Ring Energy, Inc. (REI) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Ring Energy 2015 Third Quarter and Nine Months Financial and Operating Results Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now turn the conference over to your host Mr. Tim Rochford, Co-Founder and Chairman of the Board of Directors for Ring Energy. Thank you. Mr. Rochford, you may begin.

Thank you, Mannie, appreciate that and we want to welcome all listeners to the 2015 third quarter and nine month financial and operational conference call for Ring Energy. Again myself Tim Rochford, Chairman of the Board. Along with me this morning on the call is our CEO, Kelly Hoffman; our President, David Fowler; our Chief Financial Officer, Randy Broaddrick; and Executive VP and charge of operations, Danny Wilson. Today, we will cover the financials and operations for the three and nine months ended September 30, 2015. We'll also review results and provide some insight as it relates to our current progress thus far in the fourth quarter 2015. At the conclusion of our third quarter and nine month review, we'll open it up to the operator for any questions you may have. At this point, I'd like to turn it over to Randy Broaddrick, our CFO, and allow Randy to give us some overview. Randy?

Thank you, Tim. Before we begin, I would like to make reference that any forward-looking statements which may be made during this call are within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete explanation, I would refer you to our release issued Monday November 9. If you do not have a copy of the release, one will be posted on the company web site at www.ringenergy.com. For the three months ended September 30, 2015 the company had oil and gas revenues of $8.6 million and a net loss of $1.1 million as compared to revenues of $10.9 million and net income of $1.7 million in the third quarter of 2014. For the nine months ended September 30, 2015 the company had revenues of $23.7 million and a net loss of $1.6 million as compared to revenues of $28.1 million and net income of $5.7 million for the same period in 2014. The primary factor in the change of our net income or loss is commodity prices. We saw lower revenue totals for both the three and nine month periods as compared to the same periods in 2014 despite significant increases in production volume. For the three months ended September 30, 2015 our oil price received was $45.24 per barrel, a decrease of 48% from 2014 and our gas price received was $2.64 per mcf, a 10% decrease from 2014. On a per BOE basis, the third quarter 2015 price received was $41.34, a decrease of 52% from the 2014 price. For the nine months ended September 30, 2015 our oil price received was $47.31 per barrel, a decrease of 44% from 2014, and our gas price received was $2.70 per mcf, a 36% decrease from 2014. On a per BOE basis, the price received during the nine months ended September 30, 2015 were $44.57, a decrease of 51% from the 2014 price. Reduction cost per BOE for the three months ended September 30, 2015 increased to $13.98 as compared to $10.71 in 2014. For the nine months ended September 30, 2015 production cost increased to $13.18 per BOE as compared to $10.28 for the same period in 2014. The primary reason for this increase is the inclusion of operations from the Finley acquisition and our attempt at allocating the ad valorem taxes throughout the year rather than absorbing all of them into the fourth quarter. Most production taxes are based on values of oil and gas sold, so our production tax expense is directly correlated to commodity prices received. Our production taxes as a percentage of revenue remained relatively flat and should continue to be. Our total Depreciation, Depletion & Amortization including accretion of asset retirement obligation per BOE decreased for both the three and nine month periods ended September 30, 2015 as compared to the same period in 2014. For the three month period, the rate decreased from $36.04 per BOE to $22.86 in 2015. For the nine month period, the rate decreased from $30.89 in 2014 to $22.20 in 2015. Depletion calculated on our oil and gas properties subject to amortization constitutes the bulk of these amounts. The primary driver in this reduction per BOE is the acquisition of the Finley properties. As to total amount, the three month period ended September 30, 2015 increased approximately 5% from the comparable period in 2014. For the nine month period ended September 30, 2015 total DD&A increased approximately 23%. These increases are the result of higher production levels. Our overall general and administrative expense increased $187,000 for the three month ended September 30, 2015 and $760,000 for the nine month ended September 30, 2015 as compared to the same periods in 2014. On a per BOE basis this equates to a drop from $14.43 in 2014 to $9.59 in 2015 for the three month periods and from $16.13 in 2014 to $10.88 in 2015 for the nine month period. The increases in total for the three and nine month period versus 2014 were the result of a variety of relatively small increases. The decreases in the per BOE rate for both the three and nine month are primarily a result of increased production. On a diluted basis, the loss per share for the three months ended September 30, 2015 was $0.04 or $0.03 per share excluding $651,000 non-cash charge for share based compensation as compared to earnings per share of $0.06 as reported or $0.07 per share excluding a $631,000 non-cash charge for share based compensation in 2014. For the nine months ended September 30, 2015 loss per share was $0.06 or $0.03 per share excluding a $2 million non-cash charge for share based compensation as compared to earnings per share of $0.22 as reported or $0.25 per share excluding a $1.9 million non-cash charge for share based compensation in 2014. As of September 30, 2015 we had drawn down $40.9 million on our $100 million borrowing base on our credit facility. We have not made any additional draws on our credit facility subsequent to quarter-end. For the three months ended September 30, 2015 we had positive EBITDA of approximately $3.9 million or $0.13 per share compared to approximately $7.9 million or $0.29 per diluted share for the same period in 2014. For the nine months ended September 30, 2015 we had positive EBITDA of approximately $11.7 million or $0.43 per share compared to $20.5 million or $0.80 per share for the same period in 2014. Commodity prices are the biggest factor in these changes. I will note that those numbers were EBITDA versus pure cash flow as presented in our press release. With that, I will turn it back over to Tim.

Okay, Randy. Thank you. Good overview. At this time, I’d like to turn it over to Kelly Hoffman, our CEO and Kelly is going to give us an overview on the operations. Kelly?

The third quarter on our sales as a result of production were 208,726 barrels of oil equivalent, it is a 66% increase over the same period in 2014. Our average net daily production was approximately 2,270 barrels of oil equivalent per day. And that average sales price on a per BOE basis that we received in the third quarter was $41.34 as compared to $86.82 in 2014 and that’s 52% decrease. Moving on and talk a little bit about what we’re doing now an overview of our acquisition, I want to point out that I don’t want to talk badly about the previous operator or the property but quite frankly his issues became our opportunity. We anticipated on these issues but once we got control of the properties, a few of those were a little more unexpected and we adjusted our game plan on the fly to convert those problems in the field to advantages that we expect to start realizing in the coming months and quarters. And so we took advantage of some one-time purchases that have dropped the bottom line and reduce future cost that’s across the field and we can get into more of that here in the question and answer period at the end of the conclusion of this. Currently, what we are doing is we are concentrating a lot of our efforts on the Culberson and Reeves properties and most of our efforts outside of that are going to acquisition. We are looking at a lot of ideas contemplating what’s next for us. As Tim alluded and commented about earlier, we’ve been very, very patient. These properties are a result of that and we are excited to see what we’ve got out of it. We are taking advantage of that. As it relates to the CBP, the Central Basin Platform, in Culberson and Reeves we still see cost coming down. We can talk a little bit more about that in a moment but those costs are across the board in both the Central Basin Platform as well as Delaware. At this time, I’m going to introduce David Fowler and David say some things about the acquisitions and some of our ideas and current activities moving forward on that. David?

Thank you, Kelly. The M&A market really remain sluggish during the third quarter and the industry experienced another drop in oil prices. As I look back, I looked at the last two months of the second quarter which was May and June time period and oil prices had been trading at about $60 range for about nine weeks. And as you remember that when we closed the Finley acquisition in Culberson and Reeve County, and we were really expecting a vibrant M&A market through the end of the year, instead oil prices began another downward slide at beginning of July right at the beginning of the third quarter and hit a new low at the end of August, but it was almost two months slide. That preceding eight to nine week rebound of $60 a barrel caused really a false hope that oil prices were in recovery and really the worst was behind us, and the result was two-fold. Number one it caused companies considering a fail to hold or participate with the expectation that prices were in recovery and number two it kept a bit gap wide as Delaware’s expectations remained optimistic [indiscernible]. As a result, only really a few deals hit the market in the third quarter causing extremely lethargic M&A marketplace and a high percentage of those marketed in the third quarter didn’t really do very well. Now that’s not to say that we weren’t active during that time period because we were but we are just having a really difficult time getting traction. As we enter the fourth quarter, it appears more or expecting the fact that oil prices are going to be in the $40 to $50 price range for the foreseeable as I’m beginning to see evidence that that bid aspirant is narrowing based along on some of these recent acquisitions that have been announced. Today, they are waiting for higher prices through the best [indiscernible] is behind us and as we realized we got to learn not only provide but also growing the current price environment. We remain proactive in pursuing joint ventures and development agreement, leasing activity and acquiring existing producing properties not only on the Central Basin Platform but also on the Delaware. I’d see more deals come across my desk in the last four weeks that I’ve seen in the entire third quarter and anticipate that trend continuing through the second half of 2016. With our strong balance sheet, we are ready and able to move quickly to consummate any kind of transaction that hits our radar that we find of interest. We remain focused and patient as we believe the remainder of 2015 and the first half of 2016 will see a significant increase in M&A activity industry wide. And with that, I’ll now turn it back to Tim Rochford for his closing statement.

Thank you, David. Thanks, Kelly, good job. Listen, in summary, I’d like to point out that we believe the patience we displayed earlier in the year certainly paid off the acquisition of our Delaware assets and I think we also believe that continuing that same strategy in the future will pay off as well. In the interim however together with our ongoing efforts to lower and continue to push back on the service cost and our vendors along with stabilization of somewhere in the mid to mid 40s, upper 40s obviously higher it won’t be long that we’ll be announcing probably shortly after the first of the year, we’ll be announcing a formal CapEx program for 2016. And what I’m suggesting is that a little more improvement on our F&D cost where we are working on as I mentioned along with that stabilization in that mid 40s or higher, you will see us start to work. So with that, this concludes the company’s portion of the 2015 third quarter and nine month financial and operational review. And what I’ll do now is I’d like to turn it back over to the operator. We are going to open it up operator for any questions that any of the listeners may have.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Joel Musante of Euro Pacific Capital. Please go ahead.

Good morning guys. You drilled your first well in the Delaware basin properties. I’m just going to ask you what you saw there? What kind of results? What was the well cost and you hadn’t planned to drill that well before so just kind of a rationale there?

Yes. Kelly?

Yes. Hey, Joel, good question. This was a lease that we had – we have heard it mainly that was due to expire and we took advantage by putting another hole down to perpetuate the lease itself. We offset a well that was on the far outside edge of the property that was deemed early on when we first start to talked with Finley as average well, the well turned out as we started the foreclosing, we realized that well is a much better well another anticipated. So we were offset – we were excited about we drilled the well. We saw everything we want to see and more. We are very excited about the results our methodology for drilling these things out here is a little different than a processor there. And at the end of the day, I think the results are going to bare out to be potentially better too, but we are excited about it. From a cost standpoint, we have been telling everyone that we are modeling cost in around the $800,000 per well basis. I think you could say that with our style of operating that we’re going to be looking at a cost that’s probably closer to that $650 to $675 range maybe potentially a little bit lower. So we’ve been able to reduce the cost out of Delaware considerably and we have the same results that we are seeing out in the Central Basin Platform from a cost reduction standpoint. So I think it’s going to continue to close the gap between price and cost as it relates to how feel about drilling going forward but as it relates to Culberson and Reeves, we like what we saw a lot.

Okay, good deal. And last call, you were talking about some completion improvements that you’re making in the platform and I’m just wondering if – how far along are you on that and could we see some performance increases in your next reserve report from that work?

Yes, it’s Danny Wilson and I do think we’ll see some results from that. The completion changes that you’re speaking up, we implemented those in the second quarter. We saw some positive results. We are in the process of drilling a couple of more wells right now. We anticipate that we’ll use that same completion technique on these. We have seen a good increase in our initial potentials. We are waiting to see whether or not it changes the EURs but at the very least it will move our – it should affected the PV values just because of moving the reserve to the front.

Okay, all right, great. And just last on fourth quarter, what kind of activity should we expect in the fourth quarter and CapEx? I guess 2016 is – you’re coming out with that in a couple of months.

Yes. What I suggested earlier Joel was that we’ll come out with a formal CapEx as it relates to 2016. Although we do have slated for the fourth quarter here, activity both from the Delaware side as well as on the platform. So Danny, may be take a moment just give us a brief description of what our activity might look like there?

We are in the process right now drilling a three well package on the Central Basin Platform that will finish out in a year, commitments that we have for this year. Beyond that we are in the Delaware Basin, we are doing the upgrades through some equipment as we finished our capital project that we had to increase our salt water disposal capacity there. We are now going in and wells that we identified that had high fluid levels. We are coming in now and we are changing out, rod pumps putting in progressive cavity pumps to increase our ability to handle fluid. We had several of those recompile in Culberson and Reeves work over lined up between now and the end of the year, but no significant other capital projects between now I’m hearing.

Okay. And spending within cash flow or more or less, does that were you’re targeting?

No, our expenditures for the fourth quarter are going to be within cash flow and we do anticipate tapping in further into the credit facility. As Danny pointed out, we are drilling those three wells and while we’re putting these, we have a number of – we started with 70 if I’m not mistaken, correct me if I’m wrong anybody, we started with round numbers 78 wells in the Delaware and the majority of those wells if not all of those wells are in standing fluid. So you can see there is a lot of work ahead of us. We’ve already started that and we are well into the project but we have a number of more to change out to these PC pump, so we’re going to be spending some money. It’s going to well worth it but we do anticipate spending money that will probably cause us to go into our facility between now and year end.

Okay, great. I’ll jump back in the queue. Thanks. Appreciate it.

Thank you.

Thank you. The next question is from John Aschenbeck with Seaport Global. Please go ahead.

Hi, good morning guys. I just had another follow-up on 2016 here, I understand they’re coming up with some little bit more official but I was maybe wondering how you’re thinking about it thematically. I understand they were looking for maybe an oil price in the mid40s or above maybe stabilize at that level but as you think about 2016 how you’re thinking about it as there is certain rate of return you are looking for, you’re looking to spend with an cash flow or you’re looking to hold production, just any type of color around that?

Yes, let me take the first swing at that guys, this is Tim. As I mentioned, we are going to come out with that formal CapEx shortly after the first of the year and of course in connection with a stabilization of at least a capital level in the mid40s are a bit better is going to allow us to kick that off. And when you see us announce that, you’re going to see that there is going to be quite a bit of activity on the platform as well as in the Delaware. I think really what you can expect from us is that, that you’re going to see probably the bulk of that activity in the last three quarters of next year although there will be some activity in the first quarter. And as it relates to the Delaware, I believe you’re going to see some drilling there along with the rig conversion or the conversion of the conventional pump into the PC pump that Danny mentioned earlier. But I believe that cash flow along with some more use of the credit facility, I would – our numbers right now internally that we’ve been crunching diligently would show that by year end next year our credit facility wouldn’t be considerably higher. It maybe 10% to 15% maybe 20% higher but that’s we think about max. So between that and cash flow, we think we can do a pretty good job with our CapEx next year.

Got it. Really appreciate it. Then I had a follow-up question here on M&A and I understand if you all can get to details, but I guess just wondering a general the tighter deals you’re looking at it, those bolt-ons to existing acreage or they maybe not bolt-ons but in the Delaware in CBP or they may be a completely different play, any type of color you can provide there.

Yes, I’ll let David respond to that but primarily we are staying in and around the platform in the Delaware, but David maybe put some more color on that.

Sure. I’ll be happy to. John, we are beginning to see the benefit of being visible and as a result of being here in the Permian there are lot of independent operators that again go back to relationships they’ve had over the years but it was even last night at Executive Oil Conference there was an opportunity that came my way that I weren’t expecting, this would have been in the Delaware area and anything any opportunities that come along you’ve got to investigate to see really how they fit. Obviously we’d love to increase our core areas both in the Delaware and the Central Basin Platform, and so that is remaining as one of our primary focus point. But we also look at other opportunities that grand us another foothold in good areas that are – sticking with our same type of asset base and there is – it’s what nice to see that deal flow beginning to pick up. So going back to the fact that there are seeds that I’ve sold over the last year, year and a half, then I’m going back and are looking to beginning to take route and those are on some JV and some development agreement side situation, but it is encouraging to see more acquisition, more deal flow start to hit the desk a lot of which is not in the marketplace. These are deals that are just coming directly to us that afford us a great opportunity to work a deal.

All right, sounds good. I’ve one more question but I’m going to jump back in queue.

Thank you.

Thank you. The next question is from John White with Roth Capital. Please go-ahead.

Good morning and thanks for taking the time to update us. It sounds like between the M&A and the PC piece everybody is real busy out there. I was wondering on that first well you drilled on the Culberson and Reeves, can you give us a little bit more data like the name of the formation, how deep any IT rates you want to disclose.

John, we haven’t. We are still in the process of completing the well. We’ve done the frac job. We’re moving in right now to clean the well out and hang it on. As Kelly mentioned, we were very happy with what we saw in the mud logs and in the logs that we ran open whole log. Initial fluid samples we’re seeing back are encouraging just from opening up the well and letting it flow back after the frac. No IP obviously yet till we get pump on the well. The well was drilled to the Cherry Canyon which is for the most part the main pay out in that area. TD was somewhere around 4,500 feet.

Okay, I appreciate that. And if that well was drilled to HBP at least so now is Reeves, Culberson or Culberson and Reeves, is it a 100% HBP?

No, it is not. We still have some obligations out there and I think we’ve touched on it a couple or three or four times with bottom line is that, we’ve got a small number of wells that we have to drill and that we want to drill next year to help HBP additional acreage and some drilling obligation just going forward.

Okay, thanks very much. I appreciate it.

Thanks, John.

Thank you. The next question is from Richard Tullis of Capital One Securities. Please go ahead.

Hi, thank you. Good morning. Just a couple of quick questions. Tim, you envisioned next year’s program having any horizontal wells in Delaware?

Richard, that’s an excellent question particularly because it rings with Delaware but the answer is no. The play that we’ve acquired in the Delaware is really lends itself to the vertical side, that’s not to say that we couldn’t at some point in time consider that particularly as we look at deeper horizons and we know that there is a deeper horizon that’s very active in the area that is a horizontal play and that’s the Brushy Canyon. We have it predominantly throughout the entire 14,000 plus acres that we own out there. We have no plans at this point in time but in the future certainly that’s something that would be considered and looked at but for the most part the activity we’ll be doing there as well as the platform will be vertical for now.

Okay. And then just one final maybe for David, in general terms how much acreage would you look to add next year considering maybe a more conservative drilling program of one to two rig, how much would you like to take on and keep in mind future lease exploration et cetera.

Sure. And that’s one thing Richard that we always keep in mind is what do we stepping into. Along that same lines, if some of the deals that we’ve seen recently are people that are wanting to try to hold acreage, they don’t have a drilling budget and they’re coming to us with leasehold that these have a well drilled on it February, March of next year. And so to go right along with your thinking process of what we look at adding next year, there is not a set number. Obviously we like to add as much as we can especially in this price environment. It’s going to be driven by our – it’s got to fit within our total area. Let me just give you another example, the opportunity and I know nothing about this at this point other than one of the questions that I ask was, this acreage idea that you’re bringing to me, I’m new to have production on it and the person said it’s like 90% HBP or obviously that’s interesting to us. I don’t know where it is exactly or what all the details but we’ll be getting together next week. But those are the type of opportunities that we’ll be looking for.

Richard, I might add one thing. I might add something here just in case of passing your head as a thought that is, one of the criteria and piece that David looks at critically is being sure that when we are considering the acreage, we are looking at what those drilling obligations are going forward. The term of the lease plays into this, our land department has been really, really focused on maybe longer term leases less obligations to drill in this climate things of that nature. So we pay very close attention to how much money it’s going to take keep this thing alive as it relates to the leasing.

Thank you. That’s very helpful. That’s all from me. Appreciate it.

Thanks, Richard.

Thank you. The next question is from Jeff Grampp of Northland Capital Markets. Please go ahead.

Good morning guys. I wanted to maybe get a little bit more color on the 2016, go back to that topic again. Just wondering Tim or maybe for Kelly, how you guys are viewing what type of production numbers, whether it will be a growth or a BOE number you guys think is attainable based on the programs that you’re tentatively looking at running in 2016 understanding, appreciating of course that we are still in the early days of putting this program together.

Right. Jeff, good question but as you just commented we’re still in the infancy. Although it’s not going to be too much into the early part of the year that we’re going to make that announcement, but I can share with you now that what we’re doing as a team and what we’ve been reviewing as a team is going to definitely contribute to growth not only in the reverse side but production side. And we’ve never been a company that’s given formal forecast, so guidance isn’t something to expect as part of that CapEx but I can tell you it definitely is going to bring growth.

Okay, that’s helpful. And then just wondering do you guys have maybe a ballpark run rate of where production stands today between the Delaware and the Platform?

Yes, I think. So Danny, Kelly you guys…

Yes. The production breakout right now is about 60-40 leaning towards the Central Basin Platform property but it’s sketching the Culberson properties or sketching up quickly. So we anticipate there will be pretty much even in the near future.

Okay. And Danny, do you have offhand kind of what a net production number is in aggregate?

From what we announced at the end of the quarter, we are sitting at about 20. I think we announced 20 to 70 net BOE, so I think that number I would say October is looking a little better now but I can’t give you a firm number on that yet.

Okay, fair enough. And then last one from me just on the infrastructure facilities improvement that you guys are targeting on the Delaware side, is that something that you guys think as kind of year-end target as far as having a lot of that stuff out of the way or is some of the stuff going to be part of the earlier 2016 activities as well.

Jeff, a lot of the work that we did in the third quarter was a result of – as I mentioned seeing some things that were expected and something that were unexpected, and we took advantage of the unexpected pieces and built out some stuff that we feel like is going to fall to the bottom line give us a big benefit in the fourth quarter and the first and second quarter next year. So as we continue to move forward, we may have some of those types of expenditures, for the most what we saw in the third quarter we think was extraordinary and won’t be repeated to that extent. So a lot of things that we put in place in some of our disposal systems were anticipation of as Tim mentioned speeding up your pumps. We talked about the right pumps, the PC pumps maybe the PC pumps to ESP things of that nature. So what we are doing is putting ourselves in a position to be able to take advantage of those higher fluid levels when we see them and we believe that will give us an increased production rate.

So is it fair to say Kelly that maybe the production numbers you guys have talked about to date are maybe a little bit way down because of these issues that were both I guess anticipated but a little bit I guess weren’t anticipated when you guys first signed to this.

It was – another factor that we haven’t touched on, I want to mention is that whenever we were taking over those properties again I’m walking a fine line and I’m going to talk a bit poorly about our previous operator, that’s just not our style. But at the end of the day again his issues were our opportunities and so the way they operate the wells are different in a way we anticipate operating and we do operate. So we took advantage of that by saying don’t do anything in the last portion or the last month if you will before we close the properties. And so when we took the properties, the production was down a little bit because of that there were some unanticipated weather this summer that we had out here. A lot of electrical storms and a lot of unanticipated rain is something that’s unique to the desert quite frankly but – all those things contributed along with us making that previous operator didn’t go out and make any – only necessary changes to the properties giving us a chance to take it over cleanly and not have to identify even more problems which we did when we guided on the leases. We took care of those and that’s what we’ve been working on in the last three or four months. So that is most of the extraordinary cost that I was thinking of in the third quarter that we don’t expect to see going forward.

Great. Appreciate the time guys.

Thanks, Jeff.

Thank you. The next question is from Neal Dingmann of SunTrust. Please go ahead.

Good morning guys. Tim, just a quick question again when you and Kelly and the guys are looking at the plan, is it more about hurdle rate either external or internal, you’ve obviously made the right color so far by shutting the rigs down as always you all did. So again when you’re looking at 60 out of those, there have been a lot of questions asked around it. Is it simply when you, David and all the guys are looking at any of these acquisitions all of them that are out there thinking about the size as well as you have to hold and bring in more activity back simply looking at hurdle rates or what else you’re looking at?

Yes, here is what happened. You go back to late last year in fact it was early to mid-December last year that we made that decision and you all remember that we had mix running at the time. And those rigs we made that conscious decision to bring those in and of course we started the battle and that was pushing back. Remember we were across something north of $500,000. As far as making that decision now, one would say look we’re in an environment of mid40s or upper 40s and some cases lower 40s, how can we do that? If we can get our cost, if we get these F&D cost down a little bit lower than we are at right now, we think it’s reachable by the way. We think we need maybe a couple of more months or six or eight weeks to finish the year and get into early part of the year and comfortable about it, but when we get to that point, the EUR is even at that lower level. It makes sense and it’s accretive on all cylinders. And so it’s really more of a function Neal of that just feeling good not only about an internal rate of return but return on investment.

That makes sense. And then just two quick ones, I’ll get dropped off and [indiscernible] get this, just on reworks and coming back to some of these existing wells either in the new acquisition or the existing areas, you offer them quite a few reworks already still there are opportunities next few quarters, Kelly some below that?

Yes, no question about it. There is still much work to be done, not only where we as I mentioned ran into a few unexpected issues out in the Culberson field none of which we couldn’t handle and none of which were brought in nature or very expensive quite frankly. But we also just made a lot of discovery and I think those discoveries fell enormous opportunity for us and that without putting a rig to work. So we are excited about that and we are learning more about it as we speak. So I think the next few quarters we’re going to have some of that layered on, there is no question about it.

Okay. And then lastly I had besides obviously what you did to some of the infrastructure, some things you did around the acquisition, are you all now seeing when I look at 2016 as you continue to grow, would you consider pretty good chase, Kelly for you or Danny when you look at infrastructure wise and takeaway wise?

Yes. Neal, as far as takeaway goes we are actually in the process of finishing up hopefully giving in the next few weeks an oil pipeline deal signed for our Andrews County and Central Basin Platform property. That should significantly reduce the weather issues that we have in the winter time there. So I’ve got two or three people who are calling about the same thing in the Culberson area that all of these oils are being drilled over in that area. There is a lot of top lines now coming through and we’ve been contacted by two or three of those. I don’t know how quickly they can get in place but we are hoping at least in the Central Basin Platform did have something in place by the end of the year or very early next year.

It makes sense guys. Thanks for all the details.

Thanks, Neal.

Thanks, Neal.

Thank you. The next question is from Sam Burwell of Canaccord. Please go ahead.

Good morning guys. I thought you gave some nice color on the well cost out in the Delaware, how cheaply do you think you could drill a platform well these days?

Good question. I was wondering that was coming Sam. Danny, why don’t you respond to that if you don’t mind.

You bet. We’ve seen some significant savings in that area using even just – when we were taking bids on the three wells that are drilling right now, we cut cost another $15,000 a well from even midsummer. So what we are seeing now, we think we’re going to be safely in the mid to maybe lower mid 300. So the numbers as Tim said, we are getting very close to the point we can as we think we can go back to work even at current process.

Gotcha. And what percentage of the platform acreage is held by production now?

We got just a few wells that we have to drill that are coming up to term next year that we will be layering on but I’m still going to say and that’s a tough question for me Sam because this is a very fluid. As you know, we have almost 31,000 acres out there so it’s very fluid. But I would say for the most part, I’m going to say by far the majority is HBP without looking right at it however we do have items that will come out next year that we want to drill, that we need to drill, that we put into play as Tim said, probably towards the latter three quarters of the year.

Okay. Shifting gears just a little bit, LOE picked up in Q3, where do you guys see that trending towards especially if you’re likely to the accelerating activity into 2016?

I think that number is going to come down a little bit from what you saw in Q3. As we mentioned there is extraordinary cost that we picked up during that time period and take advantage of some of those unexpected issues and then take advantage of looking forward and building out some of the component systems. Right now while costs are down, this is a great time to improve some infrastructure and those are costs that you won’t incur later and then if you do incur them later they will be at a much higher price. So we’ve taken advantage of that in the third quarter. So I think the fourth quarter is going to be a better looking number and I think on average that what we will see next year will be good looking numbers too.

Okay makes sense and then let’s squeeze one last one. Any thoughts on hedging assuming you guys do accelerate activity next year?

We have – we are not adverse to hedging but in the current climate that we are in right now the pricing environment it’s not that – there is nothing really that attractive out there for us. Our debt is well managed even at current commodity prices. So if we saw ourselves layering on larger debt component then Sam by all means we’d consider and we do monitor that, so it’s not like we just have a close door but we don’t have any near term plans on putting any hedges in place but we are open to it as time goes on particularly if the debt instrument is useful.

Okay, got it and so the curve looks that attractive any way. So thanks for the color guys, appreciate it.

You bet. Thank you.

Thanks, Sam.

Thank you. The next question is from Noel Parks of Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, Noel.

A few things I wanted to run by. Talking about well costs in the Central Basin Platform, can you just remind me what achieved us that cost cut down to in the old arena days back in the 2009 timeframe when we had sort of our last draw in oil prices?

Yes, you know something Noel, I’m not sure if I can nail it exactly in the 2009 period. As you know in late 2008 and early 2009, we did kind of – we went through the same phase where we pulled back the centered home and waited for a better day. And fortunately there wasn’t – it wasn’t that long before prices did start picking up again. We did see the benefit of lower cost and we took advantage of working closely with our suppliers and vendors and providers and doing that, but I think to answer your question maybe give you a better feel for it. As we go back to the early days of drilling out on the platform, the former Moscow arena, we were drilling wells in the low 300s and this was back in 2005 and 2006, and they started of course creeping up as commodity prices creped up. So but we were in that low 300 level back at that point of time.

Okay, great. And I was one sort of housekeeping thing, of course it’s not a number that really moves the needle but your natural gas realizations were a bit better than I expected. I was thinking it might come in below closer to $2. So was there anything there that is worth modeling going forward?

I don’t know. Danny, what are your thoughts on that?

I think our gas is pretty high BTU and we have good contracts in place. Noel, I think you could probably count on is being well I think what those process are going to do but I think what they’re coming in right now is probably going to be a good number for you.

Okay. And could you give any update on what’s going on in Kansas right now?

We have not but we are happy to share that with you. Danny or Kelly?

Tim, this is again sort of status quo with us. We did some you might remember we ran some seismic out there. There is some 3D work, we were very happy with what we saw in the 3D work. It identify some very meaningful opportunities for us and we’ve had some further conversations with our partner out there. There is still some money available on the book so to speak for developing more wells. We are jus evaluating the seismic and having further discussions about all optional that is available to us. There are several things that have come into play. There has been outside parties that have even surfaced and said they was planning to take a broader look at this and asked our consideration for what we’ll be willing to explore ideas with them and we said, sure we will talk. And so right now again from our standpoint, I feel like that we are in the best place we could be and that is the money that’s on the books as it’s not ours, it’s from a partner we don’t have to spend any money to go out and develop that. Some of the much desired 3D seismic that we saw, so we are happy to explore all kinds of concepts right now and I think I would consider to be maximum optionality available to us.

Okay great. And then one more question on the M&A picture. So we have had a sense for a while that there was a lot of money out there on the sidelines looking for a home and I feel like in the last couple of months, we’ve been hearing even more concretely about there is been a lot of management teams out there with a lot of experience but not much in the way of assets. So as far as in the Permian, are you seeing that that trend of too many management teams not choosing that enough assets, is that likely to go on a while, is that going to go on a long term do you think?

That’s a good question, Noel, interesting question. In areas that we are dealing with in really specifically the platform and of course in the Delaware and we know that there are management teams that have had successful runs that are backed reloading again and looking for opportunities. But I think it’s fair to say and David maybe have a feel for this and Kelly, but I don’t see that we have a conflict that we run into any pushback as it relates to somebody stepping in front of us because they are still waiting for yet another opportunity to reload, maybe you guys have seen a little different line of that but I certainly I haven’t.

Tim, the only thing that I would add and Noel to your question, what has been interesting is the private equity firms are not wanting to pay anymore D&A and/or looking to the management teams that are newly formed or are in the process of reloading base of look. Before we fund anything, we want to know that you have an asset and that’s been the problem like I and David in understanding of why it’s a little activity took place in the third quarter, that money is still looking for asset and there is just very few assets out there to chase that are seeking those – that those dollars are seeking [indiscernible]. One thing that I’ll add I think would give companies often times a desire maybe or an interest of lean ROA versus private equity is companies realizing what we’ve done and what our balance sheet looks like, and our reputation that if they are desiring or have a need or a liquidity event that they can sell down and they can be taken whether it would be in cash, cash and equity it gives us a lot of versatility, give them a chance to stay in the deal and grow for latter day. So those are some of the opportunities that we are pursuing that give us I think a definite advantage when competing against private equity money.

Thanks. I just was looking for it. That’s all from me.

Thank you.

Thank you, Noel.

Thank you. The next question is from Michael Burns, a private investor. Please go ahead.

Thanks for the call this morning. You just answered my question, thanks, about the M&A using cash and equity. The only clarifying question I have is you drawdown about $40.9 million on the facility, is the 10% to 15% or so expansion that number or the whole $100 million available to you.

That was referencing an additional roughly 10%, 15% maybe a size of 20% from where we are at today, so from the $40 million.

Okay, thanks. And you guys re-determine that in May and what are the principal assets you’re going to look at for that redetermination and would it include the infrastructure you would like to build out or for a land acquisition?

Actually that redetermination is taking place again as we speak and we would anticipate over the next few weeks having the conclusion of the banking group results. At this point in time, we haven’t seen or heard anything that would believe us to believe that we wouldn’t have anything other than what we have now and that’s the $500 million with the $100 million base. But that still is yet to be official so we are a couple of weeks out from that.

Okay, thanks a lot.

Thank you. We have no further questions at this time. I'd like to turn the conference back to management for any closing comments.

Very good. Thank you, Mannie. Appreciate it. Listen everybody we know it's still a busy time and we appreciate your time today. If there is follow-up questions, you all know how to reach Bill Parsons and of course management including myself are always open for calls or questions. So have a good day and we appreciate your support.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.