W&T Offshore Inc (WTI) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen ,and welcome to the W&T offshore second quarter conference call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded on Wednesday, August 9, 2006. I would now like to turn the conference over to Miss Lisa Elliott with DRG&E. Please go ahead Ma'am.

Thank you operator and good morning everyone. We appreciate you joining us for W&T Offshore conference call to review the second quarter's results. And before I turn the call over to management I have a few to items go over.

If you'd like to be on the Company's email distribution list to receive future news releases or you experienced a technical problem this morning and didn't receive yours please call DRG&E's office and we will be glad to help you. That number is 713-529-6600. If you wish to listen to a replay of today's call that will be available in a few hours via webcast by going to the Investor Relations section of the Company's website at www.wtoffshore.com or via a recorded replay until August 16th, 2006.

To use the replay feature call 303-590-3000 and dial the pass code 1106-7661. Information reported on this call today speaks only as of today, August 9, 2006, and therefore time-sensitive information may no longer be accurate as of today's mini-replay.

Today management is going to discuss certain topics that contain forward-looking information which is based on management's belief as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production and expenses for the third quarter 2006 and full year 2006. Although management believes that the expectations reflected in such forward-looking statements are reasonable they can give no assurance that such expectations will prove to be correct. Such statements are subject a certain risks, uncertainties and assumptions including - among other things - market conditions, oil and gas price volatility, and certain certainties inherent in oil and gas production operations in estimating reserves, unexpected future capital expenditures, competition, the success of risk management activities, governmental regulations and other factors described in the Company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission.

Should one or more of these risks materialize, or should underlying assumptions prove incorrect actual results may vary materially from those expected. Please also note that this conference call contains references to non GAAP financial measures. You can find reconciliations of these non GAAP financial measures to GAAP financial measures in the form 8-K filed by the Company earlier today as well as in this morning's press release.

Now I would like to turn the call over to Mr. Tracy Krohn.

Thanks, Lisa, and good morning, everyone. I would like to thank you for joining us for our second quarter 2006 conference call. I'm Tracy Krohn. With me today are several senior management's W. T. Offshore team. This morning I'm going to discuss (indiscernible) that took place in the second quarter and update everyone on the K&G test (technical difficulty) anticipated in the near future.

(indiscernible) review our recent production build up and discuss our upcoming development projects. Steve Schreiber, our recently appointed Chief Operating Officer. Congratulations on that, Steve. Going to touch on the progress of the remaining 2006 major (indiscernible) and updates from the hurricane repairs (indiscernible).

I will then turn it over to Bill Talafuse, our (indiscernible) CFO, who will review financial results on our second quarter 2006.

Following the formal presentation, we are going to have a Q&A session. This morning, I'd like to begin by saying we had another successful quarter financially and (indiscernible) we were 100% successful, or [30 for 30] in development drilling on the conventional shelf in the second quarter. We drilled nine exploration wells in the second quarter, six on the shelf, two of the deep shelf, one in the [B corridor] and we are successful at four conventional shelf and two deep shelf wells.

At the end of the quarter, (indiscernible) June 30, we re-drilled 30 additional exploration wells. (indiscernible) including yesterday at [DG9 205 Steam 3 sidetrack] we are 15 to [18] on the exploration side and six for six on the development side. Keep in mind this does include that we are two for two with the current G exploration wells, both of which were in the deep shelf.

We have had excellent success with drill bit finding reserve (indiscernible) sheer number of successful exploration wells should provide some level of comfort about our ability to replace reserves for the year.

Most of you know I have always focused on cash flow. This quarter, we grew EBITDA [12]% over first quarter 2006 and 18% over second quarter of 2005. This is truly a hallmark of WTI's ability of what we do, our ability to increase cash continually as well as control cost. This is another quarter that the EBITDA margins [gained] 80% which is very much in line with the EBITDA margins we have achieved consistently for many years of between 77 and 82% through various pricing environments.

At the end of the quarter we continued our success by drilling three more successful exploration wells, including one in deep water, one conventional deep shelf development well and one deep shelf well. Our success rate is very encouraging for continued production growth and drill bit, potential reserve [adds] for the year. Both [former] productions with a current deep transaction was approximately 400 million cubic feet equipment per day.

Now I will turn it over to Jeff Durrant, our Senior VP of exploration, to review the second quarter 2006. Some of our recent drilling results in how the rest of the year is going to shape up. Jeff.

Thanks, Tracy, and good morning everyone. We had a very active and successful second quarter exploration and development drilling program. As Tracy just reviewed, during the second quarter, we were successfully completed six out of nine exploration wells and three out of three development wells.

Looking at the exploration program we were four out of six on the conventional shelf, two out of two on the deep shelf and we drilled a single non-commercial well in the big water. All three of our successful development wells were in the conventional shelf.

Following the close of the quarter, we continued to have success with our drilling program where we drilled discoveries in three out of three exploration wells, including one in the deep water and one in the deep shelf. Additionally we successfully completed a shelf development well so year-to-date we've successfully drilled 15 out of 18 exploration wells for a success rate of 83% and we have maintained a perfect development drilling record with six out of six.

Looking at the shelf the conventional wisdom has been that the shelf is dead. Our drilling program on the conventional shelf so far this year does not support that hypothesis. We continued to find good drilling opportunities in our [Hells By Production] or [HBP] mature fields. For example we successfully drilled two exploration wells - the D3 Sidetrack and the D6 Sidetrack and one development was the D2 Sidetrack and our 100% working interest was (indiscernible) which is one of the oldest fields in the Gulf.

Combined all three of these wells encountered a total of almost 200 feet of net oil in numerous stacked oil sands. The current combined rates for this program were about 1860 barrels of oil per day and 1.1 billion cubic feet of gas per day which are net to W&T's interest.

Another one of our mature HDP fields where we had drilling success is our 100% working interest Eugene 9 and 205 [Southstone] fields. In this case we looked in deeper in the section below 15,000 feet along the salt flats. In the second quarter, we successfully drilled two deep shelf wells below 16,500 - total vertical depth - and that will be the Seaport Sidetrack and C1 Sidetrack along with the conventional shelf success, the C2 Sidetrack.

Currently, the combined rate on this program is 17.2 million cubic feet of gas per day and 940 barrels of oil per day. And these are net to W&T. Our fourth exploration wells - the C3 Sidetrack, a deep shelf well, was just completed and will be a success counted in the third quarter.

Also on the shelf we successfully drilled a 100% working interest the BB-2 wells in the Mobile Bay area, where we found about 20 feet of gas in two upper Myocene [aged sands]. Following construction of a pipeline and the associated facilities, we expect to have this one online by the end of the year.

During the second quarter, we did have two non-commercial shelf wells - the D4 Sidetrack and Eugene Island 205 field with the cost of approximately $4.5 million and the BLD 1 well in Venice with a cost of about $7.4 million. And additionally W&T participated in a 33% working interest, non-commercial well in the deep water in Garden Banks 240 where our cost was about $6.3 million.

As I mentioned earlier, we have had three additional exploratory discoveries following the close of the second quarter including a 25% working interest well - the A 10 Sidetrack in South Timbalier 206. This well has been cased and is currently undergoing completion operations with first production expected in the next several weeks.

Of greater significance, though, is that we continue to successfully explore and delineate our 100% working interest deep water Healey Discovery in Green Canyon block 82. Following a shallow water flow problem just below the mud line on Healey No. 2 we elected to band on that well. We did move several hundred feet away and began drilling the Healey No. 3 which has been drilled to 11,484 feet. It has been cased and temporarily suspended.

Full wireline evaluation including formation samples indicated the presence of approximately 106 feet of high-quality oil and gas sand in four zones in the Prospect's upper objectives only. Additionally about 37 feet of conventional core was obtained in the wells' main oil objective.

We set casing through the zones with the intent of drilling the wells' lower objectives. Unfortunately [new currents] became too strong for our drill rig to remain on location and we elected to release the rig.

Our current plans are to reenter this well before the end of the year and finish drilling the lower portion of the prospect. Following test results from this and our prior drilling we will then formulate potential production plans.

Besides Healey we continued to (indiscernible) Florida shelf where we are currently drilling a well - a 25% working interest well - at High Island 24 L. No. 1 and, additionally, we are nearing our main objectives in 100% working interest deep shelf well we call the King Lake prospect, which is in Louisiana state waters. With these wells and up to three others, we anticipate drilling approximately 24 gross exploration and eight development wells by the year in. This is in line with the planned well count we set forth the beginning of the year which was 25 exploration wells and seven development wells.

With the Kerr McGee transaction the combined company will have additional 2006 exploration and development drilling successes. The 40% working interest South Timbalier 41 field produced two excellent deep shelf wells. One development well - the B-2 - is currently producing a net rate of about 24 million cubic feet equivalent per day and one exploration well the South Timbalier 41 No. 5 spanned over 100 the deep feet of oil sand.

Another 33% working interest development well in May passed 94 No. 5 was also highly successful and a fourth deep shelf exploration wells in the West Cameron area has just been completed and has encountered several high-quality [raw belt] and a raw belt gas sands. We expect this production to come online by the end of August.

With these drilling successes, our combined Company is currently 17 out of 20 for an 85% exploration success rate. And we continue to remain perfect development drill record with eight successes out of eight.

With that, I want to turn it back over to Tracy.

We are on track achieving above average drilling success again this year. As we mentioned before the [KMG] prospects are real and incremental. Our team is chomping at the bit literally to fully explore the potential of these prospects.

Those 90 plus prospects are only the beginning of the pipeline of prospects that we feel we will also get from this transaction. In prior presentations we've stated that we believe the [3P] reserves associated with the proved reserves (indiscernible) transaction is over one trillion cubic feet equivalent.

I think as we continue to drill up some of these prospects, we will begin to see this same type of success that we have seen in our other transactions.

Jeff and his team will continue to hydrate projects from his inventory into our confined (technical difficulties). As (indiscernible) we had a better than expected quarter in production. Our production recorded 1920 Bcf equivalent. Primary reason we exceeded our guidance was that production was better than expected and pipeline repair projects were deferred until the third quarter.

We are approaching 90% pre (indiscernible) rates. So with that I'm going to turn over to Cliff Williams, our VP of Reservoir Engineering, to discuss that second quarter production and to review some of the development projects for the second half of 2006.

Thanks, Tracy. We anticipate the midpoint that W&T Production guidance for the second half of 2006 to be approximately 30% higher than the first half of the year. Production buildup will come from several sources including W&T's successful redevelopment program at East Cameron 3021 field, the pipeline between (indiscernible) Mississippi Canyon 718, our (indiscernible) field. W&T's successful exploration drilling program to date and the reestablishment of production from other hurricane damaged fields.

As previously reported, at East Cameron 321, we are waiting on the Gas Sales Pipeline Company to repair the outgoing gas sales line in order to re-establish gas sales and increase oil sales. We anticipate the pipeline is prepared to be complete in September of this year. To date we have successfully completed four out of four Sidetracks and five out of six workovers and we are completing the final Sidetrack operation and have one more workover operation to complete the successful redevelopment program at this 100% W&T operated field.

After the gas sales line is operational, we anticipate a net volume increase of 600 barrels of oil per day and 20 million cubic feet of gas per day.

Another source of production buildup in the second half of 2006 is at Mississippi Canyon 718. Earlier this quarter we successfully played out the fuel line between the subsea well and the host (indiscernible). We anticipate production startup in September at an initial rate of approximately 23 million cubic feet equivalent per day.

During the third quarter, we will realize a full buildup from our successful exploration program. At Eugene Island 205 field, two wells are producing at combined net rates of 17.2 million cubic feet of gas per day and 940 barrels of oil per day and shortly we will put a reasonably successful C3 well on production.

At the West Delta block 29, three wells are producing a combined net rate of 1860 barrels of oil per day and 1.1 million cubic feet of gas per day.

Now updating you on our hurricane downtime we currently have a net rate of approximately 16 million cubic feet equivalent per day, shut in, resulting from the 2005 storm. Approximately 12 million cubic feet equivalent per day is directly related to the field and the structure in a field. The field infrastructure consists of a platform's flow and (indiscernible) process facility located within individual fields.

The Company anticipates over half of its shut-in volume to be onstream next month with the remainder expected to be online in first quarter 2007. The remaining four million cubic feet a public per day is related to the gas sales pipeline at East Cameron 321 field, which we anticipate will be flowing next month.

In our production guidance for the third quarter we expect to produce between 1.5 and 1.6 million barrels of oil, 11.9 and 12.2 [million] cubic feet of gas for a total of between 21.1 and 21.6 Bcfe. This production volume is up approximately 8% from the second quarter of 2006.

As Tracy mentioned earlier, we produced 19.8 Bcfe in the second quarter of 2006 which is approximately 2% above our revised guidance. The gas sales pipeline maintenance project mentioned our previous operations update was started in late July, causing W&T to shut in approximately 18 million cubic feet equivalent per day. The Company's currently producing at a net rate of 203 million cubic feet equivalent per day and we anticipate re-establishing production from the two field shut-in due to this maintenance project in less than one week.

Full year guidance remains unchanged to 83 to 87.7 Bcfe. I want to point out that these numbers are W&T stand-alone and do not include the impact of the pending Kerr McGee transaction. From reports provided by the operator for the Kerr McGee property, current production is approximately 186 million cubic feet equivalent per day. As a matter of fact Kerr McGee recently reported in their 10-Q that their Gulf of Mexico shelf production averaged 174 million cubic feet equivalent per day for the second quarter.

Back to you Tracy.

As mentioned before on these calls rig rates must inevitably begin to soften. In fact they have begun to soften. We believe rig rates have reached the top of the cycle and will either flatten or retreat slightly from here.

While we are still not happy with current rig rates being offered we're content that we are not locked into any long-term contracts. We continue to adjust to market conditions to maximize the only opportunities we keep a close eye on overall spending.

I will repeat this. Some from previous discussions. Being first at the back of the line is turning out to be the right call. Steve [Schreiber], who was recently promoted to BP of Production to our Chief Operating Officer, is going to update you on our current operations and our hurricane repairs and (indiscernible).

Thank you Tracy.

The second half of 2006 is filled with much anticipation as three of our major projects - South Timbalier 299, Queen of Hearts and Cypress - should be placed on production or nearly completed by the end of the year. Also as Cliff discussed earlier the two major fields still impacted by hurricane repairs - East Cameron 321 and Pluto - should have repairs completed by the end of the year. Excuse me -- end of the third quarter.

At South Timbalier 299, all wells had been completed and briefly tested. The facility on W&T operated South Timbalier 299A have been installed and the export pipelines had been laid. We are coordinating with the operator of the processing platform for the installation of W&T's processing equipment.

Two deepwater projects - Queen of Hearts and Cypress - are progressing on schedule. We have contracted rigs to complete the wells and have contracts to install both the pipeline and umbilicals for both subsea wells.

Queen of Hearts is projected to be online in December while first production through Cypress is expected in early January 2007. To update our drilling program we are operating three rigs at this time and have an interest in two rigs operated by third parties. The five rigs include a barge rig, a mat [canvelier] rig, a platform rig, a submersible and independent leg jack up.

As Jeff stated earlier we elected to release the rig, delineating the Healey Prospect before we reached total debt. The Luke current forecast projected currents higher in Healey locations than levels the rig could safely operate for an extended period. Space on the significant cost of the rig and uncertainty associated with the forecast we decided to eliminate the risk of spending the significant amounts of money and not obtaining the information we were seeking.

We have contracted to bring the rig back to Healey later this year and continue the delineation.

One additional benefit of releasing the rig is the riser will be modified before we mobilize the rig and will allow us to drill deeper for additional perspective reservoirs. We recently had a storm approach the Gulf of Mexico and shareholders are always concerned about these types of events so I'd like to take a brief moment to review W&T's hurricane preparedness plan with you.

W&T's hurricane preparation team takes every precaution necessary when a storm approaches and we are constantly finetuning our procedures. We began preparing for the hurricane season last year and actually began implementing our plan before June 1st, 2006 - the first day of hurricane season.

The industry along with the [mineral] management service has made some recommendations and changes as a result of last year's storms. Jackup rigs are required to have higher air gaps to prevent large waves from capsizing them. In certain circumstances floaters are required to have additional mooring to keep the rigs secured and not float away during the storm. These and other precautions are being taken to reduce future financial risks and costs associated with hurricanes.

In general, our employees have between ten and 40 years' experience each in offshore operations and we have seen numerous -- we have been in numerous hurricane seasons. We always prepare for the worst and hope for the best. Relative to damage from last year's hurricanes we continue our construction projects and they are progressing on schedule. We maintain multiple vessels and crews to complete the repair program.

Our estimate of repair cost associated with Hurricanes Katrina and Rita have increased to between 90 and 100 million. The increase from projected costs is a result of weather downtime, higher contractor costs and additional scope. For submittals of W&T's insurance claims totaling nearly $33 million have been conveyed to the adjusters. To date, we have been paid in full for our first claim and we expect all claims to be reimbursed by the insurance company.

Tracy, back to you.

Thanks, Steve.

One question that I keep getting asked is about our new insurance policy (indiscernible). I think I will be able to give you some more details at this point. Our new coverage will cost approximately $19 million annually this point for W&T. We will have a $10 million deductible and have 100 million worth of coverage. The incremental portion of that premium for second half of 2006 is about 7 million. Earnings was slightly less than we disclosed in July in the prospectus supplement.

We seriously considered self-insuring but knew we could put the 100 million (indiscernible) to better use than keeping it locked up the back. We have also negotiated a policy for KMG and we will release those details after we close the transaction.

Talk a little bit about CapEx. For the second quarter 2006, the capital expenditures were 151.5 million which includes 65.1 million for development activities, 80.4 million for exploration, 6 million for acquisitions and other capital items. The dollars we spent on exploration development, we spent 53.8 million in the deepwater, 21.6 million on the deep shelf and 70.1 million on the conventional shelf and other projects.

These expenses do not include 22.7 in hurricane -- or 22.7 million that is, in hurricane repair costs, which we believe our insurance will cover (indiscernible).

The other good news is that we have become a victim of our success. You have to be careful when you start poking holes in the Gulf of Mexico. You might screw up and find something. As a result of all our exploration success, our budget is expanding. Mostly changes in the completion of facilities and programs necessary to complete all of these new discoveries in the last 12 months.

When I first cut the new budget we expected to add an additional 150 million to the budget. This figure will include mostly completion and facility costs and additional (indiscernible) as a result of new locations drilled or to be drilled as an [option] of having had success already and drilling the next fall black over for instance (indiscernible) location.

Also the estimated K&G budget has been reduced to approximately 10 million from 50 million. The 40 million difference has already been spent by Kerr McGee and will be reflected in the purchase price adjustments. The 10 million is included in our revised budget.

The good thing is, we continue to grow production reserves. We've always said you have got to get return on our investment and then we just plow it back in the ground.

Now let me address the Kerr McGee transaction, another good investment.

Before (indiscernible) with the Kerr McGee subsidiary is expected soon. Our staff has worked closely with Kerr McGee through this entire process to ensure us a smooth transition and we are prepared to close now. I know Jeff has already begun to see the potential of this transaction when we close. I am sure you're going to see the potential as we do of these prospects.

Let me update you on the facts. Based on today's production the combined (indiscernible) approximately 400 million given the equivalent per day we combine proved reserves will exceed 800 Bcf equivalent. We will be the third-largest shelf acreage holder in the Gulf of Mexico with over two million acres. (indiscernible) reserves associated with the Kerr McGee transaction is viewed by management as approximately one Bcf equivalent. That's a [trillion] cubic feet equivalent.

The combined non risk net exploration potential looks to be six trillion cubic feet of equivalent.

Talk a little bit about the equity offering. Before Bill Talafuse talks about the second quarter of financials, I do want to mention a little bit about our offering.

On July 20th, we sold 8.5 million shares of our common stock at 32.5 per share with net proceeds (indiscernible) approximately 266 million. But using the proceeds from this offering I had the portion of the cash consideration acquired at the closing of the Kerr McGee transaction. Any net proceeds from this offering we don't use at the closing will be used for general corporate (indiscernible) which may include running CapEx capital expenditures related to our drilling activities.

Also as we just announced, the overall life (indiscernible) of 1.275 million shares was exercised and we will be receiving those additional proceeds of 40 million by the end of the week.

For those who did not see our recent equity offering presentation, let me just tell you that W&T is prepared to close the transaction - the Kerr McGee transaction now with our backs and the reason we did the equity offering was to reload for the next transaction. I am telling you, that Yeah, we are on the prowl again. We are ready to do something else.

Bottom line is, W&T is prepared to jump when the right deal comes along, the additional -- and the additional capital gives it that flexibility today. Now on with financials included in the second quarter.

W&T had to recognize a mark-to-market derivative lost in our financials. While we understand fiscal creates greater volatility in earnings it also (indiscernible) presented in a format investors and analysts are more comfortable seeing.

Now here's Bill Talafuse to discuss those financials further.

Thanks Tracy. Let me just touch on some items already discussed and refer you to this morning's press release for more details.

Net income for the second quarter decreased 16% to $0.58 per diluted share due to higher [TD&A] and general administrative expenses and a pre-tax derivative loss of $10.5 million. This derivative loss is net of a $2.2 million settled gain and a $12.7 million unrealized mark-to-market loss. Now if we make out a non GAAP calculation, net income for the second quarter adjusted for the effect of the unrealized portion of the derivative loss would have been 46.8 million or $0.71 per diluted share.

Year-to-date net income increased 11% to $1.43 per diluted share Q2 a higher oil and natural gas prices. But year-to-date derivatives loss of 5.3 million is also net of the two point to million dollar subtle gang and a $7.5 million unrealized mark-to-market loss. Net income for the 6 months adjusted for the effects of the unrealized portion of derivatives lost within $99.2 million or $1.50 per diluted share. Net cash provided by operating activities for the second quarter decreased 9% Q2 working capital needs. Second quarter EBITDA adjusted for the non-cash derivatives loss increased 12%. Our adjusted in about margin for the second quarter was 83%. Net cash provided by operating activities for the 6 months increased 15%. Year-to-date either the adjusted for the non-cash derivatives loss creased 18% and our 6 months adjusted EBITDA margin was 82%.

DD&A increased to $57.3 million or $3.40 per Mcfe. The second quarter Q2 significant increase in our capital expenditures, higher drilling and surface cost and higher estimated future development cost. Now we haven't updated our reserves at year-end so we have going on is our CapEx is going into our depletable full cost pool without any offsetting reserve additions.

For the six months DD&A was $116.4 million or $3.14 per Mcfe. For the current quarters our (indiscernible) day increased primarily due to an increase in the number of employees and anticipation of closing the (indiscernible) transaction. Incentive compensation cost of [$1.14] billion and higher legal and professional fees. Year-to-date G&A increased primarily due to increases in the number of personnel and approximately $4.9 million of incentive compensation cost.

Income tax expense of the second quarter and year-to-date represents an estimated effective effective tax rate of approximately 35%. We expect that our effected income tax rate will remain at 35% for the remainder of this year and also expect to defer approximately (indiscernible) of our booking income taxes.

Because the IRS postpones certain deadlines or taxpayers protected by Hurricane Katrina we have been able to defer payment of our estimated federal income taxes since the third quarter of 2005. On or before August the 28th we will be required debate approximately $43 million of estimated federal income taxes which covers payments originally to in September at December of 2005 and April and June of 2006.

This payment will ultimately cover a significant portion of our full year tax obligation and it is not indicative of the level of payment that we will be required to make during the remainder of this year. At the ended June we had $97 million in cash and equivalents total assets of one point to billion dollars. Shareholders equity of 635 million and no long-term debt. These amounts do not include the effect of our equity offering in July nor debate include the effects of the (indiscernible) transaction.

At June 30th we did have a working capital deficit of $1.2 million which is not unusual at the end of period and commonly relates to accounts payable associated with capital expenditures. Says the equity offering we have an excess of $300 million in cash and equivalents and as Tracy mention later this week will have an official $40 million from the underwriters exercise of the over allotment option. With that back to you Tracy.

Thanks build. I think that concludes our prepared remarks. Now wear and take questions. Operator if you would let's open the phone lines for questions and answers.

(OPERATOR INSTRUCTIONS). [Joe Molman], JPMorgan.

Could you run through for us again what's happened so far at [Healey]? I think you drilled two wells there, but it sounds like one of the wells was called the number three well. Can you just take us through, from the beginning, what's happened there again?

Sure. We drilled the discovery well, and then we were getting ready to drill the confirmation well. We had a little saltwater flow and we had to abandon that location, as the result of (indiscernible) currents, move the rig over a few hundred feet and drill the replacement well for the number two well, which is the Healey number three. We drilled it down to the first few objectives, and we had to abandon the location as a result of (indiscernible) which we had ongoing through the project, but we couldn't actively forecast -- the course of the forecast was changing almost daily. We just (indiscernible) the fact that we didn't really feel comfortable with what we thought the duration of those currents would be, so we [T&A'd] the well and pulled the rig off location. We will return in the latter part of the year.

Based what you've found so far -- and I heard what you said in terms of the feet of pay -- what would you estimate would be the approximate size of the discovery, and is it more oily or more gas, and what do you think you might be able to get booked at year end, and what would be the infrastructure plans there?

Those are all good questions, and I wish I could give you answers to that at this point, but we haven't finished our evaluation. We do expect we'll add some reserves before the end of the year.

David Adams, Jefferies & Co.

Hi, guys, great quarter. Real quick, touching back on Healey, if you decided to do a subsea tieback, is there enough infrastructure in the area that it's feasible?

The short answer is yes. We haven't made that decision at this point in time. That will be part of the decision process as we fully evaluate the well and figure out what all the (indiscernible) are.

Just back of the envelope, is there a size that would justify the construction of the standalone facility?

Well, I'm sure there is. However, I don't think I can do this back of the envelope. It's a pretty important decision for us, so I wouldn't even hazard to make that guess as a back of the envelope.

So no minimum threshold, I guess is what I was alluding to.

What I told you was that we are going to add reserves before the end of the year. So I'm confident that we have something going forward, but the way that we will ultimately produce it will be a function of (indiscernible).

Kerr McGee transactions are very compelling. Can you kind of qualify the nature of the reserves? Is it more [low-lift] drilling opportunities?

To give you a quick summation, in the five previous transactions that 343 Bcf equivalent, and we found an additional 292 Bcf. We generated about $680-something million worth of (indiscernible).

It's got a full spectrum, and plus, we don't feel like the fields have been worked in a while. So many of them are mature (indiscernible) so that's (technical difficulty).

[Neal Damon], [Pritchard Capital].

It looks like, Tracy, that - just kind of reviewing as far as CapEx versus cash flow, that you all spent a little bit more than historically. Was there something as far as opportunities you were seeing that pushed you in this direction this time? Or in going forward, is that something we'll see as far as looking at that free cash flow number?

The short answer to that is, I hope it's something we'll see going forward. We had very good success with the drill bit, and we found that we were having to do more completion and facilities work than we had originally anticipated. And the cost of (indiscernible) services did go up somewhat. We added some additional staff (indiscernible) to get ready for this merger transaction, as well.

And then, your hedges, going forward on the operating assets, Tracy, do you foresee adding any additional hedges, and are you concerned going into the brunt of the hurricane season, on possible effects around adding those?

No, I'm not. When you talk about hurricanes, I think the mindset is that gee, you know, we could have another Rita and Katrina situation - two category five storms, one right after the other. This was a real fluke type of occurrence, and it's never happened before. Hurricanes are a part of life in the Gulf of Mexico. It's one of the things that happens out there. We're prepared for it. As a function of how we need to treat our hedging budget - or excuse me, not budget, but our hedging philosophy -- we hedge when we have a financial reason to do so, and we use it as a tool. So if we've got another transaction to do that we need to hedge, we will do that. If we have a situation where we feel like we need to protect our budget, we will do that. We have never hedged to protect our budget and frankly don't see a reason to do so now.

If I can sneak in one other, regarding that first question on the CapEx. Do you foresee, Tracy, when you're diving into these Kerr McGee assets, even more - deciding about possibly spending more around those, or is that just time will tell?

I hope that's the case. That's a real (indiscernible) for us. It's one of the reasons why we took this company public, was because we felt like we were continuing to see more and more opportunity, and we wanted to structure our company such that we could approach different capital markets.

Ray Deacon, BMO Capital Markets.

It looks like your guidance is basically saying that by the end of the year, you'll be at sort of a 280, 290 million equivalent per day run rate. Then if I add in Kerr McGee volumes of 185 or so, and just assuming that you can kind of keep that flat for next year, you'd be producing in the high 400's. Is that - I know you haven't given any guidance for 2007, but does that sound in the ballpark to you? Or do you have higher goals than that?

I'm not sure. Right now, we are about 400 million cubic feet a day. We've given guidance for the remainder of the year. We haven't given out guidance for 2007 yet.

The stock's done fine this year. You've done better than most of your peers. It's come down recently. One of the concerns in the market, that I'm hearing anyway, is what have you done with your deepwater group? You've done a great job buying assets from some other large independents and finding a lot more reserves there. But as you move more and more into the deepwater with Kerr McGee, maybe if Jeff could just go into what he's been doing to build up that group and what percentage, say of your CapEx will go to the deepwater looking out into next year, maybe?

That's a good question. The deepwater of course is contingent on building a technology database. We continue to add high-quality seismic. That's what you have to have on a regional basis. I think we announced a large purchase last year. We continue to upgrade that to the (indiscernible) type stuff, which obviously means we're looking not just at [amplitudes] above salt, but we're looking at prospects now on our properties that are subsalt as well, which is where the big discoveries are being made. So we're looking at the entire Gulf, and in fact, we still have an additional well to drill later on this year. We call it [Dumont]. That's out in Green Canyon 732. We're still negotiating on a potential second well by the end of this year as well, so we're not done drilling the deepwater this year. I anticipate that we'll have additional wells, perhaps (indiscernible) what we did this year. We haven't finalized that, of course, but [that's how it looks for now].

You haven't broken out any sort of deepwater capital spend versus reserves found kind of track record, have you? Do you have any numbers like that?

The short answer to that question is no.

All right, [I can get back into it].

Clarification on Ray's question on the 475 million. In thinking about it, I guess I didn't answer your question. You asked me if I'm uncomfortable with it or comfortable with it. I'm reasonably comfortable with that kind of a back-of-the-envelope type of calculation, the 475 million cubic feet a day.

(OPERATOR INSTRUCTIONS). Joe Molman.

In terms of the increase in the CapEx budget of 150 million, I think, Jeff, I think you said you were drilling the same number of wells that you expected at the beginning of the year. I'm just trying to reconcile that increase in CapEx.

Sure. A lot of it is as a result of doing the completions and putting in the (indiscernible). We had some unplanned over expenditures on the drilling side of it. We had a little bit in acquisitions. We didn't risk-weight the success of the drilling program. I think we risked it at around 50%. The success rate is like 80%, so that accounts for the changes in that.

That's helpful. Is there any part of the increase, just service cost inflation, above and beyond what you expected?

Well, I think that's a portion of it as well.

Joe Molman That's helpful. In terms of the -- separate topic -- the two remaining deepwater wells this year - could you give us those two? I think is one of those Green Canyon 732?

Yes, we call that [Dumont]. That's scheduled for [drilling]. That's in the fourth quarter. That's in about 240 feet of water. We're currently negotiating a potential second well right now. We can't delve too much into those details at this point, but that would likely be towards the very end of this year and early next year, as well.

What are you calling that one again? Green Canyon 732?

That's called Dumont.

The discoveries you've had in the conventional shelf, I think you announced five since the first quarter. What would be the average size of those discoveries?

The same answer as before. We're not going to go into reserve sizes at this point.

When the Kerr McGee transaction -- when that closes, what would you expect you actual cash cost of that transaction to be?

We don't have a number on that exactly, at this point in time. It's not something that I want to disclose at this point in time. It's in line with what we think it should be.

Ray Deacon, BMO Capital Management.

Tracy, one more question on the debt. It looks like, based on my numbers here, your debt's going to be less than one year's cash flow on next year's numbers. (indiscernible) dollars per Mcf. What's the primary driver for how much you'll get levered up, I guess? What do you look at most closely?

You mean in preparation for the next deal?

Yes, exactly. I mean, do you focus on debt to cap, or debt per Mcfe, or debt to cash flow, or what's most important to you guys?

It's a little bit of a nebulous question. If you're talking about a transaction, an acquisition type transaction, we look at all of the different things. It's got to be a function of how much cash flow is and what the additional reserve potential could be. (indiscernible) go by. It's very similar and very much in line with what we had done in the past on several other larger transactions. So as a go-by model, we can't (indiscernible) go by. But as giving you an exact model, it's pretty nebulous. I can tell you it's been as much as 500 to 1000% over-leveraged in the past, as a function of what our capital has been. We're scheduled to pay the Term A off in 15 months, and we looked at - and (indiscernible) debt to capital. We would certainly expect to be in line with our peers and what the market [would expect].

So more from an NAV accretion standpoint is how you look at it (indiscernible).

One last thing. I've seen these deep offshore rig stocks have come off pretty significantly, and I guess kind of coincides with what you're saying about rig rates plateauing. But I guess with the overall market, you've got rigs continuing to leave the Gulf. Why are you so convinced that rig rates are going to plateau here?

Well, because they have. That's what we're seeing on our (indiscernible) stuff. It's not something we have to guess about. We know it's (indiscernible). Rigs are leaving the Gulf, but rigs are also being built. This is a substantial market for jackup rigs and (indiscernible) well and people's schedules change. And one of the things that's happened with the rig rates, it takes about three to six months for the rig market to catch up with commodities. As commodity prices rise, the rig rates take about three to six months to [fully escalate], the reason being that most people will rent or will enter into a contract for one or two wells with an option contract. And so as commodity prices rise and stabilize, then those rig prices rise and stabilize and actually they tend to go up pretty quick and then they bounce off the ceiling and fall back a bit. And then as commodity prices lower, and three to six months later, the rig rates will follow that as well, and I think that's what you've seen. You've seen a reduction in the price of gas this year. And now you're to that point in time when you should start seeing relaxation in those rig rates.

Operator. Thank you. Mr. Krohn, at this time, there are no further questions. Please continue with any further remarks that you would like to make.

Thank you, operator. In closing, we appreciate your interest and participation this morning. I think if you look at W&T, we are very well-situated to continue doing what it is that we do, and that is explore and acquire and produce properties in the Gulf of Mexico. We like where we are right now. We have sold equity to put the Company in a position of being [reloaded] and looking for the next one.

So hopefully, that is the message [you'll carry off] with you today.

Ladies and gentleman, this concludes the W&T Offshore second-quarter conference call. If you would like to listen to a replay of this conference, please dial 303-590-3000 and use the access code of 11067661. You may now disconnect. Thank you for using AT&T Teleconferencing.