W&T Offshore, Inc. (WTI) Q2 2007 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thanks for standing by, welcome to the W&T Offshore Second Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only-mode. Following the presentation the conference will be open for questions. [Operator Instructions]. This conference is being recorded today August 7, 2007. I would now like to turn the conference over to Mr. Manny Mondragon, Vice President of Finance. Please go ahead, sir.

Thank you operator and good morning to everyone. We appreciate you joining us for W&T Offshore's conference call to review the second quarter 2007 results. Before I turn the call over, I have a few items I'd like to go over. If you would like to be on the company's e-mail distribution list to receive future news releases, or you experience a technical problem and didn't receive yours, please call DRG&E's office at 713-529-6600 and someone will be glad to help you with that. If you wish to listen to a replay of today's call, it will be available in a few hours via webcast by going to the Investor Relations section of the Company's website at www.wtoffshore.com or via recorded replay until August 14, 2007. To use the replay feature, call 303-590-3000 and dial the passcode 11094324. Information recorded on this call speaks only as of today, August 7, 2007, and therefore time-sensitive information may no longer be accurate as of the date of any replay. Today management is going to discuss certain topics that contain forward-looking information, which is based on management's beliefs as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production and expenses for 2007. Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurances that these expectations will prove to be correct. Such statements are subject to certain risks, uncertainties, and assumptions including, among other things, market conditions, oil and gas price volatility, uncertainties inherent in oil and gas production operations and estimating reserves, unexpected future capital expenditures, competition, the success of risk management activities, governmental regulations, and other factors described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected. Please also note that this conference call contains references to non-GAAP financial measures. You can find reconciliation of these non-GAAP financial measures to GAAP financial measures in the Form 8-K filed by the company earlier today as well as in this morning's press release. Now I would like to turn the call over to Mr. Tracy Krohn.

Thanks Manny and good morning everyone. I would like to thank you for joining us for our second quarter 2007 conference call. Again I am Tracy Krohn, CEO of W&T and this morning I will discuss events that took place in the second quarter of 2007. With me today as part of our team, Danny Gibbons, our CFO; Danny is going to review financial results for the second quarter 2007; Steve Schroeder, our Chief Operating Officer, who will discuss 2007 drilling projects, operations, review production and LOE and give third quarter and full year 2007 guidance; and then he will turn it over to Jeff Durrant, our Senior VP of Exploration and Geoscience, who will review the near-term drilling prospects in our 2007 program. Following our formal presentation, we will have a Q&A session. As you saw in this morning's press release, our second quarters earnings per share was $0.60 bringing the street estimate of $0.46 and slightly ahead of last year's second quarter. EPS was higher due to lower than projected workovers and facility expenses and probably because the prices were realized in the second quarter from the sale of our oil and gas production was higher than the street price bet, rather 874 per MCFE compared to 827 per MCFE for the street. EPS adjusted to exclude commodity delivery of losses and a write-off of deferred debt issue costs was $0.63 in the second quarter of this year. This represents a significant improvement over the first quarter this year when we earned $0.17 per share. Currently as we near the 1 year anniversary of the closed Kerr-McGee transaction, we are transitioning from the first phase of the valuation and planning to the next phase which is implementation. Thereafter [ph] the exploration team have identified numerous drilling prospects on the properties acquired by merger from Kerr-McGee and are ready to start adding them to our substantial inventory of existing prospects. To help to meet [ph] this plan the board of directors has approved $100 million increase to the capital and major expenditures budgeted for 2007. Jeff will give you more details on where we plan to drill later in the call. Part of the reason that earnings were higher in the second quarter compared to the first was that our base lease operating expenses, LOE, this quarter was down over $9 million. Workovers and facility expenses for the second quarter were much slower than first quarter and it appears some of the initial upfront cost related to the properties from the Kerr-McGee transaction may be behind us now. As we've said before, it is not unusual to have higher workover in a facility cost in the first year after we acquire properties particular in a significant transaction from others in order to bring these fields up to W&T standards. Also in the second quarter we successfully completed our insurance renewals. Overall we have higher coverage amounts and the premiums are going to be somewhat less than last year. Last, during the second quarter W&T issued senior notes for $450 million with a coupon of 8.25% [ph]. I would like to quickly note that our timing couldn't have been better. Looking back we are very excited to have completed that transaction and to have a permanent layer of capital with a reasonable class and with reasonable covets [ph]. These senior notes extend the maturity of a portion of our long-term debt for 7 years which allows us to free up cash flow for capital expenditures as it eliminated the majority of our near term principal repayments. This also enhances our liquidity and provides us full access to our bank credit facility. So with that I'll turn it over to Danny Gibbons to expand on our financial result. Danny?

Thanks Tracy. Net income for the second quarter of 2007 was $45.5 million. That represents an 18% increase over the mail [ph] reported in the second quarter of 2006. Revenue increased $106.8 million to $273.6 million in the second quarter of this year due in large part to an increase in production from the properties acquired by merger from Kerr-McGee. In addition the average realized cost we received in the second quarter was higher. These operating expense for the second quarter of 2007 was $51.2 million and represents an increase of $34.9 million over the $16.3 million in the second quarter of last year. The increase is attributable to increases in operating costs of $17.5 million, workover expenditures of $0.5 million, major maintenance expenses of $9.3 million and $7.7 million in higher insurance premiums. Approximately $14.3 million of the increase was in operating costs, workovers and insurance premium are associated with the properties acquired by merger in Kerr-McGee. The increase in major maintenance expenses is partially due to $5.9 million of Hurricane remediation costs that were not covered by insurance. Amounts spend in 2006 related to the hurricane remediation efforts were covered by insurance and therefore were not included in lease operating expenses. Depreciation, depletion, amortization and accretion referred to as DD&N was a $126 million in the second quarter of 2007, an increase of $58.7 million over the incomparable period of 2006. On a MCF basis, DD&N increased to $4.04 from $3.40 last year. The increase is primarily due to higher depletable cost, an increased oil and natural gas reserves associated with the properties acquired by merger from Kerr-McGee and to a lesser extent due to higher funding and development cost. The full-cost pool [ph] at June 30, 2007 stood at $2.7 billion, up significantly from $1.4 billion at June 30, 2006. Now let me talk about cash flow. Net cash provided by operating activities was $308.4 million for the first half of 2007. That is a 35% increase over the same period in 2006. Adjusted EBITDA was 376 million for the first six months of 2007, up 42% over the comparable 2006 period. Our adjusted EBITDA margin for the second quarter was 76% substantially in line with our higher high historical returns. During the first six months net cash provided by operation less capital expenditures, dividend and differed issue costs was $100 million, and that was used to reduce debt and built cash balance. For the second quarter of 2007 our natural gas price averaged $7.81 per MCF and crude oil and condensate averaged $60.44 per barrel for an average realized price of $8.74 per MCFE. This compares to a natural gas price of $6.98 per MCF and a crude oil and condensate average price of $61.13 per barrel and that combined for an average realized price of $8.37 per MCFE in the second quarter of 2006. With the second quarter of 2007, general & administrative expenses increased to $10.1 million from $9.1 million for the second quarter of 2006, due to an increase in the number of employees and therefore a greater compensation and benefit cost and higher legal and professional fees in the 2007 period. On a per MCFE basis, G&A actually decreased to $0.32 per MCFE from $0.46 per MCFE. G&A decreased by $3.8 million in the second quarter of 2007 from the first quarter primarily because of lower compensation cost. Talk about interest expense and the debt offering. Tracy mentioned in June 2007 we issued 450 million of senior notes at an interest rate of 8.25%. These notes are 7-year non-core [ph] and were issued under rule 144 A without registration rights. The indenture related to the notes contains dead issuance covenants and restricted payment covenants typical for our type of credit profile. As a result of the offering, Moody's upgraded the rating on our existing tranch B term loan and our revolving bank credit facility by two notches to BA2 [ph] and S&P upgraded our outlook from stable to positive. The proceeds from the offering were used to prepay the remaining balance of the tranch A term loan, $90 million of the tranch B term loan and the amount upstanding on the revolver. As a result of the issuance and paydown of a portion of our existing indebtedness we wrote off $2.8 million of previously incurred debt issue costs. Interest incurred was $15.7 million in the second quarter of this year compared to the $300,000 in the last year's second quarter. This increase is associated with the debt incurred in August 2006 to finance the properties acquired by merger from Kerr-McGee. During the 2007 period, $6.3 million of interest was capitalized to unevaluated oil and gas properties. Switch to income taxes for a moment. Income tax expense was $23.1 million in the second quarter of 2007. Our effective tax rate was approximately 34% this quarter and we now expect a way to stay at 34% for the remainder of 2007 and that represents a change from previous guidance. The reduction in income tax rate from 35% to 34% is due to the utilization of Section 199 of the internal revenue code that allows for a deduction from income for qualified domestic production activities. The deferred tax income rate for the quarter was a benefit of less than 1%. Turning to capital expenditures. For the first 6 months of 2007, capital expenditures were $199 million split between a $130.6 million for development activities, $48.2 million for exploration, $19 million for acquisition and leasehold costs including seismic and $1.2 million for other capital items. For the first six months of 2007, development and exploration capital expenditures consisted about $77.3 million in the deepwater, $29 million on the deep shelf and $72.6 million on the conventional shelf and other projects. Turning to the balance sheet. At June 30th, 2007 we had a $102 million in cash and cash equivalent and $655.6 million in long-term debt. Total assets were approximately $2.5 billion compared to $1.2 billion at the end of June last year. Shareholders equity increased to $1.1 billion at June 30, 2007. Our debt to total capitalization ratio stood at 37% and our last 12 months adjusted EBITDA to interest coverage was 12 times interest expense. And with that I'll turn the call over to Steve Schroeder to discuss operations. Steve?

Thanks Danny. First I would like to give you an update on the progress on the number of fore well [ph] at our Green Canyon number 82 prospect which we refer to as the Healy prospect. We drilled to 3,920 feet and ran surplus casing and cement. We have temporarily pulled the rig off the well due to eddy currents. We plan on returning to the well in approximately 30 days assuming conditions will improve. Secondly I would like to up date you on our current drilling activity at South Tim 41 B-3 well or Cap Rock with -- from both oil and gas in several zones. Jeff Durrant will further update you on this well. With respect to production, in the second quarter production average 343 million cubic feet equivalent per day down slightly from 357 million cubic feet equivalent per day in the first quarter of this year. In fact the week ending July 31st, we had an average production rate of 309 million cubic feet equivalent per day. Production has declined because the natural decline in the producing wells and the unexpected loss of a few key completions. For instances during 989 Cyprus, the completion was lost after it tainted up in late June. This well was producing at a net rate of 6.5 million cubic feet equivalent per day. Due to the MMS anchoring requirements we have elected to differ the work until fourth quarter at which time we expect to have a rig on location. The Eugene Island 205 C-4 Sidetrack completion watered out late in March of this year which is earlier than was forecasted. The completion had been producing at a net rate of 1244 million cubic feet equivalent per day in late March which quickly declined to 2.1 million cubic feet equivalent per day in late May before finally watering out. We have since re-completed the well to a new reservoir which is producing at 8 million cubic feet equivalent per day. Four days ago on August 3, 2007, a third party pipeline in the main path area began experiencing operational difficulties and producers were required to shut in. This has reduced our current production by approximately 17 million cubic feet equivalent per day and this reflected reduction is not reflected in our current third quarter guidance. Now turning to guidance for the third quarter. We expect to produce between 1.8 and 2 million barrels of the oil and 16.6 and 17.9 billion cubic feet of gas for a total of between 27.5 billion and 29.7 billion cubic feet equivalent. Although this is a decline from second quarter, we anticipate volumes to be higher in the fourth quarter. We still feel comfortable with our annual production guidance. As we stated in our last operational updates, the Company anticipates full year 2007 production to be between 7.7 million and 8 million barrels of oil and 74.7 billion and 78.7 billion cubic feet of gas for a total of between a 121 billion and a 127 billion cubic feet equivalent which is a 25% increase over the Company's 2006 annual production. There are several key projects that will drive the expected production build-up in the third quarter and fourth quarter of this year. During the third quarter, we anticipate shifting to a new zone in the Mississippi Canyon 718 while our Pluto 2 well with an expected rate increased to peak at approximately 20 million cubic feet equivalent per day. We anticipate production build up at a net rate of 18 million cubic feet equivalent per day from our Bay Junop discovery in mid-September. We expect to obtain our costal use permit for the pipeline and production facility this week. The refurbishment of an existing structure is complete and we are outfitting the deck with the processing equipment currently. Beginning in early September we expect to have first production from both our South Timbalier 299 installation and from our East Cameron 338 facility following the completion of our hurricane remediation efforts for a combined net rate of 7 million cubic feet equivalent per day. At South Tim 299 we are completing the final tie-in at the third party processing platform and our commissioning the control systems. At East Cameron 338 all major facilities kits have been set, all major piping is complete and we are currently commissioning the instrumentation and electrical systems. In the early fourth quarter, we anticipate initial buildup from the two High Island 24L discoveries at a net rate of 19 million cubic feet equivalent per day. Two pipelines have been laid and one structure has been set. The main processing structure is scheduled to be loaded out at the end of the month. We have an active workover facility surveillance program underway. We are installing low pressure facilities Acromilian [ph] 115 allowing us to reestablish production from an existing completion at an anticipated net rate of 4 million cubic feet equivalent per day. In addition to the Eugene Island C-4 Sidetrack and Pluto 2 recompletes I mentioned earlier we are evaluating several more recomplete and workover opportunities. Projects that have come online includes the West Cameron 181, C-2 Sidetrack and Galveston 303 number 7 tie-in are loose prospects in Mobile 867 and the South Timbalier 314 pipeline cleanup. During the second half of the year we also expect buildup from our active and planned exploration program. This buildup is currently not in our guidance. However we do anticipate a contribution this year from the exploration well that is currently being drilled at South Timbalier 41 as well as from our planned main-pass and ship shell projects. These wells are from existing platforms and should contribute production this year. Moving on to lease operating expense, in the last conference call I discussed our lease operating expense forecasting method. Taking a conservative approach we use the first quarter run rate on base LOE and held them flat for the year. I am pleased to note that the base LOE for the second quarter was $45.3 million, $4.7 million under the low end of guidance and hurricane remediation costs were $5.9 million slightly below the low end guidance of $6 million. This is a reduction in LOE and hurricane repairs of $9.3 million and $1.2 million respectively from the first quarter of 2007. Unlike the first quarter we had no significant well failures and workover expense was dramatically less. In fact 75% of the reduction in LOE is due to lower workover expenditures. Although LOE was lower in the second quarter, we are not revising full-year guidance at this time. Workover facility expenses are the greatest variables in total LOE because of the unpredictability of the well failures and unidentified facility problems. Now I would like to turn the call over to Jeff Durrant to update you on our drilling program. Jeffrey M. Durrant - Senior Vice President of Exploration/Geoscience: Thanks Steve and good morning to everyone. Although we started on an exploration well in June, WNT [ph] did not complete the drilling of any new exploratory wells in the second quarter. However, we did successfully complete the 825 Sidetrack development well in Vermilion 331 field. Year-to-date we have successfully drilled two exploration wells plus we have deepened the Healy #3 project. And additionally both of our development wells drilled through the end of the quarter were also successful, so for an overall 100% successful 2007 drilling program. So, where are we now. Well as Steve just mentioned, we are currently drilling the 40% W&T working interest South Timbalier 41 B-3 Sidetrack, the Cap Rock prospect which is operated by EPO. In the original hole we found 70 feet of oil and gas and fire sand [ph]. Following information to evaluation we have mixed the Sidetrack well up-structure to a more optimal reservoir position. Current plans are the set casing and continue to explore for deeper objectives. The proposed final total measured depth for the well is expected to be about 19,000 feet or about 17,000 feet of true vertical depth. In our deep water program, our Healy #4 exploration well began drilling in July but our progress was cut-short by eddy currents and we decided to move the drilling rig off location. Before leaving however we were able to drill down to 3,920 feet and set 22 inch casing which is just above the first of the well's exploratory objectives. You might recall that this 14,500 foot well is designed to test for independent exploration targets. These wells are just the beginning of an expected increase or exploration drilling activity in the third and fourth quarters of this year. As we have discussed in various forms it takes about 1 to 2 years of evaluation of an acquisition before drilling activity significantly increases. Well it's now been about a year since we closed on the Kerr-McGee properties and I am happy to say that our exploration are capitalizing on our regional 3D seismic databases that cover both of these properties as well as the heritage W&T properties. Their efforts are showing promising results including two upcoming drilling programs in the Ship Shoal and the Main Pass areas. As Tracy mentioned in the opening... the Board has approved a $100 million increase in capital expenditures and here are some details of where we expect to be spending some of that digital capital in the remainder of 2007. We plan to begin drilling a fixed well infield [ph] exploration and development drilling program in the Ship Shoal 300 field in September. This was one of the properties that we got from Kerr-McGee. This low to moderate risk program will be drilled from existing platforms and infrastructure allowing us to quickly bring our successful wells online. The initial three wells will be drilled from Ship Shoal 300-A platform and will include two shallow gas wells... two shallow horizontal gas wells actually and an oil prospect. Additional drilling is anticipated in the Ship Shoal 300 field area later in the year and possibly on into early 2008. The Main Pass area, we expect to begin the drilling of a four to six well programs in September which will likely carry on in Q2 of early 2008. These wells are targeting objectives even with work [ph] between oil and natural gas. Also these wells will also be drilled from existing infrastructure. So that the combined, the Ship Shoal and Main Pass drilling programs could allow us to drill and complete up to six additional wells from existing structure by yearend 2007. Net unrisk production build up of 13 million cubic feet of gas per day and 2000 barrels of oil per day is possible. Also in the third quarter we are ramping up our open water exploration drilling program. This program includes a James volume [ph] test in the [indiscernible] and the old Main Pass area. Two deep water wells including the continuation of Healy #4 in Green Canyon #82 and the Blackbird prospect in Green Canyon #177. A final deep shelf well is planned in High Island area. The unrisk net exploration potential for all of the total remaining 2007 drilling programs is about 280 BCFE. The remainder of the year we anticipate drilling a total of 10 to 13 additional wells with two being in the deep water, two on the deep shelf and the remaining six to nine on the conventional shelf. Think as you can see that we expect the drilling activity to pick up significantly in the third and fourth quarters from what it had been in the first half of the year. While next year's drilling plan is still coming together in the planning and budget stage, I think it's fair to say that we see this ramp up in our drilling activity to continue into at least the first half of 2008. The paddle, I will turn it back to you Tracy.

Thanks Jeff. As you have seen and heard we are gearing up for much more active second half of the year reserve bit [ph]. As we have stated before, 2007 was going to be about the balance between debt management, drilling and cost containment. With half of the year behind us, it's now time to put our drilling plan into action; we should start to see some results from existing WNT and former Kerr-McGee properties later this year during the next. We are also encouraged with LOE cost going down from first quarter and having our insurance renewals completely for another year. Hopefully we won't have the hurricanes this year and we will go back to the market next year with even more favorable market than our insurance reveals. Timely with the placement of a senior notes offering, we have... now I have got a permanent layer of capital and can focus again on our drilling activities. That really concludes all of our prepared remarks and we are ready to take your questions. So operator if you would please open the phone lines for Q&A. Question And Answer

Thank you sir. Ladies and gentlemen we will now begin the question and answer session. [Operator Instructions]. Our first question comes from the line of Jeff Robertson. Please take your company name followed by your question.

Lehman Brothers. Steve can you talk a little bit more about the pipeline outage at Main Pass and how long you all think if you know that that may be out. And did I hear correctly that that is not included in your guidance?

Yes, you heard correctly that it's not in our guidance. It's a third party pipeline that in fact last night they posted really the first significant detail that they have been assessing it ever since Friday and what it is, is a platform that has three pipelines that leave it. One of the pipelines that leave it ruptured was a 20-inch and then the other two, they are currently accessing those and should have those assessments done today on one of the other lines. The actual other assessment has been completed and it looks like that will be out after two to three weeks.

Okay, thank you.

Thank you sir. Our next question comes from the line of Neal Dingmann. Please state your company followed by your question. Neal Dingmann - Dahlman Rose & Co.: Good morning, guys. Dahlman Rose. Say, Tracy, you just pointed out that you have good color, was wondering on -- some of the deferrals you had obviously was -- obviously some of that stuff was whether just stuff you can't control. But on the piping and different things beyond that, is there anything more you can do to I guess I don't want to say insure but to help so that we don't see as many deferrals?

Yes, thanks Neal. I think that most of whether the deferrals are behind us, I agree with you. I think some of them were equipment related as well. The deferrals at Green Canyon, Healy drilling what not are again nature related. We picked up some eddy currents there so that's going to push us back a little back with that portion of our drilling program but it looks like South Tim 299, Bay Junop, High Island 24 are going to be about where we thought we are going to be last time we provided guidance. Could slope a little bit in some of our planned maintenance. It's -- or planned construction, High Island 24, because of rain and the inability to occupying some of the processing structures we have to plan before we get them out. It's been raining a hell of a lot in South Texas. You might have noticed that, I am not quite sure I can give you much more guidance on that other than that we did have to place these structures forward, put them out there [indiscernible] but that... but again the rain is just a factor of South Texas being flooded and that's where these structures are being build. But you have the pipelines that are being laid now. So hopefully we get everything hooked up within a reasonable amount of time here. Neal Dingmann - Dahlman Rose & Co.: No... understandable. Then a follow up on... obliviously your cash flow continues to be very high impressive level, near-term plans would be to continue to paydown more of that debt and then I guess how active would the cash, could you be in these upcoming lease bond [ph] sale?

Well the cool part about the company is what we did with the debt offering, was we positioned ourselves to have more options. So yes, we can pay down some term B data if we choose to. We can certainly look at more leasing opportunities and we can also be ready to make other acquisitions should they come about. Obviously we have told the market we are going to do some more drilling in latter part of this year and going in 2008. You might recall that we have told the market that it takes us a couple of years to get our arms around a large transaction, figure out what our optimal locations are and the timing and the logistics, and we are starting to get to that point now even though it has been just about a year or we are getting a pretty good idea of how we need to start the program and I am sorry, I think, you will see a very market increase in drilling activity in the next 12 to 18 months. Jeffrey M. Durrant - Senior Vice President of Exploration/Geoscience: Great, look forward to seeing it.

Thanks.

Thank you sir. Our next question comes from the line of Scott Hanold. Please state your company name followed by your question.

Yes, RBC Capital Markets. Good morning.

Good morning Scott.

My question kind of relates I guess you have become obviously a little bit more aggressive as far as organic opportunities here in the second half of the year. Can you sort of talk a little bit about the acquisition opportunities involved, there's two organic opportunities, and also from the acquisition front as well, would you guys consider some onshore Gulf coast stuff potentially as well down the road?

That's a further comprehensive question, but let me give you what our current view on it is. Unfortunately one of the things about this company is we have enough balance to do both activities, both acquisition and exploration. So that's one of our advantages. I think that there are opportunities out there for purchases in the Gulf and Gulf coast area. So that answers part of your other question regarding Gulf coast. Gulf coast on shore is still in my opinion Gulf of Mexico type activity there. The geology is essentially the same. So yes, the answer to that question is yes, we would certainly consider stepping onshore in Gulf coast area. And have, we think, that going into latter part of this year and into next year depending on what pricing does. Our advantages will be that we are well capitalized, that we don't need to arrive too much on the debt markets to... at this time to accomplish what we think we can accomplish. Credit markets are closed up a little bit right now. So some of the guys they have had rely on some of the private equity partners and what not, are finding it more difficult to compete. So that we see is a bit of an advantage for us currently. And that could change next week. But in any event, we certainly pay fair prices for properties. We will continue to pursue acquisitions very aggressively, that is one of the things we do very well and it is one of the reasons why we did this dead offering was to free up some of that cash so that we could take advantage of that. As far as going through the drill bit, are you gone see a lot of activity in the later part of this year, so we have high hopes for it, that's why we are out doing it.

Okay. And then switching to Cyprus, I guess you are going to do a rig out there in the fourth quarter, how long will that take to potentially workover?

Our actual work should take 30 days or less. The problem with Cyprus is the anchor split, it's near some infrastructure and with changes in international requirements after the hurricanes: Katrina and Rita, the anchor spread is a little problematic with regards to infrastructure, you don't want it do drag along after hurricanes, snag a pipeline or something. So that's the concern there. So we will just have to wait until we can get to it and abide by the race to finish our workover.

Okay. So maybe early '08 would see a production coming out of there again, late fourth quarter, early '08?

Yes, I think that's probably right, yes sir. Jeffrey M. Durrant - Senior Vice President of Exploration/Geoscience: Okay, thanks a lot.

Thank you.

Thank you sir. Our next question comes from the line of Brian Kuzma. Please say your company name followed by your question.

Sure, Brian Kuzma, JP Morgan. How is it going guys?

Fine.

I guess my first question is that 309 million a day you guys are currently producing does that include that 17 million day?

It does not. That will be reduction of 309 million a day.

And then the... your remaining exploration opportunities, I think you said which you drilled in the second half is going to be around 210 feet worth of potential. How does that break out in terms of like... let's have a rescue towards the deepwater versus all the other opportunities that you're looking at.

Now most of our drilling is on the shelf, certainly Healy is one of the wells that we are going to be drilling and that is an impact well for us.

And what was the name of the Green Canyon well, again?

Green Canyon #82 Healy prospect.

I am sorry, the other one... I am sorry.

That's Green Canyon #177.

What was the name of that one?

Blackbird.

No... I'm sorry, Blackbird.

Okay. Thanks guys.

Thank you sir. Our next question comes from line of Richard Tullis. Please say your company name followed by your question.

Capital One Southcoast. Good morning.

Hello Richard.

Hey, if you could run over the drilling program again the plans there as far as what number of rigs do you expect there would be required to carry it out over the course of the year and what you see in there as far as rig rates, things like that?

The number of rigs more than 1 and less than 10, okay. I don't have an exact number on that, but that is a little bit of a logistical question. We will judge that as we go through the program, find out what rigs are closer to what locations at the time. We don't have anything on long-term contracts. So we do that a little bit on spot if you will.

I got you, I got you. So nothing to secure the contract at this point?

Well, yes, I mean, nothing on long-term contracts. That's right.

Okay, okay. And one other quick question. With the -- what's your hedge position right now for the rest of '07 and to '08?

We are still about I guess around 10 to 12% hedged on our current production. Those should start to come off in the next year or two.

Okay.

But largely unhedged which is one of the reasons why you see the increased price on... or the increased spread on our... on a per MCFE basis because we are... large... we have a large compound of our cash flows in the oil and currency [ph].

Okay. Very good. Thank you. Thanks so much.

Thank you sir.

Thank you sir. Our next question comes from the line of John White. Please state your company name followed by your question.

Natexis Bleichroeder. Good morning gentlemen.

Good morning John.

I was as mentioned you're going to get busy with the drill bit the second half of the year, glad to see it. You also talked about a number of re-completions and workovers for the second half CapEx. Can you give us the breakdown between drilling new wells and working over or re-completing existing wells?

I think we did that earlier. I guess earlier... I think I can give you those numbers a little bit more precisely. We had 48.2, let's say... hold on just a minute and I will find it in my notes here. One moment.

And while you're looking for that a question I guess for Jeff, he mentioned a 4 to 6 well program in the Main Path area. Is that concentrated on one block or is it spread over the... over the Main Path. Jeffrey M. Durrant - Senior Vice President of Exploration/Geoscience: Yes, it's actually after several individual platforms. So, yes, it is spread around between actually Kerr-McGee... former Kerr-McGee properties and some of the Heritage, dug and see our properties as well.

But John actually what we have done is we have given a detail of CapEx so far. So I didn't give u detail on workover and drilling for the latter half of the year. I just don't have that handy right now.

I'll call you back.

It's about 75% on drilling and 25% on workovers and re-completion.

Okay, thanks very much, and good luck.

Thank you Sir.

[Operator Instructions]. Our next question is a follow-up from the line of Jeff Robertson. Please go ahead sir.

Thanks. Tracy, you all commented that you are moving to the implementation stage on the Kerr-McGee asset base. Can you talk a little bit conceptually about how you think about planning the 2008 capital program between exploration and development and how do you think about the risk profile of what you hope to do next year? Jeffrey M. Durrant - Senior Vice President of Exploration/Geoscience: Yes, for the next 12 to 18 months I think you'll see a very strong emphasis on the shelf. I think I think that there... we've... and again it takes us a couple of years to let go our arms around it. But we are kind of going out after the staff that we think is fairly low to moderate risk. There are some... there will be couple of wells in there that will be oriented towards kind of a swing for defense type thing. But for the most part kind of bread and butter type things that will continue to add reserves and in the sort of our BCF category, but not the really large high price that would see with higher risk exploration. We do have some deep shelf opportunities that we are going to look at that will have a higher risk profile and higher reward. And I don't have all that firmed up, we have to come with everything that we are going to drill. In 2008 that's moving a lot a bit. But sufficed to say that majority of it will be on the shelf.

Can you talk a little bit about the work you all have done in the past year evaluating the... just the opportunities set on the Kerr-McGee asset base and have you changed categories at all in terms of the reserve upside that you all talked about when you close that transaction? Jeffrey M. Durrant - Senior Vice President of Exploration/Geoscience: I think that as we look towards 2008, Jeff, part of the exercise is... was getting a whole lot of seismic which we have done. We just purchased a little bit more here recently off the coast of Texas. So we are gearing up for that and I think that as you talk about changing reserve categories from unrisk, undrill, we haven't gotten to that point, we are still analyzing that and that's what we want to spend a good bit of time and effort on. It's likely true [ph], we spend to drill dollars, whatever we think they are going to do is the most good. So we are spending a lot of time in exploration efforts with our... see scientist making sure we've got all the right data and that we've got the all the right analogs for what we are trying to do. And I think that's very important. I think data is actually although it sounds expensive is actually fairly cheap. I mean you buy $30 million worth of data and that's approximately 5 BCF of gas. If you buy that much data you can find 5 BCF gas where you, you probably need to be in another business. But the truth is that we've reduced their money on data we think very valuable asset for us and we are working very hard and that's what we will spend most of our time in doing is making sure that things we look out are valid and that we prioritize them properly.

Okay, thank you.

Thank you Sir.

Thank you sir. The next question is a follow up from the line of Scott Hanold. Please go ahead Sir.

Thanks, I just had a follow up to Jeff question on sort of looking at the capital into '08 and enjoying plans [ph] and you indicated sort of it's more of a low risk to moderate risk exploratory stuff with some swings that are thought to the linked in there. Given that what are you guys sort of targeting as your sort of organic growth, and I know it tends to be somewhat difficult. But what would you expect sort of a organic growth going into '08?

Well, what we have target in the past as always been about a 5% growth.

Okay.

And again we don't budget for acquisitions, we think we will get our fair share overtime and we will enhance that. But organically that's what we target.

Okay. And looking again at sort of a capital here and where your stock price has been trading recently. Have you guys considered share buyback at all?

No, that's the question that's been asked quite a bit. I think that at this point in time it actually that's no. What we are looking at is really enhancing our drilling program and finding out the... making sure that we capitalize a company, take advantage of different acquisitions. Obviously with the entire sector trading down, that becomes even more attractive. It's kind of... this happens fairly frequently in shorter months. We see a reduction in the entire sector in shorter months prior to [Indiscernible] more months and that sort of thing.

Thank you.

Okay.

Thank you sir. Our next question comes from the line of Adam Oloflin [ph]. Please state your company name followed by your question.

Yes, hey this is Ray Deacon with BMO. I just had a question about production run off maybe to ask Scott's question a little bit differently. If you look out over the next year, how much production would you expect to have to offset just to kind of stay flat and with some of the similar production, is it easier I guess to get a period where some of these wells are going to stay flat for the first 12 months?

Normally our reserve profiles are about a third, a third, and a third and on prove reserves. So these wells run off about a third year on production, about 30% to 40% year-on on PDP. So we have to scramble pretty hard to replace that. But that's kind of the... that's the bad news. The good news is there's really big cash flow. So the trick in the Gulf is always can you stay ahead of that curve. And so far we've been able to do that. So... if you are talking about building a model; you can always call here and give it to Manny and what not where he can give little more help on that. That's kind of how we look at it... it is that we have always been able to maintain about a third, and a third and a third profile on our proved reserves and we have scrambled to replace that prove producing segment of it. The good thing is we do a good job of converting reserve categories.

Got it, great. And maybe just any thoughts on between now and yearend, how you think you will... how much production is... I guess have updated that slide in your presentation when you show kind of how much production you going to be bringing on gone bring now and yearend? A number you can put your hand on easily?

I am sorry, I could... you are a little bit low I'm having a hard time hearing you.

Sorry it's probably my phone. Between now and yearend I guess how much is drilled waiting to be brought on line and how many million cubic feet equivalent?

Yes, we are going to update that slide as soon as we are able to. I don't have an exact answer for your on that just at this point but will be able to provide that for you. We addressed it a little bit in our conversation with Steve, would talk about Mississippi Canyon 718 team going up to about 20 million cubic feet equivalent. The issue with 718 is that the existing completion is still producing beyond what we had hoped for or beyond what we get predicted which is a good news bad news bang and that the results are bigger. But the cash flow is not as great as we had recently predicted of this well with a recompletion. So we are producing more reserves but we have lost some right as a result of that. The other part of it is the Bay Junop completion which we're going to bring on the battle of net rate of 18 million cubic feet a day or so. And that is supposed to come on in mid-September and we are waiting for our couple [ph] of use of permit right now and we should have that virtually impact up and probably within a week. And beginning in early September, we expect production from our South Tim 299 and the East Cameron 338 facilities come on line at a combined net rate of about 7 million cubic feet a day. And then in the fourth quarter we expect our two High Island 24 discoveries to come online at a net rate of about 19 million cubit feet a day. Again we are rating on some of the structures to continue to get... or to finish getting painted and we are setting the pipeline now. We do have some other production in Acromilian [ph] 115 at about 12 million cubic feet a day or so coming online. So an additional 15 million cubic feet a day equipment from Outlouse [ph] and South Tim 314 pipeline, as we know.

Got it. Great. Thanks very much.

That's kind of the thumb [ph] they were scratching. And there's some other things with workovers and recompletions as well.

Got it, great. And maybe just one more quick question. It sounds like you wouldn't really... given that you finally got or you feel like you've got a better handle on the Kerr-McGee properties in terms of what you want to drill and which ones to prioritize, really the big impact on F&D costs I would think is going to coming next year and not to look for a big drop in F&D this year. Is that probably right.

I'm sorry... and not to look at the big drop.

And finding a development cost. It sounds like it's going to be more of a 2008 ramp [ph], I guess.

We're certainly looking forward to 2008. I mean we have them back a little bit this year and making sure that we got the company on to a point of where you could analyze and developed this Kerr-McGee transaction. We will contend to cut back on our drilling program the first part of the year, get our debt structure back in share to take advantage of what we thought were going to be opportunities later on. So yeah you're correct in assuming that the 2008 is kind of where we are focused on right now.

Got it. Thanks very much.

Okay.

Thank you sir. Mr. Krohn, there are no further questions. Please continue.

Okay, well we appreciate everybody listening today and I look forward to talking to you again for our third quarter conference call. And I think that concludes unless there's any other questions, we will call it a morning. Thank you very much.

Ladies and gentlemen, this concludes the W&T Offshore second quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter your pass code 11094324. Once again if you would like to listen to the replay of today's conference, please dial 3035903000 and enter the pass code 11094324. Thank you for using AT&T teleconferencing. You may now disconnect. Have a pleasant day.