Nov 7, 2007
Executives
Frank E. Hopkins - VP, IR Scott D.
Sheffield - Chairman and CEO Timothy L. Dove - President and COO Richard P.
Dealy - EVP and CFO Chris J. Cheatwood - EVP, Worldwide Exploration
Analysts
Ted Izatt - Bear, Stearns & Company David Tameron - Wachovia Capital Markets Bob Christensen - Buckingham Research Jeffrey Hayden - Pritchard Capital Partners Rehan Rashid - Friedman, Billings, Ramsey John Herrlin - Merrill Lynch
Operator
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, 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 in future periods to differ materially from the forward-looking statements.
These risks and uncertainties are described in the last paragraph of Pioneer's news release on page 2 of the slide presentation and in the most recent public filings on Forms 10-Q or 10-K made with the Securities and Exchange Commission. At this time for opening remarks and introductions, I would like to turn the call over to Pioneer's Vice President of Investor Relations, Mr.
Frank Hopkins. Please go ahead, sir.
Frank E. Hopkins - Vice President, Investor Relations
Good day, everyone, and thank you again for joining us this quarter. Let me briefly review the agenda for today's call.
Scott Sheffield will be our first speaker. He is going to discuss the third quarter highlights, our reduced capital spending plans for 2008 and a good progress we are making towards achieving our production growth and F&D goals.
After Scott concludes his remarks, Tim Dove is going to provide an update on what's going on with our operations. Rich Dealy will then cover the financial highlights from the third quarter and provide earnings guidance for the fourth quarter.
After that we will open up the call for your questions. Before turning the call over to Scott, please let me remind you that on July 26, we announced that a registration statement was filed with the Securities and Exchange Commission for Pioneer Southwest Energy Partners L.P., the master limited partnership that we are forming for the purpose of owning and acquiring interest in oil and gas assets in the Spraberry field.
A copy of the prospectus for this offering when available can be obtained by contacting one of the three underwriters listed on slide 44 of today's presentation. The rules of the Securities and Exchange Commission limit the nature of the information that we can provide you about the MLP and any other MLP plans at this time.
As a result we do not plan to take any questions related specifically to the MLPs in this call, or in follow-up meetings. We refer you to the press release and 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. Good morning.
Let's start out on the highlights on slide number 3. We had obviously a great quarter.
We reported third quarter net income of $102 million or $0.84 per diluted share. We're behind of our production range with third quarter of about 109,000 barrels of oil equivalent excluding Canada, 101,000.
When you look at it versus 12 months ago third quarter of '06, we were up 11% when you include Canada, excluding Canada, pro forma, we were up 12% over the last 12 months. What's more important is our four core onshore assets, Spraberry, Raton, the Edwards play in South Texas and onshore Tunisia.
We were up 21% versus 12 months ago third quarter of 2006. We are delivering on our South Coast Gas project coming on, on schedule in late third quarter '07.
The Oooguruk project up in the North Slope is still on schedule. Tim will talk more about that.
We've already announced the fact that we've had another three discoveries in Tunisia and two more in our successful South Texas Edwards Trend are continuing to significantly grow both of those projects. In addition, we announced this morning two attracted bolt-on acquisitions; the Spraberry Trend area for $90 million.
We acquired $38 million barrels of oil equivalent of resource potential. And then in the Barnett Shale where we've made our first acquisitions, the first part of this year, another important acquisition for us, $150 million for 400 Bcf equivalent and the resource potential.
Tim will talk more about the details of both of those transactions. As we have in the past, we continue to reduce our share count as we see opportunity to buy shares at low prices.
We did buyback 3.7 million shares in the third quarter at an average of little over $43 per share. Also important, we announced the agreement to sell Canada, Canadian assets for $540 million, which we expect to close during the fourth quarter.
Then our MLP as Frank mentioned, it is on schedule to get this project done sometime during the fourth quarter of this year. The proceeds from both the MLP IPO and the Canadian divestiture all allocated to share repurchases, bolt-on acquisitions as I have mentioned and also debt reduction.
Due to the fact that we are getting close to the end of the year and also with three acquisitions, the two that we announced plus the Petrogulf deal, we are very comfortable in announcing the fact that we have an all-in finding cost of $14 to $17 per BOE and reserve placement greater than 300%, pretty much hitting at the higher end of our targets, midpoint range of the finding cost, the high end of reserve placement. We will talk a bit more about that as we move forward.
Slide number 4; delivering consistent production growth establishes what we have been doing quarterly, and again just emphasizes the fact that we are on track to deliver 12% production per share growth in 2007. And you see at the bottom what's happened to our outstanding shares, continue to come down.
2006 from almost 128, averaging the first 9 months 121.8 million shares. We're now down to 119.7 million shares, which will report something close to that the year-end 2000 and this year.
Slide number 5; our 2008 capital was something we stated in early 2006 with this refocused strategy onshore primarily... 2008 capital was in line with our cash flow.
We're reducing our CapEx from $1.4 billion, $4 billion to $5 billion in 2007, to about a $1 billion in 2008 as we have announced previously. The major reductions on our too big projects both in Alaska and South Africa, also the elimination of high impact exploration and the divesture of Canada.
Most of the capital will be focused on Spraberry, Raton, Edwards, Tunisia and some Oooguruk drilling which Tim will talk about starting up that rig toward the end of the fourth quarter of this year. So you can see I'm pretty much where the capital is focused.
We will be moving into... right now with strip prices, we are in excess cash flow position for 2008 with significant excess cash flow in 2009, '10 or '11 moving forward in our plan.
Slide number 6. A little more background on our 2007 F&D estimate.
Obviously, our reserve adds have been from a successful drilling and core onshore areas primarily this Spraberry Trend area, Raton, Edwards and onshore Tunisia followed up by the recent acquisitions in Raton, Spraberry and the Barnett Shale. As I've mentioned already all-in finding cost $14 to $17 per BEO, organic F&D expected to the range between $17 and $20 per BOE, excluding Spraberry and Raton PUD drilling, the organic number would have been somewhere between $11 and $15.
Again, I mentioned reserve replacement should be over 300%. Slide number 7.
Again, just showing the fact that it's important to reduce shares, which is our commitment over time. We have bought back about 24% over the last three years of our outstanding shares.
Our average price is a little bit over $43, coupled with the fact that we bought 3.7 million shares during the third quarter of 2007, a little over $43 also. We have utilized about a little over $200 million this year, so far of our $750 million program.
Slide number 8. Just empathizing the fact in today's weighted price towards oil and crude related products including NGOs, most of our growth in revenue is going to be more primary focused on oil related projects.
Spraberry Trend area in West Texas, Oooguruk in Alaska, Tunisia onshore and in South Coast Gas, as we have mentioned before is tied to Brent pricing. The gas is coming from Raton, Edwards and Barnett Shale, so again 65% of our incremental revenue growth is coming from oil-related projects.
Slide number 9. Again just emphasizing the fact that our commitment of growing production per share is happening, delivered on 18%.
Our first year 2005, 2006 wound up being around 12% from '06 to '07. Obviously with a lot of projects coming on, we expect to deliver something north of 12% plus per share for 2008 to '07 going forward.
Slide number 10. Cash flow and return on capital employed increasing significantly.
As I mentioned already we expect to be free cash flow neutral or positive in 2008. In addition, return on capital employed is expected to improve from 6% to 7% in 2007 or really doubled over the next three years to 12% to 14% in 2010 primarily driven by production growth, legacy hedge explorations, reduced VPP obligations and improving commodity prices.
We've taking the company from about $800 million to $900 million in cash flow. In '07, we will be doubling it by 2010.
Let me now turn it over to Tim Dove who will talk a little bit more detail on our assets.
Timothy L. Dove - President and Chief Operating Officer
Thanks Scott. As Scott has already eluded to, our third quarter results are really further evidence of the ability of Pioneer to show consistent growth in our assets, specifically from our core areas, and to deliver on our growth initiatives.
We are starting off here in 2007, we think we have a great deal of confidence. We can continue these type of growth through 2010.
And that starts with one of our cornerstone assets of course being the Spraberry Trend area where about 50% of the company's crude reserve reside. We've been able to show double-digit growth in Spraberry for sometime.
In fact, if you look at the third quarter results, increased production by about 14% compared to a year ago, and 12% compared to the nine-month periods. We do expect the continuation of that level of growth.
In fact, we are calling for about 10% to 15% growth in 2008. That's after the effect of subtracting production that will be attributable to the public following the IPO PSE.
We have been very successful over the years in acquisitions and we're continuing that trend. I'll mention on the next slide a little bit more detail regarding the Spraberry acquisition we just made.
But we'll continue to focus on bolt-on transactions in this key asset. We are in the middle of a substantial drilling program.
We have 16 rigs running and have drilled about 300 wells out of the 350 well program for this year and essentially are on schedule to complete that by year-end. And the majority of those wells are still being drilled to the deeper Wolfcamp, where we've co-mingling Wolfcamp and Spraberry production, and adding incremental reserves and production in the neighborhood of 20%, which is incrementally adding a lot to the economics of these wells.
Turning to page 12. A little bit more detail on our fourth quarter Spraberry acquisition.
We do have a substantial track record of success in adding bolt-on transactions in this field. In fact, since 2000, we have acquired $430 million worth of properties equating to 190 million barrels proved.
So, the economics of acquisitions at Spraberry have been excellent as well. On the current transaction, it's $90 million purchase price, which is acquiring today's production anyway of 700 barrels of oil equivalent per day.
But more importantly, it adds over 600 undeveloped locations into the drilling inventory at a very high working interest. And accordingly along the lines of the economics I mentioned in prior transactions, this one also is very attractive when it comes to the acquisition F&D and the ultimate F&D in the project, if we've prognosing about 38 million BOE of net resource potential to the life of the project.
And in that drilling will also be Wolfcamp potential, as I mentioned in our normally drilling campaign. So we believe the economics are going to be very attractive of the drilling of the assets they require in this transaction, as we look forward.
Most of the gas will be processed through our existing Midkiff/Benedum plants. Of course these are the plans where Pioneer has the option to increase our working interest over the next couple of years up to 49%.
And these are the typical Spraberry long-life assets slow declining with stable cash flow, so they fit very well with the Pioneer model. On slide 13.
I think you can see from the graphs down below the right what's happen with production. We are obviously extremely pleased with results from our Edward's expansion.
And we are starting to see the substantial effects of our recent drilling on production. In fact, production was up about 63% this quarter versus the same quarter last year.
And we do anticipate production growth to continue in the neighborhood of 25% into 2008. And that is as we bring on some for the new fields that have been discovered in the past, and continue our aggressive development drilling campaign.
In late October, we announced that we had made two new field discoveries, which now means we've added a total of 8 new fields to the trend. We are in the process now of completing a 35-well campaign this year, most of that is development drilling.
As we said, we are holding off on some new exploratory drilling until we have the seismic programs complete. We have had a substantial amount of success both with regard to new wells and existing wells in the Pawnee field of using new multiple isolation frac technology to increase EURs per well, typically by 1 to 1.5 BCF at a cost of only about $1 million per well.
And these are substantially added to the economics of drilling the Pawnee and Edwards extension wells. We're about 45% complete on our 900 square mile 3-D seismic surveys in the area, up and down the trend.
And we're making substantial headway in terms of completing or treating in pipeline facilities. They can allow us to increase production even further.
I did want to mention even though it's on the slide, we do have two wells on production still on our Mississippi field area that continue to produce about 7 million cubic feet to 8 million cubic feet a day combined. We're going to be shooting 120 square mile seismic survey in that area to define the next drilling campaign locations.
Slide 14 is on Raton. Raton really had a great comeback year.
You may recall, it was slowed considerably by bad weather in the first quarter. It's now increased its run rate above 10%.
In fact production in the third quarter was about 11% over the same quarter last year. We still believe that we're on track for about 10% growth rate this year even though we suffered that horrendously bad weather in the first quarter and we're also looking for about 10% growth rate in 2008.
Importantly, Raton continues to benefit from getting or receiving Mid-Continent pricing. In fact if you look at today's data, Mid-Continent differentials, basis differentials are about $0.75 where Uinta/Piceance areas west of Raton, differentials are in the neighborhood of $2.50 to $3, so we're clearly are the beneficiary of being able to move this gas into Mid-Continent markets.
We're in the midst of a substantial drilling campaign that we are going to complete on schedule here at the end of 2007. About 300 wells will have been put on line during the year.
We're doing a good job in Raton of controlling costs. Of course that's where we have our integrated well services model that continues to give us benefits or cost control when we've pretty much providing about 65% of our own services.
And we are operating two Pioneer own rigs, so that drilling cost are essentially, are being held constant even though we've been in this escalating cost environment for a couple of years. One important aspect of Raton that we continue to be focused on is improvement of and optimization of well head and field compression as that's a very key component to growth and increased production in a coal bed methane field.
Incidentally, we did shut in some Uinta/Piceance gas in mid September about $6 million a day. It was receiving less than $0.10 per Mcf.
That gas is now back on line as of November 1st as we've been able to secure higher prices for that gas. Turning to slide 15, Scott eluded to some more detail I would provide on the Barnett Shale acquisition.
This is an important transaction as we continue to take steps to build our Barnett Shale interest into the core area. This acquisition is an important contributor to that, $150 million acquisition, it has 37,000 gross acres predominantly in Parker County and a similar amount more in the expansion areas, but it also importantly will add over 300 drilling locations.
We have existing 3-D over most of those and about 480 Bcf of resource potential with today only about 80 Bcf what we consider to be approved. Current production about 15 million cubic feet a day.
This will be one of the areas we begin to target for a ramped up drilling campaign in 2008. We do add that of course to some small amount of existing acreage we have about 13,000 acres that has an existing 150 drilling locations and principally that's in Wise County where we are drilling wells on 50% basis with Devon and having very good results.
We are also going to be shooting seismic up in Wise County to further delineate drilling opportunities there. On Slide 16.
Scott has also mentioned our success in Tunisia, which has really been phenomenal. We continue to have a great deal of success there from the drill bit.
Production in the third quarter essentially doubled versus that in the same quarter last year, and we anticipate production will essentially double or be up approximately 90% in 2008. And that's really coming from a combination of existing discoveries we have made specifically in Jenein Nord adding those into production and drilling more wells in Jenein Nord where Pioneer today has 100% working interest.
We believe that will go to 50% upon the completion of the development planning as ETAP backs in for their share of the development. However at 50%, it can have a significant impact on Pioneer.
We mentioned in mid-October in a press release, we had made two discoveries that tested approximately 5,000 barrels a day. We are please to announce a third well that actually itself tested over 5,600 barrels a day.
So, that now we can say over the last three discoveries they have averaged a testing at a combine rate of over 10,000 barrels a day. Again, very significant volume and relatively quick tie-in.
The production facilities that are being put in place should be in place to begin at least production of wells probably mid-November or latter part of November. In the early stages, we will be producing some volumes of oil, but most likely we won't have any total sales line, in other words cargo size availability of oil until the early part of 2008.
We are going to have capacity of 10,000 barrels a day, currently in other words, here at the end of November increasing to about 20 by the time we get to the second half of 2008. And in a couple of areas I will show on the next slide, we have substantial 3-D shoots underway that will be the linchpin for future drilling.
Adam, which is the block operated by ENI, we had a discovery there called Nadir, 4,000 barrel a day well and that's quick to get on production because of the existence of facilities on that block. And finally, Anaguid, where we have taken operatorship is the site of a 3-D program as well in 2008.
Drilling still continues. We have our own H&P rig, drilling wells in Tunisia.
We have two wells planned in Jenein Nord. One is actually drilling as we speak and another well planned in Adam to complete this year's campaign.
And today's view is that we would have about 15 to 19 wells to drill next year, again adding to the productive capacity of these three blocks. We are working hard on the possibilities of a longer term gas sales program.
What's needed is a new expanded pipeline from the southern gas areas into northern markets, and so we're working with conglomeration of several operators in the area to decide whether or not we can provide enough gas reserve and a project to move gas to northern markets. That's a project that will probably not have much impact though until the early part of next decade.
On 17, again it is more of a cartoon map regarding prospectivity and clearly the map shows... number one, we have had a great deal of recent activity but it has substantial upside and running room in this country.
Specifically, you can see on slide 17 the black triangles. Those are 10 recent discoveries in 2007, seven of which are in our operated 50% after back end block Jenein Nord, two in Adam and one in BEK.
You will also see that the three wells to be drilled are shown in yellow for the remaining part of 2007. And importantly, the red blobs here really show prospectivity, prospects and leads to future drilling.
I mentioned substantial seismic shoots going on. You can see in the Southwest part of Jenein Nord in the orange, we have a existing 3-D shoot going on, in addition to which we have the same in the northern block called Anaguid and we hope to be able to reap the benefits of those 3-D seismic shoots and begin further drilling as we get into the latter part of 2008.
So Tunisia is really doing some good things for us and it's going to be a major contributor to number one, F&D cost improvements but also production growth, and has our strongest economics in the company. Slide 18, South Coast Gas, we announced at the end of the third quarter that we've commenced production from this project from four wells.
There is one additional well that we are anticipating coming on here probably near the end of the year. There was a problem with the subsea control panel on this well and that is in the process of being replaced, and so we anticipate that well can be turned on by the end of the year and we will increment production by doing so.
Our 45% of the production in the fourth quarter from these wells is expected to be about 15 million cubic feet equivalent per day to 20 million cubic feet equivalent per day given the fact we have pretty substantial condensate production from this field as well. Of course peak production from this project won't come until the latter part of '08 or in '09.
That's because one of the major wells for contributing to the project is a gas injection well in the Sable oil field, and the Sable oil field of course has been extended in terms of its life due to the high oil prices that are in the market today as well as excellent performance of the wells. And so its the case that these initial five wells will really be on production until the decision is made to shut the Sable oil field and begin to produce what's now re-injected gas.
We are separately evaluating whether it might make sense at some point to simply produce Sable oil and gas simultaneously. That would need some work to be done at the gas to liquids plant onshore in order to be able to handle the incremental liquids.
But it may be a lower cost alternative as oil production declines looking ahead. Finally, the gas prices here as Scott already mentioned are tied to Brent and so we're getting strong gas prices for realizations.
Slide 19 Oooguruk, of course we have been very busy putting this project up to schedule. It's doing well.
We now have the rig installed and we expect to start drilling in December. Recognizing the first wells will be disposal wells and injection wells typically.
That means we really won't be drilling... producing wells until the first half of 2008 and we anticipate that we won't really see sales of oil to about midyear as expected, the reason being of course we have to fill the pipeline on the one-hand in addition to which in the cold temperatures there, we have to be very sure of our full assurance and so that's kind of the timeframe that we've been thinking that we'll see first sales of oil out of Oooguruk probably mid 2008.
Peak production of course as we continue drilling won't come until 2010 at about 15,000 to 20,000 barrels a day on a gross basis. It is a substantial resource.
We'll just start booking some of the reserves here at the end of the year, but there is substantial booking potential as we see 70 to 90 million barrels of gross potential from the existing field. And there are expansion opportunities.
There are contiguous reserves, we think that can be reached from this island, and in particular one area of approved reserves that we know can be reached from extended reach drilling from the island that could have a substantial impact, but that's down the road for us. On slide 20, our cosmopolitan.
This of course is an appraisal well offshore the Cook Inlet. We're drilling an extended undulating horizontal well from the shore to a resource about 2 miles offshore.
It's really proved to be about 30 to 50 million BOE on a gross basis. Pioneer now owns 100% of this resource.
The well has been very successful to-date and that we've essentially reached 3-D, we've drilled about 5,800 feet of lateral section and we are in the process of working towards completing this well and putting it on what would be several weeks of testing. So the next time you hear from us on this, will probably be the first quarter when we can report about results from the drilling of this well.
So with that, I'll pass it over to Rich for a discussion of the financials for the quarter.
Richard P. Dealy - Executive Vice President and Chief Financial Officer
Great. Thanks Tim and Good morning.
As you've heard from Scott and Tim, the operations are going very well. Production is continuing to grow out of our core areas and as a result, our financial results are continuing to improve.
For the third quarter, we did report $102 million of net income or $0.84 per diluted share. This is our highest quarterly net income that we have reported thus this year.
And so a good trend moving forward. Included in net income is discontinued operations, which are associated with our Canadian results for the quarter that was $9 million or $0.07 per share, so on a continuing operations basis, we had net income of $93 million, or $0.77 per share.
The quarter did include two items, I think are worth noting. First, for the second quarter in a row, we were able to sell a portion of our Alaskan Petroleum production tax credits, which resulted in an $18 million after-tax benefit to the quarter, or $0.15 per diluted share.
The quarter was negatively impacted by higher DD&A rate in the Uinta/Piceance basin area where we had a charge of11... incremental charge of $11 million after-tax or $0.09 per share.
This is primarily related due to the low quarter end Rockies prices where it was $0.60 per Mcf as spot prices into the quarter, which had the effect of reducing our crude reserves downward in that area, and had... and therefore increasing our depletion that we recognized for the quarter.
As we look forward into the fourth quarter, gas prices in the Rockies have improved and have averaged about $4 per Mcf in October. And so currently, I don't anticipate seeing that type of DD&A charge in the fourth quarter, and really expect those crude reserves to come back at $4 gas price, where we substantially get those reserves back into our reserve basis at year-end for fourth quarter depletion purposes.
Turning to slide 22 and talking about prices in the green bars. There you can see oil prices are up 16% to $70.27 for the third quarter, as compared to the second quarter.
This is due to primarily the continued rise of oil prices over the quarter. NGL prices are similarly up 9% to $42.48 per barrel from $39.11 in the second quarter, also the benefactor of higher oil prices causing NGL prices overall to move up.
Looking at the blue bars, we look at gas prices. Gas prices for the quarter were down 6% compared to the second quarter to $7.11 per Mcf.
As most of you are aware, obviously we have had weaker gas prices, given the high level of storage that we are experiencing today and so that has put weakness on our gas price realizations. We have benefited from hedges as you can see at the bottom there to the tune of $6 for the quarter, related to the hedges that we had in place with respect to gas.
Turning to slide 23 to look at production costs, if you look at the second quarter bars and the third quarter 2007 bars, you can see that they are fairly flat by category from period-to-period. We did see a slight increase in our base LOE.
This is primarily related to our South African Sable oil project that has a large fixed cost component of LOE associated with it. And as that production declines, our per BOE basis continues to go up a little bit.
Also impacting the quarter, we had a slight increase in labor cost in our field operations and then also our salt water disposal cost have increased, as we have drilled some wells further away from infrastructure, and so we have had higher transportation cost associated with that salt water disposal. Turning to slide 24, we look at our hedge position, as of November 2nd.
You can see on the slide, we have got lots of detail on what our hedge position is. This does include those hedges that we plan to assign to the Pioneer Southwest Energy Partners at the close of the IPO.
And those are reflected on slide 34, but I think the important thing to note here is that we have added 80 million cubic feet a day of 2008 gas swaps between $8.25 and $8.50 per Mcf further protecting our capital budget, and cash flow stream for 2008. In addition, we have added some first quarter 2009 gas hedges above $9.27 per Mcf and we did put on a couple of oil contracts for '08, '09, north of $70 per barrel.
Turning to slide 25 and changing focus, look at fourth quarter guidance, production for the fourth quarter excluding Canada is expected to be between 1,01,000 and 106,000 BOEs per day reflecting the continued growth in our Spraberry, Raton, and Edwards projects, as well as bringing on line this South Coast Gas project that Tim and Scott mentioned. Production cost for the quarter is expected to be $11.75 to $12.75 per BOE.
This is $0.25 per BOE higher than the last quarter guidance we provided. And really with the increase in higher oil prices, we do expect production taxes to go up since they are directly correlated and that's making, or causing the difference...
or the increased in net per BOE metric. Exploration and abandonment cost for the quarter are anticipated to be $40 million to $70 million.
It is primarily driven by activity that Tim mentioned in Tunisia in our South Texas Edwards Trend play where we both have Seismic and lower risk exploration extension wells being drilled during the quarter. The DD&A is expected to be between $10.50 and $11.50 per BOE for the quarter assuming that commodity prices stay in the range that they are running today.
G&A is expected to be $30 million to $34 million for the quarter. Interest expense is expected to be $38 million to $42 million, increased from the second quarter primarily as no longer capitalizing interest associated with the South Coast Gas project that we bought online and given that we have a higher debt level at the end of the quarter, until we close our Canadian sale on MLP IPO that we'll be able to allow to reduce debt at that point.
Cash taxes for the fourth quarter expect to be $5 million to $10 million principally related to Tunisia, as that's the only area that we're really paying cash taxes today. Then our effective tax rate overall is expected to be 40% to 45% consistent with prior quarters.
If you look at slide 26, we do provide a number of slides in the back for your additional information related to the third quarter, as well as modeling questions. So I encourage you guys to look at those and then at this point that really conclude our prepared remarks and we will open up the call for questions.
Question And Answer
Operator
[Operator Instructions]. And we will take our first our question from Ted Izatt with Bear Stearns.
Ted Izatt - Bear, Stearns & Company
Hi, congratulation on your quarter.
Scott D. Sheffield - Chairman and Chief Executive Officer
Thanks Ted.
Ted Izatt - Bear, Stearns & Company
: You're welcome. Hey on the...
and very good results. One of the issues Moody's had with their review is the organic F&D cost in North America, so you gave some guidance on your F&D cost, and so forth.
Where would you stand on that one issue?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, I think it's on that slide I'd talked to, Ted. It was $17 to $20 organic and if we take out as everybody knows, we do a lot of PUD drilling in Spraberry, so if you take out the PUD drilling and Spraberry, Raton it's $11 to $15, but most people calculate it in the $17 to $20 range.
Ted Izatt - Bear, Stearns & Company
Okay, okay great.
Scott D. Sheffield - Chairman and Chief Executive Officer
So it's down substantially from the last two years.
Ted Izatt - Bear, Stearns & Company
Okay, great. Thanks again.
Operator
And we will take our next question from David Tameron with Wachovia.
David Tameron - Wachovia Capital Markets
Good morning.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi David.
David Tameron - Wachovia Capital Markets
A question for you. Looking out into 2008 CapEx, I know it's a preliminary figure but, as you look out and go through the Board meetings, how do you compare your outlook today versus six months ago, meaning your CapEx are down from '07 levels, and you are still targeting the same growth.
How much of that is cost related? How much of that is getting over some of those...
some of platform installations type big projects you did this year. Could you talk a little more about?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, in general that slide pretty much outlined it. Oooguruk and South Africa were two big expenditures in the last two years of high impact exploration in the last two years was big.
It's going to zero and in Canada, it's been running $70 million, $80 million, $90 million per year. And so its going to zero.
That the... most of the reduction of about of about $400 million to $500 million.
So, we are pretty much keeping spending fairly close, maybe a tad less, but fairly close to what it is on the fourth core onshore assets; Spraberry, Raton, Tunisia, and Edwards, and then follows it up with the Oooguruk drilling, which Tim mentioned will start up here late fourth quarter. So with gas prices...
gas prices can easily swing between $7 and $9. That's why these recent uplift in the last two weeks has been down in the last two days was the reason we've put on some more hedges, so I think we're about 35% hedged on natural gas for 2008, so that helps protect the budget.
So we feel pretty confident that cash flow can be $1 billion or higher in this marketplace and that we can limit the CapEx to about a $1 billion. The key swing factor to any increases will be continued success in Tunisia and also Edwards exploration wells.
David Tameron - Wachovia Capital Markets
Okay. And year-over-year what's your general expectations on and what you're building on the cost side?
Scott D. Sheffield - Chairman and Chief Executive Officer
On the cost side, drilling cost are going to stay pretty much flat because we contracted almost all of our rigs, mid to late 2006 to about mid to late 2009, still cost we've got all of our bids in already, it's flat. I know Tim and Danny, I don't know if you have any update on our...
on the services bids, you'll want to comment on those?
Timothy L. Dove - President and Chief Operating Officer
We've currently seeing, Scott, a reduction in the public services bids in the negative of 10% to 15% compared to 2007.
Scott D. Sheffield - Chairman and Chief Executive Officer
Okay. So those three components probably make up 80%, 85% of the typical well in all of our four core onshore areas, so this issue be fairly flat to maybe down.
David Tameron - Wachovia Capital Markets
Okay. And one question then I'll let somebody else jump on.
The Barnett transaction, can you talk a little about the structure of the deal, who you brought the acreage from, what the royalty terms are, lease terms, can you give us anything that you care to share with us?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, obviously we didn't mentioned the sellers name because it's an agreement between the two parties. We've been targeting...
we can't compete with the top three or four producers, I mean the Barnett Shale, so we're targeting two or one acreage, which is very good economics. As you can see most of the acreage that we've acquired early this year then also in this transaction is focused on Tier 1.
A typical well will come in about $2 million to $2.5 million a day, so still very, very good economics and an $8 price tag. What's interesting, I don't if Tim mentioned this, was that a lot of this acreage is held by production, so we don't have to go out there and start 10 rigs, 15 rigs.
So it's one thing very, very positive. So it's a very good transaction for us.
We are targeting transactions as I have mentioned below, the radar screen of the top four producers and the Barnett Shale, so we can help build the core position.
David Tameron - Wachovia Capital Markets
Okay. Was that a public or private company you brought this from?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, I cannot say.
David Tameron - Wachovia Capital Markets
All right, thanks.
Scott D. Sheffield - Chairman and Chief Executive Officer
Okay.
Operator
And our next question will come from Robert Christensen with Buckingham Research.
Bob Christensen - Buckingham Research
Yes, good morning. Along the same lines...
Scott D. Sheffield - Chairman and Chief Executive Officer
Good morning.
Bob Christensen - Buckingham Research
Good morning Scott and everyone. Your plans for the Barnett Shale in terms of well count, you have said you participated in five wells with Devon but, with 150 locations in one area and 400 in another, what kind of well count can we expect to see, let's say '08, '09, 2010.
What's the ramp in your vision?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, I think you are going to see a more ramp up. We are ramping up a lot more than the five, six wells that we drilled this year, but due to the fact that we are committed to spending $1 billion in cash flow, it's going to increase a lot next year.
But we don't need... the fact is you can look at our production growth, if our onshore assets between our four key areas are up 21% of the last 12 months, and we still haven't brought on our big gas well in South Africa.
We haven't brought on Alaska and we haven't brought on Jenein Nord. We don't need to deliver a bunch of more production growth for 2008, so $1 billion to Barnett Shale is really key for growth 2009 to about 2013, so I think you'll see us ramp up a lot more activity in those four years versus the early years, Bob.
Bob Christensen - Buckingham Research
And another Barnett, if I might. I see that a little yellow down there in Summerville County.
It looks like that's Tier 2. When would you plan on drilling wells in that Tier 2 area?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. Some of our acreage is pretty close to...
we can't really tell it but pretty close to Quick Silver's acreage. They are moving toward us.
They are being very, very successful. So we're basically shooting seismic now as we speak.
So anticipate little to no drilling in 2008 there.
Bob Christensen - Buckingham Research
And if I might ask one more around the world there Tunisia, what kind of exploratory work in '08 perhaps in Anaguid or BEK outside of where you've been drilling so successfully? Any wild cats in those two concessions?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, Tunisia where we've drilled this year, believe it or not, and Jenein Nord has been a exploration well from accounting standards, so we do not anticipate being 7 for 7. So we are going to probably do some drilling in Anaguid.
It also extend the boundaries of Jenein Nord in all directions in 2008, so it's... we're going to step out slowly, be very careful and primarily make sure we drill bumps.
Bob Christensen - Buckingham Research
Thanks. I'll get back in line.
Operator
And we'll move now to Jeff Hayden with Pritchard Capital Partners.
Jeffrey Hayden - Pritchard Capital Partners
Hi guys. Not to beat a dead horse here but jumping back to Barnett Shale with this acquisition, could you give a little more color on the additional 37,000 gross acres in the expansion areas, kind of what counties those are in?
What's your working interest there? And then I thought it was asked, I think I missed the answer.
What's your royalty on this acreage?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. I will let Tim...
I will turn it over to Tim or Bill Hannes. Bill, you want to say anything else over above what I have said?
Unidentified Company Representative
Yes, the additional acreage we picked up is really in counties... Erath County, Bosque County those type of counties that as you know there has been mix success in those areas and we are kind of watching sitting back and seeing how that acreage develops.
The royalty is as you expect across this with so much acreage that we picked up is different across all of that, but in average I'd say it is around 80%.
Jeffrey Hayden - Pritchard Capital Partners
Okay. And any drilling obligations on kind of that 37,000 non-parker acres, lease exploration issues, any thing like that?
Timothy L. Dove - President and Chief Operating Officer
Well, yes, we did pickup... there will be expiring leases and we are going to mange that.
We don't anticipate any substantial expiring leases in the next 12 to 18 months. So we feel like we have got that pretty well under control and can balance that within the budget we have.
Jeffrey Hayden - Pritchard Capital Partners
Okay, great. Thanks a lot guys.
Operator
And our next question will come from Rehan Rashid with Friedman, Billings, Ramsey.
Rehan Rashid - Friedman, Billings, Ramsey
Good morning, Scott.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hey Rehan. How are you doing?
Rehan Rashid - Friedman, Billings, Ramsey
Good, great quarter.
Scott D. Sheffield - Chairman and Chief Executive Officer
Thanks.
Rehan Rashid - Friedman, Billings, Ramsey
On the leverage front real quick. What is it after the acquisitions that were announced this morning please?
Scott D. Sheffield - Chairman and Chief Executive Officer
I think pro forma for the third quarter were about 46% with proceeds from Canada and also from the MLP will be around 44% to 45% at year end and we're targeting a... we still have a target between 40% and 45% long-term and maintaining financial flexibility.
Rehan Rashid - Friedman, Billings, Ramsey
Because the target is 40 to 45%.
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes.
Rehan Rashid - Friedman, Billings, Ramsey
Okay. Going back to Tunisia, real quick on the...
could you remind again what's the 3P upside or call it the resource potential there?
Scott D. Sheffield - Chairman and Chief Executive Officer
Our last posted number was over a year ago. I think we only posted about 50 million barrels.
It's significantly above that. We have not given an updated number.
We are working on the gas project condensate. The typical sides of a project that we drilled this year is anything like 2 million barrels, 3 million barrels on the low side up to about 20 million barrels to 25 million barrels on the upside.
We did have a substantial number much, much higher than our 50 million barrels we posted over a year ago.
Rehan Rashid - Friedman, Billings, Ramsey
Got it. Okay.
Last question on Edwards' trend. Maybe, if you could walk us through how '08, and '09 could look like in terms of both drilling activity and reserve bookings, and I remember TCF kind of 3P potential on this front.
Could you maybe give us a feel for what's been the progression in figuring out some portion of that?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, I think our last.... it's probably about 2 or 3 quarters ago, we gave the range of about 150 to 350 BCF discovered, and that excludes the two recent discoveries, which are in the 25 to 75 BCF range, most two recent ones so we are moving toward our number of getting closer and closer to half of TCF of resource potential with more upsides, so we'll continue to see growth.
As Tim mentioned, the new frac isolation pack or frac jobs [ph], are working very well. So we continue to see it growing significantly over the next three years.
Rehan Rashid - Friedman, Billings, Ramsey
Do you anticipate most of the booking this year, next year '09?
Scott D. Sheffield - Chairman and Chief Executive Officer
We had a good amount in last year. We will have a good amount this year.
Rehan Rashid - Friedman, Billings, Ramsey
Okay.
Scott D. Sheffield - Chairman and Chief Executive Officer
We anticipate it's pretty much pro-rata. They'll definitely be a good amount in 2008.
Rehan Rashid - Friedman, Billings, Ramsey
Okay, okay. And in terms of tax implications.
Have you mentioned in your presentation that Barnett was like kind exchange. How about Spraberry?
Scott D. Sheffield - Chairman and Chief Executive Officer
No, it was not due to the size of our MLP, the Petrogulf transaction and the Barnett Shale transaction will cover alike on exchange.
Rehan Rashid - Friedman, Billings, Ramsey
Okay, all right. Thank you.
Operator
And we will now move to John Herrlin with Merrill Lynch.
John Herrlin - Merrill Lynch
: Yes, hi.
Scott D. Sheffield - Chairman and Chief Executive Officer
Hi, John.
John Herrlin - Merrill Lynch
Three quick ones. How many wells do you expect to be drilling in the Edwards trend next last year?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, Tim. What's our latest number?
Timothy L. Dove - President and Chief Operating Officer
I think the number is in the neighborhood of 30 to 35 wells.
John Herrlin - Merrill Lynch
Okay. With reserve bookings, you gave us a sense of what refinery cost were and the percentage of the adds.
Could you break them down by different play type?
Scott D. Sheffield - Chairman and Chief Executive Officer
It's pretty much scattered among those four areas. Tunisia...
of the four, Tunisia and Spraberry are two biggest adders followed by Edwards and then Raton. I'd rather gave out exact number in January, John.
John Herrlin - Merrill Lynch
Okay. That's fine.
Scott D. Sheffield - Chairman and Chief Executive Officer
Based on pricing, any pricing changes.
John Herrlin - Merrill Lynch
Sure, that's fine. You've been doing some more workovers [ph] in recent quarters.
Should we expect that trend to continue?
Scott D. Sheffield - Chairman and Chief Executive Officer
Tim?
Timothy L. Dove - President and Chief Operating Officer
We had a very, as you said John intensive workover campaign here this summer and specifically in several of our core areas. In fact if you see the slide that Richard had shown in there on slide 23, it was up to about $0.85 per BOE.
And then $0.83 in the fourth quarter. Typically, those are our two big quarters for workovers.
It tends to come down in the fourth quarter, if you look historically.
John Herrlin - Merrill Lynch
Okay. I was just wondering if there was change.
Last one from me. In the past you have mentioned other kind of germinal CBM projects.
Any sort of updates with any of those projects?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes, John. We are continuing to watch our Uinta/Piceance projects specifically Columbine Springs, Castlegate, Lake Creek.
We have essentially finished all of the drilling and all of the construction of the pilot projects in these areas and we are going to be watching here at the end of this year into 2008 for well performance, because right now having completed the drilling, we can take a look at the dewatering and therefore the potential increases in gas from the areas and make some decisions as to where we go, so 2008 is the year we should see results and make some decisions.
John Herrlin - Merrill Lynch
Thank you.
Operator
And we now have a follow-up question from Robert Christiansen with Buckingham Research.
Bob Christensen - Buckingham Research
Yes. A question on the Edwards again.
How many exploratory wells in 2008 do you contemplate there?
Scott D. Sheffield - Chairman and Chief Executive Officer
Chris, you got a hang on that.
Chris J. Cheatwood - Executive Vice President, Worldwide Exploration
Yes. I'd say probably around five exploratory wells out of that 30.
Bob Christensen - Buckingham Research
And how many did you drill this year. I am just trying to...
it looks like two or three may be?
Chris J. Cheatwood - Executive Vice President, Worldwide Exploration
Yes, I think that's right.
Scott D. Sheffield - Chairman and Chief Executive Officer
Two or three, that's right. Remember Bob this year was the year we said we are going to hold off on the exploratory drilling while we get the 3-D done.
And some areas where we are going to really focus on development drilling in areas we had 3-D with the idea of making sure we are taking our best shots when the 3-Ds are available.
Bob Christensen - Buckingham Research
You said 45% of the 900 square miles is in. Any preliminary indication and any number of prospects kind of kicking up at you?
Scott D. Sheffield - Chairman and Chief Executive Officer
Well, it's hard to say number of prospects, but I'll just say that in some of the new areas where we have gotten the 3-D, we are seeing things that look very positive.
Bob Christensen - Buckingham Research
And one final question. I hope it's not taken the wrong way but some customers has been recently asking me about Iraq and Pioneer venturing into Iraq, maybe like Hunt ventured into Iraq.
Would you care to comment on that?
Scott D. Sheffield - Chairman and Chief Executive Officer
Yes. We've not been into Iraq or we are not looking at signing up something in Iraq at this point in time.
Security has to change significantly, Bob.
Bob Christensen - Buckingham Research
Thank you.
Scott D. Sheffield - Chairman and Chief Executive Officer
For us to even consider it.
Bob Christensen - Buckingham Research
Thank you.
Operator
And sir, you have no further questions. I would like to turn it back over to you, Mr.
Hopkins for any closing remarks.
Frank E. Hopkins - Vice President, Investor Relations
Thanks for joining us on the call and please if you have any follow-up questions, give myself, Scott Rice or James Meier a call today.
Operator
This does conclude today's audio conference. Thank you for your participation and have a wonderful day.
Scott D. Sheffield - Chairman and Chief Executive Officer
Thank you.