W&T Offshore Inc (WTI) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the W&T Offshore first quarter earnings conference call. During today's presentations, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, May 8, 2007. I would now like to turn the conference over to Manny Mondragon, Vice President of Finance. Please ho ahead, Sir.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for W&T Offshore's conference call to review the first quarter 2007 results. Before I turn the call over I have a few items to go over. If you would like to be on the company's e-mail distribution list to receive future news releases, or you experience a technical problem and did not receive yours, please call DRG&E's office at 713-529-6600 and someone will be glad to help you. If you wish to listen to the replay of today's call, it will be available in a few hours via web cast by going to the Investor Relations section of the Company's website at www.WToffshore.com or via recorded replay until May 15, 2007. To use the replay feature, call 303-590-3000 and dial the pass code 11089320.

Information recorded on this call speaks only as of today, May 8, 2007, and therefore time sensitive information may no longer be accurate at the date of any replay. Today management is going to discuss certain topics that contain forward-looking information which is based on management's beliefs as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production expenses for 2007. Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurances that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties, and assumptions including, among other things, market conditions, oil and gas price volatility, uncertainties inherent in oil and gas production operations and estimating reserves, unexpected future capital expenditures, competition, and 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 reconciliation 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, Manny, and good morning, everyone. I'd like to thank you for joining us for our first quarter 2007 conference call. Again, I am Tracy Krohn and this morning I will discuss certain events that took place in the first quarter of 2007. With me is part of our team. Danny Gibbons, our CFO, who will review financial results for the first quarter 2007, and Steve Schroeder, our COO, who will discuss 2007 drilling projects, operations, review production, and also give second quarter and revised full year 2007 production guidance. And then he'll turn it over to Jeff Durrant, our SVP of Exploration and Geoscience, who is going to discuss our first quarter drilling success and review the near term drilling prospects in our 2007 program. Following our formal presentation, we will also have a Q&A session.

Okay, to start off this morning, I'd like to point out that we did have another very successful quarter where the drill bits were 100% successful in exploration and development drilling in the first quarter. We drilled two exploration wells and both of them fairly deep wells, and one conventional development well, all on the shelf. We're really excited about the success and we expect that these wells will both be pretty good wells.

High Island 24L is one of these success stories and it's a well that has exceeded our drilling expectations. We'll discuss High Island 24L more in a bit. As you saw in this morning's press release, our earnings per share was $0.17 versus the consensus of $0.44. However, our adjusted earnings per share is $0.29 per share after taking into account the unrealized commodity derivative losses of $13.9 million which had a large impact this quarter.

EPS was also lower due to a 15% increase in the number of shares outstanding. This is the result of an equity offering we did in July of 2006 in connection with funding the Kerr-McGee transaction. This operating expense was higher than anticipated due to a much higher workover and major maintenance expense that caused us to exceed the high end of the range. Danny Gibbons and Steve Schroeder will discuss these issues in further detail. Now here's Danny Gibbons to expand on our financial results.

Thank you, Tracy. Net income for the first quarter of 2007 was $13 million or $0.17 per diluted share on revenue of $246.5 million. This compares to net income of $55.8 million or $0.85 per share on revenues of $156.9 million for the first quarter of 2006. You can see that the $90 million increase in revenues was outpaced by a rapid rise in expenses. Also please note that included in first quarter 2007 results, is an unrealized commodity derivative loss of $13.9 million. This compares to an unrealized commodity derivative gain of $5.3 million in the first quarter of 2006.

Net income was affected in the first quarter of 2007 due to higher, overall higher LOE including hurricane repairs and insurance premiums, increased charges for DD&A, more service costs associated with a greater number of wells, and increased interest expense. Earnings per share was also lower due to a 15% increase in the number of shares outstanding.

I'm going to switch and talk about LOE specifically. LOE for the first quarter of 2007 was $61 million compared to $15.8 million in the first quarter of 2006. The increase of $45.9 million is attributable to increases in operating costs of $20.3 million, workover expenditures of $7.5 million, major maintenance expenses of $11.1 million, and $7 million of higher insurance premiums resulting from the hurricanes in 2005. Approximately $17 million of the increase in lease operating costs and the increase in amounts spent for workovers is primarily associated with the former Kerr-McGee properties.

The increase in major maintenance expenses is somewhat due to $7.1 million of hurricane remediation expenses that were not covered by insurance. All amounts spent in 2006 related to hurricane remediation efforts were covered by insurance and therefore were not included in lease operating expenses. Despite higher total sales volumes in the 2007 period, lease operating expenses on a per Mcfe basis increased to $1.92 per Mcfe from $0.91 per Mcfe for the reasons just discussed. Steve Schroeder will discuss changes in our lease operating expense guidance and the reasons behind it.

Now moving to DD&A. Depreciation, depletion, amortization, and accretion collectively referred to as DD&A was $124.2 million or $3.87 per Mcfe in the first quarter of 2007. That's an increase of $75.1 million over the comparable period in 2006. The increase can be broken down as follows. $42 million of the increase is due to higher production volumes and $33 million is due to higher depletable costs. Next [move] I'll talk about cash flow. Net cash provided by operating activities was $146.7 for the first quarter of 2007, up 29% from the prior years' first quarter. First quarter adjusted EBITDA was $168.7 million, which is up 32% over the comparable period.

Cash provided by operating activities was higher in the first quarter of 2007 than the first quarter of 2006. Despite the decrease in net income which was negatively affected by the increase in DD&A and a change in unrealized commodity derivative results because of increased production partially offset by higher operating expenses. From a pricing standpoint, for the first quarter of 2007 our natural gas price averaged $7.20 per Mcf and crude oil and condensate averaged $51.00 per barrel. This combined for an average of realized price of $7.67 per Mcfe. This compares to an average realized price of $9.06 per Mcfe in the first quarter of 2006

Moving on to G&A, for the first quarter of 2007, G&A expenses increased to $13.9 million from $11.7 million for the first quarter of 2006 primarily due to increases in employee compensation and benefits and legal and professional fees in 2007. But on a per Mcf basis, G&A decreased from $0.67 per Mcfe to $0.43 per Mcfe primarily the result of higher production volumes.

Talking about interest expense, for the first quarter of 2007 interest expense $17.8 million. Capitalized interest was 6.8 and for a net interest expense of $11 million versus $300,000 last year. The increase is primarily due to the increase in debt incurred to finance the Kerr-McGee transaction. This compares to $300,000 of interest expense and $1.6 million of interest income in the first quarter of 2006. There was no capitalized interest in the first quarter of 2006.

Income tax expense was $7 million in the first quarter of 2007. Our effective tax rate was approximately 35%, and we expect that to remain the same for the remainder of 2007. The decrease in tax expense is the result of lower taxable income. Income tax expense for the first quarter of 2006 was $29.8 million.

Now moving onto CapEx, for the quarter ended March 31, 2007, capital expenditures were $134.8 million which included $81.3 million for development activities, $41.6 million for exploration, $11.4 million for seismic acquisition and other leasehold costs, and $500,000 for other capital items. During the first quarter of 2007, development and exploration capital expenditures consisted of $64 million, that was in the deepwater. $41.4 million was on the deep shelf, and $37 million on the conventional shelf and on other projects. Steve will discuss the CapEx budget later in the call.

Moving onto the balance sheet, at March 31 we had $4.3 million in cash and cash equivalents, $643 million in debt. Total assets were approximately $2.5 billion compared to $2.6 billion in the comparable 2006 period. Shareholders equity increased to $1.056 billion at March 31. Our debt to cap stood at 38% and our last 12 months adjusted EBITDA to interest coverage was over 14 times interest expense. And with that I'll turn the call over to Steve Schroeder to discuss operations. Steve?.

Thanks, Danny. Spring is a site for sore eyes. This past winter was a particularly difficult one in the offshore operations. Because of storms and rough seas, the startup date of a number of our projects has slipped. I believe the worst is behind us, but as projects have been deferred, so has production. I'll discuss the impacts on production in just a minute.

To update you on our drilling program, we are operating three rigs at this time, one mat cantilever rig at West Cameron 181, a 225 foot class mat slot jackup for Phase I of our multi well recomplete program, and a recently contracted additional 200 foot mat cantilever rig for Phase II of the recomplete program. In addition to our operated rigs, we have an independent leg jackup at one of our non operating platforms sidetracking an existing well.

During the previous conference call, I discussed the completion of a well at Highland 22, our first well drilled at a former Kerr-McGee property as well as the drilling of our second well at West Cameron 181. The High Island 22 B3 Sidetrack well is on line, producing at a rate of 6.3 million cubic feet equivalent per day net and we are completing the West Cameron 181 C2 Sidetrack. In addition to these two wells, we recently brought our Cypress project online. Currently the well is producing 1,600 barrels of oil per day and 1.5 million cubic feet per day net.

The offset to last year's High Island 24L discovery reached total debt in March of this year. Jeff will discuss the geologic aspects of the well later, but the well tested at a rate of 53 million cubic feet equivalent per day gross or 11 million cubic feet equivalent per day net to W&T's interest. With the original well testing at 50 million cubic feet equivalent per day gross, project scope relative to the infrastructure is being reviewed by the working interest owners to ascertain optimal size for the development. W&T has a 25% working interest in High Island 24L field.

Earlier I mentioned a multi-well recomplete program We have successfully completed our first well in the program in the South Marsh Island area. The well is currently producing 3 million cubic feet equivalent per day net. The rig has been mobilized to the Ship Shoal area for the second well on this rig program. We also picked up a second rig for a two well program in another Ship Shoal field. We anticipate all three of these recompletes to be finished by the end of the second quarter.

Last conference call we gave high end guidance per base LOE of $47.6 million and high end guidance for hurricane repairs of $7 million for a combined high end LOE guidance of $54.6 million. The actual LOE was $61.7 million or $54.6 million for LOE and $7.1 million for hurricane repairs. The majority of the $7 million difference in LOE versus LOE actual, excuse me, LOE guidance versus LOE actual, was workovers and facility repairs. About $1 million were associated with transportation costs. Relative to workovers, about 80% of the costs were associated with 5 wells. The issues included remediation of sand production, alleviation of chasing pressure, and in one case, the election to change the tubing which was restricting the production rate of the well. All combined, these wells are producing 12 million cubic feet equivalent per day net to W&T's interest.

First quarter spending on major facility repairs was higher than projected during the typically slower beginning of the year. Nearly $1 million has been associated with cleaning and unplugging of the pipeline at the former Kerr-McGee field South 10 316. We mentioned this field in the last call. The field was shut in due to a paraffin plug in the departing oil sales pipeline We replaced a section of the riser and cleaned the pipeline tie in assembly and are currently cleaning out the pipeline with coil tubing. The additional future costs and shut in production are incorporated into our revised guidance.

The increase in the amount spent for workovers and major facility expenses are primarily associated with the former Kerr-McGee properties. For the first quarter of 2007, 83% of the amount spend on workovers was in fields acquired in the Kerr-McGee transaction. We believe that incurring such costs following the -- excuse me -- after a large acquisition of properties like Kerr-McGee is not unusual.

Similarly, the magnitude and timing of additional expenditures on these properties for such expenditures as workovers and facility expenses, has not been fully determined, but is in part our basis for adjusting full year guidance today. Accordingly, based on the experience we have to date, it is prudent to adjust LOE higher to reflect the most recent LOE increases and the budget for possible unforeseen workover and facility expenses.

Before I review our revised guidance, I want to discuss our forecasting method. A conservative approach to projecting our LOE, we modeled second quarter 2007 and the remainder of the year based on first quarter run rates for base and insurance premium expenses. We believe that workovers and facility expense have the most variability in our guidance because of the unpredictability of well failures and unidentified facility problems.

Facility expenses are seasonal with more expenses in the summer months as the weather is better and the days are longer. So we expect expenses to taper off toward the end of the year. With that, the mid point of our LOE guidance increased $25 million from $183 million to $208 million.

Onto production and our production guidance revision. Net production for the first quarter was at the low end of guidance at 32.1 Bcfe and was 14.6 Bcfe or 86% higher than first quarter 2006. The Company anticipates second quarter production will increase 4.5% over first quarter at the mid point of our guidance. For the second quarter, we expect to produce between 2.1 and 2.2 million barrels of oil and between 20 and 21 billion cubic feet of gas for a total between 32.7 and 34.4 Bcfe.

Sources of this anticipated buildup include a full period of production from East Cameron 321 field which was back on line following repairs to the third party gas sales pipeline, tie ins completed for Grand Isle 3 #1 and subsea completions at Queen of Hearts and Cypress, and recent production from the High Island 22 B3 Sidetrack. We are also anticipating production buildup in the second quarter from recent drilling at West Cameron 181, tie ins completed for earlier discoveries at Mobile Bay 867 and Galveston 303, and the pipeline clean out at South 10 316.

For full year 2007, the Company now expects to produce between 8.1 and 8.5 million barrels of oil and between 84.1 and 88.7 billion cubic feet of gas for a total between 132.7 and 140 Bcfe. The midpoint of the revised guidance is approximately 9% below the low end of that range. This reduction is the result of project start up delays at Bay Junop, High Island 24L and a modest degree of buildup in 2007 from our 2007 exploration program. Here are several specific items that impacted our production guidance. First, Bay Junop, the initial production has been deferred from the second quarter to the third quarter which will shift 2.5 Bcfe out of 2007 sales. The two wells at High Island 24L were initially in the beginning of third quarter and moved to the end of third quarter, shifting approximately 1.5 Bcfe. The remaining shift of 7.6 Bcf out of 2007 is for various smaller projects which have been deferred from the previously mentioned storms, giving a total sum of 11.6 Bcf shifted out of 2007 into 2008.

Let me give you an update on the capital budget. As Danny mentioned earlier, we spent $123 million of exploration drilling, of exploration, drilling, and development projects and a total of $135 million for all capital expenditures. 2007's capital budget is front end loaded and was impacted by significant projects, especially deepwater projects at Queen of Hearts and Cypress. One final note, during the first quarter, W&T Offshore was selected as a finalist among 3 companies for the Minerals Management Services Safety Award for Excellence in the high activity category The Safe Award in the high activity category recognizes exemplary performance by outer continental shelf oil and gas operators producing more than 10 million barrels equivalent per year and operating a minimum of 1,000 safety components

Given this category's criteria, W&T was selected among the industry's majors and large independent companies. Even though the award was presented to another operator, I'm very proud of the offshore staff and even more of our offshore personnel. The nomination for the award recognizes their dedication and hard work and highlights to the public that we can conduct oil and gas activities safely and in a pollution free manner even those these activities are highly complex. Now I turn the call over to Jeff Durrant to discuss our first quarter drilling efforts and preview the second quarter.

Thank you, Steve, and good morning to everyone. So far in 2007, our exploration and development drilling program is off to a good start. In fact, we are batting 1,000 with two successful exploration wells and one development well in the first quarter. All three of these wells are on the conventional shelf. And on top of that, we successfully deepened a 2006 exploration discovery well in our Healy Deepwater program. The results of these successful wells generally exceeded our going in reserve expectations. We are certainly pleased with these results. Additional, we have 3 upcoming exploration wells, a South Timbalier 41 B3, a High Island Area well, and a Healy #4 are key to this year's drilling success and to our ability to replace our production through the drill bit. On a non risk basis, these 3 wells have a net unrisk exploration potential of about 264 Bcfe.

Now turning to the specifics of the quarter, as we have previously discussed in the first quarter, we successfully drilled the High Island 22 B3 Sidetrack. This is 100% W&T working interest well and was on a former Kerr-McGee property. This well is now producing from its first completion zone out of five and is flowing at a gross rate of about 7.5 million cubic feet of gas per day. A few blocks to the west in the same geologic trend, we continue to have success in the conventional shelf with an offset to our 2006 discovery in High Island 24L. This well, the 25% working interest state lease 107044 #1, was drilled to 14,146 feet and encountered a high quality 470 foot gross gas productive interval with over 142 feet of net productive gas sand full to base.

These results were at the high end of our going-in expectations. We completed drilling this well at the end of March and have since run casing and tested the well at a gross rate of 50.5 million cubic feet of gas per day along with 384 barrels of condensate per day. We anticipate that this well, along with a previous discovery in the field, should be on line by September of this year. Previously we had thought the well would be on line in July, but is now estimated to be September. As a reminder, the first discovery well was tested at a gross rate of 47.7 million cubic feet of gas per day and 312 barrels of condensate per day. Clearly, there are still good exploration opportunities remaining out in the Gulf of Mexico shelf.

Looking at the development side, we successfully drilled the 100% W&T working interest C2 Sidetrack 3 in West Cameron 181, a former Kerr-McGee property. This well also exceeded our going-in expectations encountering 84 feet of gas condensate to sand and 3 productive intervals. This well is currently being completed. Additionally, following the close of the first quarter in April, we just successfully completed the drilling of another conventional shelf development well. The 12.5% working interest A25 Sidetrack in Vermilion 331 field and approximately 82 net feet of gas sand in 3 intervals. Production casing has been set across the pay zones to total depth. Current plans call for the well to be completed following the drilling of a second well.

Looking at the first quarter development activity, we successfully deepened the Healey #3 and found about 45 feet of high quality gas sand. We ran casing across the zone in anticipation of a future completion. The current plans are to offset this well during the second quarter in an offline position at the Healy #4 well. This proposed directional well will test the down dip limits of the field's main oil reservoir along with penetrating 3 additional previously undrilled exploration objectives.

For the second quarter on the Gulf of Mexico shelf, we currently plan to begin drilling a conventional shelf well in the High Island area along with two deep shelf wells on former Kerr-McGee properties. One of the two deep shelf wells is a 16,600 foot measured depth W&T operated well in Ship Shoal 256. The second, a non operated well, the B3, is planned for South Timbalier 41 to a measured depth of 18,500 feet or about 17,000 feet of true vertical depth.

With that update, I'll turn it back over to Tracy.

Thanks, Jeff. As you can see we had a good quarter with the drill bit and we expect to see continued good results for the bit in the balance of the year As we gain further control of LOE in the coming quarters, we should also gain better visibility of our future cash generation and operating results. We still believe KMG will be another stellar transaction and it's beginning to turn the corner. You'll recall in our last 5 significant transactions taken as an aggregate, we have managed to more than double those proven reserves. In other words, those reserves that were booked at acquisition. I believe we'll see the same kind of performance from this transaction as good or better in the aggregate of those previous transactions.

We've had a tremendous amount of -- we have a tremendous amount of un risk, undrilled opportunities with these packages and I expect we will have our fair share of success with the drill bit. I've been very pleased with what we've done so far. We're still getting our hands around the KMG properties and the bottom line is, we're going to stay the course and keep digging it out. That concludes my prepared remarks and we're ready to take your questions. Operator, if you would, please open the phone lines for Q&A.

(Operator Instructions) Our first question comes from the line of Scott Hanold. Please state your company followed by your question. Please go ahead.

Yeah, it's RBC Capital Markets. Good morning, guys. A question on production just so I'm -- just to clarify things. I know you guys talked a little bit about it, but obviously in the first quarter you were a little bit lower than you anticipated on sort of the lower end of the guidance and to be clear, basically the reason you guys were towards the low end was because of delays due to workover activities you had on several wells. And I think was it 12 million a day you pointed to as the number?

Yeah, on those workovers net of the work that we did do, that's correct.

Okay, and that was the average that it impacted the first quarter, is that correct?

I'm not sure, I didn't hear your question, Scott. Please repeat. You're a little bit broken up here.

Yeah, sorry. In the first quarter, workover activity, unanticipated workover activity impacted production by 12 million per day on average in the first quarter?

No, what it did was it restored about 12 million a day of production, that's correct.

Okay, so can you talk about why you guys were at the low end of guidance in the first quarter relative to where you could have been at about the mid point?

Let me repeat that. The production that was restored was 12 million cubic feet a day net. That wasn't consistent through the quarter. We did those workovers sequentially so it didn't add 12 million cubic feet to the quarter. Currently those wells are making 12 million cubic feet a day net.

Okay, and then sort of going forward, expectations I guess into the second quarter, obviously you did point to a few delays at Bay Junop and I guess High Island 24L as well as some other small projects. But what do you have in your guidance as far as continued workover activity impacting production going forward?

Well, one of the things that you need to understand with regard to High Island 24L is we kind of screwed up there and drilled another well and found considerably more reserves. So instead of having a production train that would produce, that would handle 40 or 50 million cubic feet a day, now we're looking at a production train that will handle 100 million cubic feet a day. So it's actually pretty good news. You've got to be careful what you look for. You might find it. So but fortunately this is on the shelf, so we're still going to get it online in fairly short order. It just goes from July to September and it looks like that's a good thing for us.

As far as other wells that we have on tap, we do have some more workovers. I don't know that I can, that we give out specific ones, but they're not necessarily ratable every quarter as to exactly what we've got to do and exactly what we're going to spend. In other words, we've given you guidance on what we think we'll spend. We've taken what we spent in the first quarter and we have annualized that, if you will, for your current guidance.

Okay. And the High Island wells you expect online in September, is that right?

I didn't hear the question again.

The High Island wells -- you expect both of them to be online in September, is that correct?

That is correct.

And in your guidance, do you have any I guess -- do you count at all for potential hurricane impact in the '07 season here?

We have built into our numbers additional, well not additional, but what we think are further hurricane remediation issues.

Okay. And back to the High Island 24L, is there any other prospect drilling on that area? Or is that it?

No comment.

Okay, thank you.

Thank you, Sir. Our next question comes from the line of Jeff Robertson. Please state your company name followed by the question. Please go ahead.

Lehman Brothers. Tracy, can you all talk about LOEs on the assets you acquired from Kerr-McGee compared to what you thought you were taking over when you made the acquisition last year? In other words, are they running a lot higher than what you expected? And is any part of that due to the time between when you all struck the agreement with Kerr-McGee and when it finally closed in August of last year?

Thanks for that question, Jeff. Absolutely. We make our estimates before we really get our hands around the operations. We took over the operation on October 1. We did have some weather and as we've seen the opportunity to do workovers, we've taken that opportunity. So some of those were not necessarily scheduled. They came up and rigs came available so we could go out and do work. However, costs have been higher. These properties were neglected for a pretty good while meaning there was absolutely no work done on the properties. So we had to spend additional funds just to get the properties up to what we think are W&T standards.

So yeah, that's part of it. I think we've got our hands around it pretty well. We'll see going forward. Again, part of this is kind of feeling our way through that operation, integrating those properties with our own. So we'll start to see efficiencies later on with the transportation and whatnot.

Are you -- as you work through the assets, Tracy, are you coming up with more workover projects to carry into 2008 and maybe even beyond? Or do you think the bulk of that work gets done in 2007?

That's a pretty nebulous question. I'm not sure I have a really good answer for that. Intuitively, I think we'll get to those as quickly as we can There's a lot, so I wouldn't say that necessarily we finish that in 2007. My idea is to find as much as we can in all of these well bores. So it could very well extend out into 2008 and beyond.

Okay. Can you all remind me what the deepwater plans are for the rest of this year and if you have anything kind of sketched out for 2008 yet?

For sure we're going to drill Healy 82. The next well is scheduled for this quarter.

At this time -- this is Jeff. The #4 is the last one we have on our current budget at this point. And '08 has yet to come together, so at this point, it looks like #4 will be the last deepwater well in '07.

Okay, thank you.

Our next question comes from the line of Neal Dingmann. Please state your company name followed by the question.

Morning, Tracy, Dell Monroe. Say, Tracy, the deferred bit of production that you mentioned, has this caused you to change any of your plans as far as what you'd like to pay down on debt versus -- I think you outlined pretty good on some of your growth prospects what you all think you'll pay down and some of the plans on the debt pay down going forward.

No, no, it doesn't. We're going to continue to pay down debt. We had higher costs than we anticipated in the first quarter. It's just kind of part of what you get with one of these larger transactions. It was higher than we had anticipated, but in the overall sense of it, you're talking about we missed earnings by about $0.15. That's about $11 million in a Company with a market cap well in excess of $2 billion. It's not terribly what I would consider a real impact on us. Some of it's bad news and the costs were higher than we anticipated, but some of it's good news in that we were able to do some work on some wells a little bit sooner than we had anticipated.

Great, cash flow still looks very good to me. Say, how active will you be on this upcoming lease sale in August or so?

Well I should probably turn this over to Durrant, but I'll go ahead and answer that. You can expect us to be active in the lease sale. I know geologists get a lot of data -- we got a bunch of data this year, and it's unlikely that they'll sit on their hands and not do anything. But I don't have a really good picture just yet of what we'll be looking at.

Okay, and then last question -- on looking forward, some of the rigs that you're continuing to line up, rates looking like you'd like or are you still sitting back and waiting to find some openings and maybe find some better levels to come in and start contracting some of these folks?

Well, I think that's part of it. I think we're seeing a little bit of stabilization of the rig rate and of course you would expect that going into the second quarter because that's when weather starts to get better. So -- but we're not having any trouble getting rigs. We don't have a whole lot of deepwater activity scheduled, so I'm sure the guys that are out looking for rigs in the deepwater, that's a real issue for them, but we've got that pretty well covered in our program. Most of what we're looking at are jackup rigs and we're not having issue getting rigs or boats or anything at this point.

Okay, and last question, remind me again what does insurance look like going into this hurricane season versus last year or year before?

Well, in the brief amount that we've looked at it, it looks like for sure there's more capacity in London and more capacity for wind coverage. I would expect to see our rates go down.

Okay, perfect. Thanks, Tracy.

Thank you, Sir. Our next question comes from the line of John White. Please state your company name followed by your question. Please go ahead.

Natexis Bleichroeder. Good morning and thank you. Say, the workover expense you mentioned 80% of that involved 5 wells and I didn't catch the dollar amount of workover associated with those 5 wells.

I'm not sure that I have that right off the top of my head, the exact amount.

I thought it was thrown out but I wasn't quite sure.

I don't believe we put it out. Maybe we did, I can't remember. I don't think so.

This is Steve. It works out to be about a little bit more than $6 million.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Ray Deacon. Please state your company name followed by your question. Please go ahead.

Yeah, hey, Tracy, I just had a question about how do you view the market for acquisitions currently versus drilling in terms of your costs to add reserves and versus I guess spending money at a lease sale? And what is the deepwater market like and how does that affect your ability to go after your inventory there?

Okay, well I'll address the first question with regard to acquisitions. We're -- we've been in a number of data rooms this year, there's a lot of properties on the market. Some of them are announced, some of them aren't. We expect -- although again, we don't budget for acquisitions, but we expect we'll get our fair share in time to come. I can't tell you that that will be this year or next year or the year after that, but certainly we're out looking. It's an integral part of our business and something that we pay a great deal of attention to.

As far as the deepwater market, gee, that's -- there is going to be a lot of turnover in the deepwater in the next couple of years for leases. All things being equal, no change in cost of goods and services and no change in commodity prices, and that's a rather ridiculous assumption to make, because we know it's going to change, we just don't know how much relative to current pricing. But assuming that everything is static, then you have to assume that with all these leases that are going to expire, that they're not all going to be picked up and that that market would get a little more flush for producers as far as the cost of goods and services.

Got it. I guess just one last question is, if you looked at the guidance for the rest of the year, it looks like it assumes basically you can keep production flat at about second quarter levels. Do you see much risk other than hurricanes there? Are there any particular projects that are very important to keep an eye on as far as the current full year guidance?

No, I don't think so, Ray. I think that as we think about hurricanes, I think everybody is still, and probably rightfully so, a little bit attuned to major hurricane impact. And I just want to point out again to the market and you as well, that when you talk about what happened in 2005, that was an absolutely extraordinary event where you had two category 5 hurricanes come across the Gulf of Mexico. It would be like the recent event in Greenburg where you had the force 5 tornado come across, it would be like two of them coming across within 3 weeks of each other. It's extremely rare. The truth is, that in the Gulf of Mexico, the reason why we go to work in the summer and activity levels increase, is because the weather is generally better. And that was no different this year. I'd point out to you that last year we didn't have any hurricanes, not any, in the Gulf of Mexico. So it is random, it's not something that I get terribly concerned about. In spite of that, this company had two record years with regard to just about everything we did. So I really -- and of course, as you get these hurricanes, it also tends to increase prices, commodity price, because the markets fear shortages. So things have a way of working out even with these large hurricanes and it is a part of what we do. It's a way of life in the Gulf. We do have hurricanes We actually have more downtime and more weather time in the winter just like we had this winter, than we do in the summer.

Right. Got it Thanks a lot.

Thank you, Sir. Our next question comes from the line of Joe Allman. Please state your company name followed by the question. Please go ahead.

JPMorgan. Hey, Tracy, what are the plans for excess cash flow besides debt pay down?

That's the really good question, isn't it, Joe? Again, we'll look at that whole card a little bit later on in the year. We're on a schedule here to pay debt down and it's reasonable to assume that we're certainly out looking for acquisitions and that sort of thing as we always are. The good part about it is that we can be pretty flexible in what we want to do. So we do kind of what we always have done in the past and that is we leverage up, we pay it down, and we exploit it and we go do something else.

Gotcha. And then in terms of the drilling plans, are you still planning on drilling 15 exploration wells in 2007?

That is the current plan, yes sir.

Okay, thank you.

Thank you, Sir. Our next question comes from the line of Kevin Wing. Please state your company name followed by your question. Please go ahead.

Pioneers Capital Management. Good morning, Tracy. Aside from the disappointments with the production guidance and the lease operating expenses, if you could summarize for us let's say two or three things that you felt very positively about concerning the quarter. I mean there's a lot of data given on the call, but if you could -- out of all the data say hey, these are two or three things that we really felt great about in the quarter.

Well one of them is what we're finding with the drill bit. The guys are really doing a good job in locating these prospects. I think that our staff is getting their hands around all the data, the new data that they have. It takes awhile to integrate that into the mainstream of what we already have. So I think that's a real positive point for us. I think that our operations guys have done really a very good job of integrating these Kerr-McGee properties essentially from zero. I mean, we really didn't have much of a handle on exactly what we were going to have to do with all the platforms until we got on there and we hired -- we targeted 37 people from Kerr-McGee to put on staff. We got 36 of them, so we got a little bit of help in the transition. And I think as far as integrating that, that way of doing business into our own corporate culture, I think that's going very well. So I'm very pleased with that. I think we're getting a handle on the logistics. So those are all real positive points I think the fact that this company has become a much bigger company in a pretty short period of time and that we've handled it very smoothly is a tribute to this staff. I think we've got great people, I think they do a good job, I think they're all very motivated, so I think that's real positive as well.

All right, thanks for your help on that. And then one follow up concerning the Kerr-McGee properties. What are some things that you would still look at at this point as being either a negative surprise or somewhat disappointing about that transaction?

I don't find anything about the transaction disappointing. We had a little bit higher costs in the first quarter, but I think that's due to the fact that costs of goods and services are higher and we had more work than anticipated. I think again that we're getting a handle on that. But no, I think the Kerr-McGee transaction is an excellent one. In fact, I've told the market all along I think it's the best thing we've ever done. And nothing has changed that.

Okay. Thanks for your help.

Thank you, Sir. Our next question comes from the line of John White. Please go ahead with your follow up question, Sir.

Yes, what was the reason for pushing Bay Junop into third quarter?

Steve, I'll let you.

Bay Junop is a field that's in shallow water Louisiana and primarily the deferral is the permitting for some of the pipelines and whatnot. Because you're going through shallow water Louisiana, there's oyster reefs and whatnot and I think that the projected time in which we thought we were going to get those permits was probably a little bit on the high side rather than what reality has turned out to be.

Yeah, I've seen problems with the tricky oyster beds before, so good luck on that, and thanks for the question.

I think we got our hands on it and we're moving forward and I'm feeling pretty comfortable about where we are now.

Good deal. Thank you.

Okay, well that concludes it for today, so I appreciate your attention and we'll talk to you again next quarter. Thank you, Operator.

Thank you. Ladies and gentlemen, this concludes the W&T Offshore first quarter conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 followed by the pass code 11089320. Once again, if you would like to listen to a replay of today's conference, please dial 303-590-3000 entering pass code 11089320. You may now disconnect Thanks for using ATT Teleconferencing and have a pleasant day.