Mar 19, 2008
Petroleum Development Corporation (PETD) Q4 2007 Earnings Call March 19, 2008 1:00 pm ET
Executives
Steven Williams –CEO Rick McCullough – President, CFO
Analysts
Michael Hall – Stifel, Nicolaus & Company Leo Mariani – RBC Capital Markets Corp. Adam O’Laughlin – BMO Capital Markets Bradley Teets – KDT Investments Eric Steve – Goldentree Mark Lear – Sidoti & Company
Operator
Greetings ladies and gentlemen and welcome to the Petroleum Development Corp 2007 earnings conference call. (Operator instructions).
It is now my pleasure to introduce your host, Mr. Steven Williams, Chief Executive Officer for Petroleum Development Corp.
Thank you Mr. Williams, you may begin.
Steven Williams
Thanks very much Doug. I’m here today with Rick McCullough the President and Chief Financial Officer of Petroleum Development Corporation and we’re going to be going through our 2007 earnings information.
First of all before I begin, I won’t read it to you and subject you to that, but we will be making forward working statements during the course of this presentation and we’re talking about reserves both proved and probable, possible. Of course those are all subject to many conditions that could affect them and I’d encourage you to look at the disclaimer if you’re not familiar with it.
The top item here I think as you probably mostly aware, we have filed for an automatic extension of the filing date to March 31st for our form 10K for 2007. We are currently awaiting an SEC response to a presentation issue that impacts 2007 as well as 2006.
Other than that, the form 10K was prepared and ready to file on time and we would hope that we’ll be able to resolve that issue with the SEC very shortly here. And assuming that we get a reasonably timely response from the SEC here, we do expect to file on or before the extension date that we showed there.
The only issue that’s outstanding at this point in time deals with the presentation of partnership drilling and revenues. We have been showing them for the cost plus type contract that we’re doing with them right now and there’s some question as to whether it should be a gross or net presentation.
So we’re checking into that. At any rate because it’s just really a question of where the numbers are presented on the income statement, regardless of what the presentation is, it would have no impact on operating pretax or next income, earnings per share or cash flow per share, so the numbers that we have put out, the numbers we’ll be discussing today, we would not expect to be impacted regardless of what happens in this area.
Moving on to the better news, I guess what happened in 2007, of course the production increase was pretty spectacular by industry standards, 65% increase during 2007 to 28 BCF. That was fueled both through the drill bit as well as to a lesser degree by production from acquisitions.
A reserve increase of 112% to 686 BCF from 323 in the prior year, again an excellent number for the company. The drill bit acquisition, we did have a very active year drilling the 349 gross wells, net wells bout 278 with the majority of the difference of course being attributable to the company’s partnership activity.
And for looking ahead into 2008 we plan to drill about 364 wells of which we would have a net 334. We have announced previously that we don’t plan to offer a 2008 partnership so the difference here is basically carry over wells from our 2007 partnerships that are being drilled in largely in the first quarter of 2008.
And in the graph you can see that the steady increase both in the number of wells that the company has drilled and in the percentage of those wells that we’re drilling for ourselves as opposed to partners and other. And that’s certainly one of the major factors behind the company’s growth over the last several years.
The company continues to basically have three core operating regions, the Appalachian Basin, Michigan and the Rocky Mountains. In 2007 virtually all of our drilling and completion activity was focused in the Rocky Mountains and in 2008 we’ll continue to have a very heavy focus there.
As you can see from the graph the result of the last several years of development in the Rockies has resulted at this point in time in over 80% of both reserves and production being located in the Rocky Mountain area. We did, through our acquisitions at the end of 2007 add some additional development potential and reserves in the Appalachian Basin and that increased its percentage of the total a little bit compared to last year and compared to the Michigan area.
Looking at the next slide, you can see from the business segment contribution again the growth of the E&P segment relative to the other segments of the business and I think the declining importance over the time period of the partnership activities in particular to the overall company results. And that’s really the movement of the company from its historical partnership syndication as the primary business activity into the E&P type business as the primary business activity.
Our energy market exposure we did in 2007 see negative impacts as a result of the pricing difference between the Rocky Mountain area and other parts of the country with our exposure to what we call CIG or Colorado Interstate Gas type contracts which are the ones that have been the biggest difference from NYMEX being about 38% of the total. That actually will be a plus since we move into 2008 as beginning with the start up of the Rockies express pipeline in December, we’ve seen the NYMEX and CIG prices move back into sort of the historical relationship of about 80-90% for the CIG, it’s about 80-90% of NYMEX.
And of course strong oil prices have helped a great deal with the overall picture given about 16% of exposure to oil overall through 2007. On the next graph you can see really the impact of two impacts, one the first one between about March or April of 2007 and the end of 2007 the movement of the CIG away from NYMEX as oversupply of gas in the Rocky Mountains resulted in soft prices in that area and then at the end of the year as we moved into the winter weather first of all and then with the startup of the Rocky pipeline, seeing those two ratios close back up again and projected to stay based on the futures market in that kind of a relationship moving forward as well.
Looking for a second at proved reserves at year end 2007, basically in terms of the additions we did add both through acquisitions and development activity during 2007 with about 195 of the BCF of proved reserves being added through acquisitions, in extensions, discoveries and other additions and purchases of 205 BCF equivalent giving us the total of about 686 BCF equivalent of reserves of which 53.6% is developed and about almost 87% of which is natural gas. So we remain heavily leveraged to natural gas overall although the oil has been a nice component of the total given the price differentials over the last year.
Beyond the proof picture we also as we’ve previously announced have on the order of about 360 BCF of probable and possible development potential in the future as well. Virtually all of that is located in the three primary development companies, areas of the company in Colorado with almost 60% in the [Wauseon] Grand Valley field in the Piceance Basin and another 28% Wattenberg Field.
And we believe this to be a very high quality 2P, 3P inventory that will convert in large measure to proved reserves over the next several years and it really forms the basis of our future development opportunities moving forward. Looking ahead a little bit to the 2007 as well as our guidance for 2008, we expect total net production in 2008 of about 38 BCF up from 28 BCF in 2007 which would be a 36% increase.
That’s really based just purely on the development activity that we discussed earlier, the 364 planned wells for 2008. In the investment in the development portion of the budget would be about $194 million with about another $50 million going into other projects including exploratory lease acquisition, G&G and other items like that.
And you know the next number that’s sort of the increases in reserves we hope will be proved to be very conservative by the end of the year but we’re looking for at least 750 BCF of proved reserves at the end of 2008 and on the order of about 1.2 TCF of 3P reserves as well. And then the final slide and sort of the operations part of this call, again we see over a period of time a nice growth curve, steady growth, predictable growth from the company’s production which is we think is largely attributable to the high quality low risk development prospects that the company has and is focused on the [tangible], continues to focus on.
And then really a dramatic increase in the growth rate as we move into 2007 and on into 2008. With that I’d like to turn the presentation over to Rick McCullough, PDC’s President and Chief Financial Officer.
Rick.
Rick McCullough
Thank you Steve and good afternoon. Just to give you a little bit further clarification on the status of the yearend audit, as Steve says we have the 10K prepared and the audit is actually complete and we were ready to file using the net presentation method.
We also have been, this is a method that we had been using since 2006 and we have been disclosing the drilling revenues and expenses in our footnotes and so once this issue, once we get an answer back from the SEC, it should be very straightforward for us to finalize our 10K. We think probably within three to five business days.
This dialogue has been going back and forth and we hope to be talking with them soon in the next few days in wrapping this up. Our staff is actually working on the first quarter close using the new Bolo system and so we’ve kind of moved on and we see no problems with expecting to file our first quarter sometime in early May.
If you look at the financial results for the year, because of the issue about the SEC matter, we’re starting with income from operations but you can see that our quarterly results, about $8.2 million worth of net income on $17.5 million of income from operations, about $0.55 per share on a diluted basis. And you can see how that compares on an annual basis.
The fourth quarter was real challenging largely because of the depressed pricing out of the Rockies, the CIG, although we began to see that turn up some late in the quarter. The actually recurring operating income was slightly higher when you isolate it for leasehold sales.
Both the fourth quarter and year 2007 numbers include results from the sale of leaseholds, both the bit Marathon sale in 06, the third quarter adjustment in 07 for Marathon and then the sale of the North Dakota properties in the fourth quarter. I think the continuing story as we’ve been reporting is the continued growth in adjusted cash flow and EBITDA and as you can see here, even despite the lower gas prices that we realized during 2007, adjusted cash flow from operations has continued to grow quarter by quarter in 2007, up substantially over the 06 numbers.
EBITDA likewise we’ve seen growth in this again in spite of an almost 8% decrease in realized gas prices during the year. We’ve got a reconciliation at the end of this presentation reconciling EBITDA which is not a GAAP measure but as you can see, this is something that’s commonly reported by others in the industry and the number continues to grow in 07 and we’re projecting even higher numbers in 08.
I think when you look at some of our unit costs it’s probably kind of a mixed story for the fourth quarter and for the year. On the oil and gas production and well offs, these numbers actually include our total cost of operating our wells including the costs associated with operating partnership wells.
Our revenue is not included in these numbers. What you can really see that’s happening is our costs did increase during the year and in the fourth quarter.
A lot of the dollar increase obviously is due to a 65% increase in production but another dynamic that is occurring and we’ll be getting more information out on this in the near future is with the buyback of the partnerships that we did in late 2006, this is also impacting some of our unit costs because we’re not allocating as much of the operating expenses to partnerships. On a G&A point you can see that we ended the year at $31 million, we had projected coming in at $30 so just slightly over our projections for the year.
The fourth quarter was impacted two reasons primarily, one was an under accrual of an annual expense that we had been booking through the year and so there was a disproportionate amount of catch up in the fourth quarter, probably about $700,000 worth of an adjustment. And the other thing that we’ve seen is as you remember last year we were still working on the audit into the May time period.
This year our audit process and expenses were largely fourth quarter and so the fourth quarter was actually up over comparative numbers last year. Kind of a big pleasant surprise was in DD&A, this is a cost component that actually had been increasing all throughout the year on a quarterly basis and you see it took a dramatic drop in the fourth quarter and this is really a reflecting on the significant additions to reserves in the production program in the second half of the year.
This graphic is really new, we’ve not presented this in the past but this shows you I think anybody that has been following the company realizes that 2007 was a very large year as far as growth of the balance sheet in the oil and gas properties area. You can see almost $4 million of additions.
Also the additions to reserves of 396 BCF and see how large that is comparing to prior years. That brought our F&D cost per MCFE down to $1.22, you can see that historically over the last three years its averaged about $1.35 so the upward trend is really largely corrected and is headed back more towards normalized levels.
The last comments I wanted to make is really about derivatives. Just remind everybody like others in the industry we did not use hedge accounting for our derivatives and so we really have two components that impact our income statement.
One is the unrealized gains and losses that we’re showing here for the fourth quarter and the two years, six and seven and then we have the realized gains and losses which are really our cash, the cash impact of our derivatives. One of the things that you’re seeing, you can see the large unrealized loss in the fourth quarter of 07 that actually swang our position for the entire year to a loss of $4.4 million, that’s really what’s happening is we, because of PDC drilling more and more for its own account, the partnership volumes thus decreasing, we’re really seeing that we’re hedging larger volumes and then combine that with our substantial growth in production, almost 70% for the year, we’re seeing our hedge volumes go up substantially.
To give you an example of that, if you looked at our positions as of the end of 06, we had about 19.5 BCF of future production hedged. As of the end of 07, that number is more like 34.4 BCF, so a substantial increase.
Now the good news in all of that is because prices, realized prices in 08 and our hedge prices are higher than what we had used in our initial earnings guidance for 2008, we would expect to realize higher prices in 2008. The flip side though is these unrealized losses that you see and again they’re really reflective of the hedge positions that are on the balance sheet and the change in the valuation during that quarter, you will still see larger and larger quarterly swings in this unrealized number throughout the year because of those increased volumes and just the price volatility that we’ve seen here in the last three or four months.
So and just wrapping up again you know really when you look at PDC for its outlook for 2008 and beyond I think we continue to be very bullish on our opportunities, we have a large inventory of our low risk high quality development prospects at Colorado. We feel like we have the staff and expertise to continue to execute on that development plan and with the transaction, funding transaction that we did in February of this year we now have the capital to executive on our 2008 and 2009 plan.
So we think there’s, the company is in a position for significant value creation in 2008. And as I’ve said, we plan to bring some more information forward on that again because of the hedging and just some of the other things that’s happening within our cost structure.
But I would also remind you that the prospects that what we’re showing in the way of proved reserves and our 3P reserves does not include any benefits associated with our positions in Barnett or Marcellus and doesn’t really include any increase in production resulting from any of our acquisitions or exploration work that we may do. So that concludes the prepared remarks, I’d like to turn it back over to the moderator for the Q&A portion of the call.
Operator
(Operator instructions). Our first question comes from the line of Michael Hall with Stifel Nicolaus, please go ahead with your question.
Michael Hall – Stifel, Nicolaus & Company
Good afternoon gentlemen. A couple of quick ones, first, as it relates to cost structure, kind of looking at the oil and gas production costs and well offs, kind of coming in what $1.88 per M, is that directly comparable then to the $1.30 you talked about at the analyst day for 2008 kind of target per M or are there other numbers kind of skewing that?
Steven Williams
No Michael this category on the slide that we were covering today include the entire cost of our production and production department and our entire well offs. These numbers do not net back, we charged back our partners a fee for operating their wells.
If you look at our net cost, you know we’re probably more in the $1.35-$1.40 range for just our lifting cost alone.
Michael Hall – Stifel, Nicolaus & Company
And that’s this quarter?
Steven Williams
Yes.
Michael Hall – Stifel, Nicolaus & Company
Okay. And in terms of the delay or the presentation issue, it seems like in the past the restatement back in 2006 as I recall was actually going from a gross presentation to a net presentation.
Is that not the case and if so what, I guess what’s the question at the SEC, it seems like in the past they’ve ruled that net was the appropriate presentation.
Rick McCullough
Well it was similar. This is the first time this specific issue has been called into question.
This is dealing with the drilling revenues associated with when we drill for the partnerships. And we enter into a contract with the partners to drill the wells.
Remember we had talked about the fact that we had switched to a cost plus methodology and under that cost plus methodology we’re pretty much serving as an agent we believe in that transaction and just realize you know kind of a [copus] type return on our activities. This is an area where you know this is the first time the SEC has looked at this.
I think what you’re thinking about dealt more with the consolidation issue on the partnerships a few years back. So this is really a new issue.
We took the position that when we changed to the cost plus that made a dramatic change in our business relationship. This is an area where it’s really a judgment call and I think more than anything else the SEC is just taking time to understand our position which I think is personally well reasoned and we actually have conferred with two CPA firms, two big four accounting firms on this methodology.
So and the ironic thing is we have all the information disclosed so that if we decide we should present it the other way it’s pretty straightforward to present it that way.
Michael Hall – Stifel, Nicolaus & Company
Okay, very good. And then one more and I’ll hop, in terms of, you mentioned in the release the West Virginia infill and evaluating some work there, can you remind me exactly what kind of the upside would be there if a successful infill results, what kind of inventory that might bring to the company.
Steven Williams
Yeah I mean I believe probably if you look back at the analyst day information Michael that you’ll find that we have a relatively small number of West Virginia infill opportunities. My recollection is its 24 planned wells for 2008.
We’re sort of in the process of taking another look at the Appalachian Basin area and that we hadn’t drilled here really for about eight years and it’s sort of with the changes in prices as we’ve been working to get some additional technical and professional people back in the Appalachian Basin, have them look hard for all the opportunities we might have. We are sort of evaluating whether there might be other thing.
We also did though make the acquisition not in West Virginia but in Pennsylvania, the acquisition of Castle last year. And that does include some additional drilling opportunities beyond that.
Michael Hall – Stifel, Nicolaus & Company
Any news on the Marcellus evaluation?
Steven Williams
At this point in time we really don’t have anything new, we’re sort of listening to what and reading what everybody’s press releases as I suspect you guys are.
Michael Hall – Stifel, Nicolaus & Company
Okay, alright, thanks very much gentlemen.
Operator
Our next question comes from the line of Leo Mariani with RBC Capital Markets, please go ahead with your question.
Leo Mariani – RBC Capital Markets Corp.
Good afternoon here guys. Hey a follow up question on the Marcellus, I know you guys had [unintelligible] analyst day about trying to evaluate your acreage and determine where you had deep rights, has there been any progress on that?
Steven Williams
Progress, at this point in time we’re not complete, it will probably be another three or four months, something like that before we’re fully done with that process. I’ll let you know about lead positions in the Appalachian Basin but you know this country has been occupied for a long time and so you end up with a lot of the properties are passed down through wills to multiple descendants and this can take a long time to sort your way through all of the land work to really know what you have.
Leo Mariani – RBC Capital Markets Corp.
Right, okay. One comment that you made in your press release was talking about sort of flattish production in the first half of 08.
Are you guys sort of seeing kind of flat to fourth quarter levels, is that what you were referred to?
Steven Williams
Yeah, basically that’s exactly right. The reason is, there’s really two reasons.
One is that beginning in mid to late September we started drilling wells for our 2007 partnership and we’re using essentially the same rigs were using to drill 100% wells for us earlier in the year and we’re only drilling 40% wells, so we’re not adding as much in the way of additional interest starting in mid September through about February. And you know that’s the drilling and then you’ve always got somewhere between a 30 and 90 day delay beyond that before the completion and tie in work does, so that sort of shifts those lower interest wells into the first half of 2007.
The other thing that we have that impacts the first half is that the drilling in the Piceance Basin and to a lesser degree drilling and completion work in Wattenberg Field are impacted by winter weather conditions and we’re currently drilling on top of the, in Grand Valley Field in the Piceance Basin which is 9,500 feet above sea level or thereabouts and you know there’s just, we’re doing the drilling work but we’re going to hold off on the completion until we get through the winter and into spring weather just will be easier to work up there. You know with the quantities of water you have to use for completions and that kind of things are just a lot easier to deal with at that time of year.
So those two things combined result in the sort of flattish production through the first half and then you know as, in particular as the Piceance Basin wells, we’re able to get in there and do the completions and turn them in, you know we expect to see a pretty significant increase in production. Very much like, if you look at last year’s production curve we had sort of flattish through six months and then a pretty dramatic increase in the last six months.
Leo Mariani – RBC Capital Markets Corp.
Okay, in terms of your projections for the fourth quarter, do you guys have a breakout of your Rocky Mountain area in terms of what was it in Echo, Grand Valley and what was Wattenberg?
Steven Williams
It is in the 10K, hopefully we’ll have that out here, I don’t have the numbers here and I guess we haven’t put them out yet. But if we get delayed significantly we can maybe put that information out supplementally.
Leo Mariani – RBC Capital Markets Corp.
Okay you made one comment about your realized pricing being impacted you know in the fourth quarter and obviously with low Rockies prices. Can you give us a sense of what your realized pricing was in terms of oil and gas prices out there?
Steven Williams
I don’t have that number with me now but again that’s something we can get, certainly the information is available in the 10K and we just have to, if we’re going to be delayed significantly we’ll get that out as well.
Leo Mariani – RBC Capital Markets Corp.
Okay well I guess we’ll sit around and wait for the K.
Operator
Our next question comes from the line of Adam O’Laughlin with BMO Capital Markets. Please go ahead with your question.
Adam O’Laughlin – BMO Capital Markets
Thank you very much. Good afternoon.
A quick question, Ultra and Quest Star have been getting approval for five acre down basin in the Piceance, is that something that you’ve been looking at, is that something that’s possible with your acreage there?
Steven Williams
That would not be local in the area that we are. I think in the past that Williams has done some five acre testing and we don’t think at this point in time that that’s likely to be available in our area.
Adam O’Laughlin – BMO Capital Markets
Okay, Kinder Morgan has proposed a pipeline to Chicago and I heard that Williams and Trans Canada are proposing a pipeline out to kind of the northwest, is that something that will also benefit you in the future as far as getting the Rockies pricing in a better place?
Steven Williams
Yeah I mean I think that as has been demonstrated a couple times over the last five or six years that periodically over the next who knows maybe several decades, the Rocky Mountain area is going to need additional pipeline capacity to move an increasing production stream to market areas. And it’s I think from the standpoint of most producers out there we’re happy to see new pipelines being proposed for additional capacity take away from the area over the next several years.
You know, depending on who you talk to, the feelings are that the increment added by Rockies express is good for somewhere between maybe at the low end two years and at the high end five years before another pipeline is going to be needed. So given the lead time it takes to get a major pipeline project in the ground, it’s not too soon for those things to be underway.
Adam O’Laughlin – BMO Capital Markets
In the Wattenberg can you kind of remind me what kind of frac results do you get between what you’ve seen on 20 acre and 40 acre, what kind of economics do you see there?
Steven Williams
Really no difference. I mean we’re not seeing any significant interference at 20 acres compared to 40 acres.
Adam O’Laughlin – BMO Capital Markets
Okay. So in 2008 I mean is the program really trying to shift much more to the, can you remind me of what your plans are in 2008 for that development?
Steven Williams
I mean we have about 100 wells planned to drill, some will be on 40 acres facing, some will be on 20 acres downs basis.
Adam O’Laughlin – BMO Capital Markets
Okay great.
Steven Williams
And we’ve done both in the past without significant [unintelligible].
Adam O’Laughlin – BMO Capital Markets
Great and last question in regards to your hedging, you guys have put out a lot of hedges updates recently, what is kind of the total percentage hedge at this point in natural gas again? Kind of just a rough percentage.
Rick McCullough
For 2008 we probably have about 75% plus of our production hedged.
Adam O’Laughlin – BMO Capital Markets
Do you have an average kind of price there? A floor?
Rick McCullough
It varies. We have put, disclosed that, every time we put on a trade on we’ve disclosed that so our press release includes all the hedges.
I think we have some, I know in CIG we have some hedges in the 650 floors and 750 floors but then again we’ve also got some SWAPs locked in for 08 that are in excess of $9.00 on NYMEX. So this is some of the information we’re going to try to get out in a more condense matter but I think all the information is in our last press release.
Adam O’Laughlin – BMO Capital Markets
Okay, great, thank you very much.
Operator
Our next question comes from the line of Bradley Teets with KDT Investments. Please go ahead with your question.
Bradley Teets – KDT Investments
Thank you for taking my call. I wouldn’t expect an answer down to the penny per share but in a recent conference call you indicated the positive aspects of the new Rocky express to be able to increase your price for gas for 2008 from that area.
Do you have like a relative percentage of revenue that that might increase for the year from what you would have had in comparable production last year without that additional outlet for sale?
Steven Williams
I think the answer would be know. We really don’t.
You know it’s, I can’t say we’ve done that calculation.
Bradley Teets – KDT Investments
Okay but I do read it correctly that you are very optimistic about the potential upside from the Rocky express outlet?
Steven Williams
Yeah basically I mean what we saw between about March or so last year and through I mean on slide 8 of this presentation, you know between about March or April and really November a significant difference between the CIG and NYMEX and I mean I think in the October it was, the CIG was down to just over $1.00. So you know it’s that differential that we the potential to pick up and in addition I think the hedges that we’ve done in both CIG and certainly NYMEX as well have been at levels that have been higher than what we saw last year.
So I mean there’s clearly some positive price potential given the market, the way the market has done.
Bradley Teets – KDT Investments
Okay, thank you.
Operator
Our next question comes from the line of Eric Steve with Goldentree. Please go ahead with your question.
Eric Steve – Goldentree
Hi guys I have a few questions. My first is with respect to the drilling program.
When I look at the 07 program and you lay out in a table in the press release the wells drilled and the successful wells drilled the NECO seems to stand out in that it had a much higher proportion of dry holes than the rest of the program. Is that something that is expected in that basin, is it just a basin where you have lower success rate?
I wouldn’t have thought that it was and to the extent that it’s not, is that impacting your capital plans going forward, can you talk how you think about that?
Steven Williams
Yeah sure, I mean one thing in NECO is the least expensive wells that we drilled and drilling completion cost is only about $200,000. The dry holes are pretty inexpensive, but the nature of the geology there is that we’re looking basically for high spots on the [nio prayer] formation, the gas collects in the hinds and the low spots are wet and we identify them using 3D seismic.
In contrast in both Wattenberg Field and in the Piceance Basin you have you know resource type plays where over a large area you can drill a well virtually anywhere and be successful. So you know we do anticipate having somewhat lower success rates in NECO but even with that it’s still our lowest acquisition cost per MCF of gas of any of the areas.
So no we don’t intend to, it won’t change our program there. You know we do expect to have relatively speaking a lower success rate than the other areas but still a pretty high success rate.
Eric Steve – Goldentree
Great, thank you. Next I was just hoping you could provide as much color as possible on the budget for 08.
I’m sure you talked about this a bit at your analyst meeting but could you remind folks what your total budget is and how that’s broken down in terms of how much will be spent on drilling and how much will be spent on other things.
Steven Williams
Yeah I’m going to go a little bit from memory but I believe the total budget was about $255 million. Of that $194 million is designated for development drilling.
I believe about $25 million is exploratory drilling. On the order of about $10 million is for the miscellaneous cars and pipelines and that kind of thing that you just always have.
And there’s some component in there of, most the balance is [take crease] acquisition and maybe $4-$5 million of G&G.
Eric Steve – Goldentree
Okay and with respect to the reserves, year end 08 reserves that you project. It looks like if you back into that number it assumes a higher finding and development cost than you guys have historically had.
Can you talk to us about what methodology you used to get to that number?
Steven Williams
I’d call it a very conservative methodology basically I mean we really just looked at probably the in the areas where we’re drilling wells and generating additional proved location just through drilling, we’re picking up that and with a relatively conservative assumption and sometimes you won’t always get additional proved locations for location drills. And then nothing in terms of additional proved developed reserves from, you know for example we could have the potential to convert some of the 2P, 3P in Wattenberg field but I guess in particular from 2P, 3P to proved reserves just by completing some engineering and scheduling the drilling of some of the prospects.
So we do think that’s a conservative number and you know we’ll see that improve as the year goes forward.
Eric Steve – Goldentree
Okay, thank you. On the G&A side it ran about $9 million in the quarter, is that od run rate for us to use going forward?
Rick McCullough
No, I think we’re still comfortable with the guidance we’ve put out back in February was for $30 million for the year, about $7.5 million a quarter, I think that’s, we’re still comfortable with that.
Eric Steve – Goldentree
Okay, great, very good, thanks very much guys.
Operator
(Operator instructions). Our next question comes from the line of Mark Lear with Sidoti & Company, please go ahead with your question.
Mark Lear – Sidoti & Company
Good afternoon guys. I just want some language in the extension filing about the derivatives and I guess you’re saying that most of it has a lot to do with the partnerships, I was just wondering if there’s potentially an issue moving forward as well.
Rick McCullough
No I mean it’s really should be, there’s some shifting that he’s referring to, because of the delay in the filing of the 10K, when you file the extension if we’ve completed our work on material weaknesses we also disclose that and we do have some verbiage in the extension dealing with derivatives because we continue to have an issue there, largely in the reconciliation between the realized and unrealized and the valuation of the derivatives at the balance sheet date.
Mark Lear – Sidoti & Company
So there’s potentially an issue there I guess?
Rick McCullough
Not from an audit or a delay of the 10K, no. It’s more of a control matter.
Mark Lear – Sidoti & Company
Gotcha. And then just looking at the press release, I saw that you did talk about $33 million in pretax gains on leasehold sales, does that include the North Dakota sale?
Rick McCullough
Yes it did. Yeah we had a little size $8 million I think on North Dakota on a pretax basis.
Mark Lear – Sidoti & Company
Alright and then I guess just looking at acquisition activity or how hot the Marcellus and the Barnett is I was just wondering how active you guys are in aggressively trying to grow your positions there and I guess and for that matter in your core DJ base scenarios and what you guys were seeing there on that side.
Steven Williams
You know I mean I guess we’re always interested in continuing to increase our interest in our core areas. At this point in time I think I’d prefer to sort of remain quite about, you know we don’t really like to talk about where we’re adding new positions very much.
Mark Lear – Sidoti & Company
Fair enough, thanks.
Operator
We do have a follow up question from the line of Eric Steve, please go ahead with your question.
Eric Steve – Goldentree
Hey, one more question. Just trying to get a sense of how you know as you ramp up the Bolo system and you continue to beef up your financing [and candidate] department, [was I] supposed to get an update on how that process was going and how the company is adapting to the new systems.
Rick McCullough
I think where we are in the implementation is we’re closing January and February at this time. All the modules except one module has been implemented and that we purposely delayed the one module until really is our distribution module so later in the year because of the calendar delays that we have.
We’re processing like November activity now under the old system. I think everything I hear is that it’s still going well.
We’re pretty much on schedule. We’ve set some internal target dates about when we, as you might imagine we have to complete our 10K process and then take our staff and redirect our staff into the closing processes.
But we’ve made that transition a couple weeks ago and we’re well on our way to closing the first quarter.
Eric Steve – Goldentree
Thank you.
Operator
Gentlemen there are no further questions in the queue. Would you like to make some closing comments?
Steven Williams
Yes we will. Thank you very much.
We’d like to thank everyone for taking the time to join our earnings conference call this afternoon. You know we look forward really to an interesting year, we think there’s some great future for the company and you know we look forward to bringing back further reports as the year progresses.
Thanks very much and goodbye.
Operator
Ladies and gentlemen this does conclude today’s teleconference, thank you for your participation. You may disconnect your lines at this time.