Pure Cycle Corporation (PCYO) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Pure Cycle Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, President and CEO, Mr. Mark Harding. Sir, you may begin.

Thank you. Thank you, very much. I'd like to welcome you all to our 6 months earnings call. Before we get started, I do want to begin by saying our hearts go out to all of our Boston shareholders. As with all of our earnings calls, we do have a slide deck for this. You can find that on the front page of our website at purecyclewater.com. And what I'll do is I'll try and note the transition of the slides for you. You'll have to click through that to pull up the slide deck and then I'll note the transition of each of the slides as I work through the presentation. At the very first slide -- or I guess the second slide, technically, is our Safe Harbor statement, statements that are not historical facts contained or incorporated by reference in this presentation, are forward-looking statements. Actual results could differ materially from those discussed or implied in these forward-looking statements. And I would refer you to our risk factors identified in our annual report. So now that we've got the Safe Harbor statement, really, I want to begin this by giving -- for those of you who may be new to the company, I'd like to provide a brief overview of our business before we detail our financial results. And we'll start that out by the next slide where we really identify the business areas of emphasis that we have. The primary business, really, is the acquisition, the development and the delivery of water and wastewater services to various users in Colorado. And some of those users are our municipal business, where we're providing domestic water and wastewater services; our agricultural operations, where we own significant land interest and the water associated with that in Southeast Colorado that we lease out our land interest to tenant farmers. Some of the more interesting activities more recently are our industrial water sales, where we're developing and selling water for oil development in the area. And then finally, I'll highlight some of our mineral royalty interest that we have relative to some property that we own and the mineral estate associated with that property. If you click to the next slide. It highlights our municipal water and wastewater services. Our municipal segment consists of, really, what we define as cradle to grave approach between acquiring the water rights as a real property asset, developing the facilities that divert that, that treat that, that store it, distribute it, ultimately collect it back and retreat that back, and then we operate and maintain those systems. Currently, the company serves a very modest number of single-family equivalents, and that's our unit of measure, is the amount of water that's typically associated with water delivery to a standard single-family house. We serve about 260 domestic water connections and about 160, 157 domestic wastewater connections. Moving to the next slide. One of the things that we've also sought to do is also make some additional investments to, in part, diversify ourselves away from our reliance on housing but also in part to move up the chain and vertically integrate ourselves, not only on the domestic water and wastewater side of the company and providing wholesale service, but also being able to control and have an interest in our residential land development on properties that we have an interest in. And so one of the things that we did was acquire some real property. A couple of years ago, about 930 acres known as Sky Ranch, this is a fully zoned master plan community. It's located along the I-70 corridor, right -- near an interchange, along the I-70 corridor. It's about 16 miles east of Downtown Denver. As you go straight across on I-70, it's zoned for about 4,400 single-family houses together with some commercial and retail properties, which aggregate to about 4,850 SFEs for us. What this represents is a tremendous opportunity not only from the land standpoint but also from the utility standpoint, where we'll provide wholesale water and wastewater service to this. We get 2 fee instruments in our municipal segment. We get a tap fee instrument, both for a water and a wastewater tap fee. Our current water fees are around $22,500. Our current wastewater tap fees are close to $5,000. So this represents a very attractive opportunity for us on not only the land side but also on providing domestic water, wholesale water and wastewater. And then we get the trailing revenues by providing wholesale water and wastewater operating services to it. If you take a look at the overall property and the number of lots that are zoned on them, deducting out the water rights that came with the property, our basis in the project is very modest. We have a basis of about $900 per lot in that. If you move to the next slide, it's been some time since we had anything positive to report on housing, I thought it might be useful to highlight some of the progress the Denver market had, had during 2012. This is some information that was accumulated by Metrostudy, but it really does highlight the strengthening residential home building market segment in the city of Denver. Annualized starts in 2012 were up about 55% from 2011. We have a data metric on where our price points are for this, the starter home market, which is really predominantly where our Sky Ranch property is zoned. And we'll provide the bulk of our product service with these, still about 40%, a little more than 40% of the overall market, so almost half of all new homes that are going to get built are going to get built in that starter home price points. And really, the most interesting metric is the inventory of finished vacant lots. What you have is a deteriorating inventory of vacant lots, mostly because there haven't been a lot of new projects brought online when housing sort of took its hiatus over the last 4 or 5 years. So we have a very low supply of finished available lots, and that's going to be one of the more sensitive areas and obviously one where the positioning of a well-placed property that's zoned and ready to go is going to be an attractive opportunity for us. Moving on to the next slide. This slide really kind of illustrates some of our facilities and our service areas. It shows the Lowry property, a little bit south of Sky Ranch, Sky Ranch itself, sort of the adjoining areas of Sky Ranch, some of our target service areas and some of the facilities that the company has developed. We show some facilities in blue where we show the Arapahoe County Fairgrounds. Some lines there that are kind of hard to see but ultimately bringing water along Quincy Avenue up on the access road to provide domestic water and then ultimately wastewater service. We also show where we would likely stand facilities to connect the 2 systems up from our Lowry system up to the Sky Ranch facility. We show some facilities that are from a neighboring water provider, the East Cherry Creek facilities that we negotiated an agreement with East Cherry Creek to be able to operate that system for industrial water deliveries. And then also, a bit of highlight of where some facilities that the company is working together with, several Denver area water providers to the South Metro Water Supply Authority in the WISE facilities, which is not concluded yet. It's just a project that we're evaluating, but where some of that infrastructure might logically go as well. If you move to the next slide. Our first-- this really talks a little bit about our agricultural operations, and this year marks the first year of us being able to receive revenues associated with our agricultural operation. As some of you are familiar with, we acquired a large portfolio of irrigated farmland on Southeast Colorado in 2006, and as a component of that, the sellers of that were having an earn-out provision on some of these agricultural revenues for a period of time. This year's first 6 months farming operations have netted the company about $670,000. So we're very delighted to actually take an active role in not only the management of these farm leases but also the income opportunities associated with that. The next slide. I do want to talk briefly about -- give you an update about the High Plains A&M group and some defaults that they had. As we are talking about our farm properties, our farm properties really, we are -- we acquired from the High Plains group. I want to highlight briefly what their default was, but I won't be able to really take any questions on this as we're still working through the defaults of this aspect with High Plains. And we are, in fact, in litigation with High Plains over this. So I'll be a bit sensitive to what it is that we know about, first and foremost, and then secondly, what I can talk about. What happened on this is, when we acquired these properties, High Plains A&M had some seller financing debts associated with that. The company acquired the property free and clear from High Plains. However, High Plains did have that debt, which was subject to some mortgages and some deeds of trust. And they were responsible for those mortgages and deeds of trust. They did default on the majority of those, really beginning in June, July timeframe of 2012. The company had an interest in this because we own the property subject to that. So we were incentivized to remedy in whatever capacity we could to make sure the company did not lose its ownership interest in the property. We had, had some collateral stock associated with that, making sure that they did not default on that. The company did sell that collateral stock. It was about 1.5 million shares in September of 2012. The company did terminate the property management agreement. So we were able to terminate that property management agreement a couple of years in advance of it maturing on its own accord. And subsequently, we're receiving the farm income associated with that. And then the company has been working through being able to purchase some of these High Plains notes with its own obligations. So we're working through that. We've negotiated approximately 75%, 80% of the notes associated with that and are working with the remaining few note holders to make sure that they are secure in that High Plains default. Moving to the next slide. I want to get back to a little bit about our farm operations, kind of give you a sense of what it is that our tenant farmers grow on our acreage. This is basically a region that is mostly feed-based crops. We have the majority of our lands planted with alfalfa. But we do have some corn. Some of that's sweet corn, but the majority of that's going to be feed-based corn, some sorghum and some wheat. So generally, most of the crops that are going to be growing down there are going to be grown for cow feeding operations in one form or another. Moving to the next slide. I want to talk a little bit about our industrial water sales. The area of interest that we're developing, our -- not we, but what is happening is really the development of the Niobrara Formation. And really, what makes the Niobrara Formation wells produce is the advent of the technology of horizontal drilling and hydrologic fracking. And so what they are able to do is release the oil, predominantly oil. This is a very liquid oil play. As much as 70%, 75% of the product coming out of the wells are going to be oil-based products or oil as opposed to oil. There is some gas, but mostly oil. And so each of these wells gets fracked, and they get fracked in multiple stages that the fracs use between 3 and 5 million gallons of water, depending on the length of the lateral and the number of stages of the frac. I think our experience has been that these are generally in the 4 million gallon frac range on some of these early wells. Some of the wells that they're fracking up in the Wattenberg Field, they'll have some that are at 3 million gallons. Some of them are going to be at 5 million gallons. So on average, we're seeing sort of a variety of types of amounts of water used per frac. The main focus in the Niobrara Formation, if you move to the next slide, on oil and gas, has been predominantly, I'd say, 50 miles north of us in what's defined as the Wattenberg Field. It's a very large geographic area in sort of Northeast Colorado, and the field is really looking at its boundaries still. They're trying to define how far out, how far north this goes, how far east this goes and ultimately how far south this goes. And one of the new areas of interest, primarily by Anadarko, Conoco and Carrizo, but there are others that have interest down in there as what is being defined as the new Southern Niobrara Field or Southern Wattenberg Field. And so we've got a number of players, those are the predominant players, but a number of players who have leasehold interest there and are drilling wells in the southern play to see how those results compare to the Wattenberg Field. Moving on to the next slide. This slide gives you kind of an illustration of why this is an interesting play for most of the oil and gas companies because it's not just confined to one particular formation. There are multiple formation potentials here. I think they've had very good results in the C bench of the Niobrara, I think extending into the B bench of the Niobrara, some good results in the Codell, but they believe there's also productive opportunities in as many as 5 different formations here. So as they continue to gain more and more expertise and more experience with these wells, we'll see how each of these are taking a look at. Also illustrated on this, more in the text format rather than in the graphic illustration, is going to be how many wells each of these companies are looking at. Predominant spacing on each of these horizontal wells is in 80-acre spacing, but there are some companies that are moving to a 40-acre spacing up in the Wattenberg Field because they feel that they're still not seeing well-to-well interference even at the 40-acre spacing. So it kind of gives you an overview of the magnitude of the number of wells and ultimately the number of fracs and water demands for developing the play. Moving on to the next slide. This is sort of an accumulation of the Conoco position. Conoco has accumulated a very significant position on top of where our water supplies are. Initially, they had acquired some of their own independent leasehold interest. And then in April of last year, we're the successful bidder with the Colorado State Land Board for their 27,000 acres at the Lowry property, and then most recently, within the last few months, acquired a substantial position from Anadarko in this area, which aggregates to about 130,000 acres in predominantly Arapahoe County but some spilling over into Adams County and Elbert County. Significant for the company in this is that not only is it on top of where we have our water supplies. We have the exclusive rights to provide water service on the area that we highlighted, which is our Lowry property. And then we also are providing water to the majority of the wells, the majority of the water for the wells outside our service areas in this area. But one of the interesting things is that Anadarko sold not only in a transaction where they sold about 65,000 acres. A component of that was our mineral lease interest at Sky Ranch. So we do now have a relationship with Conoco on the 640-acre mineral estate that we own there at Sky Ranch. Moving on to the next slide. In addition to industrial water sales, we maintain ownership of a mineral lease that, as I highlighted, was now owned by Conoco. We entered into that agreement in March of 2011. So we are in our third anniversary of that lease. And in addition, we have a very small 42-acre lease that we entered into with another third party that subsequently had been acquired by Conoco as well. So we have 2 different leasehold interests that aggregates to about 680 acres with Conoco. Moving to the next slide. The basic terms of this lease were what we call a 3-2 lease where we had an initial 3-year term to those. And then if they did not drill and hold that lease by production, then they have the ability to extend that lease for an additional 2 years by another payment of the bonus. The bonus is about $1.25 million associated with that. So as I mentioned, we are in the third year of that initial term of the lease. We do retain a 20% gross royalty production -- royalty revenue interest associated with that. And so we are looking forward to the development of the oil and gas on that property. We have, I think, 3 well sites identified for that property within the Sky Ranch area. These well sites will be approximately 7 acres. So we try to make those -- we are very specific about the siting of those to make those along the roadway arteries so that we minimize the impact on the development that we're looking for on the residential development at the property. So with that as a kind of a general overview, what I want to do is really talk a little bit about the financial performance for the first 6 months of this year. You'll see our first slide really defines the water deliveries this year. Our water deliveries most notably are up because of the demand for frac water. Water deliveries are up nearly 2x, about 80% of what they were from fiscal year 2012. The actual water usage revenues are up modestly more than that, primarily because the delivery of water on a hydro [ph] pricing basis because those customers are not paying tap fee associated with permanent water delivery has a premium or has a higher price to it than necessarily delivering water to a standard single-family house. Moving on to the next slide, a bit of an overview on G&A. Slightly down from last year, down modestly about 3.5%. Really just a decrease in, I think, some of the bonuses paid in the prior year. If you take a look at net operating losses, we have our NOLs decreased significantly, and that was really attributable to our increased revenue, both from our industrial water sales, but also most notably from our farm leasing operations. The impact is actually a little bit more dramatic when you deduct out the non-cash components, and that's what the darker blue boxes are in front of the other boxes. And when you really deduct out the tap participation fee interest, depreciation and depletion and stock-based compensation, 123 AR expenses, we see a dramatic decrease in net operating losses. Moving on to current assets. Liquidity in current assets are up. Two reasons for this. One was the sale of the collateral stock. And then secondly, we have listed terms, receivables of the HP notes that we purchased. We purchased a number of those High Plains notes from the original note owners and are now the obligee on those notes from High Plains. Moving on to the next slide, total assets. Total assets decreased modestly, mainly due to overall NOLs. The actual slide tabling here, I think, is -- we'll try and label this and repost this because I think it's a bit hard to understand this particular slide, showing the results from 2012 to 2013. What this is illustrating is comparable periods. So it's comparable periods from 6 months ended 2011, 2012, 2013. And so you see about a $5 million decrease in the chart, which is really analogous to the impairments we took at year end, but the text portion of that shows that really, the total assets are in line with where they were at the end of the year. Moving on to the next slide, shareholder equity. Again, that same comment where each of the presentations, '11, '12 and '13 are for comparable periods at 6 months ended for each of those comparable periods. So you see a bit more dramatic illustration of that for comparable periods year-over-year. And again, the shareholder equity is really the NOLs and the impairment from year end. And then lastly, we sort of have the balance sheet summary information, which I won't detail out for you. You all can look through that and really disseminate that for your own analytical metrics, as well as the income statement, statement of operations for those metrics. So with that, as our overview, I guess I'd like to turn it back over to the moderator and see if I can answer any specific questions that you all might have.

[Operator Instructions] Our first question comes from Rob Young of William Smith. Rob Young - Wm Smith & Co.: How many wells can you currently service without any additional CapEx?

That's a good question. One of the things that we sought to do, we had a very long portfolio of water, as most of you know. We have significant ownership interest of water, both surface water as well as the aquifer groundwater. But we're a bit limited on our infrastructure, and so one of the things that we had done was worked with a neighboring municipality that developed a number of wells on Lowry that had acquired some -- another water supply that made that asset surplus for them. And so we probably have about 1 million, maybe 1.3 million gallons per day capacity, and that can keep up with a significant number of rigs. If you take a look at how the oil and gas operators are drilling, right now, most of their development program is still defining their geographic areas and the specifics of the parameters they're using, their seismic data that they've shot, both in terms of seismic shoots that was done in 2011, I think one that was finished up late last year. So they've got seismic information from about 400 square miles that they're determining and making their modeling on. And then each individual well, they're taking care to do a bit of science work on each well and then turning it over to a production well. So the drilling of each well is a little bit longer than what you're going to see on the timelines up in the Wattenberg Field just because they're still collecting the data. So right now, we see about a 1 well a month per rig. Conoco has given us some guidance on this, that they found some very favorable results that they announced in their earnings call and sort of highlighted that they expected to drill somewhere close to 30 wells this year. We certainly have the capacity for those 30 wells and probably up to maybe a little more than 100 wells a year with the existing capacity in our system. Rob Young - Wm Smith & Co.: Okay. And so if you need to drill another water well, how much does that cost and how many more acres, feet does that give you in terms of your capacity?

So typically, these wells are about $500,000 per well. Very expensive wells. They're large diameter wells. They go down about 1,700 feet. And typically, our wells will yield us about 250 gallons a minute. And so that gives us enough capacity to probably keep up with maybe 1.5, 2 rigs per well, depending on once they start moving to developing pad sites, their well programs, some of the operating results up in the Wattenberg Field, I think their well results were they can drill these wells in about 10 days. So what I would look at is, well, probably keeping up with one -- each well, 1.5 rigs, depending on sort of that timeline of completing those pad sites development versus one well at a time. Rob Young - Wm Smith & Co.: Okay. And then just 2 more. When you eventually transfer or transition the Sky Ranch properties over to a future developer, are you looking to just cover your bases? I think you mentioned [audio gap] dollars or there will be some excess on top of that.

There most certainly would be some opportunity on that. One of the reasons that we really went after that particular project was to vertically integrate ourselves, not only on the water side, where we got the water rights and the facilities to deliver that wholesale supply, but also being able to control the lot and the timing and the structure of the development, and having a very low basis in it as well as owning it in equity gives us a high degree of flexibility. We can probably do more than most in terms of incentivizing builders. We will look at a number of different types of structures that range from a deferred purchase of the lot until the house has been sold and get some calculation of what the lot cost in the house sale or some small upfront payment in deferred. I do expect that we will realize significantly more than our basis in it, but the fact that our basis is you make your money on your buy and I think the company was very -- our investors and our shareholders and our board was very intuitive about seeking that opportunity at the time period when others were running out of that. So they're a very good acquisition for us and we are very fortunate to have some high degree of flexibility on how we can make that land available to our future developer. Rob Young - Wm Smith & Co.: Okay. And then just one more. I know that you fully impaired your Paradise assets, but with the run that gas has been on, do you think that, that has some value in terms of doing some of the things that you are in, in the southern portion of the Wattenberg in terms of providing frac water for the potential gas drilling that might occur in that area?

Yes, you're right. I mean, there's been some recent wells where they've done some horizontal frac wells on the west slope, which is where our Paradise asset is. We do still own that. However, we did impair. That asset value took a very, I think, a very conservative approach but a good approach for us and for our shareholders. We have the diligence period on that, that's coming up in the next 14 months or so. And so we are looking for various options on that, whether we're looking to dispose of that, selling that to an oil and gas company or looking at other types of structures. We're going to pursue a number of structures over the next 6 or 8 months to see how we might able to monetize that. But overall, it's really in a disposition of an asset.

[Operator Instructions] And it appears to be no more further questions in the queue. I'd like to turn the call back to Mr. Harding for any closing remarks.

I appreciate that.

Actually, sir, apologies, we do have some questions that just popped up. All right, our next question comes from Spencer Larson of Moors & Cabot.

Just one question about the water pipeline. Can you talk at all about any sort of progress towards that or where we stand?

Which pipeline?

Where you're -- instead of delivering by truck.

Yes, yes. That's a very good question. One of the advantages, I think, that we really provide to the oil and gas operators, really Conoco more than anything else, is proximity. This is a haul-centric business. And so when you look at this frac water, first and foremost, you have to get the water supply. And so we happened to be in a supply constraint, so it's a resource-constrained environment that we're in. But then secondly, the farther away you are in this process, the more it costs you to get that. And so I'd sell my water to industrial water users for about $9, 1,000 gallons. And if you convert that into a price per barrel, because that's what the oil companies do, it's about $0.35 a barrel, $0.37 a barrel for them. Now if they have to haul it, they have to put it in a truck and deliver that to the site, it can be significantly more. I mean, even just on modest conveyance, a modest distance, because it can take as much as 15 minutes to fill that truck safely, these trucks are typically about 5,000-gallon trucks. And so it might take 15 minutes to fill it. It might take -- it doesn't come out quite as fast because our flow rate filling the truck is a little bit faster than the track will empty. But maybe another 20, 25 minutes to empty the truck and then the commute time on it. So it can cost basically $3 a barrel once you put it in a truck. And so the advantage for us is that we can deliver this to a significant number of well sites in here by just a transmission line that we lay on the ground. And we have done that, not the company specifically, but what we have is an oilfield services company that really is working on behalf of Conoco. And the oilfield service company really takes that delivery from our point. So from our system to ultimately the pad site. And in between that, they have some storage so that they manage not only the water transfer but also some storage of that because when they do these fracs, they frac very, very quickly. If they're going to do a 4 million gallon frac, they'll do that in less than 18 hours. So the water goes downhole very, very quickly. And so we are -- we have a system plumbed right now, where we're delivering that water, almost on a continuous basis, on a 24-7 basis. We have the capacity to deliver water through a very large pipe. Because of the production capacity, we can deliver a little more than 1,000 gallons a minute on that. And so right now, because there's only one rig working in the area, we're delivering that at a slower rate. But as they ramp up, as they add additional rigs, as they add additional holes there, we can keep up with multiple rigs, going the same time with multiple fracs going at the same time. So that is an enormous, enormous cost savings for everybody. And it's good for everybody because it keeps these trucks off the road. If you look at just one $4 million frac at 5,000 gallons of load, you're looking at 2,000 truck trip traffics in that. I mean, that's an enormous amount of traffic on the road, wear and tear on the road, impacts to the area that the oil companies will have to mitigate. So if they don't have to mitigate that, that again saves them more money and it just is a safer work environment. So that's been really the advantage that we play in, and that's because of our proximity, because of our size, because of the volume, we have the ability and the flexibility of delivering that directly on the ground and are doing that almost on a 24/7 basis. So thanks for the question. It's a very good clarification.

We have another question from Elliot Knight of Knight Advisors.

The Niobrara news on the 14th of April posted an article about Conoco's building a pipeline for the new Niobrara sweet spot, which is the way they're labeling that acreage position that you outlined. Now obviously, sweet spot has positive connotations. Based upon what you have heard people in the industry talk about, say, at the Wattenberg, I don't think we know anything about the producing rates of the South Wattenberg wells yet, but what is a reasonable figure to use as a sustained production rate after the initial flush production is exhausted? What's the decent figure to use per wells? I'm thinking of Sky Ranch, if we get lucky.

Well, that's certainly no softball. Good question, Elliot. Certainly, our hope is that the center of the universe on the sweet spot is going to be Sky Ranch.

Naturally.

We'll wait to see on that. What I'll probably do, and I hate to punt this one, but I'll probably refer you all to what others are saying. Anadarko has got some good decline curves in their presentation where they show what the decline yields on some of these wells are. I think it varies by formation. I think what they're seeing in some of these formations, it's they start out -- the wells do start out very high, IP, initial production, they may be over 1,000 barrels a day, and then a lot of them are declining to 300 barrels a day. And that decline curve, how long that decline curve is, how steep that decline curve, some of the decline curves are going to be dependent on the wells, on the completion, maybe even the formation. I think some of the Codell decline curves are going to be a little bit different than some of the Niobrara decline curves. You can model some sensitivities in there. It would not be out of character to take a look at a 300-barrel a day production over a period of time. And then maybe that declines a little bit as you get farther out in the curve. Some of the companies -- some of the E&P companies are looking at the opportunity to refrac some of these. Mostly, these wells are pretty new. So there's been a limited number of refracking on them, and I'm not exactly sure if refracking is the best solution for them or refracking them with water is the best solution or how they continue to stimulate most of these wells. But one of the things I do know is that they believe that there is a significant amount of oil in these shales. And so it may be that what they're seeing on their initial wells in this initial technology may only get as much as 17% of the oil, and there may be significantly more oil there that they're going to get over the next decades as their technologies improve or as their wells improve. That might give you a way to model this out, if you use some numbers like that, if that's of help. But then there's also some data points that a lot of the operators in the Wattenberg Field have shown in their presentations on what kind of these declines look like.

All right. That is per formation, and you're saying there could be 3 or 5 formations in total?

I think that's exactly right. So it may take them -- and maybe they start out and they drill one formation. And then when that formation declines, then they drill another formation and wait for that to decline to a point where it isn't as operationally effective. And before they go in and re-stimulate an existing well in a formation, maybe they try a different formation. And then we'll circle back to those formations as technology and as their information improves about how to get that oil out of the rock.

80-acre spacing, you say, that's what's normal now, and maybe 40, but 80 would be 8 wells on average?

Yes, 8 wells. Typically, we look at that as per square mile. So on a 80-acre [Technical Difficulty] per formation.

[Operator Instructions] Our next question comes from Riley McCormack of Tracer Capital.

Mark, these new slides are great. One question. I do see a proposed pipeline from the bombing [ph] range up the Sky Ranch. I assume that's necessary before development begins there, but is there an advantage to building that prior to developing Sky Ranch just to have more pipe as opposed to trucked water up there, just north of I-70?

Absolutely. Absolutely right. I mean, as more rigs come into the area, the emphasis, and particularly when you get into these areas where you don't have improved roads, there may not be good access to some of these well sites and they're going to want to have the ability of laying that pipe along the ground. They can do transfer stations. And what we are seeing is, and kind of the way we've got it set up with our oilfield service operator is, they've got some transfer stations that are about 5-mile increments. So we're delivering water to what they call these big tanks, maybe 40,000 barrel tanks, and then they have a 10-inch line that goes to the next 40,000-barrel tank and then a 10-inch line ultimately going to the rig site. So we'll see how these stage themselves out, but an additional transmission line with hydrants along the way can be a very big advantage to these. And so we will be monitoring that. And at the point where that becomes an effective tool for delivering this industrial water, we'll certainly look to try and make that investment.

And I guess that was my question. So you can do this with an above ground pipe, you can get access to the right of way? Or do you need to bury it?

Yes, so the line that I have on that particular slide will be a permanent buried line. So most of the stuff that we're going to have on the ground won't be permanent facility, won't be a company asset. It will likely be an oilfield services asset. But if we do make the investment in a line, it will be a buried line.

I guess that's my question, is what's the lead time? Because obviously, there's going to be development on Sky Ranch at some point, so you're going to need that pipe if it helps you get further north of I-70, which I imagine it would, why not start it sooner rather than later? is that just...

No, I mean, it is. So between the construction time, so there's a pretty low maintenance line. There's not a lot out there. We can probably build that line once it's permitted in maybe 120 days.

Okay, good. Okay, great. And then my second question. You mentioned earlier that seismic has been shot on 400 square miles. Obviously, Conoco has talked about their acreage at 200 square miles. Where is the additional 200? Is that north of I-70? Is that east of the Conoco stuff?

I think it's both north, east and south.

Okay. And any idea -- I mean, I know Carrizo has talked about having access there. I know you've mentioned some of the other guys, but that's just a lot of -- it's a lot of land beside Conoco would have shot seismic on. I mean, obviously, that you don't choose seismic unless you're seriously considering putting a lot of money into the ground.

That's exactly right. Conoco -- or not Conoco, Anadarko has significant interest other than what they sold to Conoco. So 150 of that square miles was actually done by Conoco in 2011 timeframe. And then I think Conoco, and I want to say others, Anadarko and others, participated to the 250 square miles shoot.

Okay, great. So the slide that you show overlaying the Conoco wells, that has 2011, 2012 seismic, that's just Conoco's seismic? There's another seismic outside of that area?

Yes, I think so. Yes.

[Operator Instructions] We have a follow-up question from Rob Young of William Smith. Rob Young - Wm Smith & Co.: Just one quick question. Relative to your cash, assuming some of these things come through, your various opportunities, what would be your ideal cash deployment strategy? Would you implement a dividend? Would you look to acquire more land and water assets? What would you be thinking about?

Boy, that's a great question. High-quality question, a high-quality problem. What would I like to do with a whole potful of money? Philosophically, I guess I'll just answer that by saying philosophically, there are some things that I think the company can invest in that would further our [Technical Difficulty] One, as the previous caller had mentioned, a pipeline that would be useful for the development of Sky Ranch, something that we're going to already end up doing. Maybe the timing of that can be facilitated and maybe it generates a little bit more interest either in the development of Sky Ranch or in the sale of additional waters that might make it a little bit easier rather than having a trucking. Some of the areas that we may take [Technical Difficulty] some infrastructure at Sky Ranch, some roads, curves and gutter to get that open and selling lots and super pad sites to build this and those sorts of things. So while we don't want to be in that business, certainly, we are incentivized to [Technical Difficulty] that. So the first thing you want us to do is deploy that in [Technical Difficulty] to facilitate monetizing some of the things that the company's been working on. The second area of emphasis, management's belief, I'll defer to my board, but management's belief is we take a look at a dividend, may take a look at a share buyback, a number of different things that we would take a look at. And all those things are going to be a function of [Technical Difficulty] investment needs of the company are.

And as there now appear to be no questions in queue, Mr. Harding, I'd like to turn it back to you for [Technical Difficulty] closing remarks.

Well, I appreciate your continued interest. We've had a very exciting quarter, a very exciting 6 months. We look forward to really starting to ramp this stuff up and really demonstrate some of the value of our assets. Our ideology has always been that water is going to be worth more tomorrow than it is today. That has been held true year-over-year since we've been in this business. It hasn't always been so apparent to you all. It's because we haven't been able to demonstrate direct monetization, and I think we're starting -- getting [Technical Difficulty] continuing to perform on that, continuing to make a good service relationship for oil and gas, a good service relationship for our domestic operations, and ultimately improving the performance of our agricultural assets. So all 3 of those areas are things that we look forward to. We look forward to continuing to add value. If any of you think of the question that you wanted to call -- wanted to ask on the call, didn't get through technologically or otherwise, don't hesitate to give me a call and follow up on this presentation or any other questions you might have. So thank you, all, for your continued support.

Thank you, Mr. Harding, and thank you, ladies and gentlemen, for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.