Aug 7, 2007
TRANSCRIPT SPONSOR
Executives
Frank E. Hopkins - VP of IR Scott D.
Sheffield - Chairman and CEO Richard P. Dealy - EVP and CFO
Analysts
Gil Yang - Citigroup Robert Morris - Banc Of America Securities Rehan Rashid - Friedman, Billings, Ramsey & Co. David Tameron - Wachovia Securities Robert Lynd - Simmons and Company Sven Del Pozzo - John S.
Herold Ted Izatt - Bear Stearns John Herrlin - Merrill Lynch Brian Singer - Goldman Sachs Joseph Magner - Tristone Capital
Operator
Welcome to Pioneer Natural Resources Second Quarter Conference Call. Joining us today will be Scott Sheffield, Chairman, and Chief Executive Officer, Rich Dealy, Executive Vice President, and Chief Financial Officer, and Frank Hopkins, Vice President of Investor Relations.
Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the internet at www.pxd.com.
Again, the internet site to access the slides related to today's call is www.pxd.com. At the website, select investor and then select investor presentation.
The company's comments today will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results and future periods to differ materially from the forward-looking statements.
These risks and uncertainties are described in the last paragraph of Pioneer's new release on page two of the slide presentation and the most recent public filings upon forms 10-Q and 10-K made with the Securities and Exchange Commission. At this time for opening remarks and introductions I'd like to turn the call over to Pioneer's Vice President of Investor Relations, Frank Hopkins.
Please go ahead, sir.
Frank E. Hopkins - Vice President of Investor Relations
Good day, everyone and thank you for joining us. Let me briefly review the agenda for today's call.
Scott Sheffield is going to be the first speaker and he is going to discuss the second quarter highlights, our growth outlook for the remainder of this year and our capital budget for 2007. Since Tim Dove is not with us today, Scott will also provide the operational update normally the one that Tim gives.
Rich Dealy will then cover the financial highlights for the second quarter and provide earnings guidance for the third quarter. After that we'll open up the call for your questions.
Before turning the call over to Scott, please let me remind you that back on April 23rd, Pioneer announced that we planned to form two master limited partnerships for the purpose of owning interest in long lived, low decline, oil and gas assets. On July 26th we announced that registration statement was filed with the Securities and Exchange Commission for the Spraberry Field MLP which is called Pioneer Southwest Energy Partners LP.
A copy of the prospectus for this offering, when available, can be obtained by contacting one of the three underwriters listed on slide 43 of today's presentation. The rules of the Securities and Exchange Commission limit the nature of the information we can provide you about the MLP and any other MLP plans.
As a result we do not plan to take questions related specifically to the MLPs in this call or in follow-up meetings. We refer you to the press release and the registration statement for further information.
With that I'll turn the call over to Scott.
Scott D. Sheffield - Chairman and Chief Executive Officer
Thanks, Frank, and good morning. We're going to start on slide number three on the highlights.
We reported second quarter net income of $36 million, or $0.30 per diluted share. We had net income was reduced by net after-tax charge of $29 million or $0.23 per share for several items unrelated to ongoing operations.
The most significant item was really East Cameron 322 Platform abandonment cost which was an after-tax charge of $0.24, which would have brought us back to about $0.54 for the quarter. The most important part of the message today is the fact that we have two more key assets that are growing significantly based on our investments and what's happening we'll discuss later, but now we have five key assets that are growing.
That's Spraberry, Raton, Edwards, Tunisia, and Canada which help us deliver at the high end of our guidance 106,000 barrels of oil equivalent per day. '05 assets are up 15% versus a year ago and up 14% versus the first half of 2006.
So really that leaves us two key assets that haven't come on yet. South Coast Gas and Oooguruk, we'll be adding those both shortly to the high growth profile and we'll end up having 7 key assets growing.
South Coast Gas first production will be late third quarter, 2007, with Oooguruk on schedule first half of 2008. So at that point in time we'll have 7 of our assets that will be growing over 10% up into the 12% range going forward over the next several years.
70% of our development growth primarily coming from oil related projects over the next 24 months, primarily Spraberry, Tunisia, Oooguruk, and also our South Coast Gas project which is tied to Brank crude [ph] so 70% of our growth even though we're still a firm believer in natural gas prices right now after basis differentials, natural gas to oil is trading at about 13 to 1. Our core area acquisitions as we've stated over the last couple of years we continue to make.
We started off announcing a key one we've been working on for a couple of years in Raton, $205 million for 124 BCF of 2 P reserves right adjacent to our existing assets and we'll talk about plans for that in a later slide. We also very important increased our working interest in Anaguid Block which is directly North of our Jenein Nord discoveries and Adam discoveries, we'll now be up to 60% with operatorships and we'll be starting a 3D program later this year and obviously you can see a map later on the presentation.
We have several prospects identified by 2D continued to expand our Tunisia presence. Thirdly, the key asset that Pioneer has owned since the early 1990's, we joint venture with Western Gas to buy this plant out from El Paso and we had a chance to both improve our terms on our gas contract increasing our gas prices about 5% starting in 2009 and in addition, acquiring an additional 22% option which will bring us up to 49% when we exercise that option in 2008 and 2009.
We had two additional discoveries on PXD operate Jenein Nord in the quarter bringing the total to five so we have 100% success rate on 3D there, and our six well is looking promising based on recent results and we'll be testing the fifth well and the sixth well some time over the next 30 days. Again, first production from Jenny Nord will be later this year.
We also have been working the Barnett Shale for the last two years and have been able to establish initial position of about 13 thousand acres in the forward Barnett Shale and lastly as Frank mentioned we did file our Pioneer Southwest Energy Partners S-1 with the SEC Just recently involving some of our Spraberry trend assets. Slide Number Four, impact on Pioneer of the Spraberry MLP , I think the key point here the message is it will consist of certain producing wells in the Spraberry Trend area.
Pioneer or PXD will own 55.6% of the IPO in retained interest , and less than 2% of PXD's reserves to be held by public unit holders. The estimated total reserves of the partnership will be 25 million BOE's and also, less than 2% of our production will be held by public unit holders with a total production based on first quarter of the partnership of almost 44 hundred barrels of oil equivalent per day.
Slide number five, continue to deliver on consistent production growth. We're on track to continue to deliver our stated 12% production per share growth in 2007 and beyond.
As I've mentioned already we're at the very high end of guidance, that's primarily due to several factors which we'll discuss but Raton and Edwards, Raton has made up the first quarter weather shortfall already. And again Edwards is starting to grow significantly with some recent activity, followed by Tunisia.
Third quarter guidance, 105,000 to 110,000 barrels of oil equivalent per day. Rich will talk more about our guidance for the third quarter so we continue to grow significantly to meet our targets.
On slide number six, we are continuing to expand our 2007 drilling program based on more recent successes in Raton, Mississippi, and Tunisia. Raton is primarily due to our efficiency.
We're able to get our wells drilled from the time we permit them to the time they come on production from roughly over 70 days to about 28 days. And we've had a couple recently we've done in about 10 days, continue to improve on that so we're going to end up finishing our activity a lot quicker so we're going to keep our drilling program going into the fourth quarter.
Very successful in two recent Mississippi Cotton Valley wells we'll talk more about. They both tested over 10 million a day each.
They're producing active capacity of our plant at about 10 million a day. Currently we'll talk more about that, and then Tunisia continued to have success there and then with our recent Ft Worth, Barnett, and Raton acquisitions, we will be doing some drilling, primarily in the fourth quarter bringing a total of about $100 million.
The Oooguruk cost increase, we were able to lock in about 60 % of our cost when we sanctioned this project on Oooguruk in the North Slope so we had about 40% swing in with the recent cost increases we have all seen over the last 18 to 24 months so this past winter, we did experience a cost increase of about $50 million. But if you look at the bottom of the slide, it's been offset basically with our investment tax credits coming back from the investment in that project which we expect $50 million to occur in 2007 and roughly about half of that has already occurred during the second quarter.
Our CapEx going from $1.3 billion to $1.45 billion, so I've mentioned the break down. Another important message that we are through with high impact exploration has been completed for the year.
Going forward you'll see Pioneer primarily between development projects, development drilling, and resource plays as we go into 2008 and 2009 obviously with spending in South Coast Gas winding down and a majority of Oooguruk being spent. You'll see most of our CapEx going into resource plays and development drilling over the next several years.
Also, at the bottom you can see we do expect when we tap the Tunisia Natural Oil Company exercised their rights to come back into our five discoveries and Jenein Nord that will be reimbursed half of our capital cost in future years based on that activity to date. Page seven I'm not going to spend very much time on North America activities, just a couple points.
One, our CBM pilots that we've began about 18 months ago, the Unitas Piceance, they're up to over 4 million a day gross and they continue to grow as we dewater, so obviously we're excited about the success of those projects moving forward. We will make a decision later this year or early next year on those projects, and then secondly in Canada, we did announce a Steelhead discovery last quarter.
We were making with higher water production with that, we did not have any pumping mechanism that we had to go in and shut in those wells until next Winter we'll be installing submersible pumps to start producing gas again at those discoveries. Slide number eight we'll talk more about this also later on, but the key point, South Coast Gas will be coming on later this quarter in the third quarter at the end and then Tunisia again we'll be testing a fifth discovery and also our sixth well looks very positive and we'll be testing that again some time by the end of August, early September so again very excited about what's happening in Tunisia.
Going to the specific assets and what's going on and with each of these plays on slide nine, we'll start off with the Edwards trend. This is really the first big quarter we've seen production starting to grow.
Last year, we had our exploration discoveries. This year, the primary focus is more on drilling.
Seeing lots of successes. The key message, we reported 48 million for the quarter and a significant increase, it's up 20% versus second quarter 2006 and also current net production is about 53 million.
Our target is a little bit over 60 million by the end of the year so obviously we feel very confident we'll be reaching that growing at about 25% to 30% from 06-'07 and going forward. A couple key things are happening that we're seeing.
We are using the as we have mentioned before, the isolation packer and open hole fract simulations and we're seeing a lot of successes in those. Our last five wells have exceeded 5 million a day just in the last 30 days, 45 days, and two of those wells exceeded over 10 million a day.
Obviously we're very excited about some of the work that we're doing on stimulation. Continue to do refracts in our Pawnee Field seeing very successful, continuing to shoot our 3D seismic.
We have been slowed by persistent heavy rains in South Texas , but we're very excited about what's happening in our Edwards Play and we'll continue to grow significantly over the next several quarters. In addition we did bring on to help speed up completions we did bring on two more horizontal rigs in that Play so now we have four wells that drill the vertical well bores and we have four horizontal rigs that are drilling which makes it much more cost efficient and quicker so that's helping us move forward and bring things on.
Next slide number ten the Spraberry Trend area where the cornerstone of our growth. It's still a real important asset, expected to continue to grow as it has in the past, expect to grow 15% to 20% in '07, 20% to 25% in '08.
We did lose about 1,000 barrels of oil equivalent per day second quarter due to storms and plant outages at our two processing plants and also some tank battery lightning strikes. We did lose about a thousand barrels of oil equivalent per day second quarter which is why production is only up 7% versus second quarter 2006.
We continue to pursue acreage expansion and bolt-on acquisitions throughout the year. Our rig count as we mentioned before have increased up to about 20 rigs.
We'll drill about 360 wells. Obviously at $70 oil plus the economics are significant.
In addition, we're continuing to see tremendous success from our deeper Wolfcamp Play. We're going about 1,000 feet into the Wolfcamp, almost all of our wells, some wells Wolfcamp only now.
We're starting to see significant both production and reserve adds. Slide number 11 really goes into our adding value in the Spraberry Trend area Field.
So as I've mentioned earlier, we bought into these plants with Western Gas back in the early 1990's. Adding significant value, Pioneer has over 50% of the gas today as we continue to drill, we'll have over 65% to 70% of the gas going into the plants and that's where the value adds.
Based on the percent of proceeds, we are obviously making with the renegotiation of the gas contract, with Atlas, we'll be increasing the gas price as I've mentioned already starting in 2009 and then we have a chance to increase our interest and the primary benefit of this is the fact that it's growing significantly to cash flow in this asset which is a very long life asset with growing stable cash flow so significant plus for Pioneer over the next several years. Flipping to the Raton slide on slide number 12, again, several things are happening significantly over the last quarter.
Things are development drilling is way ahead of schedule due to improved drilling efficiencies and also completion efficiencies. We've drilled almost half our program, over half our program to date and we're back on track for 10% production growth in Raton.
Drilling costs are holding fairly flat due to the fact that almost all of our costs we control by owning our own services and then followed by the fact that we've added a lot of compression, optimizing field pressures and I think that's one of the reasons that our operating expense, one of the main reasons which Rich will talk about what happened in Raton because of what we did in the second quarter with compression. Our recent acquisition on slide number 13 something we've been working on for several years, we're able to finally negotiate a price.
We'll start drilling on this and close hopefully fourth quarter. We'll start drilling on it fourth quarter.
It's about 10 million a day net. Through drilling activity we'll be growing it to over about 25 to 26 million a day over the next two or three years with all of the PUDs and probables in that transaction.
It's a very long life asset with growing stable cash flow and also it's important in the fact that it will allow us to shelter most of our PXD's tax liability on the expected sale of Spraberry assets to the Pioneer MLP, and we'll continue to do those type of transactions as we over time potentially move assets into the MLP to shelter PXD's tax liability in addition to taking units over time. Slide 14 talks about where we have built a position in the forward Barnett Shale, primarily in Wise County and the Tier 1 area, secondly in the Summervell County in an expansion Tier 2 area, we have 13,000 gross acres, we're now shooting 3D on about half of the acreage we're partnering with Devon as operator and about half of it we operate.
We have potential for up to 175 drilling locations. We'll be drilling roughly about nine to ten wells this year both with Devon and with us as operator.
Reserves estimate about 1.5 to 2 BCF per well and we'll continue to pursue additional acquisitions in that area. Turning to Slide 15, Mississippi Bolton Field, we have targeted the Cotton Valley and have drilled deeper than most people have in the state of Mississippi and we have brought on through new stimulation techniques two wells that tested over 10 million a day each.
We are at capacity at our facilities, at 10 million a day and we will hopefully be expanding that capacity over time. We expect to be shooting 3D seismic in the first quarter 2008, based on 2D, there is some faulting in the area.
We need a 3D to really identify the number of total locations in this area and also for our 2008 drilling plans. We've also identified on acreage that we have joint venture with other companies or have options on ten additional prospects in the surrounding area on this type activity, so another very exciting growth area for Pioneer going forward.
Slide 16 just goes over our Oooguruk project. It is a very important winner for us as I mentioned everything is on schedule already.
The rig is installed as you can see on the left side of the picture. We'll start drilling activity in late September, early October with that rig and first production again expected first half of 2008, peeking in 2010 somewhere between 15 and 20,000 barrels.
All in finding costs of about $8 per BOE, no reserves booked to date and we do have several expansion activities in the existing formation that we discovered over and above the 70- 90 million barrels in addition to a couple other formations in that area, so obviously we're very excited about that project. Slide 17, in Tunisia, we've had a 90% success since we've been there since 2003.
That was primarily most of it on 2D as I mentioned earlier, on Jenein Nord we have 100% success based on 3D and that's in addition since we shot 3D with E& I on the Adam concession we've had 100% success there also with 3D. As I mentioned earlier, Anaguid has been increased to 60% that's before the ETAP back in and we became operator and we got 3D already scheduled for later this year.
And then as I mentioned our Jenein Nord will be on later this year fourth quarter, first production and expanding significantly. Still expect Tunisia to grow somewhere around 80% to 90% over the next couple years.
As I mentioned we haven't talked about it much but we have a lot of gas and condensate behind pipe, and we are pursuing along with a couple of the major operators in Tunisia tremendous expansion of the gas network in Tunisia bringing the gas pipeline to the coast. You'll be hearing more about that over the next 12 to 18 months.
As a reminder also, our four wells have already tested over 30,000 barrels a day gross. Obviously ETAP will be coming back in and exercising that over the next couple months, they are 50% so obviously we're very excited about what Tunisia is delivering.
We get Brent pricing plus $2 it's becoming a very important asset and growth vehicle for Pioneer over the next several years. Slide 18 just gives you a feel for the running room in Tunisia.
You can see we have a combination of the important thing is to look at the 3D line. There's a solid blue line that pretty much covers most of Adam concession which ENI operates where we own 20%, which is where all of our current production is coming from, roughly about 5,000 barrels a day equivalent.
Jenein Nord on the left side of the map, we have several prospects there and that's where we drilled five for five, as I've mentioned already the sixth well looks promising, and we'll continue that rig drilling three more wells this year. We are drilling a well on Adam right now with ENI, should be done the next week or two followed by another well in BEK.
The 3D seismic over Anaguid will be shot later this year and we own 60% if ETAP comes back in we'll have 30%. A very important area for us to expand, all the prospects outside of the blue line 3D are all based on 2D so obviously huge running room for several years in Tunisia for us.
South Coast Gas on slide 19, again the important message is Sable has been in decline over the last several years, that's our oil project while we're bringing on South Coast Gas very important project to the company later this quarter. It will peak production about 45 million to 55 million a day net which we now expect in Late 08, early 09.
One of the best wells is associated with Sable. We've been injecting about 80 to 90 million a day production in the Sable and due to higher oil prices and better performance, Sable has been extended into late '08, early '09 which we'll see a doubling of production at that point in time.
We expect fourth quarter to average about 20 to 25 million a day net equivalent. So I mentioned our already strong margins, very low operating cost, and also we'll be getting Brent pricing our natural gas and condensate will be tied to Brent.
In summary for this part obviously with two key assets beginning to take off, Tunisia, and Edwards we've added two more growth assets to our current mix. We'll be adding two more South Coast Gas third quarter and be adding Oooguruk fourth quarter and still very confident we'll be able to deliver this year and future years our 12% production per share growth at very great returns in all of our key projects.
Let me now turn it over to Rich Dealy to go over the second quarter guidance scorecard.
Richard P. Dealy - Executive Vice President and Chief Financial Officer
Great. Thanks, Scott, and good morning.
Turning to Slide 21 at the top you'll see a comparison of our actual results compared to our second quarter guidance that we provided back in May and updated in early July as it related to Nigeria and I'm very pleased with where our actual results came in. As you can see, on an daily production basis we are at the high end of the guidance range of 106,000 BOE 's per day and as Scott mentioned that's coming from our continued growth in our core areas.
The second line item production costs, little disappointed that it did come in higher than our guidance range at $12.53 per BOE, but it was primarily due to facilities and compression work in Raton and work over activity that was delayed from the first quarter due to weather causing the rigs not to be able to get in the field in the first quarter. Looking at exploration and abandonments we're at $70 million in the mid point of the range that does including $23 million related to dry hole in Nigeria that I'll talk a little bit more about in a minute.
DD&A, G&A, interest expense all were well within the guidance range so pleased about where those came in. Cash taxes we did have a refund for the quarter that is related to primarily Nigeria that I'll talk about in a few more minutes in detail and had the same effect on our effective tax rate as well.
Looking down the bullet below, I've covered the first two so starting on the third one, we've got three items that as Scott mentioned were unrelated to ongoing operations, the first of which is the East Cameron 322 incremental abandonment charge of $47 million for the quarter or $30 million on an after-tax basis. We did expect this to be covered by insurance and to be substantially reimbursed in future periods.
I think just as a key related to this project we've expensed about $181 million since we lost the platform, $43 million recorded as a receivable on our balance sheet related to debris removal and $5 million we received in cash, so of the aggregate $48 million we've got recorded, the difference between that. And $181 million that we've expensed we expect a substantial portion of that to be recovered in future periods and recognized in earnings of future periods as the uncertainty related to that and the insurance comes in.
The second item is related to Nigeria. We did announce back in July that we completed our drilling there on Block 256.
We also recognized an impairment charge in the second quarter associated with our decision not to drill Block 320 so the combination of those totaled $35 million and impacted the quarter. These were offset by a $40 million tax benefit that we recognized as a result of our activities being completed in Nigeria and our planned exit from the country so we had a net benefit of $5 million related to these items during the quarter.
In addition we had a minor property in our Gulf Coast area that we recognized an impairment charge of $6 million during the quarter, primarily related to well performance on a few wells there, so that's included in the quarter and then the last item on the page is really a recurring item that will be going forward. But new in this quarter and primarily related to the State of Alaska's production petroleum tax, new laws they've put in place.
By way of background in 2006, the State of Alaska replaced its severance tax system with a new system called The Alaska Petroleum Production Tax or PPT. The system was designed to incurrer oil and gas investments in Alaska really by issuing severance tax credits for qualified investments.
These credits can be used to offset severance taxes to the extent your paying them, they can be sold to third parties or they can be refunded by the state. During the second quarter, we applied and received a $25 million refund from the state based on our past expenditures under the new system.
Based on our past investments that we haven't recouped already and our planned investments we do expect to receive in excess of $100 million of additional credits in future periods related to these investments. So I think in summary, I'm very pleased where the quarters results came out.
We did out perform our internal modeling and we're above the mid point of our estimate based on our guidance we provided back in May so I'm happy to report that. Turning to Slide 22 we talked about realized prices.
Oil prices were $60.38 for the second quarter, up 12% from the first quarter. Natural gas liquids were up 23% to $39.52 for the quarter, primarily both oil and NGL's were up as a result of higher oil prices in the market during the second quarter.
Gas prices were $7.45 for the quarter, fairly flat with the first quarter of 2007. At the bottom of that slide we do show what the impact of hedges had on our realized prices and I would encourage you guys to look at slides 30-34 in the appendix for a detail of our price realizations by geographical area.
VPP obligation amortization over the future years as well as amortization of terminated hedges which as you can tell has had a significant impact to our oil realizations for the second quarter, and as those legacy hedges roll off, the remainder of 2007 and 2008. Turning to Slide 23, we look at production costs per BOE.
I think I've covered most of this but you can see the top of the bar there that work overs are higher as a result of the just delay in getting some of that activity done from the first quarter due to weather and then the base then the base LOE, Scott mentioned we've done quite a bit of work at facilities and compression in Raton and that's ran through the expense side so that's up this quarter but not expected to continue at that rate. Turning to Slide 24, it shows our capital investment year-to-date for the first half of 2007 we spent $984 million obviously as we've mentioned on the last call our capital budget for the year was very much heavily front end loaded, with South Coast Gas being in the first part of the year that's winding down now with first production expected later this quarter.
Oooguruk was very busy during the winter season as well. We've got ongoing activity there to kick up the drilling program later this year.
As Scott mentioned the high impact exploration drilling for the year is complete and behind us so that's not ongoing as well as our winter access drilling in Canada is complete so in total we've spent about $390 million of the $984 million that's related to projects that will have very limited ongoing spending with the most of that related to Oooguruk. Turning to Slide 25, I'm not going to cover this in detail but we cover our existing hedge position.
I think it is important to note that these hedges include those hedges that we've entered into that we plan on assigning to the Pioneer Southwest Energy Partners, the MLP that's in registration. If you want to see a detail of those specific hedges you can look at Slide 36 in the appendix and I will show you those specific hedges that we plan to assign to the MLP.
Turning to Slide 26, third quarter guidance, daily production for the third quarter is expected to average 105,000 to 110,000 BOE's per day, really the continued growth in Spraberry, Raton, Edwards, Mississippi coming online, our South Coast Gas Project coming online later this quarter and the continued growth in Tunisia. Production costs are expected to be $11.50 to $12.50 not as high as the second quarter actual results, we really don't see that level of costs continuing into the third quarter.
Exploration abandonment costs $30 to $60 million. And I think that the key thing to note here is we don't have any high impact exploration drilling in the third quarter and the key drilling and seismic activity is in lower risk resource plays that we've been experiencing our success in of late.
DD&A per BOE $10.50 to $11.50, G&A $30 to $34 million. Interest expense has increased to $34 to $37 million primarily due to a ceasing de-capitalized interest related to our South Coast gas project once that comes on later this quarter and then our effective tax rate is expected to be 40% to 45% for the quarter, primarily due to the Tunisia tax rate being about approximately 60% that causes that rate to move up from the US Statutory rate.
I would encourage you to look at Slide 27 really just to look through the slides that we have, index of the slides we have in the background of supplemental information and focus on the slides 30 to 34 that I mentioned earlier that really walks through our differentials and our terminated hedges just for your modeling purposes, and so I'd encourage you to do that. With that I think we'll open up the call for questions.
Question and Answer
Operator
[Operator Instructions] We'll take our first question from Gil Yang with Citigroup.
Gil Yang - Citigroup
Hi. Can you talk about when Jenein Nord comes online and when Oooguruk comes online, what do you expect to happen to operating costs?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, Gil. I mentioned Jenein Nord is expected to come online fourth quarter, first production and liftings could swing, it could be hard to determine exactly about liftings but our lowest cost operating projects, you mentioned two of the three that are coming on and that's Tunisia, Oooguruk, and South Coast Gas.
When those three projects come on, it should be driving down operating costs somewhere between 5% to 10% as a company result. Obviously when the VPP rolls off we'll see another 10% drop, so we do see our operating costs coming down significantly with those three projects coming on, followed by the VPP moving out over the next two to three years.
Gil Yang - Citigroup
Okay, so in the third quarter guidance doesn't have any of that yet?
Scott D. Sheffield - Chairman and Chief Executive Officer
No. South Coast Gas coming on at the very end of the third quarter so fourth quarter you'll see South Coast Gas and when Oooguruk comes on, Tunisia come on, you'll see maybe some in late fourth quarter but more first half.
You'll see a bigger impact in the first half of 08 with Oooguruk, Tunisia, and South Coast Gas with very low operating cost.
Gil Yang - Citigroup
Going to Raton for a moment the new acreage you've got, could you just remind me where the acreage was that you had problems in terms of the I think you had volcanic intrusions if I recall?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. The volcanic intrusions were to the north.
The very north end of the acreage when you look at our map. This acreage is right adjacent to XTO's acreage, so the acreage that we picked up was right adjacent to XTO, so if you put a little circle around our acreage and the acreage from Petro Gulf that's XTO.
Gil Yang - Citigroup
Okay. With the Barnett, could you talk a little bit about how you got that acreage, how much you paid for it, what's your investment in there currently?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. We actually got there through relationships in the Raton Basin several people that we know that have owned minerals in Raton own acreage in the areas that we end up purchasing.
We have been looking at and bidding on opportunities over the last two years but obviously have been beaten, so average acreage cost is probably in the $2000 acre range, scattered throughout that play. Our 13 thousand acres.
Gil Yang - Citigroup
Okay, and Devon was already in there, is that there was a 50% interest?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, somebody actually put up some of their assets for bid. To our knowledge, Devon did not bid on that transaction and it allowed us to get in obviously and get experience with probably the premier operator in the play.
Gil Yang - Citigroup
Okay, and the royalty rates are like 25%, something like that, in that area?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes.
Gil Yang - Citigroup
All right, thanks.
Operator
Thank you. We'll take our next question from Robert Morris with Banc Of America.
Robert Morris - Banc Of America Securities
Good morning, Scott.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi, Bob.
Robert Morris - Banc Of America Securities
Looking at our estimates on cash flow with the recent $205 million acquisition of acreage in Raton and your increased budget, you're on track to outspend your cash flow by a good amount this year and I notice you didn't really buy any material shares back in the second quarter. I just wanted your view on how much you're willing to borrow to meet your spending plans and/or share repurchases because you also increased your share repurchase program last quarter in light of outspending cash flow with the recent upticks on spending when that share repurchase program may kicked back in here.
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, I think with our debt to book still strong, we still have plenty of financial flexibility and as we had mentioned already from the MLPs, there's a great amount of proceeds coming in from those, so we really see no issues in regard to we were pretty much restricted, almost all of the second quarter based on the things that we've announced we'll probably end up doing a 10 B5 program because we'll be fairly inquisitive with having MLPs out there in the future. So we'll do a 10 B5 program to be able to buy stock especially like where it is over the last several days, more aggressively than we did second quarter but we just don't see an issue on our debt to book and our financial flexibility.
We see 2008-2009 basically spending our cash flow primarily due to Oooguruk, South Coast Gas coming on strong, and also the strong pricing. We have done some hedging especially with a lot of the crude related into 2008 to help protect the economics and the CapEx at that point in time, so we still feel like the strong balance sheet we really don't see an issue.
Robert Morris - Banc Of America Securities
So basically, in effect are borrowing to buy back stock when you do that?
Scott D. Sheffield - Chairman and Chief Executive Officer
No. We look at the entire model of proceeds coming in, obviously from the MLPs too, so we look at where we are at each year-end and also in a quarterly basis, so it depends on how you look at like I can't go into the exact numbers and you can look at the model on where the yield is potentially priced at on the Spraberry MLP, so obviously we have lots of flexibility going the MLP route.
Robert Morris - Banc Of America Securities
Okay, and then just real quick here, the 13 thousand acres is gross that you mentioned the Barnett, what's your net there?
Scott D. Sheffield - Chairman and Chief Executive Officer
On half of it, it's 50% and half of it, it's 100%.
Robert Morris - Banc Of America Securities
100 %, and then how much did you spend to acquire the additional acreage in Anaguid or additional interest in Anaguid?
Scott D. Sheffield - Chairman and Chief Executive Officer
Very insignificant. It was minor.
Robert Morris - Banc Of America Securities
Okay, good. Thank you.
Operator
Thank you. We'll take our next question from Rehan Rashid with FBR.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Good morning, Scott.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi Rehan.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
On Tunisia, the reserve potential there again, remind me please and how much has been booked?
Scott D. Sheffield - Chairman and Chief Executive Officer
I think we've given out in the past our target ranges are about 4 million barrels to 25 million barrels from Jenein Nord, we have not booked any reserves from that project. So obviously we'll be booking a lot by the end of this year.
Adam, I don't think with us only owning 20%, I think, Frank will have to get back with you on the exact number.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Okay.
Scott D. Sheffield - Chairman and Chief Executive Officer
Year-end 2006.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
That's fine. Same thing on Alaska.
Should we see reserve bookings this year or next year?
Scott D. Sheffield - Chairman and Chief Executive Officer
We could see some by the end of this year. Most of it will be 2008-2009.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Got it. On the Mississippi Cotton Valley side, could you give me a little bit more comparison to call it Texas, the depth of the acreage, what kind of reserves are we looking for, costs , and anything else that we should know?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. Well we're probably in a new environment.
These are the deepest wells to date in Mississippi, so we're going to be very careful for competitive reasons of giving out a lot of data. Need to watch performance but they are performing way above expectations.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Okay.
Scott D. Sheffield - Chairman and Chief Executive Officer
So at this point in time, I'll refrain from giving out a lot of information due to competitive reasons, also competitive leasing too. But as you can see, our wells, we did not even put a large enough plant to produce the volume, so they're doing much better than expected.
That's why we're at capacity already, so we've had to choke the two wells back.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Right, right, okay. That's good.
On the Raton side, I kind of noticed that out in '08 we're looking for 10% growth upper end of the 7% to 10% for '07. Is that from the acquisition or is that just simply acceleration that you expect from drilling activity?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, that growth rate excludes the Petrogulf transaction so obviously the growth will be higher than the 10%, but we went to 7% because if you recall we had 10 foot drifts first quarter, 2007 so first quarter was way off. We picked that back up due to some efficiencies we put in place starting late 2006 as I mentioned, we're putting the wells on in 28 days versus it took us 70 days the first two years since Evergreen, it grew 10% last year.
And we're fairly confident we're going to be up 10% this year. That's without any acquisitions or drilling on the Petrogulf deal and we expect to grow another 10% the next two or three years so chances are of exceeding that are pretty high based on what we've seen and also with the recent Petrogulf transaction.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Got it. Okay, thank you.
Operator
Thank you. Moving on we'll hear from David Tameron with Wachovia.
David Tameron - Wachovia Securities
Good morning.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi, David.
David Tameron - Wachovia Securities
Scott, you just talked a little bit about Raton. Can you talk about you said 28 days versus 70.
I mean, what are you guys doing out there? Anything just beside drilling days or could you give us a little more color on that?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well it starts with permitting, and working with the state agencies, so that's a big chunk of it, experimenting on drilling techniques, I'm getting in some new drilling rigs that are much more efficient, buying new equipment, stimulation equipment. So it's really a combination of all of that and actually, I hate to say it but we actually brought in a consulting, outside consulting agency that you hate to bring those in but they actually came in and helped us also to plot all of this out.
and have to give them a lot of credit also working with the teams. So it's a combination of all of that to really focus on a from the time you permit the well to the time you bring it on production was a charge that Jay Still and his team put together and they set goals and accomplished it so it's a tremendous effort they put together.
David Tameron - Wachovia Securities
Alright. And how, infrastructure has always been an issue out there as far as compression, etc., where are we currently at and how much more do you need to add over the next 6 to12 months?
Scott D. Sheffield - Chairman and Chief Executive Officer
We're probably two years away from all of the producers, there's always, they are already in discussions with El Paso to expand the system. We want to make sure we didn't have a problem like we had in 2006.
If you recall once we acquired Evergreen, we got into our first production. We could not see an increase because we all reached capacity so we're all working together both El Paso XTL, and ourselves are the three big operators, I think we have about 2/3 of production, so we're already in discussions just to make sure that something doesn't happen to make sure there's a system, capacity in place two years from now.
David Tameron - Wachovia Securities
Alright, and then just on a production, if I look out to Q4, we have South Africa, Tunisia, are those the two big ramps coming online?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes.
David Tameron - Wachovia Securities
Did I miss anything else?
Scott D. Sheffield - Chairman and Chief Executive Officer
No, just those two.
David Tameron - Wachovia Securities
And then one final question. Mississippi?
Who is your, have you disclosed who the partner is the other 20% working interest or is that an NRI number?
Scott D. Sheffield - Chairman and Chief Executive Officer
They are private individuals.
David Tameron - Wachovia Securities
All right thanks, Scott.
Scott D. Sheffield - Chairman and Chief Executive Officer
Okay.
Operator
Thank you we'll take our next question from Robert Lynd with Simmons & Company.
Robert Lynd - Simmons and Company
Hi, thanks. My questions were already asked.
Scott D. Sheffield - Chairman and Chief Executive Officer
Okay.
Operator
Thank you. Next we'll hear from Sven Del Pozzo with John S.
Herold.
Sven Del Pozzo - John S. Herold
Hello, just one question. The PPT in Alaska, is that supplant your oil fee relief agreement that I've read about on the Alaskan Department of Natural Resources website?
Scott D. Sheffield - Chairman and Chief Executive Officer
Totally different items.
Sven Del Pozzo - John S. Herold
Okay, could you just give me an update in terms of, I mean so basically, what is the decline in the royalty, with the royalty relief from that project for Oooguruk?
Scott D. Sheffield - Chairman and Chief Executive Officer
I don't know exactly. Frank will, I'll get Frank to give you a call back on that exact amount.
I know it's a phase out. I can't give you the exact time.
Sven Del Pozzo - John S. Herold
Alright, so anyway two sources of relief essentially. Okay, thank you.
Operator
The next question comes from Ted Izatt with Bear Stearns.
Ted Izatt - Bear Stearns
Yes, hi. Good morning, everybody.
Congratulations on your quarter. My question is with the increased capital spending and with everything going on at the MLPs and so fourth, on the cash flow, do you see any need to come to the market at all for borrowing or where do you stand on that front?
Scott D. Sheffield - Chairman and Chief Executive Officer
No. Not all at all, so I think our strategy that we laid out with our MLPs pretty much laid out in the past is pretty much shows us ways over time to raise capital efficiently.
Ted Izatt - Bear Stearns
Okay, and I think before you sort of said that with the MLP process you would maybe even buyback some debt in addition to share repurchases or reduce debt anyway. Is that still true?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. I mean, the MLPs gives us lots of flexibility for capital raising significantly over the future.
Ted Izatt - Bear Stearns
And then, okay thanks, and then my last question is just in terms of the whole Moody's situation, where do you stand with them and do you feel, how do you feel you're coming on some of their issues they had specifically organic domestic F&D costs for 2007?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, as I've stated over the last several quarters, as long as we're continuing to drill up our Spraberry PUDs, it will have a reflection on our organic, but with projects like Tunisia, Edwards, Alaska coming on, South Coast Gas, Barnett Shale activity will help us obviously on the organic side. So I think the plan we laid out 12 months ago, we're executing, executing probably better than we expected.
We've added several key new areas also to continue to grow the Company, projects are really pretty much on time. Only issues I've seen over the last 12 months is just weather related items and that happens in normal course of business so we're executing exactly what we laid out about a year ago.
Ted Izatt - Bear Stearns
Okay, great. Congratulations again.
Thanks.
Scott D. Sheffield - Chairman and Chief Executive Officer
Thanks.
Operator
Thank you. We'll take our next question from John Herrlin with Merrill Lynch.
John Herrlin - Merrill Lynch
Yes, hi. Some quick ones.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi, John.
John Herrlin - Merrill Lynch
Cotton Valley you said there was fracturing so you're going to run some 3D. Are your current wells all matrix process, Scott?
Scott D. Sheffield - Chairman and Chief Executive Officer
We're not, we've only been producing the wells now for about four weeks, so we do not know exactly, so it's a combination of we need a lot more pressure data to see where the wells, the key thing as you know, Cotton Valley wells have a hyperbolic decline curve in our key point in making any future decisions where these wells break over at, they all break over and pressures are staying much better than expected. Based on that, I'd say we have pretty good frosty in some of these sands so they are much deeper than your typical, they are over pressured, so we'll just have to watch that to help us.
To my knowledge, I don't think we have any cores, so I can't fully answer your question, but I think there is decent frosty sty in the system.
John Herrlin - Merrill Lynch
Cool. Next one for me is on Canada.
CIRUS's cost have dropped a lot obviously gas prices are what you hear would be opportunistic at all in terms of your spending second half in Canada?
Scott D. Sheffield - Chairman and Chief Executive Officer
No. Almost all of our spending was done in the first quarter, so we see essentially very little spending in Canada until next winter.
John Herrlin - Merrill Lynch
Okay. Last one for me, you said by purchasing the excess in the Raton, you would be shielding your tax liability especially with MLP or at least the Spraberry MLP.
Approximately how much do you think that tax liability is from the step up of the MLP?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, you know, the signs of the Spraberry MLP is about 250 and this is about 205 so you can pretty much do a ratio. The Raton deal… Petrogulf deal was 205, it was 250, it would be sheltering 100% so it's a very significance.
You can probably just ratio the two numbers and use close to 80% probably.
John Herrlin - Merrill Lynch
Okay, thank you.
Operator
Thank you. Moving on we'll hear from Brian Singer with Goldman Sachs.
Brian Singer - Goldman Sachs
Thank you, good morning.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi Brian.
Brian Singer - Goldman Sachs
Following up on that last question given the lifetime exchange tax deferral mechanism being used here, should we expect you going forward to make acquisitions of equal value at the parent company at Pioneer the same value as future asset as MLPs?
Scott D. Sheffield - Chairman and Chief Executive Officer
We will continue to use that feature along with taking units back to defer taxes, yes. It's a 1031 tax free exchange.
We'll continue to use primarily that to defer taxes, in addition to taking back units as we move assets over time into the MLP.
Brian Singer - Goldman Sachs
I guess one would assume that that dynamic would not be any different when looking at the tax liabilities?
Scott D. Sheffield - Chairman and Chief Executive Officer
Tax liability of what? PXD?
I didn't follow you.
Brian Singer - Goldman Sachs
The Raton MLP should we also expect you to make acquisitions of equal value at the Pioneer level?
Scott D. Sheffield - Chairman and Chief Executive Officer
Oh, I see. Yes, because we're in registration, we can't answer that at this time.
Brian Singer - Goldman Sachs
Okay. And then based on the combination of your normal Spraberry drilling program and the extension to the Wolfcamp, any sense on what type of additional proved reserves we should expect out of Spraberry this year?
Scott D. Sheffield - Chairman and Chief Executive Officer
We know based on performance that we're definitely adding about 20% plus. As I mentioned before, I think in certain areas, as we extend there's about three different areas we're doing Wolfcamp only and we're getting them as good or better the reserves in production than we do in the Spraberry trend area by itself.
So it's a combination of about 80% of our wells are going to the Wolfcamp in the main heart of the field and they are probably getting 20% plus, so we'll be adding reserves this year for that and then in addition we're drilling Wolfcamp only that are doing very well also. And we will be adding reserves for those.
Brian Singer - Goldman Sachs
And that plus new PUDs would offset the drilling of existing PUDs?
Scott D. Sheffield - Chairman and Chief Executive Officer
We're continuing to make acquisitions too, so I don't know that for sure yet, but our goal obviously is to deliver a low finding cost on Spraberry Trend area to help offset the PUD drilling.
Brian Singer - Goldman Sachs
Great. Thanks.
Operator
Our next question is from Joe Magner with Tristone Capital.
Joseph Magner - Tristone Capital
Good morning, thank you. Just a question on Oooguruk with increased capital up there expected, what impact that has on project economics, finding costs or returns?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. Actually with the tax credits have essentially offset that that we've mentioned.
That was the point of that slide, Joe, and the PPT credits coming in, they are offsetting the cost increase, so no effect.
Joseph Magner - Tristone Capital
Okay and with the expectation of the PPT tax credits going forward is there any sort of schedule in when those might be realized or how do we look at that?
Scott D. Sheffield - Chairman and Chief Executive Officer
I think Frank will have to work with you. We have a pretty good handle on what we're going to spend over the next two or three years up there, and so for modeling purposes, maybe it's best just to take a number and divide by four, but we can't tell you the exact quarter.
We can tell you more on an annual basis and the state will only buy $25 million of it per year themselves. So we have to sell the rest of it to the three major oil companies up there that are producing, and that's generally they get a slight discount off to that number, so we just can't tell you per quarter.
It's easier on an annual basis.
Joseph Magner - Tristone Capital
Okay, thanks for that. And shifting to the Raton, just I just want to make sure I understand properly, it looks like no real changes in the number of wells you plan to drill and no real change in production increased capital and talking about some positive contribution from increased drilling efficiencies.
How do we resolve all of that. Looks like you're spending more to essentially do the same.
What has changed?
Scott D. Sheffield - Chairman and Chief Executive Officer
We were giving you, we felt with our first quarter down, production down, we were probably going to be more like 7% for the year, and because of the efficiencies and we'll be through with our budgeted drilling completion program by end of September, so we had a choice to increase CapEx there or to shut all of our equipment down and it doesn't make it efficient to shut our equipment down. So the net result we'll end up completing 300 wells probably this year versus originally budgeted completing probably about 240-250 wells, and with that we'll be back over 10% production growth, so and that's taken off a very weak first quarter due to weather.
Joseph Magner - Tristone Capital
Okay, thanks and with the increase in capital, and all of the areas you mentioned, any change to your expectations on F&D costs for the year?
Scott D. Sheffield - Chairman and Chief Executive Officer
No. Still no change.
Joseph Magner - Tristone Capital
Okay, thank you.
Operator
We'll take our next question from Rehan Rashid with FBR.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Scott, just a quick follow-up on the Rockies.
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
UP on the CBM sounds like it's off to a good start. Could you kind of walk us through color in the next year in terms of the program here?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, we have to decide, I think the big thing is decide, is the rocky differential, are they going to improve which you could obviously hedge those in the marketplace, I think and get down to $1 two or three years from now from a high of about $3 now, so it's really back to the allocation of capital. As I mentioned earlier we haven't spent a lot of capital in UP this year.
The pilots have been growing and we've improved the efficiency to move more water as we're most, if any capital was spent just to move more water more efficiently and de-water the wells so we're seeing that working and increasing production, but it's still, we have to have a strong view on what's going to happen to the differentials before we allocate a lot of capital into the UP over the next two or three years.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
But from a technical standpoint things are working?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Okay, and sticking with F&D thought or rather CapEx for next year, is this kind of what you were trying to guide us towards with a rough run rate of a billion and a half for the next couple of years?
Scott D. Sheffield - Chairman and Chief Executive Officer
No. Cash flow next couple years is around a $1.2 billion two or 1.3 billion three so we see our CapEx fairly close to that ballpark.
Rehan Rashid - Friedman, Billings, Ramsey & Co.
Okay, thank you.
Operator
Thank you. Next we'll hear from David Tameron with Wachovia.
David Tameron - Wachovia Securities
Hi, just one quick follow-up. You guys took a small impairment charge, $6 million related to I think you said US Properties.
What specific property was this?
Scott D. Sheffield - Chairman and Chief Executive Officer
It was Chesapeake operated properties in North Louisiana.
David Tameron - Wachovia Securities
Okay, thanks. That's it.
Operator
Thank you. That is all the time we have for questions.
I'd like to turn the call back to Mr. Scott Sheffield for any additional or closing remarks.
Scott D. Sheffield - Chairman and Chief Executive Officer
Okay, again, thanks. Obviously as Rich and I've mentioned we're excited about the quarter, getting our Spraberry MLP on file, so looking forward to seeing everyone on the next quarter.
Hopefully on a road show here shortly. Thanks again.
Operator
This concludes today's conference. We thank you for your participation and have a wonderful day.