Talos Energy Inc.
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Good afternoon. At this time you I would like to welcome every to the first quarter 2009 Earnings Call. (Operator Instructions) Now I would like to introduce David Welch, President and CEO of Stone Energy. Mr. Welsh, you may begin.

[David Welch:]

Thank you, Mindy and welcome, everyone to today's call to discuss the first quarter results and the outlook for Stone Energy. Our Senior VP and Chief Financial Officer, Ken Beer is joining us this afternoon and will provide you with a summary of the financial results of the first quarter. He'll then turn it back over to me for a few comments and a discussion of our future plans. This will be followed by a question-and-answer session. Ken?

[Ken Beer:]

Let me start with the forward-looking statement. In this conference call, we may make forward-looking statements within the meaning of Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements are subject to all the risks and uncertainties normally incident to the exploration for, and the development, production and sale of oil and natural gas. We urge you to read our 2008 Annual Report on Form 10-K for a discussion of the risks that could cause our actual results to differ materially from those in any forward-looking statements we may make today. In addition, in this call we may refer to financial measures that may be deemed to be non-GAAP financial measures as defined by the Exchange Act. Please refer to the press release we issued yesterday, which is posted on our website, for a reconciliation of the differences between these financial measures and the most directly comparable GAAP financial measures. Now rather than go through the financials in great detail we will assume that everyone has seen the press release and the attached financials. This quarter did have a few unusual items, which we will review directly. The biggest impact on earnings was that $340 million pretax non-cash ceiling test write-down using quarter and NYMEX pricing of $49 per barrel and $3.60 per MMBtu. The after tax impact on earnings in equity was about $221 million. Additionally, we have $5.9 million inventory impairment charge, which impacted after-tax earnings by just under $4 million, leaving a total adjusted net loss of about $7.7 million or $0.20 per share. The other unusual item, which occurred last quarter, was the unwinding of several hedges which provided cash proceeds of $113 million. Although this cash was received in the quarter, there was no impact to the first quarter income statement. For accounting purposes, the $113 million in hedging gains will be recognized over the next three quarters. The balance sheet adjustment will be a reduction in comprehensive income which currently stands at about $90 million, which has been tax affected at 35%. As noted, our cash flow for the quarter was $59 million or about $1.50 per share, which compares favorably with the first call estimate. Production for the quarter came in at 194 million cubic feet equivalent per day or below our original guidance as pipeline repair delays continued to impact our volumes. The Tennessee Bluewater pipeline repair continues to experience delays, which impacted our volumes by about 30 to 40 million cubic feet equivalent per day. This line had been expected to be on earlier in the quarter in the first quarter, which led to the production figure being a little lower than guidance. We hope to have the Bluewater line fully operational before the end of the quarter. As announced, we commenced oil barging at Amberjack, Mississippi Canyon 109 in late March, which will help our second quarter volumes and project the rerouted oil line to be in service late in the third quarter which should further boost our volumes. Besides Bluewater and the Amberjack reroute, there are a few more pipelines, which are also causing us some minor curtailments. As noted in the release, we expect the second quarter volumes to be in the 210 to 220 range with the full year 2009 production to be in the range of 205 to 225 in MMcfe per day. This is down slightly from our previous annual guidance but takes into effect the pipeline repair delays in the first quarter. Oil and gas price realizations for the quarter came in at around $46.52 per barrel and $7.17 per Mcf or blended price of $7.43 per Mcfe. Our hedge position boosted prices by $2.34 for gas and almost $10 for oil adding a total of about $35 million to the quarterly revenues. After unwinding most of our full-year hedges we layered in some fourth quarter 2009 swaps as well as added some 2010 and one 2011 contracts. Our current hedge schedule is included in the release. On the cost side, our first quarter LOE was $58 million as hurricane repairs added about $13 million in cost. As noted, we would not expect to have any more significant Hurricane Ike and Gustav repair costs in subsequent quarters. Our base LOE was slightly under budget and should allow for defining quarterly LOE, so we will maintain our guidance of $190 million to $210 million for the year despite the high first quarter number. The first quarter DD&A came in at $3.40 per Mcfe as expected, but will drop in subsequent quarters due to the lower full cost pooled. We are projecting a $2.60 to $2.85 per Mcfe range. Another change to be aware of is the accretion expense, which jumped from about $4 million to $8 million. Remember, the accretion expense is tied to our ARO number, a figure which is present value estimate. The discount rate used increased at year-end which generated a lower ARO figure and a higher quarterly accretion amount. The 8.4 million is a pretty good number per quarter for the rest of the year. Under reported interest expense, that was $5.2 million with another $6.3 million in capitalized interest for about $11.5 million dollars of total cash interest cost. As mentioned in the last conference call, the $450 million in unevaluated property drives how much interest is capitalized versus how much is expensed. Finally, we note in our capital expenditure budget guidance that although the Board authorized budget is $300 million, we are targeting a lower $250 million number, which is already about 40% spend in the first quarter. Just one quick comment on our borrowing base redetermination, which was approved last week. As noted, our borrowing base is now $425 million and currently we have $356 million in borrowings outstanding and another $69 million in outstanding letters of credit, which utilizes the full capacity of the facility. As of April 29, we had about $90 million in cash, although we expect cash to decline during the second quarter. Then assuming strip pricing and no major hurricane interruptions, we project a cash billed in the third and fourth quarters as our CapEx outflow during this time period is expected to be minimal. Lastly, you might note we filed a universal shelf registration statement yesterday and truly this move was intended just to allow for maximum flexibility in this uncertain market. With that, I will turn it over to Dave for his comments.

[David Welch:]

Okay. Thank you very much, Ken. As you've just heard, the first quarter had a lot of moving parts. The external situation continued to deteriorate as natural gas prices continued to weaken. This along with the hurricane-related production curtailment and recovery costs resulted in the ceiling test write-down and the net loss for the quarter. These are reflective of the times. We are continuing to get fundamentally stronger along a number of dimensions however. We are reducing debt, controlling costs and increasing production. Our organic prospect inventory is real and our people are actively engaged and determined to create success. We began the year with a clear and essential focus on maintaining financial flexibility during an already difficult external market. We are focused on addressing the principal issues impacting our business, responding to the curtailment and production and added expenses due to hurricanes, the collapse in oil and natural gas prices and the financial system crisis. All three of these issues arose shortly after we completed the merger with Bois d'Arc Energy for which we incurred additional debt. We are dealing with this situation cautiously, seeking to spend within our cash flow, optimizing our production and watching our expenses while maintaining optionality for the future. Originally we had planned a capital budget in the range of $700 million for 2009, but have since reduced that to under $300 million to live within cash flow and to reduce the debt incurred with the Bois d'Arc transaction, which was completed last August. Since the closing of that merger, we've paid down about $70 million of debt, even though our production has been curtailed due to hurricane damage to third party pipeline infrastructure and with low commodity prices. As of today, we are producing about 230 million cubic feet equivalents of natural gas. This was up from the 194 we averaged in the first quarter, which was just below our guidance range. First quarter shortfall was driven by the pipeline down time mentioned by Ken and by our own choice to suspend barging production activities at Amberjack during the winter period, when the weather would have resulted in our paying for the barge 100% of the time, but producing less than 50% of the time. At the end of March, we placed Amberjack back on partial production through the resumption of our barging operations. The long-term solution for Amberjack is the installation of a new pipeline segment directed away from a mudslide area, which severed the current export line. This project is underway and is expected to be completed in September. Amberjack, is our largest field and is mainly an oil producer. We anticipate moving a rig on to the platform to commence a multi-well drilling program later this year, which will run through a significant portion of 2010 as well. Even our short-term bias toward oil, this program will help push our production slightly above a roughly 50/50 oil and gas mix. Production is also still curtailed by about 30 million cubic feet a day in our Central Gulf operations. We are only partially producing through Tennessee gas pipeline's Bluewater system, which would be back to full operations within the next couple of months. So in aggregate we still have around 40 million to 50 million cubic feet equivalence per day of well productive capacity awaiting infrastructure repairs. We believe most of this could be back on production before the end of the third quarter, all set natural declines. This incremental production should also help us build our cash position further throughout the year. At the end of April, we had about $90 million in cash. In addition to rising production, we also have several other actions underway to maintain liquidity. These include careful allocation of capital expenditures, decreasing unit in LOE and unit G&A cost, accelerating the receipt of insurance proceeds from previous hurricanes, portfolio rationalization, joint ventures to provide external capital to projects, and the examination of other alternative sources of capital and liquidity. Although per unit LOE in the first quarter was not reduced below the prior period, we have made significant progress on controlling our expenses. The first quarter LOE was skewed by abnormally high major maintenance costs associated with hurricane recovery expenses, while base LOE was actually slightly under budget. Also on the G&A front, we incurred slightly higher costs in the first quarter as a result of assimilating the Bois d'Arc assets and personnel and seasonal fluctuations. Although it did not show up in the first quarter, due to the hurricane related production curtailment, we anticipate lower unit G&A costs in the future. We have successfully commenced our joint venture strategy, by bringing in outside capital to fund, the drilling of one of our exploratory wells. Under this arrangement, we pay approximately 5% of the dry hole exploratory costs for 15% working interest in the prospect. We intend to continue using joint venture funding methods, to extend our capital in a tight environment in a number of different project areas ranging from the Gulf of Mexico to Appalachia and even to our positions residual acreage position in the Rockies. So those are things that we are doing to survive the tough external environment. On the thrive side of the equation, which is designed for organic growth over the longer term as oil and gas demand improves, we remain very excited about the opportunities that we have captured in the deepwater Gulf of Mexico, the Marcellus Shale play and the Gulf of Mexico opportunities presented through the combination of the Stone and Bois d'Arc portfolios. We spent the last several years building an opportunity set in these three areas and we are ready to shift our capital allocation from the evaluation and access stage to the drilling stage. Even though our capital program is smaller, the percentage we will be spending on actually drilling will be increasing. Our aspiration is to begin growing reserves organically in 2010 and beyond and we feel that we have the people and opportunity set to begin delivering these results. With this, we will now be happy to take questions.

[Operator:]

(Operator instructions). Your first question comes from Dave Kistler from Simmons.

[Dave Kistler:]

Quick question for you, under the new capital spending program of $250 million, which looks like a lot of its going to workovers and what not. Can you talk a little bit about thoughts on what that might do to reserves, reserve potential and then I guess under the new reserve rules you'll be working with an average price, which may be above where current prices are. But any kind of discussions and color you can give us on how that looks under the current spending program would be great?

[David Welch:]

Well, let me just comment on the production side of it. We think that we will be able to continue growing production throughout this year, even given that curtailed 250 target. Truthfully, we haven't made the final decision yet on whether we are going to spend only 250 to 300. So as the year evolves, we'd just maintain the flexibility to only spend the 250. On the reserve side, you know that's something that we really just go through once a year and I'd be allowed to predict, where we are going to end up this year. Ken, anything you want to add on that?

[Ken Beer:]

Yes, again, Dave, as you're aware, also within that capital budget we do have dollars being spent in what we call risk mitigation, dollars to be spent on kind of proactively doing plug and abandonment work. Obviously, that's not going to add reserves. You know the delta between 250 and 300 to a certain extent between even the 200 and 250, that's where you'd find at least a good portion of the exploration side of our capital budget you've mentioned earlier. We really are focused more on the production side, which would be more exploitation drilling, which took place more in the first quarter and then re-completions and workovers during the course of the year to keep production relatively flat.

[Dave Kistler:]

One more question on reserves and I realize way too early to be asking these things, but this is actually backward looking. With the 40 to 50 million a day that are awaiting potential production in terms of an inventory that's out there being connected either through pipe or what not. With those offline as you were doing your reserves last year, was that accounted for in one way or another in that reserve calculation and is that something that we could look at as an immediate up tick?

[David Welch:]

It really shouldn't have much impact on approved reserves. In a couple of cases it might have moved things from proved producing to proved not producing for a short period of time and then as they come back online, go back into the proved producing.

[Ken Beer:]

There was probably some history that particularly on some of the Bois d'Arc wells that also may have stepped back and wanted to see some additional history, which might be reflected more in the year end 2009 numbers. But as Dave mentioned, a lot of the shut-ins just fell under a category of PDNP or even we had a special category of shut-ins. But for the most part, most of those reserves were indeed in the year end reserve report.

[Dave Kistler:]

Then on the last thing from the S-3 filing, thinking about where the stock is right now, just kind of curious on your thoughts just had the re-determination. Looks like capital is in a pretty good shape right now, cash flow definitely ticking up in the second half of the year, current stock price where it is. Should we be looking at this as something that will be used to enhance liquidity, not necessarily on the debt side?

[Ken Beer:]

Yes. Here the observation is Stone has actually historically had a shelf. We ended up, because of some issues in '05 and '06. We were really in the penalty box and were unable to have a shelf up until this year. So, really just returning to putting in place the shelf that historically Stone has had and I would actually argue most companies do have a shelf just because as we mentioned the idea of having ultimate flexibility in this kind of market makes sense. It's probably somewhat imprudent for us not to have a shelf up and running, especially in this environment. As you saw with the filing, it's universal, it has all sorts of instruments in there and at least for us, we just want to make sure we cover the waterfront in case there was, a need or an opportunity, really just to provide us with ultimate flexibility, as we had three or four years ago.

[Operator:]

Your next question comes from Richard Tullis from Capital One South. Your line is open.

[Richard Tullis:]

Just a couple of questions for you. You may have already touched on this a bit, but how do you envision, the quarterly production coming in for the rest of this year, give or take?

[Ken Beer:]

Again, you can look at the annual production guidance, and almost go backward Richard where, as Dave mentioned, we are around this 220, 230 right now. If you kind of do the math and have to bring in $194 million, as one of your four quarters, that's kind of will put you in that 205 to 225. Because we'll get volumes back in the second quarter from barging at Amberjack and then we will get volumes, hopefully a little bit of volumes from the Tennessee line coming back on in the second quarter, that should help. Now the second quarter, and then the third quarter, we should have Tennessee back on kind of for the whole quarter. So that should kind of help it, and then fourth quarter maybe we get a little boost from Amberjack coming on fully into the pipeline. Again, a lot of this is just offsetting natural declines, so we should be, hopefully relatively stable in that range.

[David Welch:]

We've also had a very active workover program and maybe that's what's allowed us to get very close to the bottom of our guidance even with the slippage in the pipeline repairs.

[Ken Beer:]

Right, because it took away about $25 million to $30 million a day.

[Richard Tullis:]

With the $250 million CapEx for this year, what do you think your 2010 production can look like, just kind of flattish?

[Ken Beer:]

Well, again probably a little premature to go down that road. A lot of it really then depends with the activity level that we have towards the very end of this year and importantly what the activity level might be in the first quarter of '10, but probably not appropriate right now to start looking at 2010 guidance.

[Richard Tullis:]

What significant expiration projects do you have kind of on a backburner ready to go once the situation is right?

[David Welch:]

Well, we have a number of deepwater prospects that we're keen to get drilled and that's why I mentioned these joint ventures that we are engaged in trying to bring some external capital and these projects are such quality that other people are willing to invest in them. So, the deepwater is an important piece and then we are going to be drilling a few more Marcellus wells trying to define our acreage and, hopefully we will begin some horizontal drilling early next year.

[Richard Tullis:]

As far as the deepwater projects go, what's going to be the right situation? I mean, you're totally dependent on partners coming in or will a certain commodity price get you to doing most of it yourself?

[David Welch:]

Well, there are a lot of moving parts right now. In a lot of the deepwater prospects, we already have really good operating partners and so the timing on those will be working with our partners to determine. I would say that there are as many as a dozen deepwater wells over the next four years or so that would have a possibility of being drilled. Of course, we have sculpted our working interest to be more or less affordable to Stone. If we can get these joint ventures, that just enhances the economic return to it. You may recall as we have spoken strategically, if we make a discovery in deepwater, part of our strategy is to try to monetize a portion of that almost immediately and so that will help generate a little fuel for some of these others down the road.

[Richard Tullis:]

Did you receive an insurance payment in the first quarter? I think maybe around $31 million or so was expected?

[Ken Beer:]

No. You might be referring to there was a tax refund.

[Richard Tullis:]

Tax refund.

[Ken Beer:]

Of around $25, $ 30 million, about $30 million.

[Richard Tullis:]

Did that come in?

[Ken Beer:]

Yes, it did.

[Operator:]

(Operator Instructions). Your next question comes from [Jon Romel from Romel Asset Management].

[Jon Romel:]

Thank you. Just a quick question, in talking to some of your peers, particularly ones whose balance sheets are in better shape, they seem to be kind of lining up to possibly make acquisitions and I'm wondering, if you have been approached by anyone in terms of an interest in selling any of your properties, either developed or not and/or whether there are any discussions in terms of getting through this kind of current crunch through selling some assets…

[David Welch:]

John, thank you for that question. We have been very actively engaged in looking at our portfolio as we continually do. It was always our intention at the time of the Bois d'Arc acquisition to sell-off a few of the properties that are not as material to the combined enterprises as they were to either Stone or Bois d'Arc. So, yes, that is one of the things that we are looking at. Another thing is the joint venture idea that I mentioned earlier. We still have I think about 70,000 net acres in the Rockies exploratory acreage and that's another place where we do a joint venture and potentially get some cash coming in without having any reserves or production impact to us right now. So we are actively engaged in looking at that and there is a lot of interest in the industry, people that are anxious to find properties.

[Operator:]

Your next question comes from [Andrew McCrease from Centuries Select Invest].

[Andrew McCrease:]

I was wondering if you could please tell me with respect to your capital spending, could you provide a little guidance, breaking it down between the Marcellus, the deepwater and workovers?

[David Welch:]

Well, I believe Ken mentioned that about 40% of our capital spent in the first quarter, most of that was spent on Gulf of Mexico exploitation or development drilling.

[Andrew McCrease:]

What about remaining 150 or so?

[David Welch:]

That's going to be split, a small amount of that, under 10 million will be deepwater. 10 to 15 in Appalachia and the remainder will be spent on hurricane risk mitigation to [obligate] future risks in the platforms and then maintenance P&A. Ken, anything else?

[Ken Beer:]

Some additional workover and re-completions, throughout the balance of the year.

[Andrew McCrease:]

Could you please tell me, what is the historical recycle ratio up in the Marcellus for the Bois d'Arc properties?

[Ken Beer:]

Recycle? Give me a little color on that.

[Andrew McCrease:]

Just with respect to BOEs found relative to money spend.

[Ken Beer:]

Well, actually Bois d'Arc was strictly in the Gulf. We started moving into the Marcellus back in 2005 and put our acreage position together, it's about 30,000 net acres. There are two types of wells, that are being drilled up there and a typical vertical well, may yield about one Bcf of natural gas, give or take half, depending upon if it's in a lesser productive area, maybe only half a Bcf, it's in a better area. So that's the range that you're seeking.

[Andrew McCrease:]

At a cost of what, Ken?

[Ken Beer:]

It varies. You know, around a $1 million or so is a pretty good rule of thumb.

[Andrew McCrease:]

With respect to the renegotiated credit facility, could you enlighten us on the financial covenants involved?

[Ken Beer:]

Yes. Those did not change. We have got really two financial covenants, debt to EBITDA, which is a ratio of 3.2.

[Andrew McCrease:]

I'm sorry. The debt to EBITDA what? Sorry.

[Ken Beer:]

3.25. Then a interest expense coverage versus EBITDA of 3x.

[Andrew McCrease:]

Right. And are there any adjustments to the EBITDA calculation?

[Ken Beer:]

Adjustments?

[Andrew McCrease:]

Well, some companies have adjustments to the actual calculation of the EBITDA?

[Ken Beer:]

Yes, there are some adjustments that just by definition EBITDA, is not a GAAP number, so there are some adjustments within the definition of EBITDA.

[Andrew McCrease:]

Could you give me a range for what those adjustments typically.

[Ken Beer:]

Yes. For instance, all the non-cash, ceiling test write, write-offs does not impact that at all.

[Andrew McCrease:]

I can understand that, I meant more from a point of view of less obvious ones. Do the less obvious ones total 10 million, 15 million, 20 million a quarter typically or …

[Ken Beer:]

No. Again, there is no substantial adjustments, it's just more trying to time non-cash adjustments versus from a GAAP standpoint. The GAAP versus EBITDA delta where there is a non-cash impact are the adjustments that we tend to.

[Andrew McCrease:]

One last one if I may, and that is with respect to the Mississippi Canyon 109, what are you assuming production wise during the last three quarters of the year relative to Q1?

[David Welch:]

Well, in Q1, we really didn't produce anything at Mississippi Canyon and so we are barging now, I would say that's probably in the 1,500, 2,000 barrels a day range and it will remain that way unless we add another barge, which would increase it a little bit. That's something that we are always looking at. We haven't made any decision to do that yet. The second big change would be when the pipeline gets built and we just [jack] up the full production, which could get us back to 4,000, 5,000 barrels a day or higher.

[Andrew McCrease:]

I know you said earlier on when you expected that could be. I apologize.

[David Welch:]

September.

[Andrew McCrease:]

September. Okay.

[Operator:]

Your next question comes from [Kelly Cringer from Banc of America].

[Kelly Cringer:]

Just wanted to follow-up with you guys on, I think you had noted that one of your primary goals for the year was just maintaining financial flexibility, the borrowing base re-determination is behind you guys now. But what kind of metrics or targets do you guys kind of look at in terms of where you won't to have the balance sheet ultimately or by the end of the year?

[Ken Beer:]

We are obviously in a mode where we are trying to continue to reduce our debt load that clearly is pretty high importance. Having said that, we are also, husbanding and valuing our cash. A lot of it, Kelly, depends upon commodity prices and what sort of cash build we might see in the backend of the year. We also have a positive tension and that we have some pretty impressive projects that we would like to put money back into, that you might not get an immediate cash return on. I mean, the payback period might be pretty attractive, but obviously every time you're spending money, you're reducing your liquidity. So, we certainly would like to continue to chip away. The debt load, as Dave mentioned earlier, we have paid down about $70 million during the first four months and we would like to continue to chip away at that, but just pretty cautious on making sure that we have cash and flexibility as we go through the back half of the year.

[Kelly Cringer:]

Sure. I guess, my question is a little more with regard to maybe not liquidity, but from a balance sheet standpoint.

[Ken Beer:]

I can tell you long term we'd like get it back down to around 35% debt ratio.

[Kelly Cringer:]

35% debt to cap?

[Ken Beer:]

Debt plus equity, yes.

[Operator:]

(Operator instructions). Your next question comes from [Wei Romualdo from Stone Harbor]. Your line is open.

[Wei Romualdo:]

Yes. Pardon me if you went through this already. I got dropped off for a moment there. You mentioned in the second quarter you expect cash to be down, but CapEx to be minimum in the second half of the year. Could you just elaborate a little more on that when you say minimum second half. Are you talking about spending closer to 150 million in second quarter or more like a 100 million in the second quarter?

[David Welch:]

Let me give you a little operational background and then Ken can give you some numbers. But we began the year under about four rigs running in the Gulf of Mexico shale. And as of April we've brought that down to zero. So most of our spending on drilling in the Gulf was front-end loaded and the way that's played out is a lot of the invoices came in the first quarter but a few continue to trickle in the second quarter.

[Ken Beer:]

Yes, that really addresses the cash outflow from our capital expenditure program is clearly front-end loaded as I think we highlighted. In the first quarter we spent about 40% of our capital program, invoices are coming in more into the second quarter as well. But as you get into the third quarter, since we have reduced our rig activity level in the Gulf to zero, obviously there won't be any invoices coming through into the third quarter for activity that just didn't happen in the second quarter. So that's why we are highlighting. We are pulling back and would expect some cash build assuming, gas and oil prices, essentially assuming the strip is a pretty good number. Looking at the production levels that we have provided from a guidance standpoint, then that's where we are coming up with the expected build.

[Wei Romualdo:]

In regards with the shelf filing and your comment on increasing or keeping the financial flexibility. In terms of timing, do you have intention to do something, to act upon the shelf before the hurricane season starts or are you talking about more longer-term?

[David Welch:]

No. This is really a shelf that we were looking to put in place and, again something that came up at the Board level earlier, and it just so happened to actually come out and actually be filed yesterday. It was more coincidence than anything else, but really the thought here is, just like most of our peers, virtually all of our peers, have the shelf out there, it certainly makes sense particularly in this environment. So, we don't have anything that has been initiated at this moment, but certainly to have the shelf out there, certainly made some sense and that was the impetus behind it.

[Operator:]

Your next question comes from [Jim Civagne] from Deutsche Asset Management. Your line is open.

[Jim Civagne:]

Is it reasonable assumption to make that, the reduction in the CapEx budget to 250 is kind of being sized to expected operating cash from operations such that, cash given what we know today, cash on hand, is kind of exiting the year, may look like $70 million to $90 million, somewhere in that range, somewhere between where it ended last year and what you have now?

[Ken Beer:]

The better answer is that as we guide further into the year, particularly as Jim you're aware, you had gas prices come down, oil prices come down, I think what management did was take a step of kind of resizing our capital expenditure program to just, be more protective of our cash and cash flow. As Dave mentioned earlier, as we go through the second, third quarter, there may be some opportunities to move up from that 250 just depending upon the environment, et cetera. But we just thought it was a prudent step to take to pull back the reins a little bit given especially the commodity and price environment and as you are well aware, kind of the capital markets are just somewhat non-existent. So our thought was that has been cash and cash flow as much as we can and maybe put on the accelerator later on in the year or early 2010.

[Jim Civagne:]

I guess just as a follow-up to that point. Ken, I mean, do you guys think it's really wise to be front loading this budget via the first and second quarter given that the cash is your primary source of liquidity faced another borrowing based re-determination November 1?

[David Welch:]

That front end loading was a residual from the higher oil price environment where we had contracts et cetera. So it just took us a little time to work through those contracts. That's all that was.

[Ken Beer:]

As Dave mentioned, I mean if you roll back the clock when you had $100 plus oil, that's when you're putting in place a lot of these rig contracts and a lot of the dollars that were, put in place for the first quarter, was really put in place six months before. As Dave mentioned, I mean, we were approaching 2009 with a view towards a $700 million plus capital budget that quickly as the end of '08 approached quickly got shrunk down. So it was not by design that we are trying to front end load the CapEx budget. It was an evolving budget.

[Jim Civagne:]

So then I guess how much, if any of the spend in the second quarter is discretionary or is it all basically spoken for vis-à-vis commitments made last year?

[Ken Beer:]

Very minimal now would be spent tied to commitments, made late '08.

[David Welch:]

Yes. We've pretty much finished all of the commitments that we have, so pretty much anything we would do going forward would be discretionary.

[Operator:]

At this time there are no more questions in the queue.

[David Welch:]

Well thank you, Mindy and thank you everyone for joining us on the call and we look forward to talking to you again, so long.

[Operator:]

Thank you. This concludes today's first quarter 2009 earnings conference call. You may now disconnect your lines.