SandRidge Energy Inc (SD) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SandRidge third-quarter 2014 operations update conference call.

(Operator Instructions)

Please note this call is being recorded today, Wednesday November 6, 2014, at 9:00 Eastern Standard Time. I would now like to turn the meeting over to your host for today's call, Mr. Duane Grubert, EVP of Investor Relations and Strategy. Sir, you may begin.

Thank you, Operator. Welcome, everyone, and thank you for joining us on our third-quarter 2014 operations update conference call. This is Duane Grubert, EVP of IR and Strategy; and with me today are James Bennett, President and Chief Executive Officer; and Eddie Leblanc, EVP and Chief Financial Officer. We would like to remind you that in conjunction with our press release and conference call, we have posted slides on the Investor Relations part of our website.

Keep in mind that today's call contains forward-looking statements and assumptions which are subject to risks and uncertainties and actual results may differ materially from those projected in these forward-looking statements. Please note that this call is intended to discuss SandRidge Energy and not our public royalty trust. Now let me turn the call over to CEO James Bennett.

Thank you, Duane. The third quarter represented another solid operational quarter with strong growth, innovation progressing, improved liquidity and hedging and a quality project inventory even at these lower oil prices.

First, we were disappointed with not having financials to report as announced in our 8-K and press release, our 10-Q filing is delayed. Eddie will give you additional details, but this is a result of a comment by the SEC that relates to booking of our annual CO2 under-delivery penalty. While we don't have a final resolution of this matter with the SEC, the issue under discussion relates to the timing and periods where we booked the under-delivery. And let me stress that we don't believe this impacts other areas of our business, other internal controls or accounting, and is isolated to this one issue. You will notice that our earnings release does not contain financials and is an operational update. While we don't have final financial results for the quarter, I do believe that our results were in line or exceeding expectations.

Turning to operations, solid operational performance is one of the consistent themes you will see in our results this quarter. Production growth continues to be strong and on track with our expectations, driven by another group of good MidContinent wells and ongoing improvements in our base PDP performance. MidContinent production grew to 67,000 barrels of oil equivalent per day, a 19% increase over last quarter and a 39% increase from Q3 last year. Total Company production grew to 80,000 barrels of oil equivalent per day, representing the 14% increase from last quarter and 26% growth rate from pro forma third quarter 2013.

Notably, on a pro forma basis, total Company liquids productions was 3.8 million barrels, an increase of 37% from Q3 of last year, with all of our wells in the MidContinent now subject to a gas percent-of-proceeds processing agreement. Overall, 30-day IPs for 122 laterals averaged 368 Boe per day, 16% above type curve. Also I am very happy with the improved consistency of IPs that we are seeing around that range. Keep in mind that we are very focused on returned and net present value, so IPs around 350 [Boe] a day with well costs of $2.9 million and LOE well under $10 per barrel, generate very competitive returns, even at a lower commodity price.

Due to strong production in the third quarter, we are tightening our full-year guidance production range and raising the midpoint by approximately 200,000 Boe to 28.7 million barrels of oil equivalent from 28.5 Boe, with the increase coming from NGLs and gas. This represents a 20% to 23% growth over 2013 production, adjusted for asset sales.

In terms of new growth projects, we have realized continued success with new zones in both our Chester and Woodford programs. In the Chester, we delivered 10 laterals to sales in third quarter and 27 total laterals since the program's inception, with 10 additional laterals planned in Q4. The third-quarter Chester IPs are averaging 252 Boe per day with 67% oil. With this high percentage of oil and flatter initial decline, our Chester well returns are on par with our Miss program and at a nice level of diversity to our MidContinent position. We're also pleased with our second geologic test of the Woodford. The second well came online during the third quarter with a 30-day IP of 382 Boe per day and 88% oil. This well is comparable to our initial well announced last quarter. With these successes driven by our new geological model, we have a two-rig Woodford program planned for the remainder of this year.

We are focused not only on growth projects, but also continuous improvements to our base operations. Per-lateral program costs were $2.9 million in the third quarter, in line with previous results. We expect this per-lateral CapEx to move around a bit as the mix of Chester and multi-lateral drilling changes from quarter to quarter. Additional cost savings efforts are underway, such as expansion of produced water fracs and the increased used of ball-drop completion technology. As we expand these efforts, introduce new cost saving initiatives, and having already achieved our 2014 cost goal of $2.9 million per lateral, we are confident in our ability to continue to reduce costs and achieve our target of lowering costs by $100,000 per year for the next several years.

Capital efficiency is one of the main drivers behind our multi-lateral program. For the quarter our multi-lateral well costs averaged $2.4 million per lateral versus $2.9 million on a single well. This program comprised 21% of our lateral spud in the quarter and 11% of laterals completed. 30-day IPs were 273 Boe per day for the quarter. Even with the lower 30-day IP, driven by the lower well costs and a shallower initial decline than a single well type curve, early program results indicate that multi-lateral projects are generating a 30% better return that Mississippian single-lateral type curve predicts. While still early in the program, and determining the best prototype well configuration for a given geological setting, we are seeing benefits of this capital efficiency initiative. Look for continued application of this design in our 2015 program.

In the last quarter we discussed some power outages and reliability issues that impacted our production. Since then the teams have worked diligently and rolled out several modifications to improve power reliability, including a new sub station in Garfield County, Oklahoma, planned in the fourth quarter; installing ESP auto restarts on new wells and retrofitting existing ESPs; upgrading main trunk lines and plans to add 30-megawatts of power in 2015. We have started to see the benefits of these initiatives and will continue to finish this program into 2015.

Our other infrastructure asset is our water gathering business. We project that we'll have invested over $120 million in this business in 2014 and at year end expect to have a cumulative of $600 million invested. Recall that we own approximately 73% of the system. At the end of the third quarter, with 201 disposal wells, 185 in the MidContinent 16 in the Permian, we had gross disposal capacity of 2.6 million barrels of produced water per day and our system disposed of 1.2 million per day. As we've said in the past, this disposal system and our three-phase electrical power distribution network provides us a real competitive advantage in terms of being able to cost effectively operate in MidContinent. These systems, which we have been investing in and developing for years, coupled with the concentrated acreage position in our focus area, allow us to effectively develop the play and generate very competitive returns.

We increased our CapEx slightly by $75 million to account for additional back half of the year seismic and land [specking] in areas where we are seeing our best results, and final Permian trust drilling cost inflation and some closing costs related to our early 2014 Gulf of Mexico sales. Importantly, our core MidContinent drilling and completion CapEx remains unchanged at $1 billion. On our stock buyback, we repurchased 27.4 million or 5.6 of our outstanding shares, spending $111 million of our approved $200 million buyback. We still have just under $90 million in our buyback program and going forward we will continue to evaluate best use of capital, taking into account our 2015 drilling program, net asset value, commodity prices our hedge position and our leverage.

On our hedges, we're very well hedged, with over 10 million barrels of oil at just over $90 a barrel and 15 bcf of gas at $4.50. And in 2016 we have another 4 million barrels of oil hedged. To put the 2015 hedges into context, if you were to use 2015 [streak] and census production guidance for SandRidge, that puts us at about 70% of liquids production, assuming a 3 to 1 for NGLs and about 75% of oil production hedged. Which is, we believe, one of the highest of the independent E&P companies.

In terms of our strategy and plans for 2015 and beyond, we are a high growth Company and our 39% year-over-year MidContinent production growth supports that. Our strategy to generate the best return for our shareholders is to turn MidContinent asset base into cash flow and close and attain self-funded status. Looking forward to 2015, I will say that we recognize the contraction in oil prices and given these facts, we will be lowering our 2015 CapEx from the previously indicated $1.55 billion level. Once we have Board approval, in the next couple months we will roll that budget out publicly.

With the lower level of spending anticipated in 2015, keep in mind these important data points. We are very well hedged for 2015 at attractive prices. Our industry-leading well costs allow us to still generate a 40% return on our wells at an $80 oil price. We have $1.5 billion of liquidity and no bond maturities until 2020. So look for us to protect our cash flows and balance sheet in 2015 while still providing meaningful growth and capital efficiency.

On October 24 we filed and S-1 registration statement with the Securities and Exchange Commission for an initial public offering of MidCon Midstream Partners LP, a master limited partnership designed to own part of our water gathering business. The SEC imposed significant restrictions on what we can say publicly about the proposed MLP IPO. Accordingly, we encourage you to read our earlier press release and registration statement. I know people want to ask about it, but I will be unable to answer any specific questions you might have about the proposed MLP on this call or otherwise.

I do believe that the value creation of this MLP is in the long-term best interests of SandRidge shareholders by highlighting the value of our water gathering midstream assets and providing a source of funding to continue to develop our business. At closing of the IPO, we would expect proceeds to SandRidge between $200 million and $250 million. The transaction is subject to SEC review and will require the receipt of a Private Letter Ruling from the IRS. One thing to note on that front is that IRS in the middle of a pause with respect to the issuance of PLRs. Therefore, we don't know the exact timing when we might receive a PLR.

In closing, on the production side we had a great 19% quarter-over-quarter growth and raised the midpoint of guidance. New initiatives Chester and Woodford programs are both advancing. Our innovative multi-lateral program is working and we have one of the strongest oil hedge positions in the industry. We remain very cognizant of the change in the oil landscape and will modify our plans as needed. So look for us to come out with a 2015 budget that is lower and more capital efficient. However, with our high-return projects, base of existing production and cash flow, hedges and liquidity, we are very defensively positioned in this current environment.

Finally, and importantly, I want to thank our dedicated team of employees here in the headquarters and in the field in Oklahoma, Kansas and Texas. It's your working safely and diligently every day to achieve our goals and develop this culture of continuous improvement that makes SandRidge successful. Now let me turn the call over to our CFO, Eddie Leblanc.

Thanks, James. At this part of the call I usually delve into the financial results for the quarter and the year to date, discussing pro forma comparisons for quarter-over-quarter and y year-over-year. Unfortunately, this time we are not able to discuss financial results due to not yet having concurrence with the SEC regarding the recording of the CO2 under-delivery penalty associated with the Century Plant contract.

In 2012, based on our review of accounting literature, we determined to book any annual under-delivery penalty in the fourth quarter of any year a penalty was due. This is an executory contract with annual volume requirements and delivery make-up provisions. Any under-delivery penalty and associated invoicing is done annually. Therefore, we believe we correctly applied GAAP, specifically ASC 450 by booking the liability on annual basis at the end of the year once we knew the actual penalty. We have received unqualified opinions in 2012 and 2013 from our external auditors using this approach.

As explained in our 8-K filed November 4, our press release dated that same day, and in our operational update release on November 5, the SEC as part of a routine review of our 2012 10-K, has informed us they believe a different accrual period, quarterly, is more appropriate. We are still working towards resolution with the SEC and don't have a final answer. We believe that the likely outcome will be us reclassifying previously recorded liabilities into earlier quarterly periods and accruing an estimated penalty for 2014, quarterly. We are disappointed in this outcome, but believe our team made a reasonable application of accounting principals.

This is a complicated set of circumstances that we believe lend themselves to more than one reasonable accounting interpretation. And the SEC has a different interpretation of the applicable accounting period. Until we have concurrence with this quarterly recording of the accrual of the probable annual liability, we cannot publish financial statements or file our third-quarter 10Q. We cannot predict the time required for the SEC and the Company to reach concurrence on this issue. We will work diligently to get our restated Ks and Qs in third quarter 2014 Q filed as soon as possible.

In October we completed revisions to our bank credit facility. The borrowing base was increased from $775 million to a self-initiated facility limit of $900 million. When combined with our cash position at September 30 of $590 million, our undrawn facility will provide us with liquidity of $1.5 billion. Our reserve supported a borrowing base of $1.2 billion, so upon written request, we can expand liquidity by another $300 million. In addition, we lowered our margin rate by 25 basis points and extended the maturity to 2019. Based on the continuing high level of liquidity, any capital expenditure program we develop for 2015 will be more than adequately funded. Our senior notes totaled $3.2 billion at quarter end for a net debt position of $2.6 billion. We have no note maturities before 2020.

We have updated guidance for 2014. We have tightened the range of production to account for improved third-quarter performance to a range between 28.3 million Boe and 29 million Boe. And adjusted oil and natural gas differentials down for currently experienced realizations. We lowered production tax range to account for the decrease in oil price and lowered the G&A range due to a current reduction in long-term incentive costs. The cost of our long term incentive program fluctuates with our stock price. Additionally, we increased guidance for capital expenditures, with the increase coming primarily from expanding our current acreage opportunities in and around our focus areas and the acquisition of 3D seismic.

That concludes my remarks. Operator, please open the call for questions.

(Operator Instructions)

Your first question comes from the line of Neal Dingmann from SunTrust. Your line is open.

Hey, guys, good morning. This is Will for Neal. Couple questions. Looking at your Mid-Con, basically overall activity around the Woodford, how do you all think about that going forward? I know you talked about increasing that. Obviously, the initial results were pretty positive, but how should we think about that for next year?

Sure, Will, this is the new geologic model that we came up, targeting thoroughly mature Woodford zones with frac barriers. Those allow for more effective stimulations.

If you remember, some of the initial Woodford wells we drilled, we believed we were fracking out of zone and stimulating nonproductive and high water-bearing zones. This is our second successful well.

We will have two rigs running the remainder of the year for the Woodford program. But look for us, when we come out with our 2015 guidance, to give more detail around the Woodford program. I would expect it to be a part of our capital plan for next year.

Thanks, James. Then also looking over on the multi-laterals, you guys had 21% multi-laterals for the quarter. How should we see that percentage? Should we expect that to increase pretty sizeably next year? How should we look at that?

We said on our last call that we would average about 20% for the back half of the year, and we'll come in right around that. I would expect us to roll it out in a little more detail when we come out with our 2015 guidance. But in terms of percentages, I think it will go up from this 20% that we have in the back half of the year.

Okay, all right, thank you.

You're welcome.

Your next question comes from line of Charles Meade from Johnson Rice. Your line is open.

Good morning, James, and to the rest of your team there. I am not trying to sneak a question here, but I was wondering is it possible to ask a question about how you as SandRidge decided how much of your midstream assets to put into Mid-Con?

No, Charles. I understand the question, but I can't comment on the MLP or the assets that we are going to put into it. I need to direct you to the registration statement.

Okay. I thought it worth a shot, but thanks for that, James. Going back to the question of the multi-laterals, I want to understand how you are counting it. When you say 21% are multi-laterals, are you counting each lateral as one? Or is that a CapEx percentage? What's the right way to think about that?

Good question. Because you could think about it in terms of CapEx or wells, but we do it on per laterals. So for the lateral spud in the quarter, 134 that were spud, 28 of those laterals were multi-laterals.

Got it.

That's 21%. In terms of the ones completed and on flow back for the quarter, that's 13 laterals out of 122 laterals, or 11%.

Got it. If I could actually go back to the earlier question and talk about, you went through Woodford, the new geologic model, you said naturally fractured with a frac barrier. Were those the two key pieces?

I said targeting thermally mature.

Thermally mature, okay.

Thermally mature with natural frac barriers, yes.

Got it. I know that you are pushing some of these questions off to when you come out with your guidance, but do you have a sense of once you put those filters on your position, how much acreage you have? And how big that can be as part of your program?

Sure. On our acreage position we've got about 650,000 acres in our focus area. Almost 55% of that is held by production. We think, on the acreage, we'll maintain around that 650,000 acres. But importantly, the percent HBP is going to go up every quarter and every year.

Right, but how much would be prospective for that Woodford, once you put those two filters on.

Sorry. I didn't know you were talking about Woodford. Charles, let us table that until we come out with 2015.

Okay, great, thank you, James.

Thank you.

Next question is from Sean Sneeden from Oppenheimer. Your line is open.

Good morning. Thank you for taking the questions.

Welcome.

James, on the funding environment, given the current commodity price environment, how do you weigh achieving your production growth goals along with maintaining your 3.5 times leverage targets, as well as your self funding status. Maybe on the high level of how you are approaching that at this point.

Sure, sure. One of the reasons we mentioned on this call that we will be lowering our CapEx in 2015, is because of the decline in commodity prices. I will stress though, that we are not that sensitive in the year 2015 to changing commodity prices.

A $10 change in oil, if you take our consensus estimates, a $10 change in oil from $90 down to $80, given our hedge position, is about a $50 million movement in EBITDA. So for 2015, we are actually not that sensitive to the change in commodity prices.

But recognizing the strip has come down and it's basically pretty flat at $80, we want to be cautious with our capital and protect our balance sheet and leverage and liquidity here a bit. So we are going to balance that.

We want a capital-efficient program next year. We'll still be able to provide some meaningful growth, but we'll keep our leverage and liquidity in check. Again, the hedge position next year gives us natural down-side protection.

Great, I appreciate that. When you are thinking about your liquidity position, are you baking in some amount of incremental liquidity from your proposed MLP? Or are you assume that doesn't happen?

Great question. No, we're assuming -- we are not baking that into our calculation right now. If that happens, we'll make a decision at that point, but that's not based into our liquidity model right now.

Okay, great. Lastly for me, on your share buyback program, certainly appreciated your comments earlier, but given where we are today, could you comment on how you would approach or think about using some of your cash balances to buy back bonds? Since they're all trading below par at this point.

Yes. With our liquidity and cash we've got to make decisions on how we allocate that. Do we drill wells? Do we return to shareholders? Do we buy back securities?

Obviously we're still getting very good returns on our wells, but it's really going to depend on what the market looks like at that time. What is our liquidity? Where are the bonds trading? Where is the equity trading? Where is the forward strip on commodity prices?

You are talking about an event that's in the first quarter of next year, so we really can't comment on it now. We'll have to see what the world looks like then.

Fair enough, thank you.

Next question from the line of Jamaal Dardar from Tudor Pickering Holt & Company. Your line is open.

Good morning, guys.

Good morning.

Just a few quick questions. Looking at NGLs this quarter, seems like they were up substantially. I was just wondering what led to that increase in NGL production? Is that something we should see going forward?

Sure, good question. When we rolled out our initial 2014 guidance, you will notice strong growth, large growth in NGLs from about 1.5 million barrels last year to almost 4 million this year.

A lot of it's due to growth in our gas volumes, but a lot of it is also due to a new percent of proceeds contract that we signed about a year and a half ago. That contract, all existing Mid-Continent wells flipped into that percent of proceeds contract in June of this year.

So the third quarter was the first quarter where we saw the full contribution of all of our wells receiving the benefit of that percent of proceeds contract. Something we have been forecasting for a while, but this is the first quarter where it really showed up in the quarterly numbers.

Okay, yes, that's right, thank you. Looking out to 2015, I know you are waiting to give more color when guidance comes out, but do you have a debt level that you are going to feel comfortable with? Or that you want to stay at next year if commodity prices persist?

On the debt level we have $3.2 billion of bonds and nothing drawn on or revolver. As Eddie mentioned, we just increased our borrowing base to $900 million. I won't put out an absolute debt number because it's going to depend on a lot of things. The forward strip for commodity prices, our drilling program for next year.

I think I was careful with our words in the prepared remarks. We are defensively positioned for next year with a lot of hedges and no bond maturities, and we are going to balance our capital program with protecting our liquidity and leverage.

Okay, great, thank you.

Your next question comes from the line of Adam Leight from RBC Capital. Your line is open.

Good morning, James, everybody. You have a very good hedge position for your oil production in 2015 with the gas strip relatively flat. You are under weight on your gas hedges. How are you thinking about that at this point?

Yes, Adam, we did earlier this year step into the market and hedge about 15 Bs of gas next year at $4.50. We focus on hedging oil a little more than gas here. Oil provides about 75% of our cash flows, even though it's half of our production.

So we get a lot more hedge value by hedging oil. We keep an eye on gas. Like I said, we stepped in the market earlier this year and we've got an eye on the strip.

Should it rally to a point we could see us locking in more gas hedges. But again, we've been more focused on oil hedges because that's where the lion's share of our revenue comes from.

I got all that, but given the volatility in the markets in general, I was curious if you felt like it would be relatively easy to add some additional protection here. Okay. And could you remind me what your restricted payments capacity is at this point?

Let me research that number. Eddie just handed me a number. About $3 billion. Thank you, Eddie. $3 billion.

Okay. Then lastly, one more on your CapEx program thoughts for next year. I don't know how you're thinking about this given you have lots of liquidity, but if you are thinking a bit more conservatively about how you spend versus what might be available in the capital markets versus your revolver next year closer towards cash flow neutral? Or are you still working with your overall capacity?

Sure. I said in my prepared remarks that recognizing the contraction in oil prices, we'll be lowering our CapEx from that previously indicated $1.55 billion level. When we came with a three-year plan, we said we'd spend roughly $1.55 billion a year over three years.

That was obviously at a different commodity price environment. I think the forward strip was about $96 then.

I am not going to give you an exact number yet, Adam. We'll come out with that after we get final approval for the plan. But expect it to be lower than that $1.55 billion.

Guess that's what we get for now. Thanks.

Thank you.

Next question from the line of Adam Duarte from Omega. Your line is open.

Good morning, guys. On the $75 million of higher CapEx for this year, can you give a little more detail around what that's for and what exactly you expect to accomplish with the higher spending?

Sure. About $45 million of that was related to the Permian and Gulf of Mexico. As you know, with increased activity in the Permian Basin, we have seen some cost pressures and cost inflation there.

That, and we had to spend a little bit on some infrastructure to support the final piece of the Permian royalty trust drilling. That drilling is wrapping up and it's going to be completed in the next couple of weeks.

And the $10 million is a roll-over from the Gulf of Mexico divestiture. It's one last piece of CapEx coming in. That was $45 million of it.

The biggest piece, Adam, is on the land and seismic. We have elected to participate in some more 3D seismic shoots and have one additional proprietary shoot.

Some of this is covering our Woodford acreage. Some is covering Chester. So as we have seen continued success in those two zones, we have elected to shoot a little more 3D.

Also in our Chester area and in our Garfield area, we have seen continued opportunities to pick up some leases in the $200 to $400 an acre range. So we decided to increase our land spend slightly in those areas. We think that's going to set us up well for 2015 and 2016, the combination of that land and seismic.

Okay. And on the new leases, is that additional -- is that core stuff or is that step-out acreage?

It's all within the focus area, but some of it's prospective for Chester and some of it is in around, very close proximity, right in around our good wells in the Garfield area.

Okay, thanks.

You're welcome.

Next question comes from the line of Gary Stromberg from Barclays. Your line is open.

Good morning.

Good morning, Gary.

I know you talked about keeping leverage in check in 2015. What do you think your comfort level is on debt to EBITDA next year? Can you remind us what the leverage covenant is in your revolver?

Sure, Gary, leverage covenant is 4.5 times. I am not comfortable at 4.5 times. When we come out with our 2015 capital plan, we can give you a better feel for where we think the leverage will be. I think it will be in the 3.75 range at the end of this year, give or take.

The way I think about leverage always, and even next year, I want to take into account on my hedge book for the coming 18 to 24 months. What are my bond maturities, which we don't have any until 2020. And what is my base level of cash flow doing?

I am not comfortable at 4.5 times. I am comfortable where we are now. But when we come out with our 2015 plan we will be able to give you a much better feel for where we will be in the calendar-year 2015.

Okay, that's helpful. Question on returns. I know you talk about 40% returns in the Miss at $80 oil prices. How do we think about break evens in the Miss play on a WTI basis?

Sure. We've got a page in our investor presentation where we show the returns at various prices. Coincidently on far left, we use $80 oil and $3.50 gas. We put this together several months ago.

You can see where the lines cross there at about the $2.9 million well cost, we are right at that 40% return. But you would need another $15 drop in oil to where you are not generating an acceptable return in this play. It would still be a little over break even. We look at more of a 20% return than we do just break even.

Okay. And that's all inclusive of all the infrastructure, land, that's fully baked, full cycle?

No, Gary, that's not. If you take the 40% return and put in our infrastructure dollars on top of that, that takes about ten percentage points, or 1,000 basis points, off the return. So the 40% loaded for infrastructure is about 30%.

Okay, got it. Okay, and then last one for me. It sounds like 2015 spending will be lower, but I think you said you are still looking at meaningful production growth. What do you think the minimum spend level is to keep production flat from that fourth-quarter level of around 84,000 barrels a day?

On an annual basis, not talking about any one quarter, we can spend in the neighborhood of $500 million just on D&C spending. So that wouldn't include land or associated infrastructure, any capitalized items. But we could spend about $500 million on D&C spending and keep our production flat year over year.

Okay, great. That's all I had. Thank you.

Thank you.

(Operator Instructions)

You next question comes from the line of Eric Ruff from Morgan Stanley. Your line is open.

Yes, thank you very much. I just wanted to verify your operating costs -- sorry about that.

That's okay.

Just to verify your operating costs per barrel of oil equivalent. Looking at your slide on your guidance that comes up to $37 to $38 per barrel range, is that full cycle cost?

Well on our -- are you talking about just lifting costs?

Well I was trying to get at what would it be on a total operating cost basis including all taxes and lifting and operating costs.

Sure, sure. If I can direct you to page 5 of the deck we put out this morning, it's got our updated guidance range per barrel there. So taken roughly to midpoint of that you would have about $12 of lifting, about $1.15 of production taxes, about $3.50 of G&A, cash, another $0.50 of G&A stock. That puts you in the $17 a barrel in terms of cash costs, excluding D&A.

Okay, right. When industry participants are talking about the average cost of production for the shale drillers is roughly $50 to $60 per barrel, are they including interest, total cash interest expense, on top of that?

Yes. What they're probably also including are the finding costs. So the costs to drill and find that, some return on the capital, maybe even some G&A burden. So I believe when people say $50 for break even, they're including the cost to develop that, not just the lifting costs.

Once you have drilled a well, the lifting costs to get the molecules out of the ground is actually pretty low. The big capital dollars are up front to drill the well.

Right, okay. Could you give an estimate on what that would be for you?

I believe it was Gary asked a similar question on what's the break even? I think for us to generate an acceptable return here you are in the $60 to $60-plus range of oil price.

Got you. Okay, thank you very much. And also when will you be giving more specific CapEx guidance for next year?

That will be in the next couple months after we have finalized our budgeting process towards the end of this year and received Board approval.

Okay, great. Thank you very much.

Thank you.

Your last question comes from the line of Robert Alpaugh from Simmons & Company International. Your line is open.

I was reading recent 8K and I get the impression that the $0.70 balloon payment for undelivered CO2 volumes could be on the table for accrual. Could you speak to this possibility or likelihood?

Yes. We don't believe that's part of the discussion here. That under-delivery penalty is paid in 2042. And to estimate that, it needs to be -- to book it needs to be estimable and probable, which it's not neither at this point in time. We have until 2042 to make up those volumes. That's not part of the discussion today, it's really been focused on this annual $0.25 penalty.

Okay, well thank you, guys.

Thank you.

There are no fur questions at this time. Mr. Bennett, I turn the call back to you.

Thank you, and thanks, everyone, for getting on the call. In wrapping up, we had a strong quarter. We are disappointed we don't have financials, but we are working diligently to get those out.

Production was up. Our new initiative programs at Chester and Woodford are working. We had some great opportunities to purchase some additional land in and around those areas, and chose to take that.

The teams are doing an incredible job executing the multi-laterals and bringing our costs down. And I'd say finally, we have a very defensive position going into these commodity price headwinds with about 70% to 75% of our liquids or oil hedged next year.

No bond maturities until 2020 and a program that can still generate 40% returns at these commodity prices. We look forward to speaking with you again in the future. Thank you.

This concludes today's conference call. You may now disconnect.