SM Energy Co (SM) 2008 Q1 法說會逐字稿

Good morning, I will be your conference operator today.

At this time, would like to welcome everyone to the first quarter earnings call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer section.

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Brent Collins, Director of Investor Relations.

Please go ahead, sir.

Thank you, and good morning to all of you joining us by phone and online for St.

Mary Land & Exploration Company's first quarter 2008 earnings conference call.

Before we start, I would like to advise that you we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance.

These statements involve risks, which may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements.

For discussion of these risks, you should refer to the information about forward-looking statements in our press release from yesterday and in the risk factor section of our 2007 form 10-Ka.

We also will discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance.

Reconciliations of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our earnings press release from yesterday.

Additionally, we may use the terms probable, possible and 3Q reserves and estimated ultimate recovery or EUR in this call are more likely than not to be recoverable.

Probable reserves are unproved reserved which are more likely than not to be recovered.

Possible reserves are less likely to be recoverable that probably reserves.

Estimates of probable and possible reserves which may potentially be recoverable through additional drilling and recovery techniques are by their nature more uncertain than estimates of proven reserves, and accordingly, are subject to substantially greater risk of not actually being realized by the Company.

EUR means those quantities of petroleum which are estimated to be potentially recoverable from an accumulation plus those quantities produced therefrom.

The Company officials on call this morning are Tony Best, President and Chief Executive Officer, Jay Ottoson, Executive Vice President and Chief Operating Officer, Jerry Hertzler, Vice President of Business Development, Dennis Zubieta, Manager of Reservoir Engineering, Mark Solomon, Controller, Matthew Purchase, Budget and Planning Director, and Brent Collins, Director of Investor Relations.

That I will turn the call over to Tony.

Thank you, Brent.

Good morning and thank you for joining us for our first quarter earnings conference call.

St.

Mary's has had a very successful start to 2008.

Let me now review some of the quarterly highlights.

We had improved operational results in some of our key operated programs particularly the Woodford Shale.

The step change improvement in the Woodford has led us to increase our capital investment in that program this year.

In addition, we continue to add to our project inventory during the quarter.

We had a series of bolt-on acquisitions in East Texas that added to our inventory of Cotton Valley locations, which may also have potential in the Haynesville Shale.

Jay will discuss our Haynesville Shale exposure in his operational report in a few minutes.

We completed the divestiture of non-strategic properties in January for approximately $131 million.

This divestiture not only allowing us to focus our efforts and resources on higher growth projects, but it also helps improve our operating cost structure.

We are successfully executing our 2008 business plan, which will maximize the potential and value of our existing assets.

It will also add new inventory to fuel future growth and focus our efforts in achieving operational excellence.

Yesterday, we released our quarterly earnings press release and financial highlights.

I won't spend a lot of time this morning reviewing the comparative numbers, but instead I will focus on the financial highlights for the quarter.

Reported net income for Q1 was $96 million, which included a $56 million gain related to the divestiture of non-strategic properties that closed in January of this year.

Diluted earnings per share for the quarter was $1.50 per share.

Adjusted net income, which adjusts for nonrecurring and significant noncash items, was $73.6 million or $1.15 per share in the first quarter, which exceeded the mean first call estimate by 16%.

Discretionary cash flow for the quarter was $198 million or $3.09 per diluted share.

This also exceeded the mean first call estimate by 13%.

We also exceeded guided production, primarily driven by our programs in the ArkLaTex and the Permian regions.

Higher production and strong realized commodity prices, combined with lower than projected lease operating expense and G&A, allowed us to maximize revenue and cash flow for the quarter.

The positive performance in lease operating expense was due in large part to the divestiture of non-core assets in January of '08.

While these properties comprised a relatively small part of the reserve base, their cost structure was meaningfully higher for recurring and workover cost than the retained property base.

G&A was lower than anticipated as a result of lower stock compensation expense being recognized in the quarter.

DD&A was higher than we had budgeted.

Directionally, as higher F&D properties become a larger portion of our production base, DD&A will go up.

Specific to this quarter, we were impacted by higher DD&A wells in the Gulf Coast and the Permian regions.

In summary, we had a solid -- we had solid financial results for the quarter.

We can answer any specific questions you may have related to our financial results in the Q&A segment of the call or you can get with Brent off line afterward.

In all, it was a strong first quarter.

We are delivering on our 2008 business plan and objectives.

Before I turn the call over to Jay, I will give a quick update on our CFO search.

We have retained an executive recruiting firm and the search is well underway.

We are interviewing candidates now and hope to name our new CFO in the next several weeks.

With that, I will turn the call over to Jay.

Jay?

Thank you, Tony, and good morning, everyone.

I will now provide a brief overview of some of the significant operational activity occurring in the Company and make a few comments about our capital plans for the remainder of the year and our financial guidance.

In the Woodford Shale, we continue to see positive results in the play.

Our operational results are improving and we believe we are doing a better job on drilling these wells than a number of other operators.

The average EUR for the last ten wells for which we have meaningful data is between 2.7 and 3 BCFE.

And on the cost front we have drilled and completed our last three wells for between $4 million to $4.4 million per well.

These wells had long laterals and utilized the multi-stage fracture simulations that are common throughout the play.

We disclosed during the first quarter that we were increasing our capital investment in the Woodford Shale by $20 million for the year, which allows us to operate two rigs in the play for the rest remainder of the year and have a third rig in the play for parts of the year.

This was consistent with the plan we had laid out, in that we said we would accelerate activity based on success.

We will continue to look at our results and may accelerate further in the second half, if we can do so efficiently.

News out of ArkLaTex region gets more exciting all time, with announcements of new plays and good well results from a number of operators.

We are very happy about the results we are seeing on our own Cotton Valley program in the region.

Our first operated horizontal well, the Boise Southern 1H, averaged 4 million a day for the month of April with essentially no decline.

We are drilling a second horizontal well in the area that targets the Taylor Sand in the Cotton Valley and we will be completing that in the next couple of weeks.

These two wells were drilled on acreage that we already had in the Carthage area and we plan to drill our first well on the acreage acquired in the bolt-on acquisitions Tony mentioned earlier in the second quarter.

Elsewhere in the Cotton Valley program, our operating partners are very active and we are pleased with the results we are seeing.

In Elm Grove, we remain impressed with the performance of the [Kilin 133H] well that our operating partner has discussed publicly.

As they are the operator, we will let them discuss the specifics of the horizontal program in Elm Grove, but we are very encouraged by what we are seeing in the program.

In the James Lime, we have several wills drilled or completed at this time.

We continue to like the play and are working to grow our acreage position, particularly to fill in contiguous blocks so that we can get far enough ahead with our land work to increase the pace of our drilling program in several areas.

We wanted to provide a quick update on our exposure in the Haynesville Shale, which is the newest hot topic in the ArkLaTex with a frenzy of leasing going on.

Most of the discussion about the Haynesville has been about an area in northern Louisiana, centered around Caddo, DeSoto and Bossier parishes.

The 10,000 net acres in the play that we have disclosed previously is located in fields in this general area.

We've recently heard of leases being taken in that area for numbers approaching $7,000 an acre.

However, based on the geologic work so far, it appears to us that there is Haynesville potential in a much larger area than just these three parishes.

At this point, we believe we have roughly 50,000 net acres in the ArkLaTex with Haynesville Shale potential.

Obviously, it's very early days in the play and there's going to be a learning curve associated with making really successful wells in what is very different rock than in some other successful shale plates.

Right now, we are pursuing the very economic Cotton Valley horizontal program I talked about earlier and we're ramping up on our technical effort on the Haynesville.

Moving north, we thought for some time that although the North Dakota Bakken play clearly had some sweet spots, that it could be potentially be a larger resource play.

Our approach was to buy acreage in some areas that were initially less competitive to avoid the risks associated with the high cost of entry.

We currently have about 37,000 net acres secured and are still leasing.

Activity has been moving toward us.

And we have participated in several wells and learned from them.

We recently permitted 21 wells in our Powers Lake prospect area that straddles the county line between Mountrail and Burke counties in North Dakota.

We are reallocating capital within the region to drill two to three wells later this year and, assuming good results, we are well positioned with resources and permits in place to accelerate that program.

As many of you know, we have entered into an agreement with TXEO to participate in a program to test the Pearsall shale in the greater Maverick basin in South Texas.

We have a four-well commitment for 2008 and the first well is currently drilling.

If this program is successful, it exposes us to a large acreage position, potentially 75,000 net acres at a very low cost of entry.

Deals like this are consistent with our desire to enter leveraging plays earlier, something you should expect more of from St.

Mary in the future.

I should also note that this opportunity came us to as a direct result of a strategic decision we made last year to enter the Maverick basin through two almost play acquisitions.

My last operational comment will be that our folks are doing a good job on what they call our operations excellence effort here internally.

We have touched on that some in our comments on the Woodford.

Another example has been our Sweetie Peck asset in West Texas where we have lowered our drilling cost by 13% in 2008.

This is something that we are working very hard at across the Company and we are seeing positive results, some of which are already being reflected in the results we announced yesterday.

On the guidance front, we are increasing our production guidance to 108.5 to 112.5 BCFE for the year.

This is a result of additional capital investment in the Woodford, the impact of productions associated with our bolt-month acquisitions in the Carthage Field in East Texas and increased production from recently completed wells on our free land of South Louisiana and offshore Gulf Coast.

Offsetting these increases to the productions forecast, our reduction is totaling approximately 1 BCFE related to minor divestitures in the Rocky Mountain and Gulf Coast regions that will impact the remainder of 2008.

We have left LOE for MCFE guidance flat for year.

The improvement in our cost structure as a result of our divestitures should continue to benefit us throughout the year.

With that said, there is continuing upward pressure in operating cost resulting from strong commodity prices and high activity levels in the industry.

High commodity prices are also impacting our G&A.

Several components of our G&A are impacted directly by profitability, which is driven by a large extent by commodity price.

In addition, our cost for hiring and retaining technical and operational staff are increasing as prices stay high.

Given where the futures market are, we felt we needed to bump up G&A a little to reflect the current market, both for our products and for our people.

With that, I'll turn the call back over to Tony.

Thank you, Jay.

St.

Mary started out the year strong, and I am excited to see the growing success of many of our key plays.

In addition, we continue to identify and pursue new play opportunities, such as our operated horizontal Cotton Valley program, our new Pearsall shale JV in South Texas, the Haynesville Shale potential of 50,000 new acres and our new North Dakota Bakken position, which has now grown to 37,000 prospective acres.

These new opportunities just announced this quarter are perfect examples of how we expect to continue strengthening and growing our long-term drilling inventory.

I am very pleased with our year-to-date performance and our slate of projects going forward and I remain confident in the delivery of this year's business plan.

With that I now turn the call over for your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Larry Busnardo with Tristone Capital.

Good morning, Larry.

Hey, I guess first on the Bakken play, was all of that acreage acquired or did you have any of that previously?

Well, what we discussed today in the Mountrail/Burke County was acquired in just the last year.

We have additional acreage in the (inaudible) area in North Dakota.

We had some in the traditional Bakken trend, trending down from -- but this is new acreage that we acquired.

All of the 37,000 acres, correct?

Right.

How far away is the nearest production from where you are looking to drill?

It is coming right up in there.

There have been wells drilled recently right -- just a little bit southeast of us, so it is pretty close.

Okay.

And the plan is to drill a couple of wells later this year, see what the results you have, and at that time at that point, would you make a determination of how you would expand that program headed into next year?

Yes.

Larry I think it is also key to note that there are a number of wells being drilled all around our acreage position.

So it won't just be the results from our wells, but we will also be able to watch quite a bit of industry activity around us.

Right --

We have the capability of accelerating even in this calendar year if we need to even as we see it.

Okay.

How does that permitting process work.

If you have the 21, are there any stipulations related to those?

Or is it just once you have the permits, they are yours and they can be drilled at any time?

I am not aware of any stipulations that will prevent us from going out there.

We did permit a number them ahead of time in order to be able to do this acceleration if we see good results.

Okay.

Shifting over to -- to the Haynesville.

You mentioned the 10,000 acres in northern Louisiana.

Where are the additional 40,000 acres located?

Is it outside of there in other areas?

Yes.

I think we -- if you look at a lot of our James Lime acreage and our Cotton Valley acreage in Carthage.

We looked at all that acreage and there is quite a bit of Haynesville potential under a lot of that?

Larry, one of the maps we shared in a number our road shows shows the James Lime trend, which is about 75 miles long, extending from Northwest Louisiana into Texas.

That is basically the area that we provided additional focus and evaluation.

Okay.

Are you currently looking to expand that position?

I know you mentioned that prices are -- are increasing.

Isn't that competition a lot -- a lot harder there?

We are really -- we are still focused on extending our James Lime position, which again we think has additional Haynesville potential.

We are not actively participating the frenzy in Cado parish at this point.

Okay.

Can you give us just a sense of when you might be drilling some of these Haynesville wells?

Well, we talked a lot about that.

I think -- I mean, our objective is to get something drilled this year.

We are going to do our technical work.

There is a -- there is going to be a steep learning curve here.

We want to learn from other people.

I think our experience in the Woodford has taught us that we need to -- we need to learn a lot before we start spending money.

So we are definitely going to do our homework before we spread a well.

Great, thanks a lot.

Thanks, Larry

Your next question comes from the line of Scott Hanold from RBC Capital Markets.

Good morning.

Good morning.

In the Woodford, I guess, you indicated that you could accelerate here in the second half of '08.

Could you kind of give us a sense on, would that mean keeping a third rig for the back half of the year or could that go to the fourth rig?

I think we have the potential to go to four rigs.

What we want to do is make sure we can apply that capital efficiently.

There is a lot more to this than just drilling the wells.

You need your infrastructure in place, get your gas handled so there is a lot of project-related stuff to doing that.

But we can get to a four-rig program.

We are just going to see -- we are going to look and see how -- as we ramp up here, look how this goes.

Make sure we are actually delivering -- getting the gas out of there that we produce, and if we can continue to ramp, we will do that.

Okay.

You know -- a couple of quarters ago, I think Tony indicated that you are kind of moving forward to building inventory for the future and clearly, obviously, you are moving in that direction both organically and in part by adding some pieces to this story.

Obviously there's been some -- some competitors that have come out and indicated they are potentially going to sell their position in the Woodford.

Is that something you all would be interested in?

And what's your thought of making acquisitions across your positions?

We would certainly be interested in looking at additional opportunities.

We have heard the same things as far as some interest in laying off some acreage or position in the Woodford.

So we certainly would be interested in looking at that, but obviously it depends on exactly where it is located and how prospective we believe the acreage might be.

Okay, okay.

And in going to the Bakken play again, I guess you all indicated that you had some acreage on the Nessen that is not included in that 37,000 acres.

Is -- is -- what size is that position there and can you sort of talk about if there is any potential to actually drill in some of these Bakken wells out there as well?

We got about 12,000 acres net on the Nessen.

And that is included in the 37,000.

Okay -- all right, that is included in the 37.

All right, all right.

Got that.

And in the ArkLaTex, the James Lime, what is your sort of recent experience there been.

There has been some nice wells drilled by industry there.

We announced a well -- the mass well here almost about a month ago.

We quote ten-day sales rate.

I think the IP we quoted was around 6 million a day.

So we have had some very good results.

I think the -- the thing that is really -- people ask, how come you don't accelerate?

And I think I mentioned it in my comments, we don't -- we have been struggling to get together some really big contiguous blocks of acreage that would allow us to pick up a lot of rigs and just drill a bunch of wells.

Our acreage is kind of cut up, so we are trying to add this.

I think some of our competitors have been fortunate and skilled in putting together blocks that would allow them to permit a bunch of wells.

You are drilling these long lateral that would require you to get a whole bunch -- if you don't have a lot of acreage, a lot of land work to get that put together.

Our focus is really on getting these blocks cored up so we can get drilling locations out in front of a rig, so we can pick up more rigs and start working.

So do you have one rig working there right now, is that right?

Yes, we have one rig working in the James and one has moved over to the horizontal Cotton Valley.

Clearly we can do more.

And we just need to get our land work done and get ahead.

What is your position -- land position there right now?

Right now we have about 50,000 net acres in the James Lime across the trend.

So we have a good acreage position, but like Jay said, the land challenges are what we need to tackle to allow us to proceed at a faster pace there.

Okay.

We have got the guys forming it.

Thank you.

Thank you.

Your next question comes from the line of Joe Allman from JPMorgan.

Back to the Haynesville for a second.

Just to clarify.

Out of your 50,000 net acres, about how much of that is East Texas and how much of that is North Louisiana?

About 10,000 in North Louisiana, and about 40 in East Texas.

Got you.

And then when you look at the data you have, can you just talk about, like.

What specific data you are basing your prospectivity on and how many data points are you looking at?

I don't know how many data points but we pulled logs across that whole area.

If you look at the logs, this stuff looks pretty much the same across that whole big area there.

I think -- East Texas is a harder place to work for a lot of people because it is a lot of HVP.

The area that has gotten hot I think in Louisiana, there was leasehold available.

And my sense of that was people went where you could pick up leasehold fast first.

And at -- those of us who have HVP or leasehold positions in East Texas, we are just going to end up with sort of a legacy position here at obviously a very low cost.

Got you.

And in terms of -- there is some confusion -- they are confusing terms regarding the Haynesville and the shale.

When you move over into East Texas, in your view, what is the equivalent of the Haynesville Shale in Louisiana?

Is it -- is it combined both the upper Bossier shale and the lower Bossier shale with a line member in between?

Can you kind of clarify that?

I am not a geologist and I can probably get out of my depth here but the Haynesville is a portion of the lower Bossier section, sort of the lower Bossier section.

I understand there are different nomenclatures between East Texas and Louisiana.

But what my geologists say if you follow the wash that we have from Louisiana into Texas, that that section looks pretty much the same.

I Got you.

Okay.

And then -- I know your cost -- switching over to another topic.

Your costs in the Woodford are coming down and it appears that is mainly just improving efficiencies and, clarify that if you would, and Sweetie Peck, what are you seeing in terms of capital cost.

You talked about upward pressure and operating costs and G&A.

What are you seeing in terms of drilling and completion costs across your different regions?

Let me talk about the Woodford just a minute.

I am proud of what the guys have done.

We just TDed a well in the Woodford.

TDed, cemented liner, on bottom in 25 days.

Admittedly, it was almost a perfect well.

It is just a tremendous achievement.

We started these wells when -- we were drilling 40 day wells and TDing at 25.

That's a combination of bit selection and just really learning how to keep these wells straight and a whole bunch of things that have gone very, very well.

And there are some other people out there who are drilling good wells, but I can assure you, we participate in a number of columnar wells here and we are best in class, or at least close to best in class in drilling these wells.

So we -- we benefit on the drilling side from both day rate production and reduction in the number of days.

We have seen significant reductions in our pumping costs in the Woodford in the last year.

Part of that is new entry from other participants and part of that is just significant reductions that we have seen from our existing pumping suppliers.

Very positive.

Same thing on the Sweetie Peck area in West Texas, again, focused on upgrading our rig contractor and our rig fleet, faster drilling, lower pumping costs.

Offsetting that, I think as you look forward, steel prices are increasing rapidly and significantly.

If you look at the cost of a well, typically the day rate associated with the rig and the steel are almost exactly the same cost in one of these wells.

So about 20% of the cost of steel.

About 20% of the cost is your actual day rate.

And steel has come up dramatically, if you have been watching the steel markets in the last few months.

So our sense is that costs are going to be fairly flat from here to the end of the year.

We looked that the when we -- when we did our forecast.

A couple of other comments relative to the Woodford.

Not only are we seeing significant improvement in drilling costs, but our EURs have almost doubled there over the last several wells, so the combination of that certainly makes this much more economic project.

That's why we're pleased to be accelerating it.

And I would also note in the Permian, a year ago, we had a contract drilling support group, and we indicated that we were going to hire and development our own internal drilling group, and we have done that.

And we are seeing the benefits of that now through lower -- lower cost as well as higher efficiency in the program.

Got you.

And beside the steel cost, are you seeing the day rates level out here or even increase?

And what about fracture stimulation rates?

So far pump and services have been coming down.

I actually anticipate -- as prices stay where they are, you are seeing rig counts are up again.

I think you are going to see day rates sperming and coming back up a year or so.

Directionally, I think costs are on their way up.

Got you.

Again for the year we are thinking costs are going to be pretty much flat to where we budgeted.

Got you.

A quick follow-up.

In terms -- there are some Woodford packages out for sale.

I know Scott asked that question.

Would you guys be interested in moving up pretty sizable in terms of your acreage position there?

Sure.

I think we have front of ourselves we can drill these wells now.

The question is will it be coming at a price where we think we can make -- generate real economic value and that is the real question.

Got you.

Thanks for your time, guys.

Thank you.

Your next question comes from the line of Steven Beck with Jefferies & Company.

Good morning, Steven.

Staying with the Woodford.

On the last three wells that you drilled -- or the three wells that you drilled that had the $4 million to $4.4 million cost, can you tell us which wells those were?

I don't have the names right in front of me here.

Okay.

I was curious if -- are those with the longer laterals -- do you know if -- if they had the 3,600 foot or longer laterals?

The last ten wells we drilled averaged 3,600 feet.

Typically what -- we drill 4,000 feet wherever we can unless we are limited by leasehold issues.

Several of the last three wells that I mentioned were 4,000-foot laterals.

Okay.

-- and currently you still have about 40,000 acres in the Woodford?

Yes, that's right.

Someone just handed me the numbers here.

Actually the -- the IDA 612 was a 4,400-foot lateral.

And our well cost there -- it was $4.2 million.

So, that -- here we go, 4,400 feet for $4.2 million.

Okay.

A sense of the kind of numbers we are able to put up.

That is very helpful.

I appreciate that.

And I know that -- recently you talked about possibly divesting some non -- additional non-core assets, properties.

Any -- any update on that?

Well, we are going to sell a couple of small packages.

Albrecht has been marketing one for us in the Green River Basin in Wyoming and we should have bids back shortly on that.

And then we have a small package that we are selling in the Gulf Coast.

Again, about a BCF total production for the year.

Not a big impact.

Typically these assets have higher LOE -- higher operating costs, which is part of the reason we are able to keep our LOE guidance flat.

Okay.

Great.

So congratulations on the quarter and thank you very much.

Thanks a lot.

Your next question comes from the line of Philip Dodge with Stanford Group.

Good morning, Phil.

Good morning, everybody.

On the Powers Lake prospect.

I am interested in two things.

First, how much technical work you have to identify these 21 locations and also whether the Red River is also prospective?

We really don't have a Red River play in that area.

I don't want to get into too much detail here on what we are aiming for, but there's several different prospective intervals and we are doing quite a bit of technical work.

As we mentioned, we participated with other people.

MDU is drilling in the area and we're partners with them in a number of these wells.

Fidelity.

Yes, Fidelity is a branch of MDU.

And we have been doing quite a bit of technical work.

Frankly, we have been watching the play, kind of watching it come toward us, looking at the completions.

Our review of this was that we understand there are sweet spots and some of the -- I am sorry the -- the partial area clearly is a sweet spot in the play.

And -- but the real issue whether it is going to be regionally expansive or not and our sense of that was that this may be a technology play, in the sense that completions are going to open this up in a bigger way.

The issue is now going to be, okay, we are going to spend more money on completions.

Are the wells going to be good enough to pay for it and that is the question as you get bigger in the play, as the play spreads out.

Can we afford to spend the $4 million to $4.5 million that these wells are probably going to ultimately cost?

What kind of reserves are you going to be generating?

We are very optimistic.

What is your net interest in these 21 wells average?

I don't have that number, Phil.

It is very high.

A lot of it is 50 percent plus.

And then, like everybody, else moving to the Haynesville, I think I heard you say that the shale quality was considerably different than a lot of other shale areas.

Could you elaborate on that?

Yes, it has been described to me when you actually get a core of this stuff, that if you take it out in ambient conditions and squeeze it, it is almost like silly putty.

A little different material than the shales that we are fracking in the Woodford or in the Bakken.

What does that mean in terms of cost and recovery?

That is a good question.

I don't know the answer to that yet.

And until I know the answer of that, we probably won't explore the well.

But I think it is clearly a different rock and it is going to require different completion techniques and we are talking to a number of service companies about what they are recommending on these jobs and how this is going to play out, but it is definitely different than what you are typically seeing in other places.

So there is -- I think there is going to be a learning curve here.

There may be some very good wells at the end of that curve, but we don't want to waste a bunch of money on the low end of curve.

We want to get the curve fast.

So that is our objective.

Fair enough.

Finally, just a very mundane one, what the after-tax profit was on the sale of properties in the March quarter.

Well, I think the gain was $35 million after tax.

Okay.

I wanted to confirm that.

Thanks.

Phil, one other clarification on the Bakken.

In addition to the work that Jay mentioned, we also have a smaller interest in -- in several wells further South in the trend toward the partial field.

So we have also been able to acquire the well information from those wells as well.

And we are using that to -- to learn from.

All right.

Hope it goes well, thank you.

Thanks, Phil.

Your next question comes from the line of David Tameron with Wachovia.

Good morning, David.

Good morning, Tony.

I hate to ask the boring questions here, but can you talk a little bit about South Texas.

Just kind of what you are doing there and maybe a little bit on the Permian.

Sure.

We have two rigs running in South Texas, drilling up the almost stuff we acquired last year.

It is pretty much on pace.

Permian, we are drilling our -- drilling some 40s there looking at proving up our 40-acre locations.

We feel very optimistic about that and we are continuing to drill those up.

Bounce back to South Texas, I talked about the TXEO deal.

We are very impressed the technical work that they put into the Pearsall play.

We have -- those four wells we are committed to, there's two re-entries and two grass roots wells.

Right now, we're on one of the re-entries and already cut the window and we're in the horizontal section.

So we should have some results there pretty soon.

Four wells in a very large acreage position, we are probably -- probably going to end up committing to phase 2 next year in order to get enough wells in this thing to really understand it, but very optimistic again.

A lot of the wells -- the good thing by the Pearsall is there has actually been gas produced from the shale, as opposed to some of the shale plays you see where nobody has ever made any gas.

The Pearsall has made gas.

So we are optimistic about that.

Relating to almost -- everything is kind of tracking?

Yes, pretty much.

We have had some positives and negatives.

But I think in general things are coming out about how we expected.

What about -- you guys talked at one point with the [Wolf Berry], [Spray Berry] and some potential there, Sweetie Peck, can you just give us an update there -- maybe you discussed it and I missed it?

Again I said we are drilling 40s.

A four-rig program running at Sweeney Peck right now.

We'll probably be at five for some parts of the year.

We have picked up some additional acreage and are looking to drill that.

So we are basically right on plan with Sweetie Peck.

How many rigs do you have running out there, Jay.

Four right now.

David, one thing to keep an eye on will be the results from our 40-acre testing.

We are going to drill 43 wells at Sweetie Peck this year and 15 of those are 40-acre downspacing.

So we are anxious to see how those 40-acre tests about, but it is in three different areas of the field.

That will be a key element going forward for us.

Okay.

Then, Tony, one question for you.

Obviously you stepped in here a couple of years ago and done a lot from acquisition, kind of reorganizing, new portfolio.

Where do you feel you are at in the -- I don't want to call it a turnaround, because it wasn't a turnaround.

But where do you feel you are at in that process?

I think we are really clearly up on step.

I view these as kind of building blocks.

Looking forward, David, the things that we have really focused on, first of all, is building the leadership.

That is a key element.

Focusing on organizational optimization.

We have brought on incredibly talented technical and support staff over the last year or so.

We continue to expand the inventory and grow that.

And I am really pleased with where we are today and what we are seeing.

A lot of that you are hearing about are basically new plays for us in just the last quarter or two.

So that -- that inventory continues to grow.

The level of confidence in terms of delivery and execution of plan is an obvious focus for us.

We absolutely are focused on performance and executing our plan.

So I feel very good.

You look at those key building blocks and what we are doing now.

I think we are getting up on step.

And I am excited about where we are going.

Okay.

And -- I will have to remember that term organizational optimization.

Sounds better than re-org.

This as it relates to divestitures, acquisitions, more on the acquisition front going forward.

How -- what size of deal can you swallow today without having to go back to the capital markets?

Le with, I think right now we have got plenty of drive and we look at a variety of opportunities on the acquisition side, some that are quite large that are corporate deals.

Some others are down to what we have it typically done anywhere from $50 million on up.

As you know, we have had most of our success with negotiated deals of varying sizes, and we continue to look at a vast array of those.

I think a couple of things that we have mentioned, both in our release as well as our conversation today, is some things you can expect from St.

Mary going forward would include getting in earlier on some of these developing plays, finding ways to establish a position where you are not having to -- to pay significant cost per acreage.

So we are going to be focused a lot earlier in some of these plays.

We will be looking of expanding our footprint in each of our regions as well as Nationally.

We are also taking a look at not only asset acquisitions but also additional leasehold and resource play entries.

Okay.

Could you swallow a $300 million deal without -- just finance that via the balance sheet?

Yes, we have the capacity to do that.

Dave, let me run through this.

We have about a $1.4 billion borrowing base.

If you see -- if we can take $700 million of that.

Right now we have only $250 million borrowed against our revolver so we $450 million of capacity just in our revolver right now.

In addition to that, we don't have any plans to issue equity this year, but we can certainly do it if we had to for a very good deal.

So we -- we have a lot of capacity.

We have a very clean balance sheet and the capacity to do a significant deal if we need to do it.

With that said, we are only going to do deals that make sense to us and are accretive.

We're not -- our intent is never to dilute our shareholders so we will do accretive deals.

But I can tell you we will remain very active in terms of sourcing deals and looking at deals that come to us.

In the last couple of years we looked at, an average, over $4 billion per year worth of opportunities and we will continue to do that.

And we certainly need to do that if we are going to expand our footprint which is our intent.

All right, thanks.

All right.

Thank you.

Nice quarter.

Thank you.

(OPERATOR INSTRUCTION) Your next question comes from the line of Rehan Rashid from FBR Capital Markets.

Good morning.

On the Woodford really quickly, the well design and in terms of how much lateral length are you finding optimal and what kind of a fracks, are you doing 6, 7, 8, 9?

In general we are trying to do a 4,000-foot type lateral on all the wells.

We do that wherever we can, not limited by either faulting or leasehold issues.

Typically -- we are pumping the same fracks pretty much everybody else is doing these days, 4,000 feet, probably an "H" stage job.

Every 500 feet.

Pretty high volumes.

We're running 5.5 on bottom and pumping probably 110 barrels a minute.

So it's a pretty aggressive job.

In terms of your Spray Berry assets, are you -- (inaudible) came out a little while ago and talked about increasing recovery factors.

Where are new your thought process of where are the recovery factors in your current acreage and where do you think you can take it to.

Well, I think it is important to recognize that this isn't a Spray Berry play.

It is really a -- what we call a Wolf Berry.

A lot of production comes out of the Wolf Camp section.

Okay.

We want to make sure people don't compare this to the traditional Spray Berry assets.

If you look at the reserve recovery on one of these wells, it is probably 145,000 to 160,000 barrels and that's including gas and oil.

You get very low -- typically out of this kind of rock you get a fairly low percentage recoveries.

It is pretty tight rock.

Again we pump massive fracks, very economic, our finding costs here about $3.

I should make the point, at current oil prices, if you take a similar type curve for an oil property and gas property, you get similar economics for a $2 F&D on gas and $4 F&D on oil.

We are an oilier company than many.

And to some extent, our F & D will be a little higher because we are focused on a number of these oil properties.

But you have very similar economics in that $2 to $4 range.

All right, thanks.

Thank you.

Your next question comes from the line of Patrick Oey with FIG Partners.

Good morning, Patrick.

Hi, guys.

Going back to the Bakken.

You said you had -- as far as accelerating activity for the rest of the year, you said you were in pretty good service position.

Could you elaborate on that a little bit?

Well, we think we can get the rigs we need.

And we certainly have the people resources to accelerate.

We have the permits in place.

If we -- if we have success and we certainly hope -- we think we will as we go forward, and we have additional dry powder in terms of capital to be able accelerate as well, so with success we think we can certainly keep a rig running and accelerate and do more than we're saying at this point.

Do you have a rig there now or is one slated to be there later on this year?

It will be a little later this year.

Okay.

And just another -- another thought here.

Is it still too early to talk about additional leasehold adages up there or -- ?

You know, I tell you, it is getting very competitive.

And, again, we took the approach going into this, that we weren't going to go in and pay really high lease costs to get into this, because we weren't sure how big it was going to be.

We have been -- we have picked up a lot of this acreage for $50, $100 an acre.

And clearly we -- it helps our economics to be in that position but it is getting pretty competitive now.

I have seen some of the results just from the lease sales that occurred recently and some of these numbers are really high.

So -- we have other things to focus on as well and we are going to do what we think is economic.

Okay.

That is $50 to $100.

That what you were paying for --

The Powers Lake area up there.

Powers Lake.

When we started up there in there we were paying those kind of lease costs.

They are higher now, at the time we acquired a lot of the acreage, that is what we were paying.

Okay.

That's it for me.

Thanks.

At this time, there are no further questions.

All right.

Thank you very much.

We appreciate all of you tuning in this morning.

Again, we are excited about where we are today.

We have got a good solid quarter under our belt, and we are focused on delivering on our business plan for this year.

Thank you for your time this morning.

Thank you for joining the first quarter earnings call.

You may now disconnect.