Amplify Energy Corp.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good morning. My name is Brandi and I will be your conference operator today. At this time, I would like to welcome everyone to the Midstates Petroleum Third Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Al Petrie, Investor Relations Coordinator, sir, you may begin your conference.

[Al Petrie:]

Thank you, Brandi. Good morning, everyone, and welcome to Midstates Petroleum third quarter 2014 earnings conference call. Joining me today as speakers on our call are Peter Hill, Interim President and CEO; and Nelson Haight, our Senior Vice President and CFO. Peter will begin today's call with an overview of the quarter and operational highlights. Nelson will follow with additional financial details and provide guidance of the fourth quarter. Peter will then wrap up with some closing comments. Because of our analyst meetings next Monday and Tuesday, which will be webcast, we’re keeping our prepared remarks today fairly brief and we’ll go into more detail at that time about operations and our look ahead for 2015. Before we begin, let’s get the administrative details out of the way with our Safe Harbor statement. This conference call may contain forward-looking information and statements regarding Midstates. Any statements included in this conference call or in our press release that address activities, events or developments that Midstates expects, believes, plans, project, estimates or anticipates will or may occur in the future are forward-looking statements. These include statements regarding reserve and production estimates, oil and natural gas prices, the impact of derivative positions, production expense estimates, cash flow estimates, future financial performance, planned capital expenditures, future potential drilling locations, resource potential and other matters that are discussed in Midstates' filings with the SEC. These statements are based on current expectations and projections about future events involve known and unknown risk, uncertainties and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Please refer to Midstates' filings with the SEC and the third quarter Form 10-Q that will be filed shortly for a discussion of those risks. Also, please note that any non-GAAP financial measures discussed in this call are defined and reconciled to most directly comparable GAAP measure in the tables in yesterday's earnings release. I will now turn the call over to Peter for his comments.

[Peter Hill:]

Thank you. Good morning everyone and thank you for joining us today, November the 5th, in my old country that's a Guy Fawkes Day which is a day where we burn person to the stake and we will have fireworks. Hopefully neither will happen today. This was another very solid clean quarter overall. We are continuing to execute on the strategy we laid out earlier this year which was to deliver financial stability, exercise ruthless capital discipline and review all strategic alternatives. Through operational performance, we are positioning ourselves for improved liquidity and value growth despite the difficult commodity environment. In the third quarter of 2014, we broke three records with adjusted EBITDA of $132 million, production averaging 34,000 barrels of oil equivalent a day and adjusted net income of 19.3 million. The increase in production coupled with lower cash costs and strong margins led to this record EBITDA. Our operating costs were well below our guidance of $5.46 a BOE and this was driven primarily by the improving efficiencies in the Miss Lime where we saw absolute costs decreased by 13% and production increased by 15% quarter over quarter leading to operating costs of $3.36 a BOE. The production increase in the Miss Lime can be attributed to the continuing strong performance from new wells and by example, we added four wells this quarter with 30 day peak rates greater than 1000 barrels of equivalent a day. We believe that these differentiating results further demonstrate the value of our premier Miss Lime position and we’re very excited and pleased with it. We continue to make meaningful progress improving of that metrics and creating liquidity with the announcement of the Dequincy sale for a total consideration of $90 million and the recent expansion of our borrowing base from $475 million to $525 million. In the third quarter we also added to our oil hedges for 2015 allowing us to lock in a majority of our revenue at favorable prices through to the first half of 2015 and protect a significant portion of our revenue in the second half of 2015. These events coupled with the closing of the Pine Prairie sale and the fleet with expiration agreement in the second quarter provided additional liquidity, security and flexibility through 2015 that are vital in the current price environment. We will discuss 2015 plans and optionality in greater detail as Al said next week during our analyst meeting that will reinforce our focus on rigorous capital discipline, margin expansion, and value growth to protect that liquidity position and bring stability to our balance sheet. Turning to our focus areas, the recent Miss Lime well performance together with significantly lower operating costs demonstrate the value and potential of our exceptional acreage position possessions out there. As indicated in the updated Miss Lime slide, on our website we now have 189 wells online with an impressive 30-day peak average production rate of 575 BOE per day which we believe is the best of all operators in the entire play. Our results are continuously improving as nearly 50% of our wells drilled at peak 30 day rates greater than 500 barrels of equivalent a day. These wells offer compelling rates of return at $80 oil strip of about 80% rates of return and off a cash margins over $40 a barrel. As we refine the use of our 3D that we have over our entire acreage position in the Miss and applying our integrated geoscience, drilling completion and reservoir engineering approach we are able to choose optimal locations and drill the best intervals. This results in increasing EURs, significant down spacing opportunities and growing the reserves and resource base reconfirming the longevity and leadership position within the play. Our concentrated acreage position and strong salt water disposal and electrical infrastructure also allow us to drive operating costs lower, efficiently develop our acreage and enhance margins further. We believe that these results coupled with our hedges will allow us to protect our EBITDA in an uncertainty near term price environment. Turning to the Anadarko basin, well results there remain encouraging and we’re beginning to realize lower costs in our Cleveland program and believe we've stabilized our completion technique. Our recent well results in the Cleveland continue to be consistent with our past peak 30 day results at just under 400 barrels of equivalent a day. In the Cottage Grove, we have another well with a 30 day peak over 600 barrels of equivalent a day and have seen our average rates in that formation coming at the same range as the Cleveland. In the Tonkawa, we want to see more data from our competitors but continue to be encouraged from the other results. In the Marmaton we too have seen consistent results near 300 barrels of equivalent a day. We do need time to further study these formations and focus on ways to drive costs lower to maximize returns and we continue to be encouraged with the potential to develop the Anadarko with further improvements to come. I will remind you that we only took over operatorship of the play in early 2014. The margins and rates of return in the Anadarko while attractive are more sensitive to price and cost movements and are currently not as robust as those that we enjoy at the Miss Lime. Given our strategic focus and our operational emphasis in the near-term remains with the Miss Lime. Looking ahead to the balance of 2014, given the current macro environment we must continue to ensure that we are spending every dollar as efficiently as possible. Pursuant to our strategy of capital discipline we’re going to slow down our activity modestly in this fourth quarter. We’ve reduced our rig count in the Anadarko to a single Cleveland rig and have temporarily lowered our rig count in the Miss from seven rigs to six rigs due largely to a backlog of completions. We intend to pick up our rig back up in the Miss early in the first quarter and in the Anadarko we will further study our results and those of our competitors and with acceptable commodity prices or improvements in our D&C costs, we would expect to ramp up activity in the Anadarko as we move into midyear 2015. As we’ve said repeatedly, we want to grow production unit value and not just growth for growth sake. This is especially and particularly important given the current uncertainty on prices. So in summary, our excellent third quarter results, our prime Miss Lime position, our low-cost and strong hedges over the next months provide a very firm foundation to weather the current uncertainty in pricing. Our focus is on improving our operational execution and that will allow us to maximize profitability and grow production in a fiscally responsible manner. Our short-term contracting allows us time and flexibility through 2015 but we will continue to act quickly in the current environment, allocating correct amount of capital to the best projects that will allow us to protect our liquidity and allow us to seek ways to reduce debt and strengthen our balance sheet. With that summary, I will turn it over to Nelson and he will give you a lot more financial detail on our 3Q performance and the plans that we have for the fourth quarter. Nelson?

[Nelson Haight:]

Thanks, Peter. Our financial results for the third quarter were clearly very attractive and reflect the success we've had in managing both our operating costs and our overhead while continuing to grow production. Our record high adjusted EBITDA of $131.7 million before 1.3 million of transaction costs was above expectations and was up 29% from 102 million in the third quarter of 2013 and up 7% from roughly 123 million in the second quarter of 2014. Our results benefited from growth in production volumes which were up 19% from the third quarter of 2013 and up 6% from the second quarter of this year. For the third quarter in a row, significantly lower cash operating costs and in particular lower LOE and G&A contributed to the growth in adjusted EBITDA. Our operational capital spending the third quarter was within our guidance and totaled 134.5 million with about 98 million in our Miss Lime properties and 37 million expended in our Anadarko basin properties. For the fourth quarter we expect our operational CapEx to be approximately 110 million to 120 million with 108 million in the Miss Lime and the balance of 10 million to 12 million in the Anadarko basin. These estimates reflect the plan that Peter described with six rigs operating in the Miss Lime and one rig in the Anadarko basin during the fourth quarter. Using the midpoints of the production range and expense guidance I will provide shortly and taking into account our existing hedges for the fourth quarter, and current strip pricing, we expect our adjusted EBITDA to equal or exceed our operational capital in the fourth quarter which would be a significant milestone for the company. This will bring our full-year 2014 operational capital investments to 520 million to 530 million well within our full-year guidance of 500 million to 550 million which we’ve consistently provided since earlier this year. Additional detail is available on our supplemental information package posted to our website this morning. Adjusted net income for the third quarter was also a record high at 19.3 million or $0.29 per share compared to a net loss of roughly $0.8 million in the period a year ago and net income of 14.4 million in the second quarter of 2014. This excludes the impact of unrealized gains and losses on derivatives and some remaining Pine Prairie transaction costs along with the related tax impact. Our third quarter reported GAAP net income of 74.6 million before 1.9 million in preferred dividends was a record high and compares very favorably with the net loss of 23.6 million in the same period in 2013 and a loss of 2.1 million in the second quarter this year. Production in the third quarter grew to 33,799 BOE per day which included the negative impact of 220 BOE per day due to a prior period adjustment to our Anadarko basin production. Excluding that adjustment, our production was roughly 34,000 BOE per day at the low end of our guidance. 71% of our first quarter volumes came from our Miss Lime properties, 25% from our Anadarko basin assets and 4% from our Dequincy area properties in the Gulf Coast. We will continue to benefit from the production at Dequincy through the closing date of the sale which is anticipated to occur in November. In light of the current commodity prices our desire to maximize cash flow and value from our production stream, we began rejecting ethane from our Miss Lime production as of October 1. That will result in lower NGL volumes by about 500 barrels per day but will increase our annual net revenue by roughly 1.5 million to 2 million per year. After taking that into account as well as removal of the Dequincy volumes in mid-November, we expect our Q4 production to be in the range of 33,000 to 34,000 BOE per day. We expect our Miss Lime properties to average from 24,000 to 25,000 BOE per day and our Anadarko basin properties to average 8000 to 8500 BOE per day. Even after the impact of the Dequincy sale and ethane rejection in the fourth quarter, this guidance will result in it still being within the lower end of the full-year guidance range we've provided in the past of 32,000 to 35,000 BOE per day. Additional details on the product mix of this volume guidance along with pricing translation differentials are included in the supplemental information pack that was posted to our website this morning. Turning to hedging, during the third quarter we further increased our 2015 oil hedge position. We have not added any gas hedges but are pleased with the ones we previously put in place with average prices in excess of $4 per MCF. For the fourth quarter of 2014, we now have about 80% of our projected oil production hedged at roughly $89 and about 60% of our natural gas production hedged at $4.17. For the first half of 2015 we now have 12,000 barrels of oil per day hedged at an average price of about $90 per barrel and 50,000 MCF per day of gas hedged at $4.13. In the second half of 2015, we have 6000 barrels of oil per day hedged at about $85 and 50,000 cubic feet of gas hedged at $4.13. A detailed summary of our current hedge positions by quarter is included in the release and is posted on our website, along with all the guidance I am providing today. Our hedging strategy remains to be as aggressive as possible to protect our operating cash flow in order to fund our development programs going forward and to protect our liquidity. I will now review our third quarter expenses and provide guidance for the fourth quarter. Third quarter cash operating expenses which include LOE production taxes and cash G&A but excludes acquisition and transaction costs, totaled 34.8 million, down 12% from 39.6 million in the second quarter of this year. Costs fell 4.8 million on an absolute basis but fell even more significantly on a BOE basis. In the third quarter, cash operating expenses totaled $11.21 per BOE which was down 18% from $13.63 per BOE in the second quarter of this year and down 34% from $16.98 per BOE in the third quarter of last year. The improvement was primarily due to increased production volumes and lower LOE and G&A. Our lease operating workover expenses totaled 17 million, down almost 14% from 19.7 million in the second quarter, even though our volumes grew 6%. Third quarter LOE of $5.46 per BOE was significantly below our guidance range of $6.75 to $7.25 per BOE as well as the actual second quarter rate of $6.79 per BOE and $8.32 per BOE in the third quarter of 2013. The reduction in rate came primarily from the Mississippian Lime where our LOE fell to $3.36 per BOE which was a new all-time low for us as we continued to benefit from the operating leverage provided by past investments in electrical and salt water disposal infrastructure and lower workover expenses. Overall we also benefited during the third quarter from the removal of the Pine Prairie properties where average LOE rates were higher. That transaction closed in May of the second quarter. For the fourth quarter we expect our LOE and workover expenses to be in the range of $5.50 to $6 per BOE of just a bit as we expect more workover expense in the fourth quarter partially offset by the removal of the higher rate LOE associated with the Dequincy properties in November. Gathering and transportation expenses associated with our main gas processing arrangement in the Miss Lime totaled 3.9 million, up 1 million from the second quarter primarily due to higher production volumes. For the fourth quarter we expect those costs to range between $3.5 million and $4 million. Severance and other taxes totaled $5.8 million or about 3.3% of total revenue before derivatives which was slightly below our guidance range of 4% to 5%. We continue to see the benefit from higher production volumes in the Midcontinent region where severance ad valorem taxes are at lower effective rates than in Louisiana. The sale of Pine Prairie also contributed to this reduction. In the fourth quarter we are lowering our guidance range 3% to 4% of revenue to reflect these lower tax rates. Third quarter total cash and non-cash general and administrative expense was 9.9 million, well below our guidance range of 11 million to 13 million and 26% lower than our second quarter figure of 13.4 million. The decline was related to the favorable resolution of an outstanding state franchise tax matter as well as lower employee related costs due to lower headcount. Non-cash G&A totaled $1.7 million during the quarter and we expect total G&A in the fourth quarter to be in the range of $10 million to $12 million with about 1 million to 2 million being non-cash. Our DD&A rate in the quarter of $23.52 per BOE was below our guidance of $25 to $27 per BOE. For the fourth quarter we have lowered our expected rate to $24 to $26 per BOE. There was no impairment charges during the quarter. You may have noticed that we had 2.4 million of other expenses this past quarter on our income statement and that was a non-cash nonrecurring write-down of inventory and equipment related to our Louisiana properties that we're in the process of selling. Total interest expense incurred in the second quarter was $36.9 million of which we capitalized $2.6 million. We expect to capitalize about $2 million to $4 million in the fourth quarter. As we discussed in the past, we are now utilizing a much lower tax rate in our financial statements which in the third quarter was about 3% or an expense of roughly $2.2 million. We utilized a portion of our previously unrecognized net operating loss carryforwards to offset the taxable income generated during the quarter. To the extent we generate financial taxable income in future quarters we will continue to recognize a portion of our un-recorded net operating loss carryforwards to offset the related tax expense. As a result, for the foreseeable future our tax rate will be between 0 and 5% with all being non-cash. Turning to our capital structure. In September we disclosed that as a result of our lender semiannual review the borrowing base under our revolving credit facility had been increased by $50 million to $525 million. The borrowing base is supported solely by our Midcontinent assets, so the sale of our remaining Louisiana producing properties at Dequincy will not affect the borrowing base. We plan to use the net proceeds from the sale to pay down our revolver and the next regular re-determination date is at the end of March. As of September 30 our liquidity totaled approximately $180 million comprised of $155 million of undrawn capacity on our revolver and roughly $26 million in cash and upon the closing of the sale of Dequincy we anticipate year-end liquidity of between $160 million to $180 million. Our debt to adjusted EBITDA multiple at September 30, 2014 was 3.6 times, down from about 4 times at June 30 as we continue to make headway in reducing our cash outspend. In achieving our expectation that adjusted EBITDA will exceed our operational CapEx in the fourth quarter will be a significant accomplishment and going forward we will continue to focus on growing adjusted EBITDA at a faster pace than our CapEx to further improve our debt metrics and pave the way for us to become cash flow neutral. We will discuss our 2015 plan as well as the sensitivities to commodity prices during our analyst meetings next week but our growing cash flow with support from our hedging program together with available capacity under existing credit facility give us confidence that we have the financial resources we need to execute our planned capital budgets and service our debt through the end of 2015. And with that, I'll now turn the call back over to Peter.

[Peter Hill:]

Hey good job, Nelson. In closing this off, I think it’s appropriate that we discuss the results to date our strategic options review and set the stage for the analyst meetings next week. And as you’ve now seen from these quarterly results we’re sustaining positive momentum with excellent growth in production and value in the Miss Lime, maintaining the focus on capital investment discipline in both the Miss Lime and the Anadarko as well as carefully managing our liquidity and controlling our operating costs. We will have monetized all our legacy Louisiana producing properties by year-end, expanded the borrowing base and entered an attractive exploration agreement over our fleet with acreage that can provide organic growth at no cost to the company. Just as importantly the strategic options process has uncovered considerable upside value that we’ve shared with you throughout the last six months. We've identified a large 650 million barrel of equivalent contingent resource base across our entire acre position with over 3000 gross well locations in both the Miss and the Anadarko. We’re currently moving forward on ways to extract maximum value from and potentially monetize our salt water disposal infrastructure in the Miss. We’re still in discussions with third parties to maximize the value across the portfolio similar to our fleet with exploration agreement and the sales of Pine Prairie and Dequincy. And while we’ve had in-depth discussion with a variety of very interested third parties, a portion of our asset base, that process has resulted in our belief the highest current value proposition to our stakeholders is to continue as a standalone company. We will look at alternatives and have the time and ability to be both thoughtful and considerate on how we best proceed. So let me make it clear – we’re keenly focused on building upon the momentum we created these past three quarters as we continue to execute on our standalone strategy. We’ve decided to consolidate our corporate Midcontinent operational offices in Tulsa by early 2015 and we will accelerate our search for a Tulsa based CEO will lead our operational execution plan. This consolidation will result in additional G&A costs in the fourth quarter 2014 of between $5 million and $7 million but we will ultimately reduce our G&A on a going forward basis by a similar amount. We will right size our organization and that will position us to be a low-cost leader in the Mid-continental region. During our analyst meetings next week, we plan to, one, provide additional details of our standalone strategy; two, discuss the resource potential and location count by both formation in the Miss Lime and the Anadarko, would dive into the recent well results and innovations in the Miss Lime and the Anadarko areas and show you what we’ve learned about the geology drilling completions and our reservoir engineering. We will provide well level economics at different ranges for oil price and we will outline various scenarios for 2015 based on commodity pricing and reiterate our strategic direction and outline our forward plans and pathway into 2015 and beyond. And with that, Al, we’re ready for some questions.

[Al Petrie:]

Thank you, Peter. As a reminder, Please limit your questions to one and a follow-up. And also I want to make sure that if anyone has not received an invitation to our analyst meeting next week, please let Chris or I know, and we will be happy to send that to you. Brandi, we are now ready to take questions.

[Operator:]

(Operator Instructions) Your first question is from Neal Dingmann with SunTrust.

[Neal Dingmann:]

Kind of just your thoughts, and I know a lot of this obviously will be hit next week on the analyst day, but just your thoughts, first of all, I know you haven’t broken out 2015 yet. But just generally thinking your thoughts on sort of spending, I guess, is it fair to say you still want to stay at least within that cash flow level and given the efficiencies and lower costs you are seeing, could you potentially see – I am just wondering – on the magnitude of how much more activity you could see even with the same potential spending?

[Peter Hill:]

Let me start by saying – let’s just touch on a couple things. You recall what we've been saying all this year that what we’re looking to do is to become cash flow neutral by the end of 2015, going into 2016 where we would hope to have been free cash flow positive. That of course has changed now given the circumstances of the past few months but we have been saying that for some time. And I think it's very solitary that this quarter we’re within $2 million as Nelson pointed out between our EBITDA and our capital spend, 134, played to 132. So we were certainly making real progress to get to that point. We always said that we will be spending less in 2015 than we would spend in 2014. We’d indicated numbers something around 450 plus a little bit perhaps and I see no reason to change that. We will give you a lot more detail as we go into next week and I don't want to go into any breakout into any of that detail right now. The one thing I would say is that we’re well hedged, we’ve got a low-cost environment. We ourselves have worked very hard at getting to low-cost across our board and I think we've shown that this quarter and that gives us flexibility to and time to be very thoughtful about how we would go about that program in 2015. So it's nice to have a few options and we’re thinking about it constantly and we will be there ready to talk about it, come next week when we talk about the program and strategic content.

[Neal Dingmann:]

And I love the optionality there and then just secondly, just looking at obviously the number of locations in the Miss, you’ve had obvious a lot of success there recently with the open hole completions. Just I guess your thoughts and I know you’ll break much more into this I am sure next week. But the thoughts on using that more of the open hole on a go forward basis do you see that continue to be more prevalent and is that just on the existing type locations or would that work on the potential developers as well?

[Peter Hill:]

We’ll keep all of those in quiver as we go forward. We've done a lot of open hole, we’ve learned a lot of lessons. We’ve done one or two other things. We’ve got other completion techniques that we’ve been applying and using. We’ve running with this thing called divert and search and we’re looking at the results of that, but as well we will go back over our ground of plug and perf and port it just sliding sledge and look at all of those and that the underlying premise here is that we’re going to use the lowest possible cost to give us the highest possible unit returns. And what will prevail will be those techniques and completions that work to that satisfaction. We’re not going to go heavy into experimentation, we’re in this now particularly this environment to make as much money as we can on a unit of production, and whatever the completion techniques or drilling technique that gives us those results will be the ones we’re going to use and apply.

[Operator:]

Your next question is from John Herrlin with Societe Generale.

[John Herrlin:]

Following on that question, you’re basically saying with the Miss Lime wells that you haven't changed your completions at all this last quarter versus prior ones?

[Peter Hill:]

Well, we have – we’ve done a fair amount of trial, we’ve done a fair amount of vary in our techniques. We’ve done open hole, we’ve done divert and search. We’ve done plug and perf and we’ve done some sliding sledge and we just go back to a very active program and looking at all of those results. Drilling our wells as best we can, I mean the key to this, John, is to drill horizontals that give you access to as much stock storage as possible which means we’re going to apply everything, whether it be 3D to give us the identification where these intervals are, staying in that section and in completing our wells in the most optimal way to access to that rock storage and gives us direct access into the well bore in a sustainable way. It’s an ongoing process, we’ve got a number of tools that we apply in a dynamic and very real time way and we’re tweaking, tuning it as we go along but the underlying thing particularly now I go back to again is that it’s the highest cost return for the lowest cost outcome. So that's what we're looking to do and we’re using all those tools at our disposal.

[John Herrlin:]

Any sense of timing with the salt water disposal system?

[Nelson Haight:]

Hi John, this is Nelson. We've been working on that over the last couple of months and I think we’ve got a series of steps that it will take. It looks like the first step we will take will be charging our joint venture or our working interest partners a more market-based rate for salt water disposals as you know we have been charging them as part of just the LOE cost structure. We hope to do that sometime between now and the first quarter. The second step, there is a couple of issues as far as the full monetization with an outside third party. There are some issues that I think need to be resolved with the Oklahoma Corporations Commission, we feel like others who are looking at the same thing we are with respect to their salt water disposal systems have the same issues that remain to be resolved. We think that will happen based on our conversations with Oklahoma Council maybe sometime late in second quarter of next year. So that’s kind of the update today. First step charging market-based -- a more market appropriate rate to our working interest owners and then follow on with the resolution of these issues before the OCC.

[John Herrlin:]

Last one from me is on the data room. How crowded was it in terms of – did you have a lot of companies through, and were they more private than public if you could say that?

[Peter Hill:]

It was standing room only, we had a process that went on for two or three weeks and we had full parties for at least two and half of those weeks. So that’s the number of folk we had in, not to mention those that didn't come in for presentation, or to look at paper reports, rest of it, those that were on the virtual data room. And there were many more visitors and looking to that. So we had a pretty thorough process, a fair mix between private and public, one or two waves and strays but generally high quality people that were coming through looking at this thing and conversations we had with 4 or 5 maybe 6 or 7 that got very real both from the asset point of view, joint venture point of view, other innovating ways of looking at trying to do some business but at the end of it, it all came down to the fact of having finished all the work ourselves in those 3000 locations and 650 million barrels of equivalent of resource potential, none of them gave us the confidential comfort that that was in the best interest of stakeholders to entertain those discussions, and we saw that going our own was by far and away the best thing to do at the time, it still is. The door is not closed. I mean we are still talking to one or two folk. So we keep this thing under constant review and dialogue and just see where it goes.

[Operator:]

Your next question is from Pearce Hammond with Simmons & Co.

[Pearce Hammond:]

At what level of flexibility do you have regarding your oil services contracts, whether it be of rigs or completion services to adjust activity in the lower oil price environment?

[Peter Hill:]

Quite a lot. We’ve consciously built into the way we go about doing it. I think each one of our rigs is on a three month contract and they are laddered. So they don’t all fall due at the same time, so it gives us a huge amount of flexibility to pick up of both drop rigs. Frac spreads are more complicated, there's been a lot of competition for frac spreads particularly with the Permian and keeping those in our area has been a bit of a challenge. But nevertheless we’ve managed to do that. As time goes by then the service companies are starting to realize the situation with regard to the price environment and we are starting to see some loosening up but it's not been very apparent thus far. But we’re going to see it for sure going forward and that will give us further opportunities and that takes care of most of it. We would point out that what we do in the Miss Lime we don't use a lot of proppant, if I don’t use any. We use acid and acid has become somewhat scarce and given that we’re one of the major users in the US, the entire US all acid, then we have to be mindful of keeping well supplied with that. But those are the major headlines, and Nelson?

[Nelson Haight:]

Pearce, I am just going to add that currently just with respect to drilling contracts, we don't have any commitments beyond February of next year. So we have the flexibility to extend these on three-month terms or whatever we can negotiate but we have no two year commitments under rigs or we have the flexibility to take advantage of pricing improvements in that area.

[Operator:]

Your next question is from Chad Mabry with MLV & Company.

[Chad Mabry with MLV & Company:]

Just a follow up to the prior question, looking at the declining activity in the Anadarko basin, just curious if there are any lease expirations at risk there, and then if you do kind of go to a no rig activity level into 2015 what you’re modeling in for your declines next year?

[Peter Hill:]

I mean it’s all part and parcel of the process Chad, you can’t do anything here without there being some sort of consequence and some sort of management requirement that is now holding upon us on a daily basis. We don't see anything in terms of the Anadarko position that is onerous. We have a goodly amount of it held by production. There are pieces in places where it's not and we will have to adapt and manage our way through that. If we do see that we don't or we’re unable because of the environment to see some of these wells drilled, then leases will lapse. There will be ones in lower priority as far as we're concerned and they will be attractively available for us to go and renew which we would commonly do. So it's a competitive environment but it’s not that competitive out there and in many instances actually it works to our favour to do that because we can then release these acres at a lower-price. So it’s part and parcel of the program and the process and if we do let that thing happen, we will let it happen for very good reason given the price environment and what we’re looking at and the primary driver here, I keep saying this is ruthless capital efficiency. And that’s the name of the game.

[Nelson Haight:]

Sorry Chad, I would just say that we’ve said in the past we’re going to manage our expirations with the idea to preserving or limiting cash out of the company. So we’ve high graded our acreage and as Peter said we will be letting where we think we have the opportunity and we’re not giving up anything in the near-term, we will selectively let things expire.

[Chad Mabry with MLV & Company:]

I guess a follow up to that on the cost side, another impressive performance in driving down these operating costs. Just curious looking at the Miss driving that down to 3.36 BOE, is that something that you can continue to leverage your existing infrastructure there to drive that cost down towards that kind of 3, 3.50 level on LOE?

[Peter Hill:]

Chad, it never ends. It’s blocking and tackling, we’ve taken all the big things in this but everyday I am going up there again the next week or so and we will go out in the field again, we will go through it and there are plenty of little areas, little things you can do that will make a difference, both consistency, the amount of tanks, the way you pump, the way you offtake, all of those things are hugely important and our guys are very conscious of all of these and they’ve always been innovative in finding ways in which you can drive down those costs. There is irreducible low, of course there is. But I don't think we’re there at this stage and such as the quality of the rock and the reservoir system is it is now up to us to both – to continue to be prudent and just keep looking for ways to improve.

[Operator:]

Your next question is from the Greg Burdy with Bank of America.

[Unidentified Analyst:]

And just on the borrowing base – congrats again the borrowing base increase this past quarter. And just looking forward to the spring re-determination, have you had any conversations with your bank as to what may have to the price decks, in that scenario, given today’s prevailing prices and perhaps how that may impact your borrowing base?

[Nelson Haight:]

Hey Greg, this is Nelson. We have talked to our bank, I don't know what decks are going to run, they haven’t given a preview that yet. I think last time they were running at $75 deck, so you can kind of interpolate from there. I haven’t had any clear guidance on what it would do to the base. I think it makes obviously an increase more difficult in this environment but the hedges to help -- that we have in place the hedges do help preserve the existing level.

[Peter Hill:]

We don't need them. We like it but we don't need them.

[Unidentified Analyst:]

Don’t need the hedges you’re saying?

[Peter Hill:]

The increase. We will manage our business appropriately. Of course Nelson will be out there working with the banks as best as he can to see what is available and if we’ve got an increasing reserve base and all those other good things, then that will go into the mix. Price will be a major driver of course but we will be about our business doing what we can to see what is available to us.

[Operator:]

Your next question is from Sean Sneeden with Oppenheimer.

[Sean Sneeden:]

Peter, can you remind me of -- at this point what your PDP decline rate is in the Miss?

[Peter Hill:]

I want to be a bit careful here because it varies but if you want a round number 40% would be a select number, what you’re trying to get – you’re trying to get a the B factor or you’re trying to get a decline or what you’re after?

[Sean Sneeden:]

Yeah, just the general decline. If [indiscernible] CapEx off today what would that be decline looks like?

[Peter Hill:]

40. We’re pretty robust at fairly low prices, let me tell you, at very low prices. And a lot lower than the Wall Street Journal.

[Sean Sneeden:]

Nelson or Peter, maybe for you guys at least on the balance sheet, can you in kind of high levels and I appreciate you talk about this on the analyst day next week but maybe on a high level, can you talk how you’re going to weigh or balance the desire to grow production next year with your liquidity and leverage profile? How – do you kind of go about in really allocating capital, what’s kind of like the minimal amount liquidity that you want to have at the company as you exit ’15?

[Nelson Haight:]

Hey Sean, this is Nelson. I will answer the last part of your question first, I think our target would be between 75 million to $100 million of liquidity would be the ideal amount we’d like to exit the year with. As far as managing growth as Peter talked about, we’re going to try to reduce our absolute capital spend next year versus what we’ve incurred this year. So we’re targeting initially I think it’s $450 million range, we think with some of the things we've done in the completions and that which Peter is more versed in, we should be able to achieve some savings on the capital side and still manage a reasonable amount of growth. Clearly the commodity price environment that we’re in today makes that a flexible target but certainly we’re maintaining our goal to try to grow the EBITDA in excess of our capital spend similar to what we did this quarter and we hope to do in the fourth quarter.

[Peter Hill:]

And that’s absolutely true. And it’s going to be a game for everyone going forward. How long is this price environment going to remain, what is that price environment going to be, how can you adapt your program to meet all your requirements and it’s a jumping act, isn’t it because there are consequences of what you do. If you spend less you don't get as much EBITDA, if you lower your cost base, you get more of your invested dollar, all of those things play into that equation. Where we are fortunate is that what we've done has been very ruthless with our capital and the guys have done a great job in the field in terms of lowering that cost base to give us that margin and give us that flexibility. More so than many others out there and if the environment stays in a very low price regime, there’s going to be a blood on the floor, and you know it. Hopefully that won’t be much about blood and our flexibility is that we can stay pretty active in a very low price environment but it comes to a point given these resource plays that you’re better of leaving that barrel in the ground because it’s more valuable there than it is on the surface. And on that basis you just wait out and there are consequences as a result of doing that. So it's very much an environment whereby you just want to make plans as best you can but certainly be as flexible as you can so you can take advantage or react to the marketplace as it opens up in front of you. And that’s what we’re planning to do and you’ll get a lot more of that next week when we go into some of that in some detail.

[Sean Sneeden:]

And then if I could just ask one more as follow up there, when you look at the strip – it actually plays out as [indiscernible] how do you guys think about layering in hedges for the second half of next year on the oil side? What kind of would be the strike price or what’s kind of the impetus to make that happen or not?

[Nelson Haight:]

That’s a good question. We try to target hedges over $80 is kind of our benchmark today to try to achieve that. Clearly the strip is not cooperating there but it is relatively flat versus where we are on the front month. So I think we’re just going to look at it and try to be opportunistic with it and see what we can do as far as adding to that position. We felt pretty good about our hedges 75 days ago in retrospect, I wish we could more but that’s kind of the benefit of hindsight. So I think that’s kind of our approach is just to be opportunistically study, we're looking at gas hedges. When they get above $4, they become pretty attractive to us, that's probably 15%, 20% of our revenue base. So it's a pretty heavy focus of the company right now and so I think to answer your original question it’s anything above – 80 or above becomes attractive to us and we will continue to look at it like that.

[Peter Hill:]

Exactly but depending what the environment is like and the way you think the momentum is, you would look foolish if you put in hedges at 80 or went to 100 or 120. If you could predict that then I’d be a very rich man but you’ve got to cut your cloth accordingly. And as Nelson says that's what we’re going to try and do. We’re okay for the first quarter or first half of this next year and we feel pretty good about where we are and we are pretty well hedged. As time unfolds as we start to look at the backend of 2015, we will have a sense of the environment, we will have a sense of the momentum and where the market is sort of heading and we will take our position at that time.

[Operator:]

Your next question is from Jamaal Dardar with Tudor Pickering Holt.

[Jamaal Dardar:]

Just looking at the Anadarko basin, I understand that activity is slowing there but it seems that even with the prior period adjustment production would have been below the low end of guidance for the quarter. And I was just wondering is that more well count driven or is it performance driven?

[Peter Hill:]

It’s primarily well count and it comes down to the thing that I insist on with these guys is that we’ve run all the list of all the well locations that we could drill and the things that we could do and we look at the cost of the well, we look at the EUR, we look at the pace of return, a number of criteria and we just say, hey, we got incremental dollar in our hand, where we would best spend it. And every time we do it, Miss Lime is double the performer that the Anadarko is which is no chain of the Anadarko, it just is the fact that we’re sat on the prime play called the Miss Lime in a very sweet area. We have hundreds of locations that we can continue to drill for a number of years yet and on that basis the Anadarko falls by the wayside to it to a degree which doesn't denigrate the Anadarko quite the opposite. It just shows that it's got to deliver more attractive returns on while we’ve still got this Miss Lime in this current environment, that's what we’re obliged to do given the situation we find ourselves in with our balance sheet. And that will continue and as long as it doesn’t cause us great grief in terms of our leases are held by production and we’re not losing it on good opportunity it will be challenged whilst this environment remains. There’s plenty of other guys out there that are doing good jobs. You know, you are going to look at zones and the stuff they are doing, with their cemented line as a sliding sledge, and their techniques and technologies, the returns they are getting are pretty healthy and there’s others out there doing the same thing. And we will look at this and learn.

[Jamaal Dardar:]

And looking at the Miss, it seems that rates continue to improve in 2014. Is this driven by the seismic and are you confident that this is repeatable going forward?

[Peter Hill:]

Repeatable for sure, that the seismic is one part of it, it’s a whole integrated approach to the whole concept of process. I go back to what I said earlier this is all about unlocking rock storage, identifying that rock storage, these rock types have a lot of variation or variability and you see porosities and storage capacities that are an order of magnitude better than the conventional Miss Lime. And where we can see that and identify it in terms of intervals, or in 3D and then staying in zone when we drill those wells horizontally and then how we complete those wells all add to the equation of being able to deliver that rock storage to the well bore.

[Operator:]

Your next question is from Richard Bedell [ph] with Wells Fargo Securities.

[Unidentified Analyst:]

Hey a quick question, it looks like the Mississippi Lime is doing pretty well in terms of production. Is there anything we should take into consideration for fourth quarter production of this year, just looking at the numbers, anything we should factor into our analysis, or any operational – any kind of operational stuff that you guys are working on in the fourth quarter that we should keep in mind?

[Peter Hill:]

We just carry on doing what we are doing. We’ve got plenty of things to do, we’ve got plenty of locations, we’ve got plenty of rigs and we’ve got business ahead of us. We will be down spacing, we will be looking at other technique, we will be following up with our original techniques, we will be just doing what we've done this last quarter.

[Unidentified Analyst:]

So nothing that’s out of the ordinary, nothing that’s for any unplanned maintenance or anything like that?

[Peter Hill:]

No.

[Unidentified Analyst:]

And then I guess a quick follow up. I must have missed the reason why we’re dropping one rig in the Mississippi Lime, can you comment on that a little bit?

[Peter Hill:]

It’s to do with completions. Frac spreads are hard to come by as we finish off drilling wells, we just build up inventory and to avoid that we can just drop the rig for a quarter and we can then get to the completions, bring them online, see efficiency and the investment you’ve made and then bring the rig back and start over when the frac spreads are available to us and we can take advantage for a quick cycle time.

[Operator:]

And there are currently no additional questions, I’d now like to turn the conference back to our presenters for closing remarks.

[Peter Hill:]

Nothing really just to add, thank you very much for your time and attention. We’re very pleased with the quarter. I can assure you that we won’t be sanguine and sit on our laurels, we will continue to do all the things that we laid out here. We look forward to seeing you guys -- those that are coming to our analyst day, where we will give you a lot more detail. And I just thank you for your time and attention. Thanks very much.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today’s conference call. You may now disconnect your lines.