Cimarex Energy Co.
Q2 2007 Earnings Call Transcript

Published: 1 Aug 2007

[Operator:]

My name is Judith and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Cimarex second quarter, 2007 earnings conference call. (Operator Instructions) Thank you, it is now my pleasure to send it forward to your host, Mr. Mark Burford. Sir, you may begin your conference.

[Mark Burford:]

Thank you Judith, and thank you everyone for joining us today for our second quarter result conference call. We did issue our earnings release this morning, and if you did not receive it you can find a copy of that on our website. And we will be making foreword looking statements in this conference call, so also refer you to [enter] our press release, or our disclaimer regarding such statements. And on today’s call we have Mick Merelli, our Chairman and CEO, Tom Jorden, Executive Vice President of Exploration, and Joe Albi, our Executive Vice President of Operations. Unfortunately, Paul Korus today isn’t able to join us. He is actually having knee surgery to repair his ACL. But we’ll go ahead, and let’s jump into this conference call, and I’ll turn the call over to Mick Merelli.

[F. H. Merelli:]

Thank you, Mark. First off, just to recap our second quarter results and highlights, production averaged about 443 million cubic feet equivalent a day. Joe Albi will be giving us details of that later. We had earnings of $79 million and cash flow of $236 million. Our exploration development investment in the second quarter was just a little bit over $235 million. Each of our exploration development regions are performing well. We’ll likely invest close to $1 billion on projects in those regions during this year. Tom Jorden is going to be covering our exploration highlights, but a few things I’d like to comment on. In the Mid-continent, in the Texas Panhandle, we continue with very strong granite wash program, looking at horizontal potential in that, and Morrow [tail] drilling. Also, I think Tom’s going to mention a few things about some other horizontal places that we’re in that area. Permian Basin, again, it’s kind of a theme. In Southeastern Mexico, it seems like our horizontal activity is picking up there, along with our Bone Spring horizontal activity, in the Permian, in the Texas side. Gulf Coast, in Liberty County; we have three rigs running in that program. From time to time we look at maybe adding another rig. We have plenty of opportunity in that area, but our problem is staying ahead of the race in terms of permitting and damages and all of those kinds of things. So we’ll just have to see if we stay at three, or if we add one later. This continues to be a really good program for us, and, again, our inventory of projects is continuing to grow. We have 22 operated rigs currently running, and that’s nine in the Mid-continent, that’s five in the Texas Panhandle, and three in Oklahoma, and one in our little field down in Panoma. Permian has ten rigs; that’s five in New Mexico and five in West Texas. And Gulf Coast has three rigs running, and they’re all, as I mentioned, in Liberty County. So it’s a total of 22. So with that brief summary I’m going to turn it over to Tom Jorden so you can get some of the details on our exploration program.

[Tom Jorden:]

Thank you, Mick. I’d like to walk us through our exploration development activity region by region. Year-to-day, we’ve drilled 225 gross, or 137 net wells. That’s during the first half of 2007, with a 91% success rate. Our drilling activity remains high, with 22 operated rigs currently running, and we’re looking to increase that. We’ve invested 482 million in the first six months of this year, and, as Mick mentioned, we’re on target for a full year 2007 exploration development capital to be approximately $1 billion. I‘ll now walk through region by region. We have a number of projects that we talked about in the past that I’ll be updating you on, and a few projects that we’ve been working on that we haven’t talked about, and I’ll give you some detail on them. In our Mid-continent region, we drilled 125 gross, and 65 net wells during the first half of 2007, and we completed 95% as producers. For first half 2007, our Mid-con and exploration development investment totaled 178 million which was 37% of our total exploration development investment. So Mid-continent continues to be a very strong part of our program. We remain very active in the Texas Panhandle with five operating rigs running and we’re looking at bringing a sixth operator rig into the Panhandle. In the first half of the year, we drove 47 gross with 31 net wells with 100% success rate. So Texas Panhandle was a very nice modern risk program. Of course, [Noble] wells, which commence production this quarter are the Byrum 12-4 where we had 75% working interest, came online at 2.1 million a day. The Flowers 15-61, 100% working interest, and 1.7 million a day. And the Hobart Ranch 18-68 of 100% working interest, came online at 2.4 million a day. Mick also mentioned our Morrow tail program, which drew a nice little Morrow tail well on the [Wolfson] 217, that’s not currently on, it’s producing but with a constrained rate, we tested that well between seven and eight million a day, and we’re hoping to get that marketing problem solved here momentarily. Panhandle is a very action-oriented group. They’ve done a great job getting after it. They’ve also got a horizontal drilling program in the granite wash that we’ve just completed our first test well on with very, very encouraging results. That well came online at approximately 2.6 million a day. Our pad drilling program continues to pace—we’re on our second pad drilling project on the Texas Panhandle. Not only does that reduce mobilization costs, surface cost, it reduces flat cost, but in the Texas Panhandle, where we have some fairly rugged topography, it also opens up opportunities where we wouldn’t be able to do it otherwise, because we just can’t simply get the location. At our Mid-continent region, another project that we’re just getting into, I’ll talk a minute about, is our Woodford shale. Starting out in our Arkoma basin in our Ashland field, we will get approximately a dozen wells done there this year. And invest $20 million in horizontal Woodford shale drawing. Our initial results in the Arkoma basin have been very encouraging. First half 2007 in southern Oklahoma, we drilled a total of 10/7 net well with 100% being completed as producers. Drilling occurred in the Old Robertson and Cumberland fields, targeting multiple reservoirs—those depths are between 6-11,000 feet. They include the Sycamore Woodford shale, Hutton, and Viola. Wells that are currently commencing production include the Dutton 416, 100% working interest well at 1.2 million a day; the McKee 217, 100% working interest, came on at 1.7 million a day; and the Mulligan 111, at 98% working interest, came on at four million a day. So it’s a very active, ongoing program. Looking ahead between now and the remainder of the year. I mentioned we’ve entered the Woodford shale. We’ve got a project going that we’re quite excited about in the Woodford shale and the Anadarko basin. Most development today has been either Arkoma basin at shallower depths. We will be participating in three test wells, three horizontal wells, in the Anadarko basin in the Woodford shale. One we will operate. Two of the others will be operated by an experienced resource player that we’re partnered with. And we’ll have those three wells done between now and the remainder of the year. We have been actively and are actively leasing. We’ve acquired a position of approximately 20,000 net acres on that trend and leasing continues at a good eclipse. So hopefully, in upcoming calls, we’ll be able to comment, we’ve been working on that play for some time, and we’re quite excited about getting our first three test wells done in that. In the Permian basin for the first half of 2007, we drilled a total of 78 gross, or 57 net wells with the 91% success rate. So our Permian program continues at pace s a very, very active program. Our capital investment in the Permian, for the first six months of the year, we totaled 159 million, which was 33% of our total exploration development capital. So we have a very active vital Permian program that’s split between Southeast New Mexico and west Texas. In Southeast New Mexico, we drilled a total of 38 gross, 26 net wells, with an 87% success rate. And a couple of the projects that we talked about in the past are kicking off nicely. In Southeast New Mexico we have two horizontal oil projects that we’ve mentioned in the past that are really ramping up here at the remainder of this year and heading into 2008. In Lee County, New Mexico, we have a Wolf Camp horizontal project where we currently have two rigs running. That’s a multi-rig program. We’ve got a very nice position there, and anticipate that program going on for some time. We’ve recently brought online the Sunshine 1H horizontal well which was a Wolf Camp test there—it was our first horizontal test. We had a 98% working interest in that well and it came online at approximately 300 barrels- a-day of oil. So we’re very, very excited about the potential in that trend. Another play we’re into is in Eddie County, in an [ogle] Wolf Camp formation, we are mobilizing two rigs for that play. We also have unmasked a very nice acreage position there—we have approximately 12,000 net acres in that play. We’re currently completing the Crow Flats Federal 4H well, horizontal oil play. And we’re looking to accelerate that program handily. So our Permian group has done a nice job over the last couple of years, building these plays and we’re at the point where we can really start to increase our horizontal oil activity there. In west Texas we talked in the past about a War-Wink horizontal drilling opportunity. West Texas drilling included eleven gross for six net horizontal wells at War-Wink that the Bone Spring formation. Initial production for these wells averaged 300 barrels oil or equivalent per day and as a result of these successful horizontal drilling programs at War-Wink, gross field production at War-Wink has increased from approximately 600 barrels a day in early 2006 to nearly 3000 barrels of oil equivalent per day currently. So, it’s been a very, very nice uplift, and that the team is to be commended for identifying a horizontal opportunity and getting after it. We added significantly to our position in this play—you’ve heard us talk in past calls about this. We acquired this spring, a 9,000 net acre position, south of the field that we’re very, very excited of. We’ve got two rigs currently running on that. Our first [literalist] is drilling, and we anticipate that being a very active drilling program for the next couple of years- that Bone Spring oil flight. I also at our Willow field that we talked about in our past—that’s deep Ellenberger gas production, we’re mobilizing a rig in and we’ll get three rigs done there between now and the end of the year, and are looking at development potential in that area. So Permian continues to be a wonderful program for us. Our team has really adapted well—they’ve identified some very nice horizontal projects over the last couple of years and it’s been very, very gratifying here to see us get after it, move rigs in, and have some success on it. We look for that to be a very, very active program ongoing. Our goal in the Gulf Coast—we drilled 21 gross or 14 net wells during the first half of 2007, completing 68% of those producers. Our capital investment in Gulf Coast for the first six months of the year totaled $92 million, which was approximately 19% of our total exploration-development capital. Liberty County is having another banner year, current year with Cook Mountain drilling in Liberty County, Hardin County, Texas, has totaled nine gross or seven net wells with an 89% success rate. Historically in that plain we’ve had between a 70-75% success rate, so that team is off to an outstanding start those are all 3D seismic driven to physical anomalies. We’re just recently brought on our pike at number one well with the 100% working interest, began producing this quarter at 3.1 million cubic feet equivalent per day. Our [Kermigee] number three has come on at 6.8 million cubic feet equivalent per day. And we have, as Mick said, three rigs running in that play and we’re currently talking about the potential to mobilize an additional rig. In Jefferson County, Texas, we also drilled a Hackberry discovery, that’s step number one. We had 100% working interest there, commence production in May is currently producing 3.6 million cubic feet a day. I believe in the last call I talked about a 3D survey we shot there this winter, got the data off the field just about the end of first quarter, we’ve got a great rich prospects that we’ve identified on that data set, and one of our rigs is currently completing a discovery. It’s moving to our first test on the 3D survey here, imminently. So it’s very nice and it’s a statement to the action oriented mode that team to get that data off the field, to hear between the first and second quarter and be drilling our first well in the third quarter, so they’re really going after that. That’s geology, geophysics and land. In addition to the drilling completion group, that really gets after it there. In south Louisiana, we had disappointing results so far this year. We drilled dry holes in our Coquille Point well in our Coastal Miocene project. You’ve heard us talk about that well for the last couple of calls. We had a 33% working interest that’s in the state wires of Louisiana, and we logged out a few weeks ago and it was a dry hole. We collected a great deal of very valuable information on that well, and we’re in the process of analyzing it, to try and recalibrate for our existing prospects at net trend. Our command chief prospect, which was a 100% working interest prospect in Vermillion Parish, Louisiana, was also a dry hole. And these were our high risk/high potential prospects. We’re very disappointed with those results. They represent $20 million of capital out of our total program, so we look for a high risk program to give us good production boost. We’re disappointed in that this year and we’re in the process of retooling and incorporating the information as we move forward. We’re not drilling in south Louisiana for the remainder of 2007. As I said, we’re reworking our prospect inventory and looking to see what exploration dollars will commit in the future. So that’s reason-by-reason recap. We’re in the midst of a very a active year and have a number of very, very exciting projects underway. With that, I’ll turn the call over to Joe Albi, our Executive Vice President of Operations.

[Joe Albi:]

Thanks, Tom. Just a couple words on our production and exploitation activity during the second quarter. We closed out Q2 with averaged daily equivalent production of 442.7 million a day. That was within our guidance, and up slightly from our first quarter average of 441.5 million a day and our fourth quarter of ’06 average 440.9 in a day. Our production during the second quarter was hampered by pipeline facility related shut-ins in the Texas Panhandle area, ultimately reducing our quarterly average by six million a day. And at the same time, as we mentioned at our last conference call, we were fighting a backlog of oil sales in the same area as a result of a local refinery fire. While the pipeline shut-ins are behind us, and we’ve been making good ground here on getting our inventory oil sold here during June and July. On a combined basis, our production from the Gulf Coast to Gulf of Mexico are has remained relatively flat from Q1 to Q2, while our (inaudible) and exploitation programs have continued to fuel nice growth in both Mid-con and the Permian Basin regions. In the Permian, our drilling and exploitation programs have been increased production to 142.1 million a day in Q2. That’s up 2.5% from our first quarter average of 138.6 million a day, and represents a 3.3% increase from our second quarter of ’06 average of 136.6 million a day. In the Mid-con net, despite the six million a day negative setback, we have on our production from the Texas Panhandle pipeline facility repairs, our average production of 182 million a day was virtually flat to Q1 and represented a 2% increase from last year’s second quarter average of 179 million a day. Had we not had the uncontrollable shut-ins, our Mid-con production would have been up 4% from last year. Combined second quarter production of 110.5 million a day from our Gulf Coast to the Gulf of Mexico areas was relatively flat per Q1 combined production number of 111.7. And during Q2’s fall off or gains of approximately a million a day from non-operated [recompilations] were offset by about a two million a day drop. And our Gulf Coast onshore production, as a result of temporary downtime associated with workovers on two of our large interest wells. And those wells are back up and going here in July. Offshore and Main Pass, we’ve begun the initial legwork to hook up the six shut-ins operated wells, no six, no seven. And we anticipate the first of the new wells to be online here in the September/October timeframe, with all of our wells, all the new wells, online by January of ’08, and that should free up, as we’ve talked about before, about 20 million a day of associated incremental net production. Looking forward for guidance purposes, we’re projecting third quarter production to be up from Q2 and in the range of 445-455 million equivalent a day. With the half dozen strong new wells coming on line here in Q3 as well as our planned accelerated activity in Liberty County, Texas Panhandle, South Texas and the Permian programs as Tom mentioned. Our goal is to end the year with an exit rate significantly above that of ’06. That said however, when we incorporate our Q1 and Q2 actuals into our current second half projections we’re reporting a full year guidance range of 445 to 455 million a day. A few words on our expectation program as you may recall the program called for capital spending here in ’07 in the range of $100-$150 million through June we are on track to meet our budget pretty well a bit more than $50 million to work and have drilled 57 new wells and performed 156 work-over recompilation projects, primarily in the Mid-continent and the Permian areas. In our Kansas and Plum areas we’ve drilled 26 shallow wells and performed 32 workovers year-to-date. We’ve got another ten new drills and 46 workovers planned for the remainder of the year. In Walnut Bend, after re-completing 20 wells year-to-date, we added another work-over rig to the fleet. This brings our total count of work-over rigs to seven. Six of the rigs are dedicated primarily just to workovers and we’re using one just for maintenance. With that our plans are to perform an additional 20 recompletions and during the next phase, which is deepenings, we’ve got eight deepenings planned here by the end of the year. In the Permian, the majority of our activity’s been focused and has continued to focus on the West Rec Field in West Texas. We’ve drilled 22 infill wells, performed 11 recompletions during the first half of the year and we’ll continue our development here in the second half of the year, 21 new drills anticipated in Q3 and Q4 along with 15 recompletions. However, we’ll be putting a stronger emphasis on looking at injectors rather than producers in order to help flood conformance. In addition to our active recompletion program in Southern Oklahoma we’ve increased our focus on the recompletion potential by Texas Panhandle down at West play. That’s kind of a new look for us in exploitation and that new look has resulted in more than two dozen recompletion candidates and we’re quite excited about where that could take us. Our Riley Ridge project has begun to take on an operational life. We’ve entered into contracts to build our plant and lay power while making good progress on establishing markets for the sale of natural gas and helium. Here today we’ve spent $13 million on the project, anticipate another $27 million down here in the second half of the year. Our hopes are to have the project on line in late ’08 or early ’09 at a total project cost of $93 million net to a 57% operated working interest. Once on line total net daily production from this 50 year life project is estimated to be about 11 million a day of methane and 300mcf a day of helium. Continued development post plant start up is anticipated to double these values by early 2008. In addition to these projects, we’ve now had enough time to get deeper into exploitation potential by assets to try and identify associated upside and we keep finding stuff to do. We continue to see a positive result from the program and anticipate that ’07 will be no different than last year as far as profitability, we expect a profitable program. With all that, I think I hand it over here to Mark who will touch on our financial results.

[Mark Burford:]

Yes, thank you Joe, I’ll just make a couple of comments on our second quarter financials and as Mick already mentioned we had 78.7 million of earnings in cash flow of 236.9 million. This compares to similar Q1 levels (inaudible) million and 235.9 million cash for the prior year. The biggest factors in (inaudible) year financials are that the gas price dropped 17% and the oil price was down 6% and some cost items are higher this year as opposed to last year. Production, as Joe mentioned, we did come in on our guidance of 140-150 million for the second quarter. We ought to point out though that our oil lines did increase 1,500 barrels a day over the prior year up 9%. This comes as a result of successful drilling in the Krotz Springs project that Tom mentioned and results in some higher oil related production in Liberty County. Touching on gas price realizations, our realized gas price pre-hedging was $7.19 versus the Henry Hub for the second quarter $7.55. So our pre-hedging differentials were $0.36. The differentials up slightly from our first quarter average of $0.22. Based on the forward curve for the second half of ’07 we expect differentials to increase to $0.60 - $0.90 which is close to the 2006 average of $0.75. Mid-continent volumes did increase our average reported price by $0.11 bringing the reported price to $7.30 for the quarter. And just to remind you that the hedges that we do have in place are Mid-continent hedges at 80 million a day for ’07 with $407 in dealings at 10.17 and we have 40 million a day next year (inaudible) Looking at a couple of spend items, production spend for the second quarter came in $1.26 (inaudible). This will have included about $1.3 million of (inaudible) expenses that were not covered by insurance which accounts for about $0.03 per CFE of that increase of $1.26. We’ve also seen cost increases in salt water disposal and water treating in electricity fuel and compression costs but excluding the insurance (inaudible) expense not covered by insurance and looking at this, there was increased, we’ve increased our guidance to $1.20-$1.25 for the second half of the year for our production expense. For DMA we came in at $2.86 within our range of guidance and our final DMA reading for the dull year will largely depend on our remaining joint program and just the actual costs in (inaudible). So, we are now going to leave that range unchanged into this quarter at $2.75 - $2.90. This quarter we also did actually complete an insurance of $350 million of new 7.8% ten year senior unsecured notes. With that offering we did recall there were 195 million 9.6% senior notes as we’ve seen with the Magnum Hunter merger. As a result our repaying of 9.6% notes, we did recognize a $5.1 million gain on early extinguishing of debt. That gain which basically reflects the difference of book value we had those 9.6% notes that we marketed at the time of the acquisition and the call price returned $4.4 million. We also did have some property sales this quarter of 21 million and we exited the quarter with no bank debt and as a result we did actually do some share repurchases for the end of the quarter amounting to 197,000 shares and since the quarter end we have continued to purchase another 335,000 shares bringing a 200,000 share purchase up to 530,000 shares at an average price of $4.10 or dollar value up $21 million stock that we repurchased this year. We’ll plan to be in the market from time to time on a daily basis purchasing shares through September, up to a total of 40-50 million and then we will evaluate where we are with our cash position and our capital requirement and whether the (inaudible) might have gone by then. The only other item I’ll touch on is that for taxes we did have an effective tax rate of 37% of which 100% was deferred during the quarter and with our active drilling program which generates continual drilling costs we expect for the remainder 2007 to continue to be essentially deferred probably in respect of 90-100% deferred for the rest of the year. With that Judith I think we’re ready to open up to questions and answers.

[Operator:]

Thank you, (operator instructions). Your first question is coming from Larry Busnardo from Tristone Capital.

[Larry Busnardo:]

Good morning, how are you doing Mick? Good, just a little bit on the horizontal granite wash plans. I’m just looking for a little bit more information on that in particular. The acreage that you put together, how you put it together, number of wells that you have planned for this year and then on taking that into next year how that could expand as you head forward.

[Michael Sullivan:]

That’s a tough question, I’m going to let Tom answer it.

[Tom Jorden:]

Of course, our acreage position in the Panhandle is a combination of a number of things, legacy, Cimarex acreage, some acreage we picked up from our Magnum Hunter acquisition and the acreage that we’ve assembled either through leasing or through joint ventures. So it’s a mixture of acreage. We will probably get this year, we just drilled our first test well and we’ll probably get 3 to 5 additional wells done this year testing the horizontal concept. There’s a lot of science behind this in terms of how we frac these wells, the orientation of the fractures and drilling is really a fairly mature area. We’re finding with proper application of our completion technique and well boring orientation that we catching some un-drained reserves. We’re still on the initial stage. Yeah, we’re moving ahead. We’re certainly aggressively looking where we can take this on our own acreage and elsewhere. We’ve got some very active joint ventures going that we’re looking to expand so we haven’t poured our plans for 2008 so I really can’t answer your question for future years, but it’s certainly a very exciting arena for us and we’d love to see it expand, but we need to get a little more experience behind us on that.

[Larry Busnardo:]

How big is the acreage position there? I think you have 58,000 gross acres, that neighborhood.

[Tom Jorden:]

Actually, I don’t have those numbers in front of me.

[Unidentified Company Representative:]

That would be our acreage and it doesn’t include our JV. That’s around 60,000 the way we said but you know, not all of that will be prospective. It wouldn’t be fair to quote that as a horizontal drilling prospective acreage. Fairly complex as far as drainage and existing (inaudible), formations were going for and so on.

[Larry Busnardo:]

OK, just remind me what’s the depth here?

[Tom Jorden:]

Panhandle, its 11,000 to 13,000 feet.

[Larry Busnardo:]

Okay. All right, just shifting over to the Woodford Shale, can you just go through that again? I think you said, you talked a little bit about the Arkoma Basin and then was the second part of that the Anadarko Basin?

[Tom Jorden:]

You know that that play is moving into the Anadarko Basin. The Arkoma is, as you know, pretty leased up, and that play is moving in to a deeper Anadarko Basin and the Anadarko Basin, the depths are deeper certainly than Arkoma. And of course this is, I’m going to quote you some numbers that are subject to change because it’s a new emerging play, but the depths that I would say characterize the fairway in the Anadarko are between 12,000 and 16,000 feet. It’s over pressured there. It’s thicker. The Wood ford shell is thicker than it is in the Arkoma Basin and it’s got our attention, and you know, a number of other operators attention. We’ve been amassing an acreage position as I’ve said. We have currently about 20,000 net acres and we’re looking to add to that handily. We’ve a very active leasing program. We’ve done some rockwork, some science work and we need to get out there and test the concept with a few wells. You know, we’ll operate one well and we’re partnering with a very experienced resource that will operate two other wells and we’ll have three tests down here between now and the end of the year. We’ve modeled it, which is quite helpful, but until we get some experience behind us it’s going to be hard to say much more than that.

[Larry Busnardo:]

So, I guess initially you plan to drill the wells, see what you have and then move from there going in to the next year.

[Tom Jorden:]

Yeah, it’s you know, how you complete these wells. How you drill them are critical parameters but the rock quality looks good to us. The maturity looks good. The organic content looks good. The pressures look good and the resource is there. It’s, in places it’s upwards of 300-350 feet thick. So we’re going to jump in and give it a try.

[Larry Busnardo:]

Is there quite a bit of competition out there then?

[Tom Jorden:]

You know, yeah, of course that’s a part of the world where it’s hard to sneak up on anybody, but we’ve made a stab where we think its prospective and we’re able to get out there and build a position. We’ve got a lot of activity going on leasing right now So we’ve taken that position from near zero and we’ve been working on this for…

[Unidentified Company Representative:]

We wouldn’t be talking about it if everybody in the industry weren’t pretty aware of it. That’s why we haven’t talked about it until now.

[Tom Jorden:]

Yeah.

[Larry Busnardo:]

Just one last point, at the red count, you’re at 22 now, sounds like you’ll be expanding in a couple different areas. Where do you think the [re] count can go here during the second half of the year and do think gas prices would impact that at all? I mean just given current levels, do you think it can go any lower, is it going to go any higher?

[Unidentified Company Representative:]

I’ll answer the gas price piece of it. As long as the gas price is September or whenever this Fall. If the front end of the strip goes down, normally the tail end of it stays where it’s at and sometimes even goes up. It depends. More pronounced (inaudible). We make our investment decisions on the strip, so a few months of down in the cash flow is particularly when those months when we’re drawing the wells and their not even producing anyway. Really doesn’t change our approach to the, to our drilling program, because we’re very much influenced by the strip and we run sensitivities on flat pricing but the flat pricing sensitivities that we’re on, if one month gets down too far, hell, our flat pricing scenario is above that, what the received price probably during those periods. So, anyway, it will be interesting in terms of cash flow but we’re very low-debt and we’re not reluctant to borrow money to drill wells. So I really don’t see much of, you know, we’ll just have to see if the gas prices goes to $5 and it’s in (inaudible) probably can see us slow down.

[Tom Jorden:]

But Larry, to answer your question, we’re at 22 operative now, we have plans to be, sometime in August at 28 and depending on results, we would certainly like to see it increase beyond even that. So we’re picking up half a dozen additional rigs.

[Larry Busnardo:]

OK. All right, thanks guys.

[Unidentified Company Representative:]

Thank you.

[Operator:]

(Operator Instructions) You’re next question is coming from Jeff Robertson of Lehman Brothers.

[Jeff Robertson:]

Thank you. Mick or Tom, can you talk a little bit about the plans for the Gulf of Mexico after you bring on this next round of production towards the end of the year? And then, secondly, as you build out some of these plays in like the Wood ford and the granite wash horizontal and some of the things that you’re trying to do in the Permian, are you trying to shift any of the emphasis away from any of the higher risk exploration programs and into more plays where they may result in development, more widespread development plays?

[Unidentified Company Representative:]

Yeah, I would like to answer that I think. The Gulf of Mexico is you know, we made an attempt to sell our main (inaudible) assets and we’re having to invest to hook those wells up so we’ve got capital, it will be in ’07 for hooking those up. Basically, all the capital that we’ll spend in ’07 in the Gulf of Mexico will be related to the hook-up of those main (inaudible) assets. We tried to sell them. It’s just cash flow stream and we didn’t like the discounting on the cash flow streams so we didn’t take the offer, the highest offer that we got. Those assets, the main (inaudible) assets, if, you know, they remain for sale essentially at what we think would be, not an outrageous price but an acceptable price. So we have every intention at some point in time, whether it’s after those wells come on production or before or whenever of selling those. The future of the remainder of the Gulf of Mexico just is basically some non-operated production, which we’re not necessarily in love with or not in love with. And in that acreage position, those blocks. The blocks that we have out, we continue to look on those hoping we’re going to find a pony in there someplace. So far we haven’t. So, we’ll have to decide what that looks like going forward. So, the Gulf of Mexico is what it’s always been so far and that is that it really kind of rests on what we find on those blocks and their continuing to expire. What do we have Mark, how many blocks now?

[Mark Burford:]

About 163 blocks now.

[Unidentified Company Representative:]

163 blocks. We started off with what, 230 or something like that? So their expiring and we’re trying to feverishly go through them and figure out what that looks like. So I don’t know if that helps you or not. Then, the other question was the what?

[Jeff Robertson:]

The high-risk program.

[Unidentified Company Representative:]

The high-risk program. Tom can articulate this better than I but I can give you the high points. The high-risk program if we refer to South Louisiana and state waters, that program is a, will continue to be an important piece of what we do. It’s based on concepts. We drill a [Wildcat], if the (inaudible) works we’ve got running rim and more prospects. The [Wildcat] doesn’t work, we look at it and we say why didn’t it work and does it kill the concept or do we need to tweak the concept and try it again? In terms of our high-risk program, the two high-risk wells this year that we drilled on, work on concepts that we really liked, represent less than 5% of our drilling capital. So the thing about our company is, is that what drives our boat is our moderate risk drilling program, which continues to grow. Now, I would really like to see that high risk program come in for us, and we'll load up and we'll drill some more of these concepts next year, but it's a pretty small piece of our overall program. If you look at the production profile of our company, our moderate risk program in a year like this will provide an exit rate of about 130 million cubic feet a day equivalent. So, starting at zero at the beginning of the year, just to keep our self to a modest production increase, a reserve increase, we have to exit at about 130 million cubic feet a day, so we have a big active moderate risk drilling program. What happens is, when our higher risk program kicks in, it just is gravy and adds on top of that and can really be good for us. So, we're going to continue to put a modest amount of money into that high risk program, what you're going to see, and I think maybe the heartier part of your question, is that what we've seen over the last year or so, and I think you see it in a lot of companies is, that there's been a profound increase in the amount of capital, drilling capital, we're putting into this horizontal drilling programs. And that really has expanded. We started that effort almost two years ago, and a lot of these programs, and we've been putting increase together, and trying to figure out if they’re going to work and everything and so we're finally at a point where we're starting to see the benefit of that, and that really has potential for increasing our drilling exposure from the dollar standpoint, you know, being a bigger factor the Woodford wells are very expansive and you can wave your arms all around about that, but our net exposure to drilling, if that were all productive and you can just wave your hand, wouldn't that be wonderful, you could just wave your hand and would be all works and everything. You know, that's a billion dollars a drilling. So, anyway, I said so much I don't, Jeff, what else would you like to know? I'll let Tom finish it.

[Jeff Robertson:]

As a follow up, on the horizontal effort that you all are making, both in the mid-continent, and also in the Permian, are you looking at plays where you were drilling vertical wells, and trying to decide whether it makes more sense to drill horizontal wells, or is it a combination of that plus putting together new [acreage] positions that haven't already been developed with vertical wells, and attacking with horizontals.

[Tom Jorden:]

Yea Jeff, this is Tom. It's a lot of both. We have plays for example on War-Wink that was vertical play. We've actually exited existing vertical producers and gone horizontal, and had tremendous uplifts in productions. There are also plays, and we're finding predominantly in New Mexico these are new plays. These are areas where there may be an odd vertical producer. When I say odd, I mean maybe one to three vertical producers out of a given formation in a township, and we recognize the potential for horizontal drilling, some of these thinner reservoirs, some of these reservoirs can be anywhere from ten to thirty feet of gross interval, often they're bypassed by vertical wells, and we've gone in and established production where production didn't exist previously. So, it's a little of both. In the Texas panhandle, a lot of that granite wash work has to do with [fracture] monitoring, we do micro-seismic listing of our hydraulic stimulations understanding the orientation, and then applying that to essentially in-fill pattern work. So, in answer to your question, it's a fair amount of both.

[Jeff Robertson:]

Ok. And then lastly Tom, can you talk about how full your plate is for the 2008 capital program at this point? And the opportunities?

[Tom Jorden:]

I can say that our opportunities are rich, and everywhere in our organization we have ideas that remind me, I think we're looking for 2008 that will be as active or more active than we currently are. We haven't formed our plans for 2008; that's typically a fall process for us, but I can tell you that our organization is highly focused on good ideas and taking actions to exploit them, so I don't think you're going to see us slow down at all.

[Jeff Robertson:]

Ok, thank you.

[Operator:]

(Operator Instructions) Your next question is coming from [Rhett Bruno] of Merrill Lynch. Hi Guys. Could you detail your share of purchase plans again?

[Mark Burford:]

Sure Rhett, this is Mark Burford speaking. Just to recap, so far through the second quarter we've purchased 197,000 shares. Since then we've purchased another 335,000, so it brings it to about 530,000 shares that have been purchased through the end of July. And going forward, being in the market on a 10-b5 rules on a daily basis, just buying small amounts of shares, and likely that’s for the full year, something in the neighborhood of 40 or 50 million and we've invested up to the end of July about 20 million, 21 million, and probably by the end of September we could have invested a similar amount and we'll see where we're at as far as our debt level or capital, and what other profits we might have made by then.

[[Rhett Bruno]:]

Ok, thanks.

[Operator:]

Thank you. Your next question is coming from Louis [Ogoin] of ING.

[Louis [Ogoin]:]

Good afternoon gentlemen, Just a quick question on leverage targets going forward.

[Unidentified Company Representative:]

Sure Louis, What level of leverage targets is going forward?

[Louis [Ogoin]:]

Yea, I mean that, I don't know I'm kind of calculating leverage to be way under one tons and coverage thru the roof. Just wondering whether you would put the [curling] program, kind of picking up a little bit, what your plan for that was.

[Unidentified Company Representative:]

Yea, Louis, I guess you're right. Our leverage coverages are very strong. We've traditionally had low leverage and that's partly driven from our approach that business being drilling oriented, but yet we're not afraid of taking on a little leverage to fund a drilling program and right now we have a $500 million commitment under our senior credit facility, of which none is drawn, and that [bar] calculates to be in the billions, so we have plenty of capacity for some borrowing, if we thought we had a need and a joint program to accelerate, we're more than ready to take on a little bit of bank debt to fund something like that.

[Louis [Ogoin]:]

Ok. Thank you.

[Unidentified Company Representative:]

Sure, Louis.

[Operator:]

Thank you, there appears to be no further questions at this time.

[Unidentified Company Representative:]

Ok, Thank you everyone for joining us today. We appreciate the questions and we look forward to reporting back to you on our progress the next quarter. Thanks again, everyone.

[Unidentified Company Representative:]

Thank you [again]

[Operator:]

Thank you, this concludes today's Cimarex second quarter 2007 earnings conference call. You may now disconnect.