Edge's production exit rate on September 30, 2004 was 33.3 MMcfe per day, up 10% from June 30, 2004.
Edge drilled and logged ten wells during the third quarter, six of which were successful. Seven wells were drilling at the end of the third quarter, of which five have reached total depth, logged pay and are now in various stages of being completed. The remaining two, along with three other wells are drilling at this time. To date, Edge has been successful on 28 of 35 wells drilled for an overall success rate of 80%.
In southeast New Mexico, Edge has completed four of five deep wells. The deep wells have not met expectations from a pure reserve standpoint. However, Edge is very encouraged by a sixth deep well in which it has 50% W.I., the SE Lusk 34 No. 1, that has logged 22 feet of pay in the Atoka/Morrow as well as six additional pay zones in the shallower Bone Springs and Delaware Mountain group which produce in the area. Completion operations are underway on this well. A seventh deep well is currently drilling and two more low interest deep wells are expected to be drilled by year-end.
Also, in southeast New Mexico, Edge has completed three of three shallow wells that have come in as expected. A fourth shallow well, the Red Lake 36-A St. No. 1, Edge 100% W.I., has logged 57 feet of pay in the Yeso section as well as pay in the lower and middle San Andres. Completion operations are underway and Edge believes this well has the potential to be significantly better than originally expected.
Edge is very encouraged with its first deep well in the Mississippi Salt Basin. The Ellzey No. 2 (Edge 28.3% W.I.) has logged a total of 105 feet of pay in two zones in the lower Hosston section and the well is now in the early stages of being completed.
In southwest Louisiana, Edge's 25% W.I. Hackberry well has begun drilling and is expected to take 30 to 40 days to drill.
In south Texas, Edge's efforts in the Gato Creek Lobo and Encinitas Vicksburg plays continue to yield positive results. Since the end of the second quarter, Edge has drilled five successful wells in the Gato Creek area with W.I. ranging from 96.7 to 100%. Two to three additional wells will be drilled before year-end. During this same period, Edge and its partners have drilled three successful wells in the Encinitas Vicksburg play. One well is currently drilling and a second well is expected to be drilled before year- end. Edge's working interest in these Encinitas wells ranges from 22.5 to 31.0%.
Edge also announced that its Board of Directors has approved a further increase in its 2004 capital expenditure budget to $52.2 million before the recently announced planned acquisition of south Texas properties from Contango Oil & Gas. Approximately $38 million of the increased capital expenditure budget is for the drilling of 50 to 54 wells by year-end.
Commenting on recent operations, John W. Elias, Edge's Chairman, President & CEO, noted, "We were able to accelerate our efforts in the third quarter, after falling short on our planned drilling and production in the prior quarter, and have now regained our momentum. Our activity level will continue through the end of the year and on into next year. The 50 plus wells we expect to drill this year represents an increase of more than 40% over 2004. We are, also, operating an increasing number of the wells we drill, which gives us greater control over the timing and efficiency of our activities. As a result, we have increased our workforce in essentially all areas to ensure that we can handle the increased level of activity effectively.
Our south Texas program continues to yield very positive results and we are aggressively looking for ways to further expand our position as evidenced by our recently approved budget supplement and the announced acquisition. We are also encouraged by our first deep well in the Mississippi Salt Basin and the two most recent wells in southeast New Mexico.
We are now confident that we will achieve a 2004 production level that will fall in our previously stated range of 12.0 to 12.5 Bcfe.
The commodity price volatility that is occurring in our business is more than likely something that we will have to deal with for sometime. Therefore, when we deem it appropriate we will hedge some of our production to help ensure that we are able to maintain the financial flexibility necessary to effectively execute our business plan to achieve the objectives and goals we have established for the company."
Separately, Edge announced that it recently expanded its gas hedging position, adding a Houston Ship Channel costless collar covering 10,000 MMbtu's of gas per day during 2005 with a floor of $6.00 per MMbtu and a cap of $9.52 per MMbtu. Michael G. Long, Edge's Senior Vice President and Chief Financial Officer, reported, "Our overall 2005 hedge program is shown below. We feel our hedges fit nicely with our financial and operating strategies and plans. Obviously, we are much more sensitive to gas prices than oil prices. The certainty of an average gas floor price of $5.50 per MMbtu and $35 per barrel for oil helps assure that we can earn a good rate of return on our expanded capital program. Currently, our oil derivatives are underwater with a September 30, 2004 mark-to-market liability position of $1.3 million. Since we do not apply cash flow hedge accounting to this economic hedge, we will record an estimated non-cash, pre-tax unrealized deduction of $1.3 million to income in the third quarter."
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