W&T Offshore Inc (WTI) 2008 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 question.

(OPERATOR INSTRUCTIONS)

This conference call is being recorded today, Tuesday, August 5 of 2008. I would now like to turn the conference over to Manny Mondragon, VP of 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 of 2008 results. Before I turn the call over, I have a few items to go over.

If you would like to be in the company's e-mail distribution list to receive future news releases, or you experienced a technical problem and didn't 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 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 12, 2008.

To use the replay feature, call 303-590-3000, and dial the passcode 11117572. Information recorded on this call speaks only as of today, August 5, 2008, 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 can be of forward-looking information which is based on management belief, as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production expenses for 2008. Although the managements beliefs that the expectation reflected in such forward-looking statements are reasonable, they could give no assurance 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 price volatility, uncertainties inherent in oil and gas production operations and estimated reserves, unexpected future capital expenditures, competitions, 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 these conference call contains references to non-GAAP financial measures. You can find the 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 mornings press release. Now, I would like to turn the call over to Mr. Tracy Krohn.

I will try that again now the mike's on. Thanks, Manny. Good morning everyone. I'd like to thank you for joining us for our second quarter 2008 conference call. Again, I'm Tracy Krohn, CEO of W&T and this morning, I am going to review the key events that took place in the second quarter 2008.

With me today are Danny Gibbons, our Chief Financial Officer. Danny's going to review the financial results for the second quarter of 2008. Steve Schroeder, Chief Operating Officer -- I've only known you for eight years, maybe I can remember your name. Steve's going to talk about our 2008 operations. Jeff Durrant, our Senior VP of Exploration Geoscience will update you on our 2008 drilling successes and preview next quarter drilling plans. Following that, we're going to have a Q&A session.

Let's talk a little about earnings per share. W&T had another record quarter financially. Another good quarter was drilling [bit]. As this morning's press release stated, we had record earning per share of a $1.77. Adjusted earning per share were $1.86 which is also a record. As I've always stated, W&T is focused on generating cash and increasing our cash flow.

And the Gulf of Mexico is proving yet again to be a great place to do that. For example, in the second quarter 2008, we made as much adjust the EBITDA as we did in the first six months of 2007. Obviously, higher commodity prices significantly helped us to achieve those goals but having the right mix of oil and gas also helped.

Our oil production mix for the second quarter increased from 43% last quarter to 45% just as the oil prices spiked. Majority of these increase of both oil production and overall production is due to increasing our interest to a 100% from 59% in Mahogany in addition to the work being done out in that field. The Gulf of Mexico basin just keeps on producing. Exploration success rates remain attractive and we continue to identify new prospects. Just a few of the reasons why we like the Gulf of Mexico.

Let's talk a little about production and drilling. Our production also increased slightly over the first quarter of 2008 due to the success and the speed with which we've been able to get new wells online which offsets our natural decline rate.

In the second quarter we produced 31 Bcfe versus 30.8 Bcfe last quarter. But we anticipate the midpoint of the third quarter's guidance, which we included in this mornings press release, to be lower than the second quarter's production. Steve Schroeder will elaborate on third quarter and full year production guidance later in the call.

During the second quarter we have an average 10 rigs drilling, we drilled nine exploration wells, seven of which was successful, and one development well which was also successful. This brings our 2008 success to 12 of 14, or 86%, year-to-date. Since the beginning of the year, we drilled or are currently drilling 23 wells. Steve and Jeff will expand on this activity later on the call but needless to say we've been very busy.

As I'm sure everyone is aware that Houston is under a hurricane watch due to tropical storm Edward. At this time I can report that we've shut in about 90 million cubic feet equivalent for day and all personnel are accounted for. Steve will provide the additional details later on the call.

CapEx. Next topic I'd like cover is CapEx. As you saw this mornings press release we were revising downward the number of wells we think we can get drilled this year. But our pace has been brisk. We now expect this year's drilling program to include 30 to 35 wells. The change in estimated well count is a result of equipment delays, revisions to outside operating drilling programs, and further technical evaluation, including the reviews of seismic information.

We're not losing any drilling opportunities, we simply expect to run out of time to get the right equipment in the right location by year-end. The downside of higher commodity prices is a more challenging equipment and services environment and given that I think I'll take the higher commodity prices. Most of the wells that aren't being drilled and the original 2008 plan are being pushed into 2009.

Vast majority of projects that we deferred on acreage that is held by production, so we have some flexibility with regards to timing. As a result of our revised well camp, we'll also going to revise our total capital budget. However, at this time, it's too early to give an exact figure. But, we'll provide guidance on the revised capital budget and operations update before the end the month. Now, here's Danny Gibbons. Danny's going to expand further on the finances.

Thank you, Tracy. Let me run through a few income statement items and we'll move on to cash flow and the balance sheet. Beginning with the revenue. Revenue for the second-quarter of 2008 was $461 million, that's a $188 million increase over the same period in 2007.

Our average realized price was $11.53 per Mcf for natural gas, and $113.74 per barrel for crude oil and natural gas liquids. These are increases of 48% and 88% respectively over 2007 prices. This resulted in an all-in realized price of $14.89 per Mcfe. This is over $6 per Mcfe higher than second-quarter 2007, and over $3.30 per Mcfe sequentially from first-quarter of 2008.

Now, moving on the lease operating expense. It was essentially unchanged quarter-over-quarter for the second quarter of 2008. LOE was $54.3 million, and that compares to $53.9 million in the second-quarter of 2007. LOE per Mcfe was $1.75 in the second-quarter of 2008 versus $1.73 in the second quarter of 2007. Depreciation, depletion, amortization, and accretion, which we refer to as DD&A was $153.8 million, or $4.97 per Mcfe, in the second-quarter of 2008, an increase of $27.8 million over the comparable period of 2007.

The factors leading to the DD&A increase were capital expenditures, an increase in future development cost, and an increase in our estimated asset, retirement obligations partially offset by the addition of reserves from increasing our interests in Ship Shoal 349 Mahogany from 59% to a 100% and reserves added as result of our successful drilling efforts.

Moving on to G&A. For the second quarter of 2008, G&A was $11 million compared to $7.4 million the second quarter of last year. On a per Mcfe basis, the quarter over quarter comparison is $0.36 in 2008 compared to $0.24 in 2007. Administrative expenses increased due to an increase in the number of employees and increases in salaries and compensation expenses.

Let me move to net interest expense. Net interest expense in the second quarter of 2008 was $5 million and that compares to $8.9 million in 2007. The decrease is primarily due to lower interest rates on our term loan B and increased interest income due to higher cash balances. Income tax expense was $70.5 million in the second quarter of 2008. Our effective tax rate was approximately 34% and we expect that our effective tax rate for all of 2008 to be around 34%.

Net income for the second quarter of 2008 was a $134.6 million, or a $1.77 per share. This compares to net income of $45.5 million, or $0.60 a share, for the second quarter of last year. Included in the second quarter 2008 results are unrealized derivative losses of $14.4 million on our open commodity derivatives positions and an unrealized gain of $4.2 million related to our open interest rates swap.

In the second quarter of 2007, we had an unrealized derivative loss of $900,000 related to our then opened commodity derivatives contracts. Adjusted net income for the second quarter 2008, or net income adjusted to exploit the after tax effect of unrealized losses on derivatives, was a $141.3 million, or $1.86 per share. Adjusted net income of second quarter 2007, which excludes unrealized derivative losses and the loss on extinguishment of debt, was $48.1 million, or $0.63 a share.

Moving on to cash flow. Net cash flow provided by operating activities was $548 million for the first half of 2008, and adjusted EBITDA was $653.3 million, up 74% over the comparable period of 2007. The increase over 2007 was due to a significant increase in sales, primarily due to higher commodity prices. Our adjusted EBITDA margin for the second quarter 2008 was 81% versus 76%, 2007.

For the first half of 2008, our capital expenditures for oil and gas properties was $399.2 million, and that includes $133 million for development activities, $127 million for exploration, and $116.6 million for the acquisition of additional interest in Ship Shoal 349 Mahogany, and $22 million for seismic capitalized interest and other lease-hold cost. Our exploration and development capital expenditures consisted of $42.3 million in the deep water, $40.4 million on the deep shelf, and $177.9 million on the conventional shelf.

Let me conclude with a couple of balance sheet items of June 30, 2008, we have $424 million in cash and cash equivalents, total assets were over $3.1 billion, and total debt was $654 million. Our debt to total booked capitalization ratio or what I refer to as debt to cap was -- stood at 32% but our net debt-to-cap was an impressive 14.3%. Our adjusted EBITDA, the interest coverage, was over 20 times interest expense. Now, let me turn the call over to Steve Schroeder. Steve?

Thanks, Danny. W&T continue to have a high activity level in the second quarter and we currently have nine rigs run. We have four Mat Cantilever. One independent leg jack-up, two platform rigs and one semi-submersible under contract and operated by W&T. Relative to non-operated activity, one rig is running an independent leg jack-up.

As Tracy alluded to earlier, we project to have drilled or be drilling between 30 and 35 wells by the end of the year. The reduction in the number of wells in this year's budget can roughly be attributed to equipment availability and timing, opportunities and non-operated leases not coming to fruition, and, to a lesser extent, further technical evaluation including the review of seismic information.

Relative to equipment availability, certain specific rigs that we needed were not available at the time we needed them. As this year has progressed, the platform rig market has tightened even though some publications indicate that platform rigs are available. Some of those rigs have been out of service for years and are in poor condition and are not immediately available.

Also, a number of platform rigs have been stacked on location at a number of deep water spars and TLP's. Nevertheless, we have contracted another platform rig for a drilling program that one of our South Timbalier properties and anticipate mobilizing two locations in November. However, we have two or three programs at non-operated properties that are awaiting on a platform rig to become available.

Also, rigs being delivered by other operators are being delivered later than anticipated due to success or longer than anticipated operations due to weather, or technical difficulties. With respect to outside operated properties, some of the opportunities have not proceeded at the pace projected at the beginning of the year.

At Green Canyon 646, our Daniel Boone project, we continue to proceed toward the development of these deep-water reserves. The Diamond Ocean Victory is on location, finishing the completion and should finalize operations by September.

To eliminate the need for future deep-water rig intervention, we have designed the well with a smart completion, allowing us to change from one producing reservoir to another, remotely, from the production facility. After the Ocean Victory completes its work, the pipeline and umbilical will be laid and connected to front runner in the first half of 2009, with first production expected the second half of 2009. We plan on including Daniel Boone's production rate in next year's guidance.

Edward is approaching Houston and the Texas coast currently. As storm develop off the Texas and Louisiana coastline, we activated our hurricane response plan. W&T's responds plan consists of five phases of activity, depending on the storm's intensity, distance from operations, and most importantly, the timing and logistics to safely secure our personnel and assets.

We feel our hurricane plan is well-thought out, and is appropriate for maintaining safe operations. As of this moment, we've activated various phases depending on the location of the field, and at this time, we have no material damage or concerns to report. Additionally, we have shed shut in approximately 90 million cubic feet equivalent per day, but expect to be up to full capacity by tomorrow. The critical path will be how quickly third party pipelines are placed in service.

With respect to productions, during the second quarter, we produce 31 Bcfe, slightly higher than the first quarter. Buildup from our successful drilling programs at Ship Shoal 300 and Ship Shoal 224 fields were key contributors to these production level. These gains were offset by several third party pipeline outages which resulted in the deferral of an estimated 0.3 Bcfe.

In addition, we experienced rig-off problems or unanticipated drilling related problems resulting startup delays for two wells and we have predicted with cut -- contribute to the second quarter production. Both wells are now in the completion phase.

For the third quarter 2008, the company anticipates production to be between 2.0 million and 2.2 million barrels of oil and natural gas liquids, and between 14.9 billion and 16.1 billion cubic feet of natural gas, or a total of between 26.9 billion and 29.2 billion cubic feet of natural gas equivalent. We estimate third quarter production to be down approximately 9% at the guidance mid-point for several reasons.

The primary reason for the decline is loss of two high rate outside operated wells in July. Together, these wells contributed close to 20 million cubic feet equivalent per day net to our second quarter production. One of the wells watered out. The other, we're routing through the well to compression in an attempt to reestablish production.

As we have stated earlier, we had unexpected delays in rigging up two of our platform rigs. Because all wells in the program are drilled from the same platform location, the subsequent wells will be delayed also. Our plans to drill these wells have not changed, however the time frame required has been extended. Due to rig availability, another drilling program where we are planning to use a platform rig was delayed from the third-quarter to November.

At this location, we tried to accelerate the programs since it includes both development and exploration opportunities. However, the production we were forcasting come online in the fourth-quarter will now begin in early 2009. Our current production rate is approximately 320 million cubic feet equivalent per day before the hurricane.

In summary, we now anticipate production to decline in the third-quarter. However, we are continuing to develop the prospects we have discussed in earlier calls and anticipate realizing this production in the fourth-quarter of 2008 and into 2009.

As such, we are lowering high side of our annual guidance and the 2008 company anticipates production to be between 8.6 million and 9.3 million barrels or oil and natural gas liquids and between 63.6 billion and 69.1 billion cubic feet of natural gas, or a total of between 115 billion and 125 billion cubic feet of natural gas equivalent. Please note that the low end of guidance was moved up last quarter from 110 Bcfe due to the success of our drilling program earlier in the year.

We talked about lease operating expenses. Lease operating expenses for the second quarter were $54.3 million, just below the low end guidance. We anticipated to start our level 2 and level 3 inspection programs earlier in the second-quarter. However, now the bulk of these inspections will occur in the third-quarter but for less than our original estimates.

We also did not have any major well work-over projects in the quarter. Gathering transportation and taxes were also just below the low end of guidance. Looking at the third-quarter, leased operating expenses are expected to be between $56 and $66 million, with the longer days and better during the summer months, we usually see an increase in our maintenance program.

We will be busy performing level 2 and 3 inspections, sandblasting, painting, and other routine platform repairs. Lease operating expense for the full year is now expected to be between $212 million and $232 million. Gathering, transportation, and taxes are expected to be between $9 million and $11 million for the third quarter.

This increase over second quarter is due to higher anticipated taxes due to higher commodity prices and increased plant expenses due to higher NGL volumes. We expect this higher prices and NGL volumes throughout the remainder of the year, therefore we are increasing the full year guidance for gathering, transportation, and taxes to $35 million to $39 million. Now I'll turn the call over to Jeff Durrant to discuss the second quarter exploration success and future drilling programs.

Thanks, Steve and good morning to everyone. In the second quarter, we completed the drilling on 10 wells, eight of which were successful, and when the four discovery wells from the first quarter are included, we have now been successful in 12 of 14 wells since the first-half of 2008.

But perhaps more importantly of these 12, we are currently producing from 10 for a combined net rate of 25 million cubic feet of gas per day, 3,350 barrels of oil per day, and 4,500 million cubic feet equivalent per day which is net to the W&T.

Of the two remaining successful wells, one has already been completed with production expected soon. Our other 2008 success not currently online is at High Island A-376 where first production is expected in early 2009, following construction of a platform and facilities. Because the majority of our drilling program comes from existing shelf infrastructure, we're seeing an immediate financial benefit from these successful wells.

In our last conference call, I discussed some of our early second quarter successes, including the Ship Shoal 224 E-18, Ship Shoal 300 A-2, High Island and A-376, number 7, and the Eugene Island 175 H-5. Other second quarter successes include the 67% working interest E19 development well in Ship Shoal 224, where we found 92 feet of oil and gas in [five sands]. This well is now being completed and should be online and producing shortly.

Another highly successful in field exploration well was the 62% working interest at A-11 well, and High Island 1-11. Similar to the Ship Shoal well, this well use newly acquired 3D seismic, integrated with the field's production history, to locate a large undrained fault block in the middle of a field that have already produced over 360 Bcf of gas. This well is now online producing at a gross rate of 9.1 million cubic feet of gas per day, along with 92 barrels oil per day, for a net rate of approximately 5 million cubic feet equivalent per day.

Additionally, we have drilled and completed the second successful exploration well in the Eugene Island 175 field, the 25% working interest I2 side tracked, where we found over 200 feet of oil and gas stacked in nine sands. Our last second quarter success is a 75% interest discovery in the main paths area. Both of these wells are online and now producing or about as expected.

Unfortunately, we also drilled two exploration disappointments during the second quarter where we found uneconomic quantities of oil and gas, in the 52% working interest High Island 38 Number 2, and the 75% working interest Ship Shoal 317 Number 2. Both wells have oil and gas shows but the reserves found were not large enough to justify economic completions. Both wells have now been plugged and abandoned with a total financial exposure of approximately $32.5 million.

Since the close of the quarter, we continued to have some drilling success. We found our objectives as planned, encountering 56 feet of oil sand pulled the base in the 100% working interest South Timbalier 230 A-7 sidetrack development well. And additionally, we have an exploratory success in the 75% working interest Main Pass 283 A-1 sidetrack.

Both wells are currently being completed and should add to production in the third quarter. We've also drilled an unsuccessful well after 50% working interest, Main Pass 266 A-5 with an estimated financial impact of approximately $10.2 million. So then, to date in 2008, we've now completed the drilling on 17 wells, 14 have been successful for an overall drilling success rate of 82%.

So what are we doing now? Well, currently, we're drilling six exploratory wells, five of which we operate, and of these six, three are deep shelf wells with exploration targets below 15,000 feet and these include the 90% working interest Ship Shoal 232 B-2 sidetrack, the 100% working interest Eugene Island 186 number 1, and the 90% working interest Viosca Knoll 519 #1. The Ship Shoal in Eugene Island wells are conventional seismic amplitude projects, while the Viosca Knoll well targets the cretaceous [HGM slime], the Viosca Knoll well is also an amplitude based project.

Before the end of the year, during the fourth quarter, we anticipate drilling at least one additional deep shelf exploratory well. The 91% working interest B-10 well in Vermillon 226. This well is designed to test deep seismic amplitudes beneath the [salt overhang]. Combined, these four wells will test a net un-risk exploratory potential of about 150 Bcfe. We believe these wells represent our best opportunity to add substantial reserves in the remainder of 2008.

Other ongoing conventional shelf exploratory drilling includes the 100% working interest South Timbalier 320 A-7, which is the first well and a multi-well drilling program that will likely extend to the rest of 2008 and on into the middle of 2009. We're also active another platform base exploratory drilling with two exploratory programs in the main pass area and our last plan Ship Shoal 224 well, the 100% working interest E-20.

The South Timbalier, Ship Shoal, and one of our main pass area exploratory projects we're all generated on former Kerr-McGee properties. So, by the end of the third quarter, we now expect to have completed the drilling of nine wells. With that, I'll turn it back to you, Tracy.

Thanks, Jeff. Well, the question you might be asking is, "What will be the impact on our proven reserves replacement for 2008 as a result of a revised well count?" Current numbers indicate that we may not replace reserves organically with drill bit, even with Mahogany acquisition and in the absence of any other acquisitions, we may only replace production this year.

However, we still have several high impact wells remaining in this year's budget that could change that outcome but this will also come with higher risk. That said, don't lose sight of the fact we've had record income this second quarter, and so far this year. I'll also remind you that we have, and have had, one of the lowest hedge exposures of most major independent oil and gas producers. As a result, we continue to benefit from high commodity prices and we continue to generate enormous free cash flow.

Regarding acquisitions. As you know, we don't budget for acquisitions. The market is extremely active and our R&D team is as active as ever. We had really good liquidity that allows us flexibility when an opportunity present itself. We have several $100 million cash on hand and we recently announced the extension of $0.5 billion credit line that is currently undrawn.

In conclusion, we've been very busy this year and we're enthusiastic about projects and opportunities that we're pursuing for the rest of this year and in the next year. We still have several high potential wells left in the program and many wells that will bring on the production before year-end.

Our focus is still on generating cash and reinvesting it in the projects that will continue to produce cash and exceptional returns in the years to come. Again, bear in mind that we have had record income this second quarter so far in 2008. That concludes our prepared remarks and we're ready to take your questions. Operator will you please open the phone lines for Q&A.

Thank you, sir. And ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Please ask one question and one follow-up and re-queue for additional questions. If you are using speaker phone today, you will need to lift the handset before making your selection. And our first question comes from the line of Neal Dingmann with the Dahlman Rose & Co. Please go ahead.

Morning, guys. Solid quarter.

Thanks.

Say, Tracy, just your comments on -- as far as sort of the newer CapEx with the rig market, I guess, are you seeing in your comment about the equipment delays, is the rig market becoming tighter or are you seeing rates going up and then as far as equipment delays is that mostly just on the rig side or is that also on the completion on the some of the other equipment?

I think we see it more on the rig side. Our rig's becoming tighter. We are not really seeing a substantial tightening in that market what we are seeing is -- which is normal in boom periods, is that it becomes more difficult for the contractors to track crews to work on the rigs, and you get some lesser experienced people, and you have some delays in getting new equipment for the rigs or equipment repaired, and that's really more what we're seeing than anything else.

We've had some difficulties with platform rigs more than anything else, getting them on location and rigged up. But other than that it's -- this is fairly normal in a boom period, I've been through several of this boom periods now and it always seems to repeat itself.

Okay, and then kind of -- the market, I guess conditions [and] now we've seen gas come down a bit here recently and oil come down a bit, Tracy, what's your comment given that on two things, on regards towards the acquisition market, regards towards hedging, given what we've seen the last few weeks. Does that cause any sort of near term changes or '08 changes?

It's kind of -- you have to put it in perspective a little bit Neal. When we talk about prices coming down may not -- my personal prediction for last year going in to 2008 was about $7 to $8 oil, and about $750 gas. It went to $146 or $7 out to $120 something. It's kind of hard to think of it as really coming down, I still think of it as having gone well up.

But, yes, it's amazing to think that we could see slowdown as a result of price accrued going from $140 something to $120 something, or even possibly lower than that. I'm not sure what the biases on volatility, but in any case, I think that it's still going to be very active year, I'm not seeing any real shortages as far as rigs and things like that are concerned.

If I can sneak one last one. Any comments or color on the Green Canyon 82, the [Hilly]?

Yes. We're still doing the resource analysis on that, we haven't finished reviewing that with the staff. I've still got a few more questions we need to ask before we come up with a firm production plan out of it. But we're still proceeding in that direction.

Okay. Thank you.

Thank you Neal.

Thank you. Our next question comes from the line of Phil McPherson, of Global Hunter Securities. Please go ahead.

Hey, good morning guys! Great quarter.

Thanks Phil.

You answered really the majority of my questions, I guess the real issue is you've-- I don't feel a sense of frustration there, I mean, 15 wells being dropped, you know, you put a press release out in June, kind of everything was great and good, and then 40 days later, we have this huge kind of delay or disappointment. Is it -- on the planning cycle, is it that quick that something like this big can happen or am I missing something?

I think -- no, I don't think you're missing anything and I don't feel any frustration for it-- I think that when we look at our program in it's entirety, there are things that fall out as a result of moving equipment around. It's a dynamic process. It doesn't-- we don't get the pleasure of having just a static photograph of what's going to happen at any one time. If we did, it sure would make planning a lot easier.

But as we change our inventory around and we defer things because we have high, high lease access, meaning we have good-- good leasing vis-a-vis held by production leases, it affords us the opportunity to move things out that might-- that maybe other operators wouldn't ordinarily be able to do and defer.

So, we really-- we're not dropping projects. We simply deferring some of them and that's one of the luxuries you get with HPP Acreage. And some of these-- most of these wells that dropped are being replaced into the program with wells that we know we can get drilled on a fairly timely basis. The equipment availability issue is an issue particularly with regard to the platform rigs.

We did have some issues. We'll actually getting started once we got the rig up there. That is [Ewing 19], we have some casing issues getting outside of the dry pipe. Once we got down there, one of them -- we actually ran into to one of the other well bores with the bit which caused a little bit of a problem concern for us and some delays. So, once you delay one well, then it dominoes.

Got you. And could you give us a little color on these four deep shelf wells seemed like to be the kind of the second half game changer. How long do these wells will take to drill? I mean, are these like a third quarter conference call kind of a result timing or --

Yes and no. Probably, third, fourth quarter. That's kind of what we're looking at. I can't really forecast that will be able to come up and tell you that all these wells will be drilled in third quarter. Certainly, Viosca Knoll is one of the wells that we're getting drilled right now. In addition to --

(inaudible) you think these wells, Tracy, or --?

What's that?

Are they like 60 day drilling time or what's kind of --

It's a 90.

90?

To -- maybe even slightly longer than that. So, we are getting started now to finish up for the end of the year. Again, that's assuming no trouble time. Part of the issues we've had been this equipment availability either. Really, it's also been non-operators. We have a certain number of wells that non-operators are drilling. And, they are experiencing some or the same issues that we are.

Great. Well, good luck in the second half.

Thank you, sir.

Thank you. Our next question comes from the line of Gary Nuschler with Jefferies & Co. Please go ahead.

Thanks, good morning. So, if we're talking about deferring some wells end of 2009, if we look into 2009, do you think we can get back into a 50 well drilling program next year?

That's certainly my intent. I'd like to see the program expand. Again, that's a function of some of the same issues that we have. Considering we will continue to have higher or about the same commodity prices, I think things stabilize and level out and we're not -- we're not reaching so far in the future to get equipment availability, the answer -- the short answer is yes. I mean, I'd like to see us do another 50 well program for 2009.

Okay. So, you don't -- I mean given the foresight that you have now, you think you'll be able to get the rigs under contract and then probably try to avoid the issues that we're having right now?

It's not just one issue, it's a couple of issues. I think part of what we need to resolve is what our outside operators are going to do as well as what we think our rig contractors capable of doing. We got several platform rigs on location with wells to drill.

So, the rigs are up now. We got them on location and we have some delays and get them on location and get rigged up. But, in any event, the short answer is still yes, I think so given the set of facts that I have right now and assuming that we won't have further delays from equipment availability in our other outside operators. They have similar experience to what we would expect.

Okay, and then last question, what are -- what's the reserve estimate for Daniel Boone?

I'm not sure if -- it was around 263p or so was it?, I'm sorry, Daniel Boone, I'm sure if we ever published the reserve estimates at Daniel Boone -- I don't recall the -- (inaudible).

Okay.

I don't recall the exact number right now.

Okay. I'll find that on my own. Thanks a lot guys.

Maybe by the time we finish the conference call, we'll get that information for you.

That would be great, thanks.

And thank you.

Thank you. Our next question comes from the line of [Chris Combs] with the Lehman Brothers. Please go ahead.

Hey guys. Obviously you have a lot of excess liquidity right now, is there any thoughts on potential debt repayment on that term loan? Or are you all still targeting any kind of debt to cap levels, I guess?

There's always that thought the reality is that our debt level is pretty manageable right now, and even at 8%-and-something for our paper, it just seems to me the better place to put it is back on the ground. That would be our first priority or potentially doing some reserves or so, I mean, some reserve acquisition, that sort of thing.

Okay, and is there any thoughts of share buybacks or increasing the dividend?

I mean, that's always a thought and yes we do the special dividend last year. Share buyback is probably the furthest down on the list but I don't rule it out but that's probably last on the list at this point.

Okay.

I do have an answer for your question earlier regarding Daniel Boone -- I'm sorry, not your question. But, it's about 18 to 20 bcf equivalent crude.

That was it for my questions. Thank you.

Okay, thanks. Thanks, Chris.

Thank you. The next question comes from the line of Nicholas Pope with JPMorgan. Please go ahead.

Good morning.

Good morning, sir.

Quick question, you -- I was wondering if you could give us a little more details on the two high rate wells that you talked about being off-line. I guess, where are they and also, is there any potential for a reserve write-downs and how much reserves are actually attributed to those wells?

Yes. That's a lot of questions. The Garden Banks 208 well appears to have watered out and the Pluto well which is out in Mississippi Canyons 718, I believe, is awaiting compression. We hope we get that well back online. Exact reserve write-downs from those, I can't tell you right offhand. It's a -- it's not significant in the overall program but it's --but it's right oriented.

Got it. Appreciate it. And then, I was wondering, with the reduction in the number of wells being drilled, is there any way you could ballpark, I guess, how much is attributed to the non-op partners versus rig and equipment availability, and seismic reduction, I guess, review of the seismic data?

Yes, let me see if I can clarify that for you. We've had about, I don't know, nine or 10 non-ops stuff that we were looking at. Steve is going to answer that question. I think, he's got better data than I do on my fingertips.

Yes. On the equipment, it was probably about --about half of the-- about half of the wells. And about a quarter of them were outside operated and then about quarter of them were additional technical evaluation.

Got it. Alright. That's all. Very helpful. Thanks guys.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). And our next question comes from the line of Noel Parks with Ladenburg Thalmann, please go ahead.

Good morning.

Good morning, Noel.

Few questions. This year, I recall you saying at the start of the year that -- how you came up with the (inaudible) drilling program you did was to seek-- be as efficient as possible in terms of rig [moves] and so forth and that some of those decisions came out as steady as it did last year.

Does your revised plan now-- does that change your thinking around how feasible it or it really is to try to manage so closely, exactly, geographically in what order you're going to drill things or is that just-- or do you feel as strongly as you did before about that?

Okay. Let me break the question down here. First of all is talking about logistics and trying to manage our logistical moves on rigs. We always try to do that. As wells fall out of the program or we change the line up in the program, obviously, those logistics change. Similarly, as rigs have issues, availability issues coming from other operators, their timing changes.

So, it's a very dynamic situation, we work very hard on trying to manage that logistics portion of it, but there are certain things that we don't get to control. I also said that-- when we propose this program earlier in the year, we had a very different pricing regime.

When we were doing our budget for this year, again, our-- my own opinion was that we certainly weren't going to have these kind of prices, and I think I told everyone that would listen that, now this was very subject to price sensitivity and that as price of commodities went up, that we would experience some equipment problems as well.

And I think that's really more of what we're seeing here. It's just-- just availability and other operators experiencing similar issues that we have. But bear in mind, the good news is there-- it would made a hell a lot of money from the commodities, so our cash flows is way, way up, as many other people is as well, and this is very similar to things we've seen in the past.

I mean, I certainly wish I could sit here and tell you that I had enough foresight to predict $130, $140 oil or even $120 oil. I wasn't even close. Similarly with gas. But the good news is, it's huge cash and we've got a huge amount of liquidity to work with for this year and beyond. So the good news is, that we are out hunting for other things and ways to constructively utilize that cash.

Okay, and also thinking about just looking back over the past year, there was some mention again of -- sort of additional technical review on some of the wells being a factor. Do you have any greater sense of how the former Kerr-McGee properties that you pretty much digested. But, any sense as to whether you are -- any pattern as far as those properties are turning out to be better or worst than expect as you got another half year further down the road?

My opinion is very safe. They are better than what we thought we are going to be. We'll continue to drill up that program. We're finding new opportunities all the time. Things that changes result of technical review are being replaced.

I mean it's not like "Gee, world comes to an end." or we decrease our inventory. We're finding more opportunities on our own properties and in others as well. So, now the Kerr-McGee thing has been an enormous success. We're very happy with it and I we still have a lot to digest there by the way in the way of things we can do with the drill.

Has that been primarily in the deep shelf that you feel like your expectations are going to succeed on all those properties?

We are -- we have a number of prospects in the deep shelf and you may have noticed there's some other operators out there drilling ultra deep. One of the things we're looking at very hard is our own properties at Mahogany, which we think has some very deep potential -- ultra deep potential. We're studying that right now.

This is no secret. I've been chatting this in different conferences and investor meetings and what not. There's still a lot of structure underneath us that hasn't been tapped. We haven't been into the [Maiacean] there yet. So, we're investigating that and I expect to have more news on that pretty shortly about exactly what we're going to do in the way of further drilling out there.

Okay. Just assume that that would be some sort of a 2009 event or at least kicking off in 2009?

It looks like we would probably spud the well in 2009.

Okay. Okay, thanks.

Thank you, sir.

Thank you. (OPERATOR INSTRUCTIONS). And our next question comes from the line of Richard Tullis with Capital One Southcoast. Please go ahead.

Hey, good morning.

Hey, Richard.

Just going back to the four high impact wells that you've looking at for the rest of this year. What are the gross reserves associated with those wells?

That's a 150Bcfe unrisked.

Okay. So, that was a gross number?

Yes, sir. I'm sorry, that is not a gross number. That's a net number, excuse me. Yes. That's right. Net number.

Okay. What's you're average working interest in those?

Most of them are pretty high. I think, Ship Shoal is 90%. Eugene Island is 100%. Viosca Knoll is 90%. I don't remember the other one.

91% at Vermillion 226

91% of Vermillion 226. So, between a 90% and a 100%.

Okay. What's the cost expectation on those wells?

I think we've given that out. I mean, it's -- I can't tell you right often.

Okay. What sort of drilling pace your looking out, like one well at the time drill and complete?

I think we're on Viosca Knoll right now and we're also at Eugene Island 186 number one right now. So, two of them located and also at Ship Shoal 232. So, we're drilling three of them as we speak.

Okay. How quickly could you bring on a successful well there? Is there an existing infrastructure in place that's available?

The short answer is most of them, yes. The Viosca Knoll, we made a discovery there. It would take probably a little bit longer.

Okay. Okay, well thanks to much, Tracy. I appreciate it.

Alright, and then also, Ship Shoal 232 is on platform, so that one would come on pretty quick. Thanks.

Thank you. And Mr. Krohn, there are no further questions. So I'll turn it back to you for closing comments.

I think, I've had my say today. We're battening down the hatches here for a little rainy day but other than that I think, we've done for it. I really appreciate your participation. Thanks so much.

Thank you sir. Ladies and gentlemen, that will conclude today's teleconference. Again, if you would like to listen to replay today's conference, please dial into 303-590-3000 and enter the access code of 11117572 followed by the pound sign. We thank you again for your participation and at this time you may disconnect. Have a nice day.