W&T Offshore Inc (WTI) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the W&T Offshore second quarter earnings conference call. During today's presentation, 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, August 7th, 2007. I would now like to turn the conference over to Mr. Manny Mondragon, Vice President finance. Please go ahead sir.

Thank you, operator, and good morning to everyone. We appreciate you joining us for W&T Offshore's conference call to review the second quarter 2007 results. Before I turn the call over, I have a few items I would like to go over. If you would like to be on the company's e-mail distribution list, to receive future news releases or you are experiencing technical problems and didn't receive yours, please call DRG&E's office at 713-529-6600, and someone will be glad to help you with that. If you wish to listen to a replay of today's, call it 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 recorded replay until August 14, 2007. To use the replay feature call 303-590-3000, and dial the passcode 11094324. Information recorded on this call speaks only as of today, August 7, 2007, and therefore, time-sensitive information may no longer be accurate as of 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 assurance that these 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 oil and gas production operations, and the 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 those 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 over the call to Mr. Tracy Krohn.

Thanks, Manny, the and good morning, everyone. I'd like to thank you for joining us for our second quarter 2007 conference call. Again, I'm Tracy Krohn, CEO of W&T. And this morning I will discuss advances that took place in the second quarter 2007. With me as part of our team, Danny Gibbons, our CFO. Danny is going to review financial results for second quarter 2007. Steve Schrader, our Chief Operating Officer, will discuss 2007 drilling projects, operations, review production in LOE, and give third quarter and full-year 2007 guidance. Then he will turn it over to Jeff Durrant, our Senior VP of Exploration and Geoscience, who will review the near term drilling prospects in our 2007 progress. Following our formal presentation, we will have a Q & A session.

You saw in this mornings press release, our second quarter earnings per share was $0.60, beating the street estimate of $0.46, and slightly ahead of last year's second quarter. EPS was higher due to lower than projected work overs and facility expenses and partly because the prices were realized in second quarter from the sale of our oil and gas production was higher than the street price dex, rather $8.74 per MCFE compared to $8.27 per MCFE for the street. EPS adjusted to exclude commodity derivative losses and a write-off of deferred debt issue costs was $0.63 in the second quarter this year. This represents a significant improvement over the first quarter this year when we earned $0.17 per share. So, as we near the one year anniversary of the closed (inaudible) Kerr-McGee transaction we're transitioning from the first phase of evaluation and planning to the next phase, which is implementation. Jeff Durrant and the exploration team have identified numerous drilling prospects on the properties acquired by merger from Kerr-McGee and are ready to start adding them to our substantial inventory of existing prospects. To help implement this plan, the Board of Directors has approved a $100 million increase to the capital and major expenditures budget for 2007. Jeff will give you more details on where we plan to drill later in the call. Part of the reason that earnings were higher in the second quarter compared to the first was that our base lease operating expenses, LOE, this quarter was down over $9 million. work overs and facility expenses for the second quarter were much lower than first quarter and it appears some of the initial up-front costs relating to the properties from the Kerr-McGee transaction may be behind us now. As we've said before, it is not unusual to have higher work over in the facility costs, in the first year, after we acquire properties, particularly in a significant transaction, from others, in order to bring these fields up to W&T standards.

Also, in the second quarter we successfully completed our insurance renewals. Overall we have higher coverage amounts and the premiums are going to be somewhat less than last year. Last, during the second quarter, W&T issued senior notes for $450 million with a coupon of 8.25%. I'd like to quickly note that our timing couldn't have been better. Looking back, we're very excited to have completed that transaction and to have a permanent layer of capital with a reasonable price and with reasonable coverage. These senior notes extend the maturity of a portion of our long-term debt to seven years, which allows us to free up cash flow for capital expenditures as it eliminated the majority of our near-term principal repayments. This also enhances our liquidity and provides us full access to our bank credit facility. So, with that, I will turn it over to Danny Gibbons to expand on our financial results. Danny.

Thanks, Tracy. Net income for the second quarter of 2007 was $45.5 million. That represents an 18% increase over the amount reported in the second quarter of 2006. Revenue increased $106.8 million, to $272.6 million in the second quarter of this year, due in large part to an increase in production from the properties acquired by merger from Kerr-McGee. In addition, the average realized price we received in the second quarter was higher. Lease operating expense for the second quarter of 2007 was $51.2 million, and represents an increase of $34.9 million over the $16.3 million in the second quarter of last year. The increase is attributable to increases in operating costs, thats $17.5 million, work over expenditures of $0.5 million, major maintenance expenses of $9.2 million, and $7.7 million in higher insurance premiums. Approximately $14.2 million of the creases in operating costs, work overs and insurance premiums are associated with the properties acquired by merger and Kerr-McGee. The increase in major maintenance expenses is partially due to $5.9 million of hurricane remediation costs that were not covered by insurance. Amounts spent in 2006 related to hurricane remediation efforts, were covered by insurance and therefore were not included in lease operating expenses. Appreciation, depletion, amortization, and accretion, referred to as DD&A, was $126 million in the second quarter of 2007, an increase of $58.7 million over the comparable period of 2006. On an MCF basis, DD&A increased to $4.04 from $3.40 last year. The increase is primarily due to higher [depletable] costs and increased oil and natural gas reserves associated with the properties acquired by merger from Kerr McGee and to a lesser extent, due to higher finding and development costs. The [full cost] pool at June 30, 2007, stood at $2.7 billion, up significantly from $1.4 billion at June 30, 2006.

Now let me talk about cash flow. Net cash provided by operating activities was $308.4 million for the first half 2007. That is a 35% increase over the same period in 2006. Adjusted EBITDA was $376 million for the first six months of 2007, up 42% over the comparable 2006 period. Our adjusted EBITDA margin for the second quarter was 76%, substantially in line with our high historical returns. During the first six months, net cash provided by operations, less capital expenditures, dividends, and deferred issue costs, was $100 million, and that was used to reduce debt and build cash balances. For the second quarter of 2007, our natural gas price averaged $7.81 per MCF, and crude oil and condensate averaged $60.44 per barrel for an average realized price of $8.74 per MCFE. This compares to a natural gas price of $6.98 per MCF, and accrued oil and condensate price of $61.13 per barrel, and that combined for an average realized price of $8.37 per MCFE in the second quarter of 2006. For the second quarter of 2007, general and administrative expenses increased to $10.1 million, from $9.1 million for the second quarter of 2006, due to an increase in the number of employees and therefore greater compensation and benefit costs and higher legal and professional fees in the 2007 period. On a per MCFE basis, G&A actually decreased to $0.32 per MCFE from $0.46 per MCFE. G&A decreased by $3.8 million in the second quarter of 2007 from the first quarter, primarily because of lower compensation costs.

Lets talk about interest expense and the debt offering. Tracy mentioned in June 2007, we issued $450 million of senior notes, at an interest rate of 8.25%. These notes are seven year non-call (inaudible) and were issued under rule 144 A without registration rights. The indenture related to the notes contains debt issuance covenants and restricted payment covenants typical for our type of credit profile. As a result of the offering, Moody's upgraded the rating on our existing tranche B term loan and our revolving bank credit facility by two notches to BA 2, and S & P upgraded our outlook from stable to positive. The proceeds from the offering were used to prepay the remaining balance of the tranche A term loan, $90 million of the tranche B term loan and the amount outstanding in the -- on the revolver. As a result of the issuance and pay down of a portion of our existing indebtedness we wrote off $2.8 million of previously incurred debt issue costs. Interest incurred was $15.7 million in the second quarter of this year compared to $300,000 in last year's second quarter. This increase is associated with the debt incurred in August 2006, to finance the properties acquired by merger from Kerr-McGee. During the 2007 period, $6.3 million of interest was capitalized to unevaluated oil and gas properties.

Switch to income taxes for a moment. Income tax expense was $23.1 million in the second quarter 2007. Our effective tax rate was approximately 34% this quarter, and we now expect the rate to stay at 34% for the remainder of 2007, and that represents a change from previous guidance. The reduction in income tax rate from 35% to 34% is due to the utilization of section 199 of the Internal Revenue code that allow's for a deduction from income for qualified domestic production activities. The deferred tax income rate for the quarter was a benefit of less than 1%.

Turning to capital expenditures, for the first six months of 2007 capital expenditures were $199 million. Split between $130.6 million for development activities, $48.3 million for exploration, $19 million for acquisition and leasehold costs, including seismic, and $1.2 million for other capital items. For the first six months of 2007, development and exploration capital expenditures consisted of $77.2 million in the deepwater, $29 million on the deep shelf, and $72.6 million on the conventional shelf and other projects.

Turning to the balance sheet, at June 30, 2007 we had $102 million in cash and cash equivalents, and $655.6 million in long-term debt. Total assets were approximately $2.5 billion compared to $1.2 billion at the end of June last year. Shareholders equity increased to $1.1 billion at June 30th, 2007. Our debt to total book capitalization ratio stood at 37% and our last 12 months adjusted EBITDA to interest coverage, was 12 times interest expense. And with that, I'll turn the call over to Steve Schrader to discuss operations.

Steve? First I'd like to give you an update on the progress on the number four well at our Green Canyon number 82 prospect which we refer to as the Heely prospect. We drilled to 3,920 feet and ran surface casing and cement. We have temporarily pulled the rig off the well due to eddy currents. We plan on returning to the well in approximately 30 days, assuming conditions and crew. Secondly, I'd like to update you on our current drilling activities at south 1041 V-3 well, or Caprock, we've found both oil and gas in several zones. Jeff Durrant will further update you on this well.

With respect to production, in the second quarter, production averaged 343 million cubic feet equivalent per day down slightly from $357 million cubic feet equivalent per day in the first quarter of this year. In fact, the week ending July 31, we had an average production rate of 309 million cubic feet equivalent per day. Production has declined because a natural decline in the producing wells and the unexpected loss of a few key completions. For instance, at Ewing 989 Cypress, the completion was lost after it sanded up in late June. This well was producing at a net rate of 6.5 million cubic feet equivalent per day. Due to the MMS anchoring requirements, we have elected to defer the work until the fourth quarter at which time we expect to have a rig on location. The UG (inaudible) 205 C-4 Side Track Completion, watered out late in March of this year, which is earlier than was forecasted. The completion had been producing at a net rate of $12.4 million cubic feet equivalent per day in late March which quickly declined to 2.1 million cubic feet equivalent per day in late May before finally watering out. We have since recompleted the well to a new reservoir, which is producing at 8 million cubic feet equivalent per day. Four days ago, on August 3, 2007, a third party pipeline in the main pass area began experiencing operational difficulties and producers were required to shut in. This has reduced our current production by approximately 17 million cubic feet equivalent per day, and this reflects -- reduction is not reflected in our current third quarter guidance.

Now turning to guidance for the third quarter, we expect to produce between 1.8 and 2 million barrels of oil and 16.6 and 17.9 billion cubic feet of gas for a total of between 27.5 and 29.7 billion cubic feet equivalent. Although this is a decline from second quarter, we anticipate volumes to be higher in the fourth quarter. We still feel comfortable with our annual production guidance. As we stated in our last operational update, the company anticipates full-year 2007 production to be between 7.7 and 8 million barrels of oil, and 74.7 and 78.7 billion cubic feet of gas for a total of between 121 and 127 billion cubic feet equivalent, which is a 25% increase over the company's 2006 annual production.

There are several key projects that will drive the expected production buildup in the third quarter and fourth quarter of this year. During the third quarter, we anticipate shifting to a new zone in the Mississippi Canyon 718, or our Pluto 2 well with an expected rate increase to peek at approximately 20 million cubic feet equivalent per day. We anticipate production buildup at a net rate of 18 million cubic feet equivalent per day from our [Bay Junip] discovery in mid-September. We expect to obtain our coastal use permit for the pipeline and production facilities this week. The refurbishment of an existing structure is complete, and we are out fitting the deck with the processing equipment currently. Beginning in early September, we expect to have first production from both both our south Timbalier 299 installation and from our east Cameron 338 facility, following the completion of our hurricane remediation efforts for a combined net rate of 7 million cubic feet equivalent per day. At south Tim 299, we are completing the final tie-ins at the third-party processing platform and are commissioning the control systems. At east Cameron 338, all major facility skids have been set, all major piping is complete, and we are currently commissioning the instrumentation and electrical systems.

In the early fourth quarter, we anticipate initial buildup from the two Highland 24 L discoveries at a net rate of 19 million cubic feet equivalent per day. Two pipelines have been laid and one structure has been set. The main processing structure is scheduled to be loaded out at the end of the month. We have an active work over facility surveillance program underway. We are installing low pressure facilities at Vermilion 115, allowing to us reestablish production from an existing completion at an anticipated net rate of 4 million cubic feet equivalent per day. In addition to the UG in Island C-4 Side Track and Pluto 2 re-completes, as I mentioned earlier, we're evaluating several more recomplete and work over opportunities. Projects that have come on-line include the west Cameron 181, C-2 Side Track, and Galveston 303 # 7 tie-ind, our loose prospect in mobile 876, and the south Timbalier 314 pipeline cleanup. During the second half of the year, we also expect buildup from our active and planned exploration program. This buildup is currently not in our guidance, however we do anticipate a contribution this year from the exploration well that is currently being drilled at south Timbalier 41, as well as from our planned main path and Ship Shoal projects. These wells are from existing platforms and should contribute production this year.

Moving on to lease operating expense, in the last conference call, I discussed our lease operating expense forecasting method. Taking a conservative approach we used the first quarter run rate on base LOE and held them flat for the year. I am pleased to note that the base LOE for the second quarter was $45.3 million, $4.7 million under the low end of guidance, and hurricane remediation costs were $5.9 million, slightly below the low end guidance of $6 million. This is a reduction in LOE and hurricane repairs of $9.3 million and $1.2 million respectively from the first quarter of 2007. Unlike the first quarter, we had no significant well failures and work over expense was dramatically less. In fact, 75% of the reduction in LOE is due to lower work over expenditures. Although LOE was lower in the second quarter, we are not revising full-year guidance at this time. work overs and facility expenses are the greatest variables in total LOE because of the unpredictability of the well failures and unidentified facility problems. Now I would like to turn the call over to Jeff Durrant, to update you on our drilling program.

Thanks, Steve, and good morning to everyone. Although we started one exploration well in June, W&T did not complete the drilling of any new exploratory wells in the second quarter. However, we did successfully complete the 825 Side Track development well in Vermilion 331 field. Year to date, we have successfully drilled two exploration wells, plus we deepened the Heely #3 project. And additionally, both of our development wells drilled through the end of the quarter, were also successful, so for an overall 100% successful 2007 drilling program.

So where are we now? Well, as Steve just mentioned, we're currently drilling the 40% W&T working interest south Timbalier 41 B-3 Side Track, the Caprock prospect, which is operated by EPO. In the original hole we found 70 feet of oil and gas and five (inaudible). Following formation evaluation, we elected to side track the well, up-structure, to a more optimal reservoir position. Current plans are to set casing and continue to explore for deeper objectives. The proposed final total measured depth for the well is expected to be about 19,000 feet, or about 17,000 feet of true vertical depth. In our deep water program, our Heely four exploration well began drilling in July, but our progress was cut short by eddy currents, and we decided to move the drilling rig off location. Before leaving, however, we were able to drill down to 3,920 feet and set 22 inch casing, which is just above the first of the wells exploratory objectives. You might recall that this 14,500 foot well, is designed to test four independent exploration targets. These wells are just to beginning of an expected increase in exploration drilling activity in the third and fourth quarters of this year. As we've discussed in various forms, it takes about one to two years of evaluation of an acquisition, before drilling activity significantly increases. Well, it's now been about a year since we closed on the Kerr-McGee properties, and I'm happy to say that our explorations are capitalizing on our regional 3-D seismic date bases, they cover both of these properties as well as the Heritage W&T properties. Their efforts are showing promising results including two upcoming drilling programs in the Ship Shoal and the main pass areas.

As Tracy mentioned in the opening, the Board has approved a $100 million increase in capital expenditures and hear are some details of where we expect to be spending some of that additional capital in the remainder of 2007. We plan to begin drilling a six to ten well infield exploration and development drilling program in the Ship Shoal 300 field, in September. This was one of the properties that we got from Kerr-McGee. This low to moderate risk program will be drilled from existing platforms and infrastructure allowing us to quickly bring our successful wells on line. The initial three wells will be drilled from Ship Shoal 300-A platform and will include two shallow gas wells -- two shallow horizontal gas wells, actually, and an oil prospect. Additional drilling is anticipated in the Ship Shoal 300 field area later in the year and possibly on into early 2008. In the main pass area we expect to begin the drilling of a four to six well program in September which will likely carry on into early 2008. These wells are targeting objectives evenly split between oil and natural gas. Most of these wells will also be drilled from existing infrastructure. So, that combined, the Ship Shoal and main path drilling programs could allow to us to drill and complete up to six additional wells from existing structures by year end 2007. Net unrisked production build up of 13 million cubic feet of gas per day and 2,000 barrels of oil per day is possible.

Also in the third quarter, we're ramping up our open water exploration drilling program. This program includes a James lime test in the Viosca Knoll, main pass area, two deepwater wells, including the continuation of Heely #4 in Green Canyon 82 and the Black Bird prospect in Green Canyon 177. A final deep shelf well is planned in the high Island area. The unrisked net exploration potential for all of the total remaining 2007 drilling programs, is about 280 BCFE. For the remainder of the year we anticipate drilling a total of 10 to 13 additional wells with two being in the deepwater, two on the deep shelf, and the remaining six to nine on the conventional shelf. I think as you can see that we expect the drilling activity to pick up significantly in the third and fourth quarters from what it had been in the first half of the year. While next year's drilling plan is still coming together in the planning and budget stage, I think it's fair to say that we see this ramp-up in our drilling activity to continue until at least the first half of 2008. With that I'll turn it back to you, Tracy.

Thanks, Jeff. As you've seen and heard, we're gearing up for a much more active second half of the year with a drill bit. As we've stated before 2007 was going to be about the balance between the debt management, drilling and cost [containment]. With half the year behind us, it's now time to put our drilling plan into action. We should start to see some results from existing W&T and former Kerr-McGee properties, later this year and into next. I'm also encouraged with LOE costs going down from first quarter and having our insurance renewals completed for another year. Hopefully we won't have any hurricanes this year and we'll go back to the market next year with an even more favorable market in our insurance renewals.

Finally, with the placement of the senior notes offering, we have now got a permanent layer of capital and can focus again on our drilling activities. That really concludes all of our prepared remarks, and we're ready to take your questions. So, operator, if would you please open the phone lines for Q & A.

Thank you, sir. Ladies and gentlemen we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Please ask one question and one follow up and requeue for any additional questions. (OPERATOR INSTRUCTIONS) Our first question comes from line of Jeff Robertson. Please state your company name followed by your question.

Lehman Brothers. Steve, can you talk a little bit more about the pipeline outage at main pass and how long you all think, if you know, that that may be out? And did I hear correctly that that is not included in your guidance?

Yes, you heard correctly that it's not in our guidance. It's a third-party pipeline that, in fact, last night they posted really the first significant details, because they've been assessing it ever since Friday, and what it is is a platform that has three pipelines that leave it. One of the pipelines that leave it ruptured. It was a 20 inch. Then the other two, they're currently assessing those and should have those assessments done today on one of other lines. The actual other assessment has been completed and it looks like that one will be out for two to three weeks.

Okay. Thank you.

Thank you, sir. Our next question comes from the line of Neal Dingman. Please state your company followed by your question.

Good morning, guys, [Stelman Rogue]. Tracy, just wondering if you could give good color, was wondering on some of the deferrals you had, obviously some of that stuff was weather and just stuff you can't control but on the pipe and different things beyond that, is there anything more you can do to -- I guess, I don't want to say ensure, but to help so that we don't see as many deferrals?

Yes, thanks, Neal. I think that most of the weather deferrals are behind us. I agree with you. I think some of them were equipment related as well. The deferrals at Green Canyon -- Heely drilling, whatnot, are, again, nature related. We picked up some eddy currents there, so that's going to push us back a little with that portion of our drilling program. But it looks like south Tim 299, [Bay Junip], Highland 24, are going about where we thought they were going to be last time we provided guidance. Could slip a little bit in some of our plan maintenance -- or planned construction, Highlands 24, because of rain, and the inability to paint some of the processing structures we have to paint them before we get them out there. It it's been raining a hell of a lot in south Texas. You might have noticed that.

I'm not quite sure I can give you much more guidance on that other than that we do have to paint these structures before we put them out there. I know it sounds a little lame, but again, the rain has just been a factor. All of south Texas has been flooding, and that's where these structures are being built. But, the pipelines are being built now, so, hopefully we'll get everything hooked up within a reasonable amount of time here.

No, understandable. And then to follow up on -- obviously you cash flow continues to be very high -- impressive level. Near-term plans would be to continue to pay down more of that debt, and then I guess how active would the cash -- could you be in this upcoming lease block sale?

Well, the cool part about the company and what we did with the debt offering, was we positioned ourselves to have more options. So, yes, we can pay down some term B debt if we choose to. We can certainly look at more leasing opportunities, and we can also be ready to make other acquisitions should they come about. Obviously, we've told the market that we're going to do some more drilling in the latter part of this year, going into 2008.

You might recall that -- or we've told the market that it takes us a couple of years to get our arms around a large transaction and figure out what our optimal locations are, and the timing and the logistics, and we're starting to get to that point now, even though it's been just about a year, we're getting a pretty good idea of how we need to start the program. And so I think you will see a very marked increase in drilling activity on the next 12 to 18 months.

Great. Look forward to seeing it.

Thanks.

Thank you, sir. Our next question comes from the line of Scott Hanold. Please state your company name followed by your question.

RBC Capital Markets. Good morning.

Good mornings Scott.

My question kind of relates to, I guess, you have become, obviously, a little bit more aggressive as far as organic opportunities hear in the second half of the year. Can you sort of talk a little bit about acquisition opportunities relative to organic opportunities, and, you know, also from the acquisition front as well, you know, would you guys consider some on shore Gulf Coast stuff potentially as well down the road?

That's a fairly comprehensive question. But let me give you what our current view on it is. Fortunately, one of the things about this company is we have enough balance to do both activities, both acquisition and exploration. So, that's one of our advantages. I think that there are opportunities out there for purchases in the gulf and Gulf Coast area. So, that answers part of your other question regarding Gulf Coast. Gulf Coast onshore is still, in my opinion, Gulf of Mexico type activity, the geology is essentially the same. So, yes, the answer to that question is yes, we would certainly consider stepping on shore in the Gulf Coast area and have. We think that going into the latter part of this year and into next year, depending upon what pricing does, our advantages will be that we are well capitalized, that we don't need to rely too much on the debt markets, at this time to accomplish what we think we can accomplish. Credit markets have closed up a little bit right now, so some of the guys that have to rely on some of the private equity players and whatnot are finding it more difficult to compete.

So, that we see is a little bit of an advantage for us currently, and that could change next week. But, in any event, we certainly pay fair prices for properties. We will continue to pursue acquisitions very aggressively. That is one of the things that we do very well, and it is one of the reasons why we did this debt offering, was to free up some of that cash, so, that we could take advantage of that. As far as going through the drill bit, you're going to see a lot of activity in the latter part of this year, so, we have high hopes for it. That's why we're out doing it.

Okay, and switching to Cypress, I guess you're going to get a rig out there in the fourth quarter. How long will that take to potentially work over?

Actual work should take 30 days or less. The problem with Cypress is the anchor spread is near some infrastructure, and with changes in MMS requirements after the hurricanes Katrina and Rita, the anchor spread is a little problematic with regards to the infrastructure. You don't want to the drag along after hurricanes, snag a pipeline or something, so that's the concern there. So, we'll just have to wait until we can get to it and -- buy the rights to finish our work over.

Okay, so maybe early '08 we'd see production come out of there again? Late fourth quarter, early '08?

Yes, I think that's probably right, yes, sir.

Okay, thanks a lot.

Thank you.

Thank you, sir. Our next question comes from the line of Brian Kuzma. Please state your company name followed by your question.

Sure, Brian Kuzma, JP Morgan. How's it going guys?

Just fine.

I guess my first question is, that 309 million a day you guys are currently producing, does that include that 17 million a day?

It does not. That would be a reduction of that 309 million a day.

And then, your remaining exploration opportunity, I think you said what you're drilling in the second half is going to be around 210 B's worth of essential. How does that break out in terms of like is -- is that heavily skewed towards the deep water versus all the other opportunities that you're looking at?

No, most of our drilling is on the shelf. Certainly Heely is one of the wells that we're going to be drilling, and that is an impact well for us.

And what was the name of the Green Canyon well again?

Green canyon # 82 Heely prospect.

I'm sorry, the other one. I'm sorry.

Oh, that's Green Canyon 177.

What was the name of that one?

Black bird.

No, I'm sorry, Black Bird.

Okay. Thanks, guys.

Thank you, sir. Our next question comes from the line of Richard Tullis. Please state your company name followed by your question.

Capital One Southcoast. Good morning.

Good morning Richard.

If could you, run over the drilling program again, the plans there as far as what number of rigs do you expect there will be required to carry it out over the course of the year, and what you see in there as far as rig rates, things like that?

Number of rigs, more than one and less than ten, okay. I don't have an exact number on that. That is a little bit of a logistical question. We'll judge that as we go through the program, find out what rigs are closer to what locations at the time. We don't have anything on long-term contract, so we do that a little bit on spot, if you will.

I got you. So nothings secured a contract this point?

Well, yes, I mean nothing on long-term contract, that's right.

Okay, okay. And one other quick question. What is your hedge position right now for the rest of '07 into '08?

We're still about, I guess, around 10% to 12% hedged on our current production. Those should start to come off in the next year or two.

Okay.

But largely unhedged, which is one of the reasons why you see the increased price on -- or the increased spread on our -- on a per MCFE basis, because we are large -- we have a large component of our cash flow is in oil and condensate.

Okay. Very good. Thank you. Thanks a bunch.

Thank you, sir.

Thank you, sir. Our next question comes from the line of John white. Please state your company name followed by your question.

Natexis Bleichroeder. Good morning, gentlemen.

Good morning, John.

I was -- as mentioned, you're going to get busy with the drill bit in the second half of the year. Glad to see it. You also talked about a number of recompletions and work overs for the second half CapEx. Can you give us the breakdown between drilling new wells and working over or recompleting existing wells?

I think we did that earlier. I'll see if I can give you those numbers a little bit more precisely. We had 48.2 -- let's see. Hold on just a minute. Let me thumb through my notes here. One moment.

And while you're looking for that, a question, I guess, for Jeff. He mentioned a four to six well program in the main path area. Is that concentrated on one block, or is it spread over the -- over a main path?

It's actually off of several individual platforms. So, yes, it is spread around between actually Kerr-McGee -- former Kerr-McGee properties and some of the Heritage W& T properties as well.

Okay.

John, actually what we've done is given a detail of CapEx so far. So, I didn't give you detail on work overs and drilling for the latter half of the year. I just don't have that handy right now.

I'll call you back.

It's about -- well, it's about 75% on drilling and 25% on work overs and recompletion.

Okay. Thanks very much and good luck.

thank you, sir.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up from the line of Jeff Robertson. Please go ahead, sir.

Thanks. Tracy, you all commented that you're moving to the implementation stage on the Kerr-McGee asset base. Can you talk a little bit conceptually about how you think about the planning the 2008 capital program between exploration and development and how you think about the risk profile of what you hope to do next year?

Yes, for the next 12 to 18 months I think you'll see a very strong emphasis on the shelf. I think that we've -- and again, it takes us a couple of years to really get our arms around it. But we're kind of going after the stuff that we think is fairly low to moderate risk. There are some -- there will be a couple of wells in there that will be oriented toward kind of a swing for the fence type thing. But for the most part, kind of bread and butter type things that we'll continue to add reserves, and, you know, in the several BCF category, but not the really large type plays that you would see with high-risk exploration. We do have some deep shelf opportunities that we're going to look at, that will have a little higher risk profile, a little higher reward, and I don't have all that firmed up yet. We haven't come up with everything that we're going to drill in 2008 yet, and that's moving around a bit, but suffice to say that the majority of it will be on the shelf.

Can you talk a little bit about the work you all have done in the past year evaluating just the opportunity set on the Kerr-McGee asset base and have you changed categories at all in terms of the reserve upside that you all talked about when you closed that transaction?

I think that as we look toward 2008, Jeff, part of the exercise was gathering a whole lot of seismic, which we've done. We just purchased a little bit more here recently off the coast of Texas. So, we're gearing up for that. I think that as you talk about changing reserve categories from unrisked to undrilled, well, no, we haven't quite gotten to that point. We're still analyzing that. And that's what we want to spend a good bit of time and effort on, is making sure we spend those drill dollars where we think they're going to do us the most good. So, we're spending a lot of time and exploration effort with our goescientists making sure that we've got all of the right data and that we've got all of the right analogs for what we're trying to do. And I think that's very important. You know, data is actually, although it sounds expensive, it's actually fairly cheap. I mean you buy $30 million worth of data, and that's approximately 5 BCF of gas. If you buy that much data and you can't find 5 BCF gas, well you probably need to be in another business. But the truth is that we do spend money on data, we think it's a very valuable asset for us, and we work it very hard, and that's what we'll spend most of our time in doing is making sure that things we look at are valid and that we prioritize them properly.

Okay, thank you.

Thank you, sir.

Thank you, sir. Our next question is a follow-up on the line of Scott Hanold. Please go ahead.

I had a follow-up to Jeff's question on sort of looking at capital into '08 and drilling plans. You indicated it's more low risk to moderate risk exploratory stuff with swinging for the fences included in there. Given that, you know, what are you guys sort of targeting as your sort of organic growth? And I know it can be somewhat difficult, but, you know what would you expect for the organic growth here going into '08?

What we've -- what we've targeted in the past has always been about a 5% growth.

Okay.

Again, we don't budget for acquisitions. We think we'll get our fair share over time that will enhance that but organically that's what we target.

Okay. And you know, looking again at sort of capital here and where your stock price has been trading recently, have you guys considered share buybacks at all?

No, that's a question that's been asked quite a bit. I think that at this point in time, the answer to that is no. I think what we're looking at is really enhancing our drilling program and finding out, you know, making sure that we capitalize the company to take advantage of different acquisitions, obviously with the entire sector trading down that becomes even more attractive. It's kind of odd, this happens fairly frequently in shoulder months. We see a reduction in the entire sector in shoulder months prior to winter months and that sort of thing.

Thank you.

Sure.

Thank you, sir. Our next question comes from the line of [Adam O'Laughlin ]. Pleads state your company name followed by your question.

Yes, hello, this is Ray Deacon with BMO. I just has a question about production runoff, maybe to ask Scott's question differently. If you look out over the next year, how much production would you expect to have to offset just to kind of stay flat, and with, you know, some of this newer production, is it easier, I guess, if you get a period where some of these wells are going to stay flat for the first 12 months?

You know, normally our reserve profiles are about a third, a third, and a third on proved reserves. So, these wells run off about a third a year on production. About 30% to 40% a year on PDP. So, we to have scramble pretty hard to replace that, but that's kind of the -- that's the bad news. The good news is there's really big cash flow. So, the trick in the gulf is always, can you stay ahead of that curve? And so far we've been able to do that, so I -- you know, if you're talking about building a model, you know, you can always call here and get with Manny, and whatnot and he can give you a little more help on that but that's kind of how we look at it, is that we've always been able to maintain about a third, a third, and a third profile in our proved reserves, and we have to scramble to replace that proved producing segment of it. The good thing is we do a good job of converting reserve categories.

Got it, great. And maybe just, any thoughts on between now and year end how much you think you will -- how much production is -- I guess have you updated that slide in your presentation where you show how much production you're going to be bringing on between now and year end? Is that a number you can put your hand on easily, or --?

I'm sorry, could -- You're a little bit low there. I'm having a hard time hearing you.

Sorry. It's probably my phone. Between now and year end, I guess, how much is drilled waiting to be brought on-line? How many million cubic feet equivalent?

Yes, we're going to update that slide as soon as we're able to. I don't have an exact answer for you on that just at this point, but we'll be able to provide that for you here pretty soon. We addressed it a little bit in our conversation with Steve. We talked about Mississippi Canyon 718 going up to about 20 million cubic feet equivalent. The issue with 718 is that the existing completion is still producing beyond what we had hoped for, or beyond what we had predicted, which is a good news bad news thing, in that the reserves are bigger, but the cash flow is not as great as we had originally predicted on this well with a recompletion. So we're producing more reserves, but we've -- we've lost some rate as a result of that. The other part of it is, the [Bay Junip] completion which we're going to bring on at about a net rate of 18 million cubic feet a day or so, and that's supposed to come on in mid-September, and we're waiting for our coastal use permit right now, and we should have that very shortly, in fact, I think probably within the week. And beginning in early September we expect production from our south Tim 299 and east Cameron 338 facilities to come on-line at a combined net rate of about 7 million cubic feet a day. And then in the fourth quarter we expect our two Highland 24 discoveries to come on-line at a net rate of about 19 million cubic feet a day. Again, we're waiting on some of the structures to continue to get -- or to finish getting painted, and we're studying the pipeline now. We do have some other production in Vermilion 115 at about 4 million cubic feet a day or so coming on line, so, and an additional 15 million cubic feat a day equivalent from our Loose and south Tim 314 pipeline (inaudible).

Got it. Great. Thanks very much.

So, that's kind of the thumbnail sketch. And there's some other things with work overs and recompletions as well.

Got it, great. And maybe just one more quick question. It sounds like you wouldn't really -- given that you've finally got -- or you feel like you've got a better handle on the Kerr-McGee properties in terms of what you want to drill and which ones to prioritize, really the big impact on F and D costs I would think is going to be coming next year and not to look for a big drop in S and D this year. Is that probably right?

I'm sorry, not to look at big drop in what?

In finding and development costs. It sounds like it's going to be more of a 2008 event, I guess.

We're certainly looking forward to 2008. We hung back a little bit this year, in making sure that we got the company on -- to a point where it had -- had analyzed and enveloped this Kerr-McGee transaction. We were content to cut back on our drilling program the first part of the year, get our debt structure back in shape, to take advantage of what we thought were going to be opportunities later on. So, yes, you're correct in assuming that the 2008 is kind of where we're focused on right now.

Got it. Thanks very much.

Sure.

Thank you, sir. Mr. Krohn, there are no further questions. Please continue.

Okay. Well, we appreciate everybody listening today, and look forward to talking to you again later for our third quarter conference call, and I think that concludes it, unless there's any other questions, we'll call it a morning. Thank you very much.

Ladies and gentlemen, this concludes the W&T Offshore second quarter earnings conference call. If you would like to listen to a replay of todays conference, please dial 303-590-3000 and enter passcode 11094324. Once again, if would you like to listen to the replay of today's conference please dial 303-590-3000 and enter the passcode 11094324. Thank you for using AT&T teleconferencing. You may now disconnect. Have a pleasant day.