Published on February 2, 2009
FINAL TRANSCRIPT Conference Call Transcript STR - Q3 2008 Questar Corp. Earnings Conference Call Event Date/Time: Oct. 30. 2008 / 9:30AM ET Thomson StreetEvents 1 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call CORPORATE PARTICIPANTS Stephen Parks Questar Corp. - SVP, CFO Keith Rattie Questar Corp. - Chairman, CEO Allan Bradley Questar Corp. - CEO, Questar Pipeline Charles Stanley Questar Corp. - CEO, Market Resources Ron Jibson Questar Corp. - CEO, Questar Gas CONFERENCE CALL PARTICIPANTS Faisel Khan Citigroup - Analyst Adam Wise John Hancock Financial Services - Analyst Samuel Brothwell Wachovia Capital Markets - Analyst Winfried Fruehauf W. Fruehauf Consulting - Analyst Carl Kirst BMO Capital - Analyst Holly Stewart Howard Weil - Analyst Rebecca Followill Tudor, Pickering Energy Partners - Analyst Brian Singer Goldman Sachs - Analyst Jon Lefebvre Wachovia Capital Markets - Analyst Shneur Gershuni UBS - Analyst PRESENTATION Operator Good morning, my name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to Questar Corporation third quarter 2008 earnings release conference call. All line have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to introduce Mr. Stephen Parks, Senior Vice President and Chief Financial Officer. Go ahead, sir. Stephen Parks - Questar Corp. - SVP, CFO Thomson StreetEvents 2 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Good morning. Thank you, Andrew. Welcome to Questar's third quarter 2008 conference call. I will briefly summarize our strong financial position and results for the third quarter 2008 and then I'll turn the microphone over to Keith Rattie, our Chairman and CEO. Keith will provide more color in our third quarter results, update earnings and production guidance for 2008, and introduce initial guidance for 2009. After Keith, we'll invite your questions. Other members of Questar management team are here today to answer your questions including Chuck Stanley, President and CEO of Questar Market Resources; Allan Bradley, President and CEO of Questar Pipeline; and Ron Jibson, President and CEO of Questar Gas. Our remarks this morning will contain forward-looking statements about future operations and our expectations of Questar Corporation. We make these statements in good faith. We believe they are reasonable representations of the Company's expected performance at this time, but actual results may vary significantly from our current expectations and projections due to a variety of factors that are described in our Form 10-K filings with the SEC. Let's start with our strong financial position. Questar's combined short and long-term debt was 40% of total capital at September 30, 2008. The Company has $365 million of short-term lines of credit available to support our commercial paper program. We have $79 million in commercial paper outstanding this morning. In addition, Market Resources currently has unused capacity of $475 million under a long-term revolving credit facility. We believe we have sufficient liquidity to support our operating and capital investment plans through the end of 2009. Now here's a short summary of our third quarter 2008 results. Questar third quarter 2008 results exceeded expectations with net income of $204.2 million, or $1.16 per diluted share. That's up 80% over a year ago. Net income a year ago was $113.3 million, or $0.64 per share. We now expect 2008 net income to range from $3.70 to $3.80 per diluted share. Please remember that our guidance excludes asset sales and mark-to-market gains and losses from hedges. Questar third quarter results included before tax net gains from asset sales of $59 million compared to a loss of $200,000 a year ago. Questar E&P sold noncore producing assets for $92.2 million in the 2008 quarter resulting in a pre-tax gain of $58.7 million and a net after tax gain of $36.5 million. Net mark-to-market losses on basis only swaps decreased net income $14 million in the 2008 quarter compared to a gain of $5.6 million in the year earlier period. Our Market Resources subsidiary once again led the way growing net income 82% to $197.6 million in third quarter 2008. All four Market Resources business units, Questar E&P, Wexpro, Gas Management and Energy Trading delivered double-digit net income growth. Questar E&P grew net income 92% to $146.8 million with production increasing 34% to 45.3 Bcfe. Realized prices for natural gas, crude oil and NGL increased 23%, more than offsetting an increase in average production costs. Wexpro grew net income 38% driven by a 32% increase in investment base over the past 12 months. Gas Management grew net income 84% driven by higher gathering and processing margins. Net income for Energy Trading increased 40% to $5.9 million as result of increased marketing margins. Questar Pipeline, our interstate pipeline and storage business, earned $15.4 million in third quarter 2008, up 28% from 2007. The increase was driven by higher transportation revenues from expansion projects completed in fourth quarter 2007. Questar Gas, our retail gas distribution utility, reported a seasonal third quarter 2008 net loss of $8.8 million compared to a loss of $8.5 million a year ago. A higher gross margin was driven by new customer additions, but was offset by higher operating maintenance and interest expenses in the quarter. Questar Gas now serves 880,100 homes and businesses, up 2.2% from a year ago. For more details on third quarter 2008 results, you can find our earnings release and the latest version of our investor relations presentation on the Questar website at Questar.com. Now I will turn the microphone over to Keith Rattie, Questar Chairman and CEO. Keith Rattie - Questar Corp. - Chairman, CEO Good morning, everyone. We have got a lot of ground to cover this morning. First, to say it's been a tough quarter for Questar shareholders would be an understatement. Our stock, as you know, is down 45% year-to-date. Let me try to put this into historical context. Questar stock recently traded at levels we haven't seen since 2004, even though Questar net income has tripled since '04. Thomson StreetEvents 3 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Questar E&P production today is about 65% higher than it was back in '04. Questar E&P proved reserves are about 50% higher today than at year-end '04. Wexpro net income has doubled, Gas Management's net income has nearly quadrupled. Questar Pipeline's net income has more than doubled and our balance sheet is stronger than it was back in 2004. Yes, natural gas and oil prices have fallen substantially over the last several months and costs are up. But the forward curves for natural gas and oil today are higher than they were back in '04. What's more roughly 40% of our forecast 2009 net income and cash flow comes from businesses that are not materially sensitive to falling natural gas prices and about 70% of forecast 2009 Questar E&P production is hedged at prices well above current levels. When you do the arithmetic only about 20% of our forecast 2009 cash flow from operations is exposed to possible further declines in the price of natural gas. So what's wrong with the picture? Obviously, it's not the look backward but what lies ahead that matters to investors. I will keep my comments this morning on our third quarter results brief and focus instead on how we are adjusting and how we intend to manage our business through what could be a tough year for the U.S. economy and the natural gas industry. We did, as Steve has summarized, have by far the best third quarter in Questar history. As he noted, despite low natural gas prices in the Rockies, we grew net income 80% compared to a year ago. Questar E&P grew natural gas and oil equivalent production 34% in the quarter. Please note we produced a record 45.3 billion cubic feet equivalent in the quarter. That's just below 500 million cubic feet a day, and, in fact, Questar E&P daily production has since topped the 500 million cubic feet equivalent per day net level for the first time. We grew Midcontinent in production 42%. The Midcontinent now contributes about 40% of of Questar E&P production. Questar E&P controllable production costs, that excludes productions taxes that, of course, are tied to product prices, our controllable production costs declined from $3.42 per Mcf equivalent in the second quarter to $3.17 per Mcfe in the third quarter. And that's a trend we hope will continue. Steve noted Wexpro, our second E&P company grew net income 38% from a year ago. Wexpro produced a record 12.2 billion cubic feet equivalent in the quarter on behalf of the utility Questar Gas. Our gathering and processing company, Gas Management, grew net income 84% from a year ago. That was driven by higher processing and gathering margins and our Questar Pipeline team kicked in -- grew net income 28% in the quarter driven by the expansions we completed last year. Today with over 80% of Questar E&P's fourth quarter gas and oil equivalent production hedged, as Steve noted, we now expect Questar consolidated net income to range from $3.70 to $3.80 per diluted share. That compares to our prior, guidance of $3.50 to $3.60 per diluted share. Also note that earlier this week our board approved an increase in our dividend from $0.49 to $0.50 per share per year. Let me turn now to 2009. As we announced in our October 15 release we are responding to lower commodity prices and tight credit markets by reducing capital spending next year to a level that's consistent with cash flow from operations plus available capacity on our existing credit facilities. Earlier this week, the Questar board of directors approved our 2009 plan. Let me give you the highlights. First, we plan to reduce Capex from $2.6 billion in 2008 to about $1.6 billion in '09. Please note our '08 capital program included E&P property acquisitions totaling about $700 million. If you exclude those, we are reducing 2009 Capex by about $300 million. We will allocate that $1.6 billion capital program as follows: To Questar E&P, $1.05 billion, that's down from the $1.9 billion with the acquisitions this year. Wexpro, $140 million next year, and that's up from $135 million in '08. Gas Management, $200 million next year and that's down from $400 million in '08. Questar pipeline, $107 million, flat with '08; and Questar Gas, $90 million and that's down from $136 million this year. Despite, and please note, despite lower capital expenditures next year, we expect Questar E&P production to grow by 10% to 15% from 167 to 169 Bcfe in 2008 to 185 to 193 Bcfe next year. As Steve noted, we estimate that Questar 2009 EPS may range from $3.05 to $3.25 per share. That's down about 15% from 2008 and it excludes the one-time items. Please note that this guidance assumes realized prices on unhedged production that may be more conservative than many of the analysts who follow our industry are modeling for next year. Also, we are modeling a lower frac spread, and thus, lower earnings in our processing business. Please see the table in our release for the key assumptions. Again, I will repeat, about 70% of Questar E&P forecast 2009 productions hedged at prices well above the current forward strip. In fact, to quantify that, the mark-to-market on our hedge book today is about $400 million. That's up about $900 million since the end of the second quarter. Thomson StreetEvents 4 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Now historically investors have thought of Questar E&P as primarily a Rockies producer. But our '09 plan showcases the flexibility that we now have with our multi-basin E&P asset base. Because we are expecting Rockies basis to remain wide for the next couple summers, we will shift capital from the Rockies to the Midcontinent. Next year Pinedale will cut back from 12 to 9 rigs. With nine rigs and year-round drilling under the current BLM Record of Decision we still expect to complete 93 to 95 wells at Pinedale next year, that's up from 78 to 80 wells in 2008. As you all know, Pinedale is the lowest cost per Mcf equivalent play in the Rockies. In fact, it may be the only major play in the Rockies with acceptable returns at current forward prices and current costs. Even with the slower ramp-up at Pinedale we still expect solid production growth from our Pinedale play next year. I'd also like to remind you that Pinedale is a quot;triple-playquot; for us. Questar E&P, Wexpro and Gas Management all participate. Questar E&P will invest about $360 million next year at Pinedale. Wexpro will invest about $70 million at Pinedale next year. As you know, Wexpro returns in cash flow are not sensitive to commodity prices and you also know that under the Wexpro agreement, Wexpro earns a 19% to 20% after tax unlevered return on its net investment base. Over the next five years, we now plan to invest about $800 million in Wexpro and about 60% of that will be at Pinedale. Wexpro's net investment base and, therefore, net income could double by 2013. Also 100% of Questar operating production is dedicated to our gathering and processing business at Pinedale. Pinedale is an investment trifecta for Questar shareholders. Now please note that in 2009 we plan to suspend all gas directed drilling in both our Uinta Basin and Legacy divisions. Now this is a tough decision for us because our technical team has done its job and our deep gas play in the Uinta Basin is working. Over the past few months, we turned several deep wells to sales with initial rates above 5 million cubic feet a day. But given margins and returns at current Rockies prices and given our focus on returns, we've got better places to put capital to work in our diversified portfolio as we cut back to live within our cash flow. We will get back after the Uinta deep play once we get better visibility on the timing of proposed new Rockies export pipelines, something I will comment on in a little bit. But we will allocate capital for oil-directed drilling in the Uinta Basin next year. We plan to drill at least 15 horizontal wells in the Green River formation. You may want to ask Chuck to explain that when we get to Q&A. Also in the Rockies, we will shift our focus from gas to oil in our Legacy Division, specifically to our 63,000 net acre leasehold in our North Dakota Bakken play. Some good news this morning. We've spudded our first Bakken well. We plan to drill at least six Questar operated Bakken wells next year. In total in 2009, we are planning to reduce Capex in the Uinta and Legacy divisions by 70% from 2008. We will move capital to the Midcontinent. We planned to drill or participate in at least 30 wells in the emerging Haynesville shale play in northwest Louisiana next year. Assuming we get the results we expect. we plan to ramp up from the three rigs we are currently operating in this play to at least five rigs next year. As you know, we have over 30,000 net acres in the Haynesville play and based on early well results reported by other operators, much of our acreage may be in the sweet spot of the play. So we will need to confirm this with both the drill bit and more production history on all the wells in the play. We currently have two Questar-operated Haynesville horizontal wells drilled, cased and waiting on completion with frac dates scheduled in early November. We are also drilling ahead on our third and fourth Questar-operated Haynesville wells. And just a reminder, we participated in one outside-operated well that was completed and turned to sales in early August at an IP of over 20 million cubic feet a day. We also have interest in two additional outside-operated wells, one waiting on completion and one drilling ahead. Also in northwest Louisiana, next year we plan to drill about 80 Cotton Valley/Hosston wells. In the western Midcontinent we plan it to drill or participate in about 20 gross horizontal Woodford wells next year. Let me just quickly summarize our capital plan for Questar E&P. We will move capital in Questar E&P to where the margins and returns remain attractive at current forward prices. We are shutting down all gas directed drilling in the Rockies except at Pinedale. At Pinedale we will cut back from 12 to 9 rigs and allocate capital for oil-directed drilling in the Uinta Basin and the Bakken. We will allocate more capital to our Haynesville and Cotton Valley/Hosston plays in northwest Louisiana and our Woodford shale play in western Oklahoma. Please note that with these shifts in capital, we forecast that over 75% of Questar E&P 2009 production will come from high margin properties in the Midcontinent and Pinedale. Thomson StreetEvents 5 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Let me turn to our gathering and processing business, as record 2008 earnings show, Gas Management's processing business tends to be a natural hedge against low Rockies natural gas prices. Next year we will allocate capital to expand our Blacks Fork hub in anticipation of growing Pinedale volumes and we will also allocate capital to expand our Stage Coach processing plant in the Uinta Basin. This latter project is underwritten by a long-term contract with an unaffiliated producer. Turning quickly to Questar Pipeline, our pipeline team's role in our corporate strategy, as you have heard us describe, is to protect returns on capital in our Rockies E&P business and specifically to do that by identifying and eliminating pipeline bottlenecks. Today, that role matters more than ever. Northern Rockies production has grown from about 5.3 Bcf a day back in 2003, to about 9 Bcf a day today. That's an average increase of over 500 million cubic feet per day per year. Over the last five years, three major Rockies export pipelines have been built. And our pipeline team has played a role in all three by expanding our upstream pipelines to increase deliveries into the new pipes. But by August this past summer, all of those new pipes and all of the existing Rockies export pipes were essentially full. Simply put, Rockies production can't continue to grow anywhere near the historic rate until new export pipelines get built. Now the final leg of REX to eastern Ohio will help. It will add about 300 million cubic feet per day of capacity about a year from now. The proposed Kern River expansion will help. It could add about 500 million cubic feet per day of export capacity in 2010 or '11. TransCanada's Bison project could add about 400 million cubic feet per day of capacity in late 2010 and El Paso's proposed Ruby Pipeline project could add over 1 Bcf per day of capacity in 2011. But when we do the arithmetic, even if all these pipelines get built, our models show that Pinedale volume growth alone can fill them all. Even if all of the other plays in the Rockies stay flat. In short, we need another major Rockies export pipeline by 2012. Based on our pipeline team's discussions with Rockies producers, we are convinced we need a 42-inch bullet from Wyoming to Chicago. Between now and the end of the year, Questar Pipeline and our partner, Alliance, will conduct a new open season on a revamped Rockies Alliance Pipeline project, or RAP, which will run from Wamsutter to the big and highly liquid Joliet hub near Chicago. In the open season we are hoping to confirm or reconfirm the initial 500 million cubic feet per day of shipper support we received in the open season we held last May. We will need another 800 million cubic feet per day of new shipper commitments to move forward with this project. We also hope to finalize an agreement to bring another major pipeline company into the project before we go out with that open season. Now to underscore Questar's commitment to this project, Questar E&P intends to make a significant capacity commitment during the open season. So our message to other Rockies producers today is this: Let's fix the basis problem. Help us get a new pipeline built to Chicago by 2012. Finally in 2009, we will allocate about $90 million to our utility, Questar Gas, to continue to serve customers safely and reliably and meet our obligations to connect new customers. That's down from about $136 million in 2008. In summary, our 2009 plan highlights what we think is a strong suit for this Company. We have the people, the assets, the flexibility and the discipline to move capital to where we get the highest risk adjusted returns. In Questar E&P, that means allocating more capital to gas-directed drilling at high margin properties including our Pinedale play and Midcontinent assets and to oil-directeddrilling in the Bakken and Green River formations. It also means continued investment in our four other businesses, Wexpro, Gas Management, Questar Pipeline and Questar Gas, all of which generate cash flow and earnings that are not materially sensitive to falling natural gas prices. I want to thank everybody for dialing in this morning and now we will open it up for questions. QUESTION AND ANSWER Operator (OPERATOR INSTRUCTIONS) We'll pause for just a brief moment to compile the Q&A roster. Your first question comes from the line of Faisel Khan from Citigroup. Go ahead. Thomson StreetEvents 6 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Faisel Khan - Citigroup - Analyst Good morning, guys. Keith Rattie - Questar Corp. - Chairman, CEO Good morning, Faisel. Faisel Khan - Citigroup - Analyst Just a question on Capex for next year. If we run the math on the Capex for next year and your operating cash flows and your commodity price deck and you have said that you will probably tap some of your revolving credit capacity. In this market given the credit market, does it make sense to be that aggressive on the Capex front? Or is there -- how much flexibility do you guys have on that front if you had to ramp it down? Keith Rattie - Questar Corp. - Chairman, CEO Faisel, we think we have a lot of flexibility and we tend to manage this very carefully. Obviously, if prices fall further from current levels and it looks like our cash flow from operations will be less than what we expect, we clearly will adjust capital spending further. I want to make a couple of points. We, as I mentioned in the call, only about 20% from our cash flow from operations is really exposed to a falling natural gas strip, number one. Number two, in the 2009 plan, particularly in the E&P business, Chuck and his team have assumed that costs remain flat with what we have seen, in retrospect, what looks like an overheated market this year. I have a lot of confidence in the operational capability of our asset managers to find ways to cut our costs and we are already seeing, as the trend in the third quarter signaled, a downward movement in all the costs that ultimately aggregate up to well costs. But we will manage this very carefully. We think we have sufficient liquidity to operate under this plan. The board and I and the management team focused extensively on that question in the board meetings we held earlier this week. As you've heard, we do have the ability to adjust either downward or upwards as market conditions dictate. Faisel Khan - Citigroup - Analyst Okay. And then just on the Rockies export pipelines. If for whatever reason your proposal did not become the front runner for a new export pipeline to move gas east, would you commit -- would you commit some of your E&P volumes to whatever the export pipeline was to move gas east? Keith Rattie - Questar Corp. - Chairman, CEO We think that the right market for the eastbound pipeline is straight to Chicago and we do think we are the front runner, Faisel. We had over 500 million cubic feet per day of initial subscription in the open season. But you will recall the original RAP project was routed basically northeast out of the Rockies to interconnects on northern border and Alliance pipeline. That -- we heard from Rockies producers in the open season that they didn't want to go to an intermediate delivery point. They wanted to go to a large liquid market, i.e., the Joliet hub in Chicago which delivers into multiple pipelines that take gas into Canada and on to big markets in the upper Midwest. The other project TransCanada's Pathfinder project has the same issue. It doesn't take gas to a large market. You have multiple hauls on multiple pipes to get to the large markets. We think the best way to solve the Rockies basis problem is to build a bullet straight to Chicago. We are getting very positive feedback in early discussions we are having in the marketplace. Faisel Khan - Citigroup - Analyst Thomson StreetEvents 7 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Okay, great. Thanks for the time. Operator Your next question comes from the line of Adam Wise from John Hancock. Please go ahead. Adam Wise - John Hancock Financial Services - Analyst Hi, guys. Just wanted to ask a couple quick questions. First, the natural gas price deck you are using currently, what are you budgeting, what is that? Keith Rattie - Questar Corp. - Chairman, CEO We were using a NYMEX strip of $6.50 to $7.50 next year. But with adjusted per basis. And there's a table in our earnings release on page 4 that I will draw your attention to and this is important. We were assuming that Rockies basis ranges from $2 to $3.50 next year. That is, the current Rockies basis is about $2.30. So it's at the low end of that range. We are assuming that Midcontinent basis, NYMEX to Midcontinent basis differential ranges from $1 to $2 next year and I would point out that that is roughly the current basis in the Midcontinent and is at the lower end of that range. So when -- in my prepared remarks I stressed that we think our guidance next year is based on price -- realized prices when you adjust NYMEX for the basis where to the regional pipes that we actually produce and deliver the gas into -- you come up with a net to the well price is that probably going to be quite a bit lower than what most of the analysts who are following our industry are currently assuming today. Adam Wise - John Hancock Financial Services - Analyst Okay. Thanks. And then using that $1.6 billion '09 estimate with that budget, what do you see as the amount outside of your operating cash flow would be that you need to finance that plan? Keith Rattie - Questar Corp. - Chairman, CEO The plan shows a modest amount of incremental financing. Steve, why don't you give those numbers just quickly. Stephen Parks - Questar Corp. - SVP, CFO If our ability to predict actually comes to resemble reality then we would expect to borrow about $20 million all net -- net for the year. It's essentially break even. Adam Wise - John Hancock Financial Services - Analyst Thank you. Operator Your next question comes from Samuel Brothwell from Wachovia Capital Markets. Go ahead. Samuel Brothwell - Wachovia Capital Markets - Analyst Good morning, everybody. Thomson StreetEvents 8 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Keith Rattie - Questar Corp. - Chairman, CEO Hi, Sam. Samuel Brothwell - Wachovia Capital Markets - Analyst Keith, couple questions on the Rockies pipeline. I think you alluded to possibly bringing in another pipeline operator as a partner. Did I hear you correctly on that? Keith Rattie - Questar Corp. - Chairman, CEO Yes, we would like to. Samuel Brothwell - Wachovia Capital Markets - Analyst Okay. And this is going to be all virgin pipe straight to Joliet you won't interconnect with anything else as you've got it planned now? Keith Rattie - Questar Corp. - Chairman, CEO Why don't I let Allan Bradley just give you a very quick overview of what the project configuration will be. Allan Bradley - Questar Corp. - CEO, Questar Pipeline Thanks, Keith. Good morning, Sam. As you know, it's about 1,100 miles from Wamsutter to Chicago. When we say Chicago, we will tie in just downstream of the Aux Sable plant on Alliance and they have a very flexible header system that basically ties into multiple interconnects in the Chicago area that can move gas both to LDCs and the Midcontinent and also to other interstate pipelines that can take the gas east, perhaps as far as Dawn Storage. There is a liquid market there and producers in the Rockies really like that. We will interconnect with existing pipelines as interest develops along that corridor. So we'd parallel REX to Cheyenne, we build straight across a new route over to basically Harper and then we sort of parallel the NGPL line into Chicago. If you look at the synergies of that corridor. Its initial capacity, as Keith said, is 1.3 Bcf a day and it's expandable up to 1.7 Bcf. We feel we have a very competitive rate now and when we look at that rate we want to make sure we minimize the variable components so we really capture the lowest possible fuel rate and try to build the most flexible line we can with that in mind minimizing the variable cost. And producers have given us a lot of encouragement to stay the course in this environment and that's exactly what we intend to do. Samuel Brothwell - Wachovia Capital Markets - Analyst Do you think they will step up with either a longer term contractual commitment or capital or both, the producers, I mean? Allan Bradley - Questar Corp. - CEO, Questar Pipeline Right now if we expand the development team I think we have the initial momentum to carry the development into a higher spend rate for '09. That will depend on the results of the open season which we hope to target mid-December and we'll run it probably through the end of January and, as Keith said, we would like to sort out the participation prior to going out with that follow-on open season. And we are pretty optimistic. The message we were getting is Piceance producers have basically anchored REX. They aren't going to be in for a major role.It will be driven by the Greater Green, Pinedale and Jonah producers and, obviously, Keith's comment about QEP making a major Thomson StreetEvents 9 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call commitment, I think, signals to other producers in that basin that this is a solid project, one that they need to take a serious look at. And we were hoping that they will match QEP's commitment on this pipe. Samuel Brothwell - Wachovia Capital Markets - Analyst Okay. Thanks. I will actually come back for a follow-up. Keith Rattie - Questar Corp. - Chairman, CEO Thanks, Sam. Operator Your next question comes from Winfried Fruehauf from W. Fruehauf Consulting. Go ahead, sir. Winfried Fruehauf - W. Fruehauf Consulting - Analyst Good morning. I have a question on Kinder Morgan's proposed bullet line to Chicago. How does RAP compare with that proposed line? Keith Rattie - Questar Corp. - Chairman, CEO They are competing projects, Winfried. Allan Bradley - Questar Corp. - CEO, Questar Pipeline Winfried, Allan Bradley. When we look at the projects basically you're looking at almost an identical route. Our route is a little shorter in that the CHEX project, as its referred to, Chicago Express, follows more the Rockies Express pipeline corridor. But when you get into the Chicago area you are basically following NGPL's line into Chicago. We feel that one of the benefits of the RAP Project is the ability to tie into a flexible downstream header that Alliance has built in, just east of Aux Sable and Joliet. There is a lot of delivery flexibility there that we don't have to replicate. Right now, as Keith says, it is a competition. We feel like there are a lot of similarities between the two projects. And at the moment we feel like we are in a pretty good position based on the results of our initial open season and the producer feedback we have gotten on our new re-route. Winfried Fruehauf - W. Fruehauf Consulting - Analyst Thanks. And another one, if I may. What happened to your venture with Enterprise that you announced about May of last year or so? Allan Bradley - Questar Corp. - CEO, Questar Pipeline That project is moving along nicely. Thank you for asking that, Winfried. It's called our White River Hub project. It basically it consists of about a six-mile, 30-inch pipeline that connects the Greasewood and Meeker hubs. We just finished hydrostatically testing the line. Everything looks good. We are finishing up interconnects both to REX, CIG, WIC, we are also working on one with Northwest. That's going to be a very liquid point and right now it looks like we will have that new system in service by about November 20, 21. We are -- because it's new system in the area we have customers coming in for some training on how to nominate early November. We were excited by this initiative and hope it incentivizes additional volume and expansions to that hub as we move forward. Thomson StreetEvents 10 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Winfried Fruehauf - W. Fruehauf Consulting - Analyst Thanks very much. Operator Your next question comes from the line of Carl Kirst from BMO Capital. Go ahead. Carl Kirst - BMO Capital - Analyst Good morning, everybody, and great quarter. Couple of micro and then a macro question, maybe staying on RAP, Allan. If my recollection serves we are looking at roughly a $5 billion proposal around $1.50 negotiated rate. As you guys go into this next open season are we staying around those parameters? Or has the retrenchment in steel perhaps made that even more attractive? Allan Bradley - Questar Corp. - CEO, Questar Pipeline We are looking at that right now. Clearly, steel prices have declined from when we put this estimate together. And at the end of the day as we bring in new partners and they look at their due diligence, I think it will also give us additional comfort that another set of eyes has looked at that estimate. We are fairly confident we can build at that price, if not lower. With commodity prices, labor rates changing dramatically from where they were just a quarter ago. This is probably on the high side if I had to guess right now. Carl Kirst - BMO Capital - Analyst Okay. Appreciate that. Chuck, turning to the Haynesville for a second. Obviously, 30 wells being budgeted here for next year. Everyone kind of interested in these next well results. How should we expect timing of information disclosure on these? Is this something where the two wells that are currently waiting to be completed that you might have at the November 12 analyst meeting or is this something where you might wait to kind of disclose sort of these grouping of four wells until you have all of the data on those four? How should we expect that? Charles Stanley - Questar Corp. - CEO, Market Resources Good question. I hadn't thought about timing on when we come out. I would like to see at least two or three weeks of stabilized production which I think is really the average over the first 30 days is meaningful. Frankly, we will complete these wells sequentially. We will have one, maybe, frac before the analyst meeting and the other one in the middle of being fraced. So we won't have any meaningful production information by then and it certainly will be about year end. And what I would hope is we'd issue an operational update maybe toward the end of the year that would give you some additional color on these wells. Obviously, we are guardedly optimistic about the sweet spot, as Keith described it, that we seem to be in. We are basically surrounded to the south, to the north and to the northwest by very good well results and EnCana has reported at least one horizontal well to the southeast of us sort of due south of our Woodardville acreage. To the north we are participants in several Petrohawk wells, one of which the results have been announced on and Petrohawk has also disclosed performance on a couple of other wells that they recently completed that indicate that the acreage that we operate seems to be in an area of high initial rates and from extrapolation from other shales encouraging EURs. Thomson StreetEvents 11 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Obviously, as Keith mentioned, it's too early to talk in great detail about our view on this area other than we are very encouraged by the other operators' results that have been reported to date. Carl Kirst - BMO Capital - Analyst Fair enough. Keith, more of a macro question and obviously you opened with the stock price performance and where it is and certainly, unfortunately, below the sort of XNG and XOP even before accounting for your utility operations. Now, obviously, we were in a crazy market. Does something like what's recently happened with kind of almost the excess beta that'sin your stock, does that get you thinking more about restructuring or does the kind of craziness in the market at this point make you think less about restructuring, let's keep it together for the foreseeable future and once the markets settle if there is restructuring to do we will address it at that time? How should we be thinking about that right now? Keith Rattie - Questar Corp. - Chairman, CEO Restructuring in the kind of environment that we are in probably doesn't make a lot of sense to our shareholders. But longer term we still think it does. We think, maybe not -- I would shift the emphasis of your question just a bit. We think about what do we have to do to maximize value for our owners and one of the options, obviously, is a restructuring. Separation of Market Resources from the rest of the company. Separation of just the E&P company. Other things that we can do is to use our regulated businesses more to highlight the value that those businesses have. And we've talked about all of the different alternatives in the past, Carl. In the current environment, we think the appropriate thing to do for our loyal long-term shareholders is focus on executing the plan that we, the board, just approved and if we do that we believe that ultimately the market will reflect in our stock price the fundamental value of this mix of businesses. Carl Kirst - BMO Capital - Analyst Appreciate the thoughts, guys. Operator Your next question comes from Holly Stewart from Howard Weil. Go ahead. Holly Stewart - Howard Weil - Analyst Good morning. Just a couple ones real quick. Can you give us an idea of current production volume shut-in in the Pinedale and kind of thoughts going into 4Q? Charles Stanley - Questar Corp. - CEO, Market Resources Holly, it's Chuck. We don't have any production shut-in other than minor amounts that as we do tie-ins of new wells. We just completed the tie- in operations on both ends of the new 30-inch Rendezvous line that we just completed hydrotesting. We are purging and packing that line. We were down for five days or so as we conducted the tie-in operations on both ends earlier -- actually we came back online last Friday afternoon, Friday evening so we were down most of last week. Other than that, no shut-ins currently. Holly Stewart - Howard Weil - Analyst Okay. And then, Chuck, you give us an idea how we should be thinking about 4Q volumes just using your actuals for 3Q. It looks like you can come in above the high end of that range. Give us an idea of, have you stopped drilling gas wells out in the Rockies and moving rigs out, et cetera? Just thinking about 4Q? Thomson StreetEvents 12 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Charles Stanley - Questar Corp. - CEO, Market Resources As Keith mentioned, we are deliberately shifting capital from the Rockies to the Midcontinent region and that will result in a reduced amount of gas production coming out of some of the areas that you've expected to see growth in, and a bit of a delay as we move rigs and people get back into the drilling mode in these new plays. You've seen our production guidance. We're comfortable within that range. We think we will come in at the high end of that range and beyond that, I can't give you much more color. Holly Stewart - Howard Weil - Analyst Okay. And then can you just make a comment or two on the Uinta oil play that Keith was referring to in his prepared remarks? Charles Stanley - Questar Corp. - CEO, Market Resources Sure, Holly. The Uinta Basin property is the big, large, contiguous block over 120,000 acres. It was originally developed back in the late '50s as an oil play. The Green River formation contains multiple stacked reservoirs that are -- have been developed over the years by Gulf and Chevron and then more recently by us. Over 600 million barrels of oil in place just in the Red Wash field alone and less than 15%, in fact, less than 12% of that has been recovered to date. Lots of attempts to water flood the fields with varying degrees of success. We have had a quiet but fairly continuous program of drilling horizontal wells to both tap unswept oil that's been banked as a result of imperfect water flooding that was done. But we have also identified some thinner reservoirs that were never actually perforated and produced and we've been targeting those reservoirs with horizontal drilling. We recently completed a dual lateral horizontal well in a formation, or a reservoir in the Green River that's only about eight feet thick or less. And that well came on at close to 400 barrels a day. We think these individual single laterals will recover about 80,000 to 90,000 barrels of oil. They are very economic even at much lower forward oil prices than we see today. And we think it's a good way to continue development. We have tie-ins to the pipeline that brings the oil directly to the Salt Lake refining complex very high net to NYMEX on this crude oil stream. Holly Stewart - Howard Weil - Analyst Perfect. Thanks, guys. Charles Stanley - Questar Corp. - CEO, Market Resources Thank you. Operator Your next question comes from Becca Followill from Tudor, Pickering. Go ahead. Rebecca Followill - Tudor, Pickering Energy Partners - Analyst Hey, guys. Can you provide, and it may take a second, Capex '08 and '09 for Rockies all together and Midcontinent so we can get a feel for in total how Capex is changing and being reallocated to those areas? And while you're pulling that, two other questions. One, on the credit watch on S&P, they're recent, putting you guys on credit watch negative. Does it take into account the lower Capex budget for 2009 relative to 2008? And then the last one is there is a lot of reallocation of capital from Rockies into the Midcontinent area and Haynesville. Do you guys have some transportation capacity out of Haynesville and north Louisiana? Thomson StreetEvents 13 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Charles Stanley - Questar Corp. - CEO, Market Resources Becca, I will take the first and last question. I will let Keith and Steve handle the S&P question. '08 Rockies CapEx estimate for the year is about $670 million. We will be down to about $480 million in '09 if we continue along the plan that we showed the board. That's about a 28% decrease year-over-year. The Midcon together will go from, let's see here -- let me make sure I have the right numbers here. About $1.2 billion and that, of course, includes the acquisition that was what was throwing me off. $1.2billion and you have to subtract about $700 million for the property acquisition. $658 million for property acquisition in the Midcon, down to about $566 million in '09. Rebecca Followill - Tudor, Pickering Energy Partners - Analyst Perfect. Thank you. Charles Stanley - Questar Corp. - CEO, Market Resources And -- Rebecca Followill - Tudor, Pickering Energy Partners - Analyst And the other one is the Haynesville. Charles Stanley - Questar Corp. - CEO, Market Resources We have transport over to Perryville on the Center Point system that allows us to get into a liquid hub there. And we are committed on some additional projects that are -- have been proposed and are in progress. Not as concerned about near-term takeaway. But as you know, with growing production volumes in northwest Louisiana there is going to need to be additional takeaway capacity, not only locally from the producing area to the market hubs, but also we will need additional takeaway capacity out of the market hubs to eastern markets or southeastern markets in order to move that gas away from the producing region and into the consuming regions. Rebecca Followill - Tudor, Pickering Energy Partners - Analyst Thank you. Charles Stanley - Questar Corp. - CEO, Market Resources And the S&P question. Keith Rattie - Questar Corp. - Chairman, CEO Becca, I will just give you a quick perspective on the S&P question and then would invite Steve to add any additional color that -- the short answer to your question is that S&P issued their announcement that they were going to review Questar and several other integrated companies before they had the benefit of our 2009 plan. You should also be aware that on September 10 of this year S&P affirmed the ratings of each of the Questar entities with a stable outlook. So sometime between September 10 and the middle part of October S&P's perspective on businesses like Questar which have a growing E&P element to our overall corporate strategy, some time during that period their perspective changed. Thomson StreetEvents 14 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call We have since provided S&P with a very detailed look at not just 2009, but looking out several years. The essence of what we have shown them is that we intend to live within our means over the next few years. That if we execute the plan, we will continue to delever on a consolidated basis and in particular at the Market Resources level over the next five years. Rebecca Followill - Tudor, Pickering Energy Partners - Analyst Great. Thank you. Operator Your next question comes from Brian Singer from Goldman Sachs. Please go ahead. Brian Singer - Goldman Sachs - Analyst Thank you. Good morning. Keith Rattie - Questar Corp. - Chairman, CEO Good morning, Brian. Brian Singer - Goldman Sachs - Analyst Two questions. First, as you shift capital into the Midcontinent from the Rockies are there any people or expertise issues that come up in terms of getting the right people with the right know-how in the Midcontinent versus the Rockies? Charles Stanley - Questar Corp. - CEO, Market Resources Brian, it's Chuck. I think we have the right people and the right know how. It's simply a matter of changing the focus. The team that has delivered on superb results at Pinedale over the past five or six years has now a core group of people in the field on the drilling rigs in the form of well site supervision that know their job inside and out. So the amount of what I would describe as office and front line supervision attention that we need to place on that asset is much less than it was three or four years ago. But we can take that same core group of people and the same techniques, technology and culture that we developed at Pinedale and transfer it to our other core operating areas and that's exactly what we are doing. In fact, we will take some of the most experienced supervision that has learned from the experiences of Pinedale and use them in places like the Haynesville play to inculcate that organization with the same techniques and culture. Brian Singer - Goldman Sachs - Analyst Thanks, and when you think about reducing, perhaps you said this already, in which case I apologize, the reduction in the Uinta Basin and ex- Pinedale Rockies. Are you thinking about this as capital markets related in which case we could see some drilling come back if capital markets improve? Or Rockies gas price related in which perhaps may not see any additional drilling or resumption of drilling until 2011? Charles Stanley - Questar Corp. - CEO, Market Resources It is price and cost and returns. And even if we had unlimited capital, I think you would see us do exactly the same thing and that is we will chase the highest returns in our portfolio and today it's not in any of the Rockies properties outside of Pinedale. Pinedale, as you know, is lowest cost, Thomson StreetEvents 15 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call unconventional gas play in the Rockies. It makes sense that prices that we see today on the forward curve and even at lower prices than today. But a lot of the other properties do not generate acceptable returns at today's prices or the forward curve. But more importantly, we have other places in the Midcontinent, oil-directed drilling, et cetera, that generate better returns. So we will focus on those. There is another factor that drives the current view and that is, although we see very strong anecdotal evidence of a softening in the services and the inputs into the drilling side of the business, steel costs, et cetera, as Allan Bradley mentioned with respect to his pipeline project, those haven't flowed through the system yet. And until they do, we have the double whammy of low forward prices and industry costs which are still reflective of commodity prices of six to eight months ago. So as is always the case, the drilling completion service industry costs tend to lag the forward curve and we expect those to come down. As Keith said, today, we run economics on our current experience not on what we hope or think might happen in the future. And as we get more tangible data on the response of the cost side, we will make economic decisions based on that. So I think for the near term, for the next six to 12 months, we are not likely to change significantly the current capital allocation. If there is a dramatic rise in NYMEX prices and basis does not widen as much as we fear then we will look at it again. We are running a very dynamic business and will continue to look at capital allocations decisions on a daily basis to decide whether or not we made the right decision today and whether it's sustainable. Keith Rattie - Questar Corp. - Chairman, CEO Brian, one added comment. Over the last several years, it has been our strategic intent to diversify away from our concentration in the Rockies. Chuck and his team have executed well, particularly with a series of transactions over the last couple of years combined with superb efforts on the part of the people in our division. So we now have the opportunity to put capital into the Bakken, into the Haynesville, into the Cotton Valley/Hosston, and Woodford shale in Canadian County, Oklahoma and the Granite Wash/Atoka in the Texas Panhandle in addition to Pinedale. So we continue to see this as an exercise in managing a portfolio of assets to achieve the highest returns. Brian Singer - Goldman Sachs - Analyst Makes sense. Lastly, on the gas distribution front, are you seeing -- or can you comment on just the demand trends that you are seeing maybe on a weather normal basis in your expectations going into winter? Keith Rattie - Questar Corp. - Chairman, CEO I'm going to let Ron Jibson handle that. As many of you know, Ron replaced Alan Allred who retired on the first of September. Ron is now running our utility. Ron Jibson - Questar Corp. - CEO, Questar Gas Yes, Brian, we still see growth in Utah being about 2.6%. Economic development is strong in the state with prices down. It's a positive model right now for us. We feel confident that we can meet that growth and do it within a live-within-our-means budget this year. Brian Singer - Goldman Sachs - Analyst Great. You aren't seeing any initial impact of lower economic growth nationwide, et cetera, on guesstimate? Ron Jibson - Questar Corp. - CEO, Questar Gas Yes, we are down like most places in the country. But we are not down as far as most places. We seem to be weathering through that right now. Thomson StreetEvents 16 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call We have certainly the housing market has been impacted. But our growth we anticipate for '09 will be down as far as new customers. But we also anticipate from all the models we've seen and analysts that we'll be rebounding quite quickly in '10 and '11. We anticipate '09 our growth being down potentially another 30% or so from this year. Keith Rattie - Questar Corp. - Chairman, CEO Brian, as you know, with respect to natural gas demand across the country in a weakening economy, we would expect that gas demand for electric power generation will be soft, tends to move in the same direction as GDP growth which, of course, is going to be down at least for the next couple of quarters. Demand in the residential sector is all a function of weather. And you tell me what kind of weather we will have this winter and I will tell you whether gas demand in that sector will be up or down. One of the intriguing things this past year is we have seen some growth in demand for gas in the industrial market. That in part reflects the fact that U.S. natural gas prices are among the lowest in the world. Certainly lower than Europe or Asia. So in industries where natural gas is an important factor in production, U.S. industry now has a competitive advantage at least against companies operating in those regions. I would expect with the economic conditions that we will see industrial demand soften. We as an industry are going to have to adjust. And that means that the kind of supply growth that we saw in the first half -- that, of course, was a consequence of high prices and increased capital spending -- that growth will have to slow to balance this market. Ron Jibson - Questar Corp. - CEO, Questar Gas And, Brian, we do have a weather tracker, a weatherization tracker in our rate structure which helps to stabilize that weather impact. Brian Singer - Goldman Sachs - Analyst Thank you. Operator Your next question comes from the line of Samuel Brothwell from Wachovia Capital Markets. Go ahead. Jon Lefebvre - Wachovia Capital Markets - Analyst Hi, guys. It's John Lefebvre, just filling in for Sam here. Keith Rattie - Questar Corp. - Chairman, CEO Hi, John. Jon Lefebvre - Wachovia Capital Markets - Analyst Just a couple quick ones. In the Bakken, can you give us an idea of what type of oil price you would need in order to achieve your hurdle rate of 15%? Charles Stanley - Questar Corp. - CEO, Market Resources John, this is Chuck Stanley. The Bakken wells, using our sort of estimated pipe curve, having not drilled one in our block of acreage -- our 63,000-acre block -- we think that the sort of 15% hurdle rate is achieved with of a half a million barrel well at mid-$40s NYMEX prices. I'm sorry, well head prices. Mid-$40s well head prices. Thomson StreetEvents 17 www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
FINAL TRANSCRIPT Oct. 30. 2008 / 9:30AM ET, STR - Q3 2008 Questar Corp. Earnings Conference Call Jon Lefebvre - Wachovia Capital Markets - Analyst Okay, great. Thanks. In the Haynesville, how many wells, I know you gave a number out there, but how many wells do you need to drill between the end of '08 and 2009 in order to hold the rest of your leases there? Charles Stanley - Questar Corp. - CEO, Market Resources Not that many. About a half a dozen is the count. You will recall, I think we visited on this topic before. The Haynesville is spaced or the drilling blocks are 640-acre one section drilling blocks. Drilling a well on one section holds the entire section even though you would only be developing a portion of it. A lot of our acreage is held by production. About half of it -- a little over half of it -- is held by production and the rest of the lease expirees are not real near. Several of the wells we're drilling right now are, obviously, in response to near-term lease expirees. But half a dozen wells or so. The rest of them are basically focused on developing subsurface control and as Keith mentioned in his prepared remarks, not only do we need initial rates of production. But the real open question that we need is longer term production history on these wells so we need to get the data gathered and start to put wells on production and get some longer term data. Jon Lefebvre - Wachovia Capital M
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