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Edited Transcript of PQ earnings conference call or presentation 8-May-18 1:30pm GMT

Q1 2018 PetroQuest Energy Inc Earnings Call

LAFAYETTE May 14, 2018 (Thomson StreetEvents) -- Edited Transcript of PetroQuest Energy Inc earnings conference call or presentation Tuesday, May 8, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles T. Goodson

PetroQuest Energy, Inc. - Chairman, CEO & President

* J. Bond Clement

PetroQuest Energy, Inc. - Executive VP, CFO & Treasurer

* Matt Quantz

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Conference Call Participants

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* John W. Aschenbeck

Seaport Global Securities LLC, Research Division - VP and Senior Exploration & Production Analyst

* Richard Merlin Tullis

Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production

* Ronald Eugene Mills

Johnson Rice & Company, L.L.C., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the PetroQuest Energy Inc. First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Matt Quantz, Manager of Investor Relations. Please go ahead.

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Matt Quantz, [2]

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Thank you, Danielle. Good morning, everyone. We would like to welcome you to our first quarter conference call and webcast. Participating with me today on the call are Charles Goodson, Chairman, CEO and President; Bond Clement, CFO; and Art Mixon, EVP of Operations and Production.

Before we get started, we would like to make our safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made today regarding PetroQuest business, which are not historical facts are forward-looking statements that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see risk factors on our annual and quarterly SEC filings and in the forward-looking statement in our press release. We assume no obligation to update our forward-looking statements.

Please also note that on today's call, we'll be referring to non-GAAP financial measures, including discretionary cash flow. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release included in our Form 8-K filed with the SEC.

With that, Charlie will get us started with an overview of the quarter.

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [3]

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Good morning. During the first quarter, we produced 6.1 Bcfe or approximately 68 million cubic feet of gas equivalent per day. The 68 million cubic feet equivalent per day was comprised of approximately 51 million cubic feet of gas, 1,100 barrels of oil and 1,700 barrels of NGLs.

On January 31, 2018, we sold our Gulf of Mexico properties, which contributed approximately 5 million cubic feet equivalent per day to the first quarter's volumes. While our production profile was reduced as a result of the sale, we did, however, eliminate approximately $35 million of an undiscounted abandonment liability from our long-term obligations. We expect to receive a refund of approximately $11 million in cash related to a depository account that served to collateralize a portion of our offshore bonds once the buyers replace the bonds are accepted by the BOEM. While we're unsure of the exact timing of this refund, we expect this to occur during the next 60 to 90 days. Once these funds have been received, we will contribute $3.75 million to the buyer for future abandonment cost. With our Gulf of Mexico divestiture goal now accomplished, we can focus our complete attention on our onshore Cotton Valley and Austin Chalk development programs.

Now turning to our operations where we continue to plan for our initial Austin Chalk well in Pointe Coupee parish, we are in the permitting process and current plans call for our drilling program to commence during the third quarter of 2018.

In addition, we are monitoring our other industry activity in this reemerging trend and are encouraged by the fact that several new large-cap companies have established significant leasehold positions and are planning near-term drilling programs. One of these companies, ConocoPhillips, recently announced that they have acquired over 200,000 acres and are permitting several exploratory wells.

The company stated during the first quarter conference call that they expect to start their drilling program late third quarter, early fourth quarter. With the increased interest in the trend, we are considering various partnerships that could provide additional liquidity or lower our future drilling capital needed to evaluate our acreage position.

Lastly, quickly touching on East Texas, we're continuing to evaluate various joint-venture structures and connection with our 2018 Cotton Valley drilling program. Since we're actively engaged in private discussions with various parties, I respectively request you refrain from asking questions on this topic during our Q&A.

With that, I'd like to turn it over to Bond to go over our financial results.

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J. Bond Clement, PetroQuest Energy, Inc. - Executive VP, CFO & Treasurer [4]

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All right. Thanks, Charlie. As I'm sure most of you saw yesterday, we began trading on the OTC market under the ticker PQUE. This move was a result of compliance actions taken by the New York Stock Exchange, relative to our market cap crossing below the $15 million requirement.

As some of you may remember, over the last couple of years, we've secured 2 other NYSE compliance notifications and we are evaluating what options we may have on this particular issue.

Looking at CapEx for the quarter, we invested about $4.5 million, which is net of $2.3 million in proceeds that we received from the final buy-in payments relative to our initial Cotton Valley joint venture. The breakout of capital for the quarter was approximately $2.7 million of direct CapEx and $1.8 million of capitalized overhead and interest. The bulk of the CapEx during the quarter from a direct basis was attributable to the recompletions that we performed on our last 2 Cotton Valley wells, which we announced earlier in the first quarter.

With the exact restart timing of our East Texas drilling program currently unknown, right now, we're going to hold off on providing full year guidance at this time. We do expect though for the second quarter that our CapEx would be flat or slightly down compared to the spending that we had during the first quarter. Once we know our plans, we'll able to inform the market about our 2018 capital budget, once all the -- all our work is finalized.

Turning to expenses for the first quarter, LOE totaled about $7 million or $1.15 per Mcfe. That was slightly above our guidance range due primarily to higher-than-expected cost associated with our Gulf of Mexico properties, during the month of January.

We're guiding down to $1.05 to $1.15 per M for the second quarter to account for that Gulf of Mexico divestiture, as those properties carried a high LOE burden relative to our existing onshore assets. The sale is expected to be very beneficial to our lifting costs on a go-forward basis.

G&A for the first quarter totaled $3.3 million, which was slightly below our guidance range. For the second quarter, we're guiding to $3.5 million to $3.9 million for G&A, which includes some limited noncash stock comp costs.

Interest expense during the first quarter totaled $7.5 million, which was within our range. For the second quarter, we're guiding interest expense to $7.6 million to $7.8 million range. As many of you know, in February, we exercised a final PIK option under our 2021 PIK notes. And so the interest payment in August of 2008 will revert back to 10% cash.

Finally on the hedging front, we have 250 barrels per day hedged for 2018 at $55 per barrel. After the exploration of our first quarter gas hedges, we're currently unhedged on the gas side for the remainder of '18. However, we'll look for opportunities to build out our gas book for 2018 and slightly beyond that as we get past the current shoulder season and into the summer.

With that, I'll turn it back to Charles to wrap up.

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [5]

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Thank you. While we have temporarily paused our drilling program, we're not standing still. We're currently actively engaged in discussions with potential joint venture partners in Cotton Valley, focusing efforts on reducing costs and improving efficiencies and are finalizing the steps necessary despite our initial Austin Chalk well in the third quarter. Precise execution of all of these items are essentially rebuilding our production profile and driving future value. I'm proud of our team and are looking forward to the back half of this year.

With that, I'll turn it back to Matt and we'll open up for questions.

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Matt Quantz, [6]

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Yes. Danielle, we're ready to start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Ron Mills of Johnson Rice.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [2]

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Just on the Austin Chalk. Curious, if you can provide an update with any other recent industry activity. I know that Eagles Ranch well has been producing for quite a few months now. Just curious if you've been getting any field reports of how that flowback has been going relative to state data, and any new drilling activity or is the industry just in the process of permitting a lot of wells?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [3]

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Well, regarding that Eagles Ranch well, I mean, we do are getting some intel but since they're not releasing that information, I'd really like to stay away from talking about it. There is another well that's currently in early stage of flowback, it was drilled by BlackBrush. They -- soon we'll start getting some information fairly quick, I think the fracs were completed last week and drilled out and they're flown back now. And there again, we know that they're -- we've talked to other people who are -- have not formally announced plans but are working towards getting wells drilled. So I look at it as there's going to be a very active 2019 and in the trend, there will certainly be things that will start in the second half to the -- more towards the end of the third quarter, early fourth quarter of 2018.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [4]

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Okay. And can you provide a little color in terms of what has happened from a leasing standpoint. We know Conoco talked about theirs that you've mentioned, EOG had been more to the west of you with BlackBrush kind of to the north. How's the leasing going -- as we look to the east and southeast, and are you becoming a donut hole in some of the bigger companies' acreage?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [5]

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Well, as you move, we're very positioned in Point Coupee where we -- there's a lot of control and a lot of really good type of porosity wells that we've seen as -- that is the reason we focus in that area. If you move across the river into West [Louisiana] and further to the East. Certainly, we heard that certainly Conoco continues to be active, and EOG and then there's another company that is -- not announcing anything, but I'll refrain to discussions. We are active in Livingston Parish. So the trend continues on further to the east and I've talked to people that are knowledgeable that they're actually people are leasing up in the Wilkinson County, Mississippi. So I mean the size and scope of this thing is very large, as we've talked about, we stay south of the lower protective shelf edge for specific reason. But there are clearly other companies, several very large companies that are leasing north of that -- directly north of us. And again, that company has not announced anything. So I'm going to refrain to really talking about who they are. But safe to say, everybody out there is still bigger than we are. And it's amazing to see how quick one well has really spurn this activity to this reemerging trend.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [6]

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And are you still [at] that same 24,000 gross acre position?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [7]

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Yes.

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Operator [8]

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The next question comes from John Aschenbeck of Seaport Global.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - VP and Senior Exploration & Production Analyst [9]

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First question here is just a follow-up on the Austin Chalk in terms of your test here. I think originally you guys had talked kind of loosely about the timing of that test being in the second quarter sometime. And now it sounds like it's getting pushed out just a little bit to the third quarter. So I was hoping you could possibly expand a little bit on that decision. Are you guys just simply waiting for a little more time to perhaps get some more industry results? Or are there other -- perhaps other factors driving that decision?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [10]

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Well, no, we're not waiting on industry results. It's really more a focus on having to dissolve units and then reestablish units in the area, title work, things like that. It's -- maybe I jumped the gun a little bit that I wasn't really aware how much of this had to be done before. It's been a while since we've really been active in drilling with a lot of units and things like that and a trend like this in Louisiana. And so -- and certainly, there's -- we would love to see other issue activity, but we've now moved on to where we know our projects very well. We've gotten pretty much all the information. We are trading for some additional downhole information from existing wells, it'll be helpful. But we really are comfortable with what we've seen geologically, geophysically, engineering-wise from wells that, in and around where we've drilled. And so we're really kind of on our own time frame as opposed to waiting on others.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - VP and Senior Exploration & Production Analyst [11]

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Okay, got it. That's helpful. Appreciate that. And then my second question is just a follow-up on liquidity in general. It seems like you guys have quite a few options here to potentially boost your position. And Charlie and Bond, you guys kind of -- you both hinted at some of these in your prepared remarks whether it be the BOEM refunds or exploring options for partnerships in the Austin Chalk. So I guess, what I'm trying to really get a feel for is just kind of bring those all together and get a feel for your guys' comfort around liquidity currently, and then -- and with that the options you have to expand that position?

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J. Bond Clement, PetroQuest Energy, Inc. - Executive VP, CFO & Treasurer [12]

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John, this is Bond. I mean, certainly we've got the $20 million available in our term loans currently out there. We've got as we've talked about roughly net of what we have to pay to the buyer for the Gulf of Mexico assets, just call it $8 million to $9 million of cash that we would expect to come in, in the next 60 to 90 days. Although I will tell you, it's very uncertain as to the exact timing just because we're dealing with a lot of government bureaucracy relative to getting these bonds released. So that's sort of an uncertainty there. And then, obviously, anything that we're able to bring forward relative to a joint venture, not only on the Chalk, but also in the Cotton Valley, could provide some upfront capital and a disproportionate cost-sharing arrangement which would be favorable for getting wells drilled. So those are kind of the pillars of the liquidity position that we have today. Do you have any follow-up on that?

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Operator [13]

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The next question comes from Richard Tullis of Capital One Securities.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [14]

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Charlie, when you look at that first Austin Chalk well, what are your well cost expectations for that when given the current environment? And say on a go forward basis, what -- could you get well costs down to using the same current environment?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [15]

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Well, I think we're looking at probably somewhere in the range of $9 million to $10 million. We are probably not going to need to core the well because of access to other downhole information. And then, once we have that first well down drilled, we feel like we can bring these costs down to, let's just say, $7.5 million. And so with that, we're very comfortable that the economics of this trend will work very well.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [16]

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Assuming success there, what sort of pace do you think you might go at over the subsequent, say, 6, 9, 12 months on a drilling basis in the Austin Chalk?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [17]

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Well, I think, you've seen how we've approached these resource plays, whether it's in the Cotton Valley or in the Woodford, earlier along the first 10 wells are so -- you certainly want to learn a lot. And so I'd say, you drill the first well and you let it produce for probably 4 to 6 months to see what the decline rates are in our first project area. It's net to us around 7,500 acres, so it's -- there's room there for 20 to 40 wells, which is in itself is a significant development program with these kind of costs, yet on the other side, it provides a huge amount of production. So you're starting to look at what's your long-term production rate, what's your long-term saltwater rate and just take away things like that. I'd say at a minimum, drill the first well, complete it and then basically try to focus on spudding a second well within 6 months.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [18]

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That's helpful. And then lastly for me, Charlie, looking at the existing DrillCo JV in the Cotton Valley, what remaining commitments are there related to that?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [19]

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Well, we basically -- when we got into that, I think we had like 6,500 acres with our partners in 47 locations. We have now -- we're up to close to 9,000 acres with our partners and 47 locations, if you back 9 out of that, that would be 38. But we've increased that location count because of the success of those wells to 92 locations. So those partners and PetroQuest together have approximately 92 wells to drill on that joint venture acreage at this point in time.

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Operator [20]

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The next question comes from [Anthony Martiez]

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Unidentified Analyst, [21]

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Is there anything that would prevent at this point insiders from buying stock in the open market. I mean, the stock is trading obviously at a 52-week low, $14 million market GAAP. It would certainly send a vote of confidence to the market if we saw something in the way of insider buying?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [22]

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I'll take that question. It's obvious -- that's an obvious question people always tend to ask. Unfortunately, when you're on this side of the table, there's a lot of things we know and it's always very difficult to do that. And over the years, I bought a lot of stock in this company. And I think, it's -- that's an individual decision that we as investors have to make. We have a lot of concentrations. So I think that's really more of an individual decision to make as opposed to trying to go out and make a statement in the market. So I think that's the way to answer it.

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Operator [23]

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And we have a follow-up question of Ron Mills from Johnson Rice.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [24]

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Charlie, did you -- in your response to Richard talk about having 7,500 net acres off of the 24,000, 25,000 gross or was that just in the direct vicinity of where you're going to drill your first well?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [25]

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Yes, that's in the first project area. We have 4 project areas that each are net to us somewhere around 6,000 to 8,000 acres. So each of those areas, we look at as 20 to 40 and maybe more wells to drill, where we can operate and control the destiny. So the first one, we're going to -- we're planning on drilling or at least we're targeting right now is around that 7,500 acres. And we're looking at unit sizes of around 1,600 to 1,800 acres and with multiple wells in those units. So it's obviously -- that in itself is a very large project for PetroQuest And we're obviously very excited about it.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [26]

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And so are you still at plus or minus that 24,000, 25,000 acres? Have you built it? I mean I'm just trying to get the sense as to what's happened with the course the past few months?

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Charles T. Goodson, PetroQuest Energy, Inc. - Chairman, CEO & President [27]

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That's where we are right now. We basically have the ability to pick up through trades and through additional cleanup operations, some more acreage out there. But at this point in time, these are relatively short-term leases, 3-years with a kicker or 4 years. And so there's not really a large desire to plant a lot more capital in this when you don't have to. So I think that we will, as I said, control our destiny in those 4 areas. And that's goal number one for us right now.

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Operator [28]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Quantz for closing remarks.

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Matt Quantz, [29]

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Yes. Thank you everybody for their time this morning. And please follow up if you have any additional questions.

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Operator [30]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.