

Hey, Dave this is Matt. I just looked at current strip, and this strip over the next three years is probably in the 650 range and our rate of return of all our plays from east Texas to mid-continent to Warwick onto our Ector County oil play ranges from a low of about 15% to a high of about 176% rate of return. The 176% rate of return is our Ector County oil play. The Warwick in that kind of price level is about 35% rate of return. So I think if you look at the strip over the next, say, just three years, year in this $6 to $7 range, and everything we have will work with the pretty nice return.

Okay. That's helpful. Then just looking at the Pinon and Warwick specifically, with another three months of results obviously been impacted by what you chose to deliver and from just purely a curtailments basis, et cetera. Do we have any new information on where we think EUR's are and what declines look like or anything like that that you can share this morning?

Everything within the Warwick Thrust is continuing to be exactly as we have stated. It's basically 7.5 bcf per well and anticipated 62% CO2 content and the per well economics have stayed the same. We don't anticipate changing those. Keep in mind the reason why that wouldn't change very much is we drilled around the outside of the field except we have more expansion. But if you just take all the wells within known gas, it has the same distribution across the field of good wells and bad wells. I think there is some that may be questioned about whether there's the quality of the Warwick, but we do drill some poor wells that don't have fracturing. We drill excellent wells that have very high delivery rate, so that average is not changing.

Great. Lastly, you mentioned you think there are about 30 structures that you guys have identified. I think in the release maybe you highlighted 20. Can you just talk about how those are spread across the WTO, is there an area that ranges as a huge sweet spot?

Not really. What our belief is and what is coming to the model comes out from looking at our seismic, which is really just finished, and we started interpreting this year. That shows that you have a very large area of thrusting, has a leading edge with back thrusts back behind it . And it would be unusual to have just one field in this type of geological setting. So we see Pinon and the northwest part of the west Texas overthrust and other structures coming up against each of the thrusts as you move across the west Texas overthrust. So what we looked at was a model that would show the same depth and size in comparison to Pinon and see those across the overthrust. And those are 20 structures in the same location as the Pinon field. We have ten structures that are very deep in the 15,000-plus range in the Ellenberger. Those projects would not be drilled as quickly as looking at the same type of structures as Pinon just because of the depth difference.

We know in the Fusselman and Ellenburger the deep zones, that they'll have high CO2. But we believe as we move east across the west Texas overthrust, we'll see little to no CO2. We don't see a degradation of structure size going to the east. What you do have is more expiration risk as you move east. On the west side of the overthrust, you'll see more of a risk for high CO2. Each area has their sets of risk. What we can't tell with seismic, we can tell structure. What we can tell is structure. We know the source rock s there and there's gas in place. What we don't know is the amount of fracturing and the amount of

Great. Thanks so much, guys. Appreciate it.

Thank you.

And our next question will come from the line of Matthew Lemme with Highland Capital.

Good morning. In terms of the ramp-up of production with the CO2 plant, help me understand something. You're going to drill a bunch of wells in preparation for the opening of the plant. What happens to those wells before you have a place to put the CO2? Are you drilling and completing and just not hooking up to sales?

We will drill. We'll complete and be banking that gas preparing for it to move, turn onto the Century plant when we turn it on.

Okay. Then naturally you'll get a pickup in production once that turns on? Okay. Then you mentioned that you would need about 11 rigs to keep that plant filled. About how many wells does that work out to in a year?

Matt will grab that real quickly. The 11 rigs that we will use after it's filled in 2011, so that's kind of a 2012 and beyond, assuming that we don't have a need for additional capacity or additional sales of CO2.

With 11 rigs, you're looking at probably in the range of 100 to 120 wells.

If you were to drill one of those today about what would they cost?

$2.2 million.

$2.2 million. That's drilling complete?

Yes.

Terrific. Tom, I know your view on gas prices, but let's just say gas prices don't go your way. At what point do you really ramp up 2011 hedging? What's your time line --

I never know until we determine to change our view, but I can say what happened in the past was that last year we had a fairly bullish outlook and then by late fall to early winter changed our view and hedged all of our 2009 -- well, 85% of our 2009 gas and 70% of our 2010 gas. So I would assume the same thing this year. Once we decide that something wasn't going our way, we'd be pretty agressive to hedge out 2011 gas.

Great. Thanks a lot.

Thank you.

And our next question will come from the line of Ann Cameron with JPMorgan. Please proceed.

Good morning.

Good morning.

The 11 rigs to keep Century filled, will that keep Century filled and all of your existing CO2 treatment facilities?

Yes. That keeps everything full for really the entirety of the contract with Occidental.

Okay. Great. The inventory of wells that you'll have drilled but not completed by the time Century comes online, can you give us an idea of how much production that is and how fast will you get the extra 100 per day in July?

Yes. I think what happens, what really happens is Century plant will be our lowest cost processing plant. How this will work is we're drilling and banking up CO2. As soon as Century starts up, we'll divert our gas from our existing legacy plants into Century and try to fill that up right away. What happens is you turn on gas and start filling the other plants as you overflow Century. And you do this really to maximize the value of your methane cells.

So right now, we're looking at ramping up to 26 rigs by about mid-year of 2010, of which about 20 rigs would be drilling the Warwick thrust. So we look at on average maybe there's for the six months, there's 15 rigs running. You're looking at drilling about 65 to 70 wells for the -- in preparation for the Century plant. Some of that will be offsetting a little bit of decline as we fill out our current capacity of 375, but we only need about four rigs to five rigs to do that. So I anticipate these wells come on 300 day of weight gas. (Inaudible) will bring on 150 million a day type when the Century plant comes on of wet gas. So you got 30%, 34%, 35% of that is CO2. So probably 50 million a day of methane gross, and then you net that out. You take 75% of that. Now you're looking at maybe 35% net methane.

Okay. Great. That's really helpful. Thanks. Just one other question. The CO2 tax credit that you can claim the $0.53 cents per m, when will you be able to take that credit, and do you have any plans to monetize that? I know you don't play taxes at the moment. What will that look like?

We don't talk a lot about that because of the confidentiality agreement with Oxy. We can say there is a tax credit that's going to go through the plant and that we'll share in that. That really wouldn't start until the plant is up and running in 2010. And then would be full capacity in 2011. So it is a benefit to us, and we don't pay taxes. So we would have to find a way to monetize it.

Okay. Great. Thanks very much.

Thank you.

And our next question will come from the line of Jeff Robertson of Barclays Capital. Please proceed.

Just a question on capital for 2010 with the $750 million budget you all are talking about. Are there development dollars in the budget currently in the event you make a discovery with the exploration program, or would any kind of delineation type drilling be incremental to the capital?

That would be incremental. In fact, if we made a discovery and needed to develop, we'll probably have to come back and talk about a restructuring of the company in some way to look at how we would develop another Pinon field. Obviously, everything we have looked at from a capital standpoint is just to develop Pinon and doesn't really anticipate having a discovery. While I believe we will have, it's not something we contemplated yet from the capital standpoint.

Secondly, Tom, you talked a little about the per well costs on $2.2 million for the wells needed to fill the Century plant, but what kind of other capital -- what's the total capital amount that would be needed to keep that plant full, including the wells, plus any other infrastructure type capital that you all -- that SandRidge would be responsible for?

Starting in 2010?

No, no, no, in 2012 once you got the plant full and you're just trying to keep it full or if you just try to keep it full.

Yes, I think by 2012, most of that capital really would be drilling, because by then you would have pretty much built up all your infrastructures. What we try to do is build out pipe and have compression out ready in front of the drilling program at least six months. So by the end of 2012, we would pretty much be done other than some ongoing maintenance capital, compressor overhauls and pipeline maintenance, things like that. But large capital expenditure, we would pretty much be done with on the infrastructure side. That's assuming we don't have a discovery outside of Pinon. If we do have a discovery outside of Pinon, obviously everything changes at that point.

The reason we don't set up an idea of what the capital is needed for discovery is we don't know the CO2 content. We don't know if we would need another plant or not need another plant. We really have to see the quality of the gas before we make that determination.

Thank you.

Thank you.

And our next question will come from the line of Mark Mayer with RR Advisors.

It sounds like a $6 NYMEX is really the threshold with respect to deferral and/or acceleration. What does that translate to in net realized standpoint?

We model $0.70 corporately on a basis that it's -- we're hedged a little better than that, but I think you can basically say it's 530.

Okay. Any recalibration to your macro in light of August 9, 2014?

Not necessarily, no. I think we're on target for -- I do believe that we're working away excess as we speak, and probably just had a little more gas to work through than I anticipated and maybe that moves it back some later than what I might have said a month or two ago. I don't have a good feel for when this happens in 2010. I am comfortable we are moving in the right direction and prices will be higher by the last half of 2010 or the first part of 2011. I'd say that today with the rig count where it is, I'm still a believer in higher prices in the future.

Can you talk about, I guess, the dominant risk factor and how you set your priority of the exploratory prospects? Is it chance of structure? Is it risk of CO2 or a more complex combination?

We have a lot of structures to choose from. The risk, I believe, the largest risk is fracturing. And in Pinon field, the geology that has set up the Pinon field has extremely good fracturing, obviously, to get as much -- to get 7.5 bcf per well out of a well bore. So what we look for, we know the structure, so we can tell that. We can tell that we have the zone in place.

So I think what we look at is the chance for CO2, which is on the west side. You are closer to the Pinon field, and you can tie those structures back to the Pinon field on seismic. That give you less risk of reservoir risk. Then on the west side -- excuse me, on the east side, we know they're producing fields that are too small of structures that we wouldn't have drilled but have produced tens of bcf of sweet gas. So we don't think there is necessarily a high risk of CO2 on the east side of the west Texas overthrust. The question then is that you're 30 to 50 miles away from your producing analogous field and you just have a higher expiation risk for your reservoir.

I'm looking at your Warwick IP scatter plot. Excuse me. Any thoughts about maybe tightening that cone as you go forward or are you just living with the inherent variability of the geology?

In the Warwick?

Yes.

We have a 60bcf will drilled in 1990 that's was offset by a well that produced just several hundred million cubic feet, maybe just over a bcf of gas. That's just a part of all of the Warwick thrust. You have gas wells in every well you drill. And you have extremely good wells and poor wells, and you take that average and you get to 7.5 bcf. That's not changing. There's nothing new that we've seen.

In fact, what you will see by the other plot that would show on that slide show you're talking about is we have wells that look like they will produce more than 60 bcf, but that were drilled in the last thee years. You're not going to give that much gas in a reservoir until you have a few years of production. So for example, the well that has 60 bcf eur that was drilled in 1990 would not have been projected to make that much gas in the early 1990's.

Thank you.

Thank you.

(Operator Instructions). And our next question will come from the line of Adrayll Askew with Hartford Investment.

Can you speak to the current environment in west Texas as it relates to services, and what's your expectation going into 2010 as you guys ramp up your drilling program?

I'll let Matt take a part of this, too. We don't see any issue with getting services. We've hedged a majority of our services through 2010. And as far as ramping up our rig count, we already have the people notified and in place to start that process. So we're well underway with our ramp up. Matt?

Most of our services on the rig side, we provide ourselves. So that's not a problem there. And as we ramped up, really, in the period from really towards the end of 2006 all the way up through 2008 where we went from roughly starting out with about 6 to 8 rigs in Pinon all the way up to 34 rigs in Pinon at the height of the industry there in the middle of 2008. Really, what that did for us was it provided some services in an area that will help us here on that ramp up again. So the service companies are there. The yards have been built. And really, they're waiting on us. So I don't anticipate any problems at the all ramping up drilling in the WTO.

Matt's team also in the summer really started locking in discounts that we'll receive through 2010. So we have a very good feel for what our costs are going to be.

Okay. That's very helpful. Thank you.

Thank you.

And at this time, we have no further questions in queue. I would now like to turn the call back over to Mr. Tom Ward for any closing remarks.

As always, we just appreciate your participation, and please give us a call if you have any further questions. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.