National Fuel Gas Company (NFG) Q4 2007 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the FourthQuarter 2007 National Fuel Gas Company Earnings Call. My name is Lacy and Iwill be your operator for today’s call. At this time, all participants are in a listen-only mode. Wewill be facilitating a question-and-answer session towards the end of thisconference. (Operator Instructions). As a reminder, this conference is beingrecorded for replay purposes. I would now like to turn the presentation over to our hostfor today’s call, Mr. Jim Welch, Director of Investor Relations. Pleaseproceed. Jim Welch Thank you, Lacy, and good morning, everyone. Thank you forjoining us on today's conference call for a discussion of last evenings'earnings release. With us on the call from National Fuel Gas Company are PhilAckerman, Chairman and Chief Executive Officer; Dave Smith, President and ChiefOperating Officer; and Ron Tanski, Treasurer and Principal Financial Officer; andfrom Seneca Resources Corporation, Matt Cabell, President. At the end of the prepared remarks, we will open thediscussion to questions. Also, since this call is being publicly broadcast, we remindyou that today's teleconference discussion will contain forward-lookingstatements as defined by the Private Securities Litigation Reform Act of 1995. While National Fuel's expectations, beliefs, and projectionsare made in good faith and are believed to have a reasonable basis, actualresults may differ materially. These statements speak only as or on the datewhich they are made, and you may refer to last evening's earnings release for alisting of certain specific risk factors. With that, we'll begin with Phil Ackerman. Phil Ackerman Thank you, Jim and good morning. Our quarter and full years'numbers are great at a $1.84 and $3.96 per share. We are raising our guidancefor 2008 and National Fuel has great money-in-the-bank type assets, such asCalifornia Heavy Oil, the undeveloped Devonian sands and pipeline and storage. Standing on the base of the utility, these should enable usto grow earnings and increase dividends for years to come. On top of that thewild card, that is the Marcellus Shale, may provide us with a huge growthopportunity if it can be successfully developed. In short, we had another great year and we are capable ofhaving many more. However, these are interesting times we live in. The companyhas nearly doubled the performance of the S&P 500 over the last one, threeand five years; periods of time when the S&P achieved returns that mostinvestors would gladly take over the next five years. And yet certainshareholders claim our Board of Directors, somehow has not adequatelyrepresented shareholders interest nor acted quickly enough. Although time maybe money, haste for its own sake is seldoma virtue. Certain shareholders address the Board at our February 15, 2007annual meeting, strongly suggesting that we sell our Gulf of Mexico assets andform and MLP of our Californiaproperty. Our history since February reinforces our belief, thatexperienced operation and management of assets is generally preferable to aquick sale or financial engineering. In February, our Gulf of Mexico production was $40 million cubic feet equivalent perday, today it is $47 million. In February the price for California Heavy Oil was $50.61,today it is over $80. Had we acted in haste, both these significant profitenhancements would have been lost to shareholders. Most of you are aware that NewMountain Ventures has filed proxy solicitation materials; and I know that youmust have many questions about the content. A complete discussion of the weaknesses of their claims isbeyond the scope of this call, since a fair critic will require a lengthyfiling of our own. Sufficed to say that every member of senior management hasan overwhelming interest in the performance of our stock, through both optionsand direct share ownership. In short, if New Mountain's claims wereconsistent with our own knowledge and experience, we would be implementingthem. Yesterday our utility, National Fuel Gas Distribution Corporation filed apetition with the Pennsylvania Public Utility Commission, seeking to ensurethat New Mountain complies with that state's lawsregarding acquiring control of the utility. Pennsylvaniautility law requires that if an entity is pursuing a controlling interesteither directly or indirectly in a regulated public utility, then it must firstsecure a certificate of public convenience. The requirement is designed to givethe public and the Public Utility Commission an opportunity to determine if anentity is qualified to manage a utility. Our Pennsylvania utilityserves more than 200,000 customers in western Pennsylvania, and has provided the safe andreliable natural gas service to its customers for more than 100 years. Thecompany is requesting that the PUC commence an investigation to assure that noviolations of the public utility code have occurred. As I indicated on our last earnings call, we've been workingwith Morgan Stanley for months, on evaluating whether the MLP structure isappropriate for our pipeline and storage asset. We recognize that at least intheory there are inherent tax advantages to the MLP structure. However in ourcase the tax leakage caused by the relatively low tax basis of our midstreamasset erode much of the benefit to National Fuel. An additional and significant concern to us and to our stateregulators is the needs of our state utility customers, because of theintegration of our pipeline and our Utility. As most of you know, the Pipelineand Storage operations of Supply Corporation and the Utility operations ofDistribution Corporation are highly integrated and mutually depended upon eachother. They share common personnel and from a practical perspective areoperated as one system. Considering the severally tax impacted benefit to thePipeline and what we perceive is a potentially significant risk on the Utilityside, we are unconvinced that the Pipeline MLP makes sense from the totalshareholder perspective. To the best of our knowledge, none of the MLPs createdto-date contains midstream assets that are as highly integrated within LDC asours are. We are discussing these concerns with our MLP Council, as well as ourstate regulatory attorneys. We will be reviewing the subject again with ourBoard in near future and anticipate a final decision at that time. We are also evaluating whether an MLP might work for certainE&P asset, particularly our Californiaoil properties. Our greatest concern in this area is sustainability. Given thenatural decline curve to the oil and gas properties, new long life reservesmust be constantly added to an upstream MLP, in order to merely sustain its gasdistributions, much less [plough] them. Given the significant premiums being paid for long life MLPfriendly reserves, we are skeptical that upstream MLPs can be fueled solelythrough acquisitions over the long-term. Should our Appalachian acreage proveto be as prolific as we all hope, the development of that resource mighteventually sustain an MLP. But it is premature to count on that. During my time as a Chairman of National Fuel, I havefocused on board recruiting, and bringing a geographically diverse array ofobvious gas industry experts to the Board, including two former chairs of theAmerican Gas Association, the former chair of Questar, and a former CFO of KeySpan,and resident of Southwestern New York, who actually made his living as an Appalachianproducer before National Fuel bought his company. These people have made the NFG Board, the best and strongestin the industry. Composed of people whose depth of experience permits them toquickly get to the heart of the issues, without a need for expensive explanation.These people have served their own shareholders well for a long period of time,and they have served our shareholders in an exemplary fashion as evidenced by ourstock performance and record earnings. I am optimistic about our assets, our people and our future.The paraphrase (inaudible), I can't wait until tomorrow because we get betterlooking everyday. With that I will turn it over to Dave Smith,

Thank you, Philip. And good morning to everyone. As Philsaid the three months ended September 2007, was yet another outstanding quarterand it capped an exceptional fiscal year for the Company. For both the quarterand the fiscal year, each of our major segments posted results that met orexceeded our expectations. Excluding non-recurring items, our 2007 earnings were 10%higher than they were in 2006. More importantly, even at the low end of ourguidance, we expect 2008 earnings will be at least 10% higher than they were in2007. The market has recognized and rewarded that strongperformance. As Phil said over the past year, National Fuel shares haveproduced a total return of 32%, twice that of the S&P 500. While we areproud of our accomplishments, we are certainly not content to rest on (inaudible).We continue to work diligently, to improve upon areas of concern, and to takeadvantage of opportunities to grow the company, with a view towards increasinglong term shareholder value. We expect much of that growth to come in thePipeline and Storage segment and also in the E&P segment. As I've said in the past, expansion of Pipeline and Storagesegment is a major priority for National Fuel. And the Empire Connector is thefirst of what we hope and expect would be a number of Pipeline and Storageprojects. We broke ground on the Empire Connector in early Septemberand expect to complete at least 20 miles by December 2007. The project is onbudget and on schedule. To-date we spent a little more than $20 million, and expectto spent a another $30 million by the end of this calendar year. We remain ontrack for a November 1, 2008 in service date. Looking beyond the Empire project, earlier this year SupplyCorporation held an open season to assess market interest in additional west toeast capacity. The results of the open season were very encouraging and led usto propose a new pipeline project; we're calling the West to East project,which would be a 324 miles pipeline from the terminus of Rockies Express at Clarington, Ohio to theMillennium pipeline in Corning, New York. The proposed pipeline, approximately 75% of which will bebuilt on existing [reservoir] would be designed to move approximately 550million to 750 million decatherms of Rockiesgas per day. It would also be able to accommodate volumes from local productionareas. In deed it would be laid through Seneca's Appalachian acreage and (inaudible)volumes arriving at lighting. As you know, there are many competing projects in this area,but we anticipate that the development of associated additional supply storagecapacity both by way have enhancement of existing storage and the addition ofnew storage, will set our projects apart from the rest. If all goes well, we hope to sign precedent agreements withpotential anchor shippers early in 2008. After that we'll complete our designand engineering analysis, and conduct a binding Open Season. We will keep youup to-date as the project progresses. Turning to the exploration and production segment, we'vetaken a number of steps that have strengthened Seneca and bode well for thefuture. First and foremost, we've added significant talent including our newPresident, Matt Cabell who you'll hear from this morning, and John McGinnis,our Senior Vice President of Exploration and Development, who we hired fromDominion and who has significant Appalachian experience. In Appalachia, we've added70 employees in the last year alone, including four recently hired geologists.We'll be adding three more this year. In short we are confident, that we areassembling the best team to move Seneca forward. As you know, we are pleased with the sales of our Canadianproperties not only because they did not perform to our expectations, butbecause we realized a sizeable gain. Perhaps more importantly, the sale allowedSeneca to focus more attention and where appropriate, more resources on areasof greater potential. Obliviously as is evidenced by the additional hires I notedpreviously, Appalachia is at the forefront ofthat potential. As a result, we have significantly accelerated our drillingprogram in the upper Devonian and will continue to accelerate drilling. But todo so on a considered, comprehensive and sequential manner that recognizes thecomplex geology of the region. In approach that was clearly validated by therecently completed 3P reserve study by Netherland Sewell. In addition, we have initiated activity on our extensiveMarcellus Shale opportunity. With a partner EOG, who from a number ofperspectives, including technical, financial and contributed acreage broughtthe most to the table. We are very comfortable with that decision, and Mattwill update you on the progress that has been made to date and our plans forthe next year. We also continue to refine our efforts in the Gulf of Mexico, and we've had some recent success. In thepast, we employed more of a shotgun approach to our exploration program. Wedrilled a large number of wells in different areas of the Gulf. While we've hadoverall success, overtime in recent years our finding cost have admittedly beenhigh, and we only occasionally developed an in-depth knowledge of a particulararea. Matt who has a great deal of experience in the Gulf, and whowas successful there heading up expiration programs at Texaco and Marubeniprefers more of a rifle shot approach, one that focuses on the areas where wehave expertise and where we've had past success. We are confident that with our new management team in place,with this different approach that we will lower our finding cost and improveour returns in the region. If we do not, as we did in Canada, we will revaluate ourentire position in the Gulf. Before turning the call over to Matt, I'd like to address ashareholder recommendation, that we sell our gas marketing company, NationalFuel Resources, because they suggest it is non-core. Simply put, we disagreeand can also assume the recommendation is based on a lack of understanding ofthat business and of NFRs activities. While NFR has indeed been expanding its business oncontiguous LDC markets to our ease, most of NFR’s business is highly integratedinto our utility and pipeline system. It is presently one of the largest, ifnot the largest retail marketer on our utility system, serving our own utilitycustomers and is the third largest customer on our pipeline and storagesubsidiary supply. In addition it is a large customer's [Empire]. Clearly it iscore, and the financial results of NFR have been strong, consistent andincremental to earnings. Those earnings have been achieved with modest capitalinvestment, and because NFR doesn’t speculate, with very, very little risk.Needless to ,say we have no intention of selling NFR. With that I’ll turn the call over to Matt for acomprehensive update of Seneca activities. Thank you.

Thanks Dave. Good morning. Let me start by saying thatfiscal 2007 was a good year for Seneca Resources. First of all, we increasedour U.S.production to over 39 Bcfe. Secondly, we sold our Canadian operations for $232million or $4.75 per Mcfe. And most notably, we continue to accelerate ourdrilling program in Appalachia, growing oureast division [proved] reserves by 32%. As we announced in our October 11th press release; in Appalachia we drilled 233 wells and added 33 Bcf of crudereserves. That’s five times our annual East Division production. We’re extremely pleased with these results, and plancontinued acceleration of our drilling program with 280 wells planned forfiscal ’08. While we do have aggressive growth plans, I must stress theimportance of balancing the increased drilling pace with detailed geologicmapping and continuous integration of new drilling results. We will continue toaccelerate our drilling pace at a rate, which will allow us to achieve that balanceand therefore maximize the value of our asset. In addition to our outstanding growth in the upper Devonian,we’ve now drilled three vertical wells for the Marcellus Shale and haverecently drilled our first Marcellus horizontal well, with our joint venturepartner EOG. The horizontal has been completed in fact with testing planned fornext week. So far, all indications are positive. For fiscal '08, we may drill up to 18 additional Marcelluswells, 10 of them horizontal. And with significant success we could do more. Weare also seeing industry activity in the Marcellus heating up, on trend to ouracreage, another operator has reported the results of their first threeMarcellus horizontal wells, with initial production rates ranging form 1million to over 3 million cubic feet per day, per well. Also in the October 11th press release, we disclosed theresults of Netherland Sewell's analysis of undeveloped, proved, probable andpossible reserves on our Appalachia acreage.As we pointed out in the release Netherland Sewell would only classifiedacreage as proved, probable or possible if that acreage was within closeproximity to wells with reliable production data. Therefore the majority of ouracreage was outside of the 3P area. Let me now address some important differences between thereport by Netherlands Sewell and the projections made by New Mountain.At the suggestion of New Mountain, I met with Schlumberger in Pittsburgh. I was toldthat Schlumberger had not been released by New Mountainto discuss their study. However, the Schlumberger manager was able to discusswhat the report was and what it was not. Although we would still welcome a copy of Schlumberger's studyand the opportunity to discuss it with them. It is apparent that New Mountain'sanalysis consisted of some simple calculations, based on Schlumberger's briefoverview, using very limited data. In the words of Schlumberger's manager,their study was a 50,000 foot view and was no way near a reserves report. While the Schlumberger overview could have driven New Mountainto invest in NFG, under no circumstances should we consider using this limitedanalysis as a guide for our Appalachian strategy. That said, we believe that there is great potential onSeneca's Appalachian acreage. And although it is hypothetically possible todrill 600 wells per year, it is not the way to create the most value. I know Ihave said this before, but it bears repeating, only through detail geologicwork and continued integration of drilling results, do we maximize the value ofthese assets, and thereby maximize value for our shareholders. Our strategy and development plan are based on ourproprietary data, our ongoing geologic work and the extensive knowledge andexpertise of our geologist and engineers. So long as we continue to follow ourstrategic plan, we will have great success in developing our Appalachianproperties. Let me continue by pointing out that Netherland Sewell'sestimated EUR per well is completely consistent with our drilling results. Infact their EUR estimates are simply an average of the EURs for Seneca'seconomic wells in each area. By definition, sub economic wells are left out,because only economic wells can be classified as spud probable and possible.Any operator will always have a tail of sub economic that are produced andthese bring down the average of the program. In most areas Seneca's EURs perwell are equivalent to or somewhat better than our competitors. I would also like to point out that, although in someprevious years we may have been less active than other operators, in fiscal2007 our Appalachian reserve growth was 32%, are higher than the average growthrate of most competitors over the last several years. In fact, our PDP reservegrowth alone at 20% was far ahead of the pack. Contrary to what some might lead you to believe, Seneca isone of the leading drillers in Pennsylvaniaand quite possibly the leading company in terms of 2007 Appalachian reservegrowth through drilling. Rest assured, we are constantly evaluating andmodifying our long-term strategy for Appalachia.As you can see, our growth plans are aggressive and our expectations are high. Moving on to the Gulf of Mexico.The highlight of our fiscal 2007 program was the drilling of the Highland 24L North well, and the subsequent developmentof the 2L field. Production commenced on October 18th, and we are currentlyproducing approximately 70 million cubic feet equivalent per day, which is 90million cubic feet equivalent per day net to our revenue interest, or 18% ofour company wide production. Over the past several months we've had many questionsconcerning our Gulf of Mexico business and I would like to take thisopportunity to briefly discuss how our Gulf of Mexicostrategy has changed. And why we intend to continue our operations in thisdivision. First of all, Seneca has a long history of profitability inthe Gulf of Mexico. Over a period of 17 years,we invested $960 million and had net positive cash flow of $1.3 billion. This17 year cash flow stream has an internal rate of return of 19%. Secondly, we have a very large 3D seismic database that hasallowed us to build a core acreage position on trend to our recent success.Finally, because of the results of the past several years have beeninconsistent; our Gulf of Mexico strategy haschanged, which Dave mentioned earlier, changed significantly from what it was ayear ago. Our strategy is far more focused and will leverage off ofour recent success. Our expectation is a rate of return that is competitive withother divisions and continued production growth from 2007 to 2008. For fiscal 2007, Gulf of Mexicohad total net production of 14.7 Bcfe, an 11% increase over fiscal 2006. In thefourth quarter, we produced 3.5 Bcfe. At today's rate of 47 million cubic feetequivalent per day, a full quarter of production would be equivalent to 4.2Bcfe or 20% more than the fourth quarter of 2007. Also, in the fourth quarter,we were the high bidder on five of our eight bids at the central Gulf of Mexico lease sale, all within our core acreageposition. Moving on to the West division, California continues to provide stable andpredictable production with excellent cash flow. Fiscal 2007 production was18.3 Bcfe, and we expect a similar production level for fiscal '08. For fiscal 2007, we drilled 57 new producers in California, includingproved undeveloped locations and Midway-Sunset acceleration wells. Theincreased at Midway-Sunset has begun toshow its effects with September oil up 360 barrels per day, versus May whenincreased steaming began. That's an 8% increase. To conclude my review of Seneca's fiscal 2007 results, Iwould like to discuss our year end approved reserves. Our total proved reservesas of September 30, 2007 are 491 Bcfe, as compared to 581 Bcfe on September 30,2006. The changes in reserves can be attributed to 47 Bcfe of production, 31Bcfe of a net negative revision, and 49 Bcfe from the sale of our Canadianoperations offset by 37 Bcfe of discoveries and extension. In the US,we replaced 90% of our production through drilling. But as I mentioned lastquarter, the reserve audit by Netherland Sewell resulted in a net 42 Bcfnegative revision or 7% of US of our reserves. As expect the Netherland Sewellrevisions were primarily in the west. Even with these changes including thesale of our Canadian operations, the net present value of Seneca's reserves atyear end has increased by more than $100 million since last year. With Netherland Sewell's initial audit behind us, we expectfuture company wide downward revisions to be rare and upward revisions tobecome much more common. Looking forward to the new fiscal year, I’m very excitedabout our program for 2008. We expect to continue to grow our US production, with 15% to 20% growth inAppalachia, 5% to 10% in the Gulf of Mexico, and flat to only a very slightdecline in California. Overall, the midpoint of our production guidance is a 4%increase to USproduction. Our refocused Gulf of Mexicoprogram includes several high-potential exploration wells on trend to ourrecent success. And as I mentioned earlier, we expect to increase our shallowdrilling in Appalachia to 280 wells, as wellas drilling up to 10 horizontal wells in the Marcellus Shale. Our proprietary database combined with the extensiveknowledge and expertise of our E&P team should continue to deliveroutstanding returns to our shareholders in 2008 and beyond. Now I will turn it over to Ron. Ron Tanski Thanks, Matt. I only have a few items regarding our earningsnumbers, before we take questions. Our reported GAAP earnings of $3.96 perdiluted share were $1.50 above the high end of the range of the guidance that Igave during our earnings call in August. Most of the $1.50 or $1.41 of thatamount came from Seneca's sale of the Canadian exploration and productionoperations. Approximately $0.03 came from lower than forecast operationand maintenance expense, and our utility and pipeline and storage segment.Higher than forecast prices on our efficiency gas sales made up $0.02 per share,and higher oil prices in the exploration and production segment made up afterremaining $0.04 difference between guidance and reported GAAP earnings. Our earnings release provides all the details for thequarter-to-quarter and year-to-year comparisons, so I won't spend time on thecall to repeat that information. Looking forward to 2008 earnings, we'veincreased our guidance to a range between $2.50 and $2.70 per diluted share. As I mentioned last quarter, the biggest driver of theincrease in earnings from 2007 to 2008 is increased commodity pricing afterhedging in our Exploration and Production segment. We increased the guidance range since our August call,because Seneca has layered in more hedges at prices higher than those embeddedin our base forecast. Our hedged volumes for fiscal 2008 are listed on page26th of the release. Using the midpoint of our production guidance, we now have50% of 2008 production hedged. Having more production hedged also required usto reduce the range of earnings sensitivity related to un-hedged productionlisted on page 29 of the release. We've also finalized our capital expenditure budget for2008. Our spending budgets are $59 million in the Utility segment, $146 millionin the Pipeline and Storage segment, between $151 million and $159 million inthe Exploration and Production segment, and $1 million in all other, for anoverall CapEx range of $357 million to $365 million. We made no major structural changes in the underlyingbusiness segments that should cause any analyst to change their underlyingmodel. We do however expect to receive an order next month from the New YorkCommission in our New Yorkrate proceeding. As we've previously announced, the Commission allowed us tohave an early implementation of our Conservation Incentive Program. Ourcustomers that install energy efficient appliances after November 1st, maybeeligible for rebate and we've listed those on our website. Any other ratechanges that are approved by the Commission will go into effect right aroundthe 1st of January. With that operator we are ready for questions.

(Operator instructions). Your first question will come fromthe line of Jim Harmon with Lehman Brothers. Please proceed.

Good morning. I have got three questions probably for Matt,and the first is if we could look at the Gulf of Mexico we've had a lot offocus on Appalachia. We’re seeing productiongrowth out of that region, but we haven’t really seen reserve growth, so what'sin your mind over the next 12 months to 18 months, are you going to be doingwith that region is it more of a production or will we see reserve growth?

That’s a good question, I guess the way I would look at howwe’re going to measure success, its going to be based on finding anddevelopment cost, and on the rate of return that we estimate for the wells thatwe drill over the course of the year. So, at the rate of capital spendingversus the production we’re going to have this year it might not be anysignificant reserve adding activity, but yet it’ll be a value adding activity.

Okay. Fair enough, second question on the rising gasenvironment and oil environment, you always get asking of this, it makes senseto hedge mines. And I know it took a while for you to get your ability to hedgeoil, and I was wondering if triple digit prices doesn’t make sense to lot morethan it, because I didn’t see any new hedges in last night's release.

I'm going to let Ron take that one.

Yeah we did have some new hedges from the last quartersrelease Jim, but as I mentioned on the call we have got 50% hedged right nowand I think as you say.

Oil?

Yes.

Okay. My mistake.

Yeah that's on page 26 of the release I believe.

We'll double check that.

Yeah, we’ve ran through those numbers and right now we areabout 50% hedged overall. And as you said given the rising prices right nowwe're comfortable with that.

Okay, oh it's possible; I miss something on a 30 pagerelease. Okay. The last question is, assuming everything hits all cylinders inAppalachia can Matt or anyone talk about what the infrastructure is, like youhandle the volumes and what would need to be done in order to make thatoperation as smooth as possible?

Well one of the continuous challenge for us is building thegathering system at a pace that will keep up with our drilling program, butit's not a challenge that can't be met, its just one that is very much part ofour emphasis.

Yeah I think Jim; this is Dave, on the upper Devonian itsjust kind of an incremental keeping on building it out. Certainly if the Shaletakes off like it might, we've already put in place the structure which wouldrevolve around a number of limited partnerships. And I mentioned previouslythat the main loss in this has been heading that up. Not only talking toSeneca, but to a number of other producers, and winding up what we need to doin order to, essentially run that as a separate business. Right now it's not needed with respect to the presentAppalachian production, but certainly if the Shale takes off, that's a businesswe'll be getting into. And we have all the regulatory work, all the corporatework, all the legal work lined up and ready to go.

Okay.

Jim let me just add this is Phil.

Sure.

Jim let me just add this as well. That if the shale takesoff as Dave says, it goes beyond near gathering. It's a different order ofmagnitude then and you wind up meeting takeaway capacity to get all that gascompletely out of the region, and then you are looking at some significanttransmission facilities as well.

Okay, great. Thank you very much.

Our next question comes from the line of Carl Kirst withCredit Suisse. Please proceed.

Hey good morning everybody.

Hey Carl.

Three questions, the first ones pretty easy today. I justdidn't get a chance to scroll down the numbers. Matt I think you had runthrough what the production growth expectations were by region could you?

Certainly, certainly. 15% to 20% on Appalachia; 5% to 10% onthe Gulf of Mexico; and flat to a slight decline in California.

Okay, great. The second question really was kind of onekeying off of Jim's and your answer to him with respect to the Gulf is, F&Dis certainly one of the metric that you are looking at to build value. Can youI guess two part for this question, with 2007 results here is it possible tobreakout F&D by region for the three remaining region? And two when you aresaying for the Gulf of Mexico as we look forward, can you help us out withwhere you think F&D should be if you are successful as we hope your.

Let me answer that last part first and say that $4 is ourtarget and with the high rates that we get in the Gulf of Mexico, $4 finding and development cost provides very economicproject. In terms of what are -- you are asking about what was our F&D.

The N&D by region right for '07.

I don't have that off the top of my head. In the Gulf itwould have been relatively high, but I should carry out that by saying that wehave significant probable reserves added in but not disclosed, but added in theHigh lsland 24-L area, which if you included those the finding and developmentcost wouldn't look too bad.

Okay. Actually, off of that, whether you want to, maybe theeasier question is just for the company as a whole on the [E&P] side, asyou look at your PV-10 calculation here for year end. In that calculation, youhave an estimate for what future development cost would be?

Not at my finger tips.

I could follow-up offline or get it --

[Scorning] around you are looking for it. May be you can goto the next question. [Multiple Speaker]

This needs some refinement Carl, because it has also all theP&A cost.

Okay.

So we're going to have work on, refine this a little bitmore.

We'll get back to you on that.

Okay. Fair enough. Last question was simply on the -- thoughthe west to east potential project coming up here. And I understand, from pastengineering and what the final size may or may not be. But, is it possible 324miles pipelines through that area, even though its non-existing right of way, Iwould think, it's not going to be a smaller project. Do you have any sort ofbookings of what size we might be talking about, whether or not that would thenrequire you to take on a partner or howshould we think about that?

Well we’ve been looking at 24 to 30 inch depending upon whatthe market calls for. It is very helpful to have the existing rates as yourecognize. And, you know Carl there are about 15, depending if you count theover the top projects, there are about 15 projects our there and certainly notall or most of those projects are going to move forward. So, we would not need to partner-up but, we are certainlynot ruling that out and we have had discussions with other pipelines and othersabout potentially partnering up. So, that certainly is something that we wouldconsider, although at this point we don't regard it as necessary.

Okay, that's helpful. And far as capital cost size should webe thinking of $1 million to $2 million a mile or could it be significantlyless than that considering the….

Estimates would range between $630 million and $725 million.

Okay.

With the whole thing.

Alright, that’s what that we were thinking. Okay, Iappreciate. Allright thanks guys

Thanks Carl.

(Operator Instructions). Our next question comes from theline of Becca Followill with Tudor Pickering. Please proceed. Becca Followill -Tudor Pickering & Co.: Hello, first question is on the Marcellus. What is yourdisclosure going to be on that? Are you going to disclose individual wells oryou are going to give us periodic updates or are you going to wait until youhave significant amount of information, what's is the plan there?

Well Becca, we recognized that all our shareholders areanxious to hear about our drilling results as soon as possible. While werecognize that, we've got to balance the value of that confidentiality with thebenefit derived by disclosing those flow rates and reserves. So, the play isbecoming very competitive, and I guess this is a long way, to say we don't knowyet exactly what we'll disclose.

Are you leasing at this point?

That again goes into that same very question aboutcompetitive issues and I guess what I would say is the success of the play iscertainly going to drive our leasing activity in our leasing plans.

Okay, thank you. Second question on you mentioned Phil thatthe rebuttal New Mountain, will take more lengthy document, I assume that youguys at this point are going to make another filing that rebuts New Mountain isthat correct?

That's right.

And the timing for annual meeting, would we expect that tobe in the normal time?

It will be in February.

Okay.

Well, the annual meeting, but are you asking Becca, when therebuttal would?

No, when the annual meeting is, I assume it's at the normaltime. And then finally back to the pipeline question, I think this is maybe thefifth or the sixth proposed pipeline that's coming for the terminus of Rockies, why does this project have a competitiveadvantage over the others?

There is at least five or six. And I mean number one, wewere at it very quickly, I think we might have been the first out of the box.Number two, we do have the existing rights, number three, fortunately becauseof our geographic area there is an awful lot of potential storage right onwhere we are proposing to lay the line. So, I think when you add all of that together, we're in arelatively good position, that's not to say, some of the other projects lookinteresting as well, but I think when you put it all together we're in a prettygood position and we'll know, we’ve been out talking with the customers at somelength for some time and we are coming fairly close to a conclusion.

Great, thank you. And then one last question on the New Mountainfiling that they made they talk about Schlumberger's PT10 value. Do you thinkthat that is an accurate assessment?

I think we've said right along and Matt said that we thinkit was a very cursory analysis, based on numbers I don't think they agree withours. That the numbers that they appear to use in terms of reserves per wellsimply don't agree with the reserve numbers that we come up with and with ouractual experience, it seems to have been based on a different portion of thebasin, and I wished that number was there.

I'll add one thing to Phil's comments back in, that is thatbeyond proved reserves as you will know and particularly when you get outsideof three 3P reserves and you are talking about perspective resources arecognition of risk is appropriate and required when you value those additionalresources. And I guess my question would be have they recognized that riskproperly.

Exactly, Okay. Thank you. And I'm sorry I have one morequestion, on the Californiareserve write-down I know there was an auditor taking a look at it, but whatwere the big pieces behind that significant change in the reserves?

The vast majority of it was a change in our recovery factor.

Okay. Can you give us metrics on from what to what?

I'm going to say from 80% to 70% and that's a roughballpark.

Okay, Great. Thank you gentlemen.

And if Carl is still on the line, the future CapEx that'sbuilt into our PV10 numbers is approximately $220 million.

And our next question comes from the line of Shneur Gershuniwith UBS. Please proceed.

Hi. Good morning guys. It's actually Chris. Most of myquestions have been answered, but I just have one quick one. Given the recentstrength in the stock, and healthy CapEx well for 2008, what's the status of yourshare buyback?

The share buyback remains authorized by the Board, thenumber of shares that have actually been bought back they are disclosed in the10-Q.

We didn't buy any shares during the last quarter, Chris.

No, for fishing around, I am just curious looking forward isthat something to kind of carry on or are you -- I mean, looking into thefuture at these levels, at these CapEx , I guess, the quarters buyback kind ofsomething that you're targeting?

Well, I guess, one way to look at it is, yes, share buybacksare competing use of capital and as Matt said if the Marcellus takes off, wewould be looking at using more dollars there and investing it in the groundrather than buying shares. But as I've sated before, with respect to the sharebuyback, we've got Board authorized targets and volumes and amount and pricingthat were not going to be disclosed beforehand.

Okay. Thank you guys very much.

At this time there are no questions in the queue. I wouldnow like to turn the call back over to Jim Welch for closing remarks.

Thank you, Lacy. At this point, we'll conclude our call fortoday. We'd like to once again thank everyone for taking the time to be with ustoday. A replay of this call will be available in about one hour on both ourwebsite and by telephone. And both will run through the close of business onFriday, November 16th. Our website address is www.nationalfuelgas.com.The telephone replay number is 1888-286-8010, using pass code 19287282. Thisconcludes our conference call for today. Thank you and good bye.

Thank for your participation in today's conference. Thisconcludes your presentation, you may now disconnect. Good day.