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Executives

Peggy Herald – VP, Accounting and Treasurer

King Grant – President and CEO

Mike Decker – EVP and COO

Analysts

John Polcari – America Capital Management

Gasco Energy Inc. (GSX) Q3 2012 Earnings Call November 15, 2012 11:00 AM ET

Operator

Good morning. My name is Barney and I will be your conference operator today. At this time, I would like to welcome everyone to the Gasco Energy Third Quarter 2012 Financial and Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the conference over to Ms. Peggy Herald, Vice President of Accounting and Treasurer of Gasco Energy. Please go ahead ma’am.

Peggy Herald

Thanks and good morning, everyone. Please be advised that our remarks and the information that follows, including answers to your questions, include statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. However, they are subject to significant risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

While the company believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us, such as commodity prices, competition, technology, environmental and regulatory compliance, drilling schedules, capital plans and other factors will be as we anticipate.

Important risks that could cause actual results to differ materially from the results implied by these or any other forward-looking statements include among others, matters that we have described in our earnings release issued yesterday and in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Existing and prospective investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

Now I’ll turn the call over to King Grant, our CEO and President, for some introductory remarks.

King Grant

Thank you, Peggy. Good morning, everyone, and thanks for participating in today’s conference call. Peggy and I are joined by Mike Decker, our Chief Operating Officer, who will cover operations. Last evening we reported the quarter that was in line with our expectations and one that was similar to our second quarter 2012 results. Some of the Q3 2012 highlights included 13% improvement in oil and gas sales as compared to Q2 2012 which was driven in part by 15% increase in oil production and a 24% improvement in the average price received for natural gas sales.

On the field level we continue to work on oil production enhancements that target bypassed oil on some of our older wells. The project has seen average daily net oil production growth of 43% in September as compared to April. This project is yielding low cost improvements to production and we continue to identify additional candidates for reentry. It is also way to continue activity in the field while we prepare to commence our new drill program in late 2012 or early 2013. The gas price environment is improving as evidenced by recent NYMEX December contracts trading around $3.70 per MMbtu.

In the past three years we have selectively entered into and closed several important transactions at Gasco. Management along with the Board of Directors has jointly managed the company through the down drop of the financial crisis of 2008 to 2010, and then later to the lower price natural gas environment that is now showing signs of recovery. You may recall that we monetize nearly $10 million in natural gas hedges in 2009 and sold our gathering system assets in 2010 for $23 million and used the proceeds from both transactions to reduce bank debt to a more manageable level.

Later in 2010, we exchanged our old notes due 2011 for new 2015 notes while equitizing 30% of the old notes. These transactions resulted in the retirement of $52 million in senior debt and ensured the future of the company during the time that many companies of our size were not so fortunate and today no longer exist.

We carefully consider the options available with respect to our asset base and other opportunities when undertaking these transactions. Our natural gas weighted asset base as a result in the company operating under constrained cash flow and slowing down our last natural gas drilling rig in 2010. Rather than sit still and weight for natural gas prices to recover the levels that makes drilling more economically attractive, we focused our efforts on two fronts.

First, we successfully drilled and completed two Green River oil wells late last year. These wells confirm the economics of drilling on our acreage for this play and laid the groundwork for the recompletion program that we kicked off last spring, and the drilling program that it set to commence not later than the first quarter of next year. Second, we bought a partner into our Utah project late in the first quarter of this year. This transaction allowed us to retire our remaining bank debt, bringing our total debt reduction since 2009 to more than $62 million.

Additionally, our JV agreement provides for a carried interest in $37.5 million drilling program that includes the old wells I just mentioned and an additional dozen or so natural gas wells. To broaden our commodity exposure, we assembled oil projects and lease hold in California where industry partners have formed into drill carried wells that have no capital expenditures natural gas going to shareholders. One of these oil wells is satisfied before year-end on our Northwest McKittrick prospect. We’re excited to get the bit turning to the right in California where we have three more wells that are expected to be drilled in 2013 again with no CapEx required for Gasco.

Moving to the most recent quarter, our cash position was $5.6 million at September 30, 2012, and our working capital was $5 million. Our long-term debt consists solely of the $45 million, 5.5% convertible notes due 2015. It’s obvious reviewing our financial statements that we’re still managing the company that is limited to liquidity, but substantial upside in the asset portfolio.

We are seeking demand to improve our liquidity by a combination of cost control, production enhancements and strategic initiatives. We are able to best focus our cost reduction efforts on items that we can control namely expense management in the field by reducing LOE, which we demonstrated this quarter.

We’re also focused on improving liquids production which we achieved during Q3 2012. We are actively pursuing several strategic pathways to improve our financial position including additional farm outs, evaluating options for the monetization of assets, purchasing cash flowing assets to the issuance of equity and investing merger opportunities.

As an E&P company with over 12 years in business and coupled with management’s numerous contacts, we have access to industry deal flow. We evaluate these opportunities and consider their relevance to Gasco. Our business development group headed by Dick Crist is constantly analyzing deals and potential transactions in order to pursue the best ones that we identify. We look forward to providing you more information about these strategic initiatives in the coming months.

The company expects more drilling activity next year on its projects than in the past three years combined. Between now and December 2013, we expect to have four California wells down, we expect to drill 18 wells in the Uinta Basin and we believe that the natural gas markets will continue to improve further benefiting Gasco and its shareholders.

Peggy, I’ll now turn the call back over to you for today’s financial discussion.

Peggy Herald

Thanks, King. I am going to cover just a few of the key financial results that we reported last evening. As usual, please reference our results release and our filing on Form 10-Q, which contain detailed disclosures regarding Q3 2012. We would like to remind our listeners that during Q1 2012, we conveyed a 50% interest in certain of our Uinta Basin properties to our joint venture partner.

Q3 2012 is now our second full reporting period in which our Uinta Basin financial results reflect this conveyance under the terms of the Gasco-operated joint venture. Please note that due to the 50% interest conveyance, our operational and financial results for the three and nine-months period ended September 30, 2012 are not comparable to the same periods in 2011.

Oil and gas sales during Q3 2012 were $1.8 million, which is a 13% improvement over Q2 2012 total. Nat gas prices were 37% lower when compared to the prior year period, but were 24% higher than in Q2 2012. We are pleased to see nat gas prices trending higher heading into the winter heating season. Oil prices received were 6% and 11% higher than in the Q2 2012 and prior periods respectively. Our net loss for Q3 2012 was $3.2 million or $0.02 per share. Please note that Q3 2012 results include certain non-cash items such as the $700,000 credit attributed to derivatives and $1 million impairment related to the carrying value of oil and gas properties.

Turning to general and administrative expense, total G&A for Q3 2012 was $2.13 per Mcfe as compared to $1.89 for Q2 2012. The increase in G&A is primarily due to legal and consulting expenses associated with the Uinta Basin joint venture transaction. When netting out the non-cash stock based compensation charge, we are still running at around $1 million per quarter of cash G&A, which is consistent with our past quarters. We would expect this trend to lower as the legal and consulting expenses associated with the joint venture will be eliminated from the line item calculation.

Now turning to lease operating expense. Our LOE expense on a per unit basis was $1.80 per Mcfe for Q3 2012 as compared to $2.24 per Mcfe in Q3 2011 and $1.96 in Q2 2012, this represents an 8% and a 20% decrease when compared to Q2 2012 and the prior period respectively. On a quarter-over-quarter basis, lower LOE is largely attributed to decrease workover activities in the field as compared to the prior year period.

Q3 2012 workover expense accounted for $0.41 per Mcfe of the LOE total. By comparison, workover expense for Q3 2011 was $0.87 and for Q2 2012 it was $0.40 per Mcfe. As we indicated on the last call, we are now seeing the LOE component numbers come down as we complete the workover program. We expect this trend to continue as we grow our gross production base in 2013.

Finally, for the nine months period, we have invested $2.7 million of our revised 2012 CapEx program of $3.6 million. We are on track for 2012 to meet this budget. I would now like to turn the call over to Mike Decker for a discussion of operations.

Mike Decker

Thanks you, Peggy. I would like to begin by updating our listeners as to the timing of the upcoming Uinta drilling program. In the Uinta, we originally projected a CapEx budget of approximately $3.6 million for the drilling and completion of six gross or one net new Green River oil wells and six gross or two net new drill natural gas wells. As previously disclosed, we elected to defer the new drill gas well program to 2013 when we expect gas prices to improve.

All of the new drill Green River oil wells are in the permitting process. Actual timing of the drilling of the wells is dependent up on receipt of approved permits and rig availability. We believe both events to occur no later than the first quarter 2013. We recently staked five additional high-graded Green River oil well locations that are also being permitted. Based on our experience, we have a reasonable expectation that we should receive these permits in late 2013.

The company is also in the process of permitting its Uinta Basin natural gas well program. We remain active in the Uinta with our workover program, which targets bypassed oil in older wells. We have performed five Green River workovers which have yielded a per well average of 15% to 20% increase in net oil production as compared to rates recorded prior to the well workovers. Average daily net oil production has improved by 43% to recent rates of 76 barrels of oil per day in September of 2012 from 53 barrels of oil per day in April of 2012. Targeting the bypassed oil intervals is proving to be a low cost way to increase oil production. We have identified 10 additional wells for workover activities and further production enhancements.

Finally with respect to commodity prices, oil prices remain strong and we are currently seeing a differential in NYMEX for our Green River oil production of approximately $12 per barrel. Based on yesterday’s OPAL closing price, our price our price received for natural gas is $3.70 per Mcfe.

Now turning to California and our oil-focused prospects on the western side of the San Joaquin Basin, as King mentioned earlier, Gasco is to be carried on four wells in California that are expected to be drilled before the end of 2013 and are staggered. We expect the Northwest McKittrick well to be spud in Q4 of 2012 and three more wells in 2013. One in Q1 in the Willow Springs prospect, one in Q2 in the Antelope Valley Trend, and one projected to be spud in Q4 in the Southwest Cymric prospect. A second Antelope Valley well is required to spud six months after the rig is released from the first AV well. The Northwest McKittrick Prospect, where Gasco controls 599 gross or 120 net acres hold net un-risked prospect potential of approximately 3 million barrels of oil.

That concludes our prepared remarks for today and I would now like to turn the call over to the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Polcari.

King Grant

Good morning, John.

John Polcari – America Capital Management

Which California property is spudding by year-end?

King Grant

That would be the Northwest McKittrick Prospect, John.

John Polcari – America Capital Management

And the percentage that has been sold out to?

Mike Decker

We would be maintaining a 20% interest once the initial early wells have been drilled.

John Polcari – America Capital Management

And the net wells in the Uinta, it’s 18 gross you are projecting for 2013, what is that on a net basis?

King Grant

The capital to us would be something less than, well, on a capital basis, it could be like 3.5 to 4, 3 to 3.5 wells net. And working interest would be 5 to 5.5 wells.

John Polcari – America Capital Management

Okay. And considering even though we generated some additional cash this quarter, in light of the Q that you have what’s the adequacy or statements in the Q, what’s the adequacy of the cash situation for 2013?

King Grant

Well, as you mentioned, it’s in the Q that if we did nothing then we would have enough cash to execute the plan in 2013, but feel confident that doing nothing is just the basis of making that statement in those in the 10-Q, it is not the plan. The plan of course is to manage the capital requirements and the cash needs and get those wells drilled and get the program running.

John Polcari – America Capital Management

Doing nothing meaning zero wells?

King Grant

Well, no, doing – if we didn’t do a transaction of some sort, if we drilled some wells, we would – if we drilled no wells, we have cash (inaudible) late in the year, that’s not our plan, our plan is to drill some wells. If we did nothing else other than sit with the cash we have and projected forward the prices and volumes that we were generating in the third quarter, that’s the basis of the presentation of the statements in the queue that you’re referring to.

John Polcari – America Capital Management

So based on current funding and projected cash flow, based on the prices that we have now, without additional transactions, how may wells would you say, would you estimate could be completed in the budget?

King Grant

Well, we certainly can drill the oil wells, the gas wells, we’ll – we’ll need to do something.

John Polcari – America Capital Management

Okay. And then just to recap because I missed, I didn’t follow Decker’s number, what was the number of oil wells again?

King Grant

It’s six oil wells with just about a $1 million cost to us net.

John Polcari – America Capital Management

About how many gross oil wells?

King Grant

Six.

Mike Decker

Six.

John Polcari – America Capital Management

Six and, and one net?

Mike Decker

That’s about right, yes, sir.

John Polcari – America Capital Management

And you don’t think you’d be able to do any of the cash flow without further funding?

King Grant

We’ll be funding or some other deal – we’re looking at a lot of different ways to get the program drilled, John.

John Polcari – America Capital Management

(Inaudible) proceed in 2013, would you look for NYMEX pricing how far north of $4 or would you, would you scrap it as the pricing war and as we’re sitting here now, NYMEX pricing is $3.75, let’s call it, and you’re getting – what’s the differential out there?

Mike Decker

Right now it’s about dime, but let’s call it $0.20 or $0.25.

John Polcari – America Capital Management

Okay, so let’s say $3.50?

Mike Decker

Okay.

John Polcari – America Capital Management

At that level, would you postpone the program?

King Grant

We are getting carried in the program, so our economics look somewhat better than that. So it is an economic program for us because of the carry from our partner, but we’re not looking to inflict too much pain on our partner, but we do want to get the wells, some wells drilled to get production up because it will also help drive down LOE by having a larger base to spread the fix component over.

Mike Decker

And John, we should add that the type of wells that we’re drilling, at this point in time, are definitely economic to a PV-10 at $3.50 NYMEX.

John Polcari – America Capital Management

Okay. And none of these wells whether its oil or gas are currently permitted, is that correct?

Mike Decker

The oil wells are – we’re being told are near the end of the permitting process, but you’re right, we don’t have those permits in hand. The natural gas wells are in the permitting process and we’re hopeful to have those in the second quarter of 2013.

John Polcari – America Capital Management

Okay. And I want to refresh again, how many six wells, six oil wells gross, one net and how many gas wells?

Mike Decker

It’s similar in the order of 12 gross.

John Polcari – America Capital Management

12 gross, okay, because it’s only six gross on the oil side right?

King Grant

That’s correct. Go ahead John, I am sorry.

John Polcari – America Capital Management

I was just saying 12 gross on the gas side would be – what 2.5 net?

King Grant

That’s a good ballpark number.

John Polcari – America Capital Management

I’m sure that you’re as frustrated as everybody else, but I see a number of other permits issued larger players obviously with a little more lead time and a little more wait to bring to bear, but what look like permitting in the third quarter than in the fourth quarter is now, you save it first quarter. Can you speak to what the permitting process, the issues are or are they somewhat environmentally constrained or is it just a bureaucratic issue, is it a combination of all of that, is it a...

Mike Decker

John, the main reason is a bureaucratic issue. The BLM has a significant backlog, which is increased earlier in 2012, it was taking in federal acreage working with the BLM has taken approximately 200 days to get a federal permit. They’re now approaching 300 days for a federal permit and it’s strictly due to the number of permits that have been recently issued to the BLM or requested from the BLM, it is strictly workload.

The BLM office in Vernal is having trouble keeping fully staffed. They have, I think, they’re requesting right now somewhere in the order of 30 to 40 additional people to help them with the permitting process. And so what we’re trying to do now to also help us with that process is to go ahead and be submitting permits on a very regular basis so that we are in the permit flow so that we’re not – so we just start getting permits turned out on a more regular basis than what we are right now. But right now we are caught up in the bureaucratic issues going on in Vernal BLM office.

John Polcari – America Capital Management

Because the oil wells have probably been in process for going on a year, (inaudible) year.

Mike Decker

The oil permits were submitted last May and so it’s now at six months, so it’s 180 days out. And we are – we know that they are in the final process through communications we’ve had with them. They still don’t have a specific data that will be released on were just based when they were submitted and where they are in the process.

John Polcari – America Capital Management

And on those, you think you are targeting feasible first quarter of 2013?

Mike Decker

That’s what we have been told, that’s what we are targeting.

John Polcari – America Capital Management

And then on the gas side, towards second half of 2013?

King Grant

That, you know, it just based on what we were being told with the permitting process, yes, that is correct.

Mike Decker

Second quarter, John, it’s what we’re – sometimes second quarter of 2013.

John Polcari – America Capital Management

Right. Because those were filed over the summer time some time?

King Grant

That is correct.

John Polcari – America Capital Management

Okay. So there is really no correlation between the BLMs green light for the overall project and the actual permitting process that would be safe statement, I mean, the overall 10 year drilling program doesn’t seem to correlate with any speed up in the permitting process?

King Grant

No.

John Polcari – America Capital Management

Okay. And you have mentioned on the last call, last quarter about, if the permits came through you’d be somewhat constrained just because weather in the first quarter anyway. So with permits in hand where do you think they would actually spud with a return to say a normal winter?

King Grant

With normal winter, let’s hope for sometime in the end of February, first part of March, (inaudible) in the Uinta Basin in January part of February.

John Polcari – America Capital Management

And all else being equal, the timeline to bring them online if the drilling successful?

King Grant

Well, each Green River well will take about two weeks to drill from spud to rig release. And so we’re making whatever may hopefully 30 days after rig release that we can have eight well brought online.

John Polcari – America Capital Management

So six to eight weeks after you’ve spudded the well?

King Grant

Yeah, I mean, we’re actually thinking that hopefully since they are smaller wells and jobs so that we can actually I’d say once we have rig release of the well then we can go ahead and complete that well within about 30 days or so.

John Polcari – America Capital Management

All right, okay. All right, so six to eight week is definitely a real...

King Grant

Yes, if you’re modeling something that would be a good model.

John Polcari – America Capital Management

You know lastly, again in the last conference call you were attempting to get a lot of credit you had thought you had stated you currently believe that there would be ability to get but obviously no assurance and I guess that process has come to a conclusion and you have decided based on the terms you have you’ll have to live without it?

Mike Decker

That’s right, where we are right now with cash flow, it’s just not a viable option.

John Polcari – America Capital Management

Feasible, right? Okay, so then just to recap if without a further deal, you could get – McKittrick is basically a free ride for the fourth quarter, correct?

Mike Decker

That’s right.

John Polcari – America Capital Management

And the oil well, which will – could proceed with the current cash situation and could you give me an estimate on the gas side maybe everything being unchanged maybe what three out of 12?

Mike Decker

No, I don’t know that you would – without doing something – I don’t know that we’d start drilling the gas wells. We will make sure we have the money to start the program to drill it.

John Polcari – America Capital Management

Okay, because it will take a little creative financing...

Mike Decker

(Inaudible).

John Polcari – America Capital Management

Right.

Mike Decker

For three years it’s trying to be creative.

John Polcari – America Capital Management

All right, all right.

Mike Decker

With all the transactions we’ve done and we’re going to keep working hard to get these wells down and develop this property both in California and in Utah.

John Polcari – America Capital Management

As I – stating the obvious, it’s pretty difficult to see a – to get any kind of an equity transaction done here at these levels, I mean, is it challenging the best?

King Grant

It would be challenging and would not be an optimal solution and I don’t think you could become...

John Polcari – America Capital Management

You’re looking at other alternatives obviously.

King Grant

Yes, sir.

John Polcari – America Capital Management

And lastly, moving just to Nevada, I had seen some interesting properties in Nevada for the first time in a long well in few other areas. I know you have some property in there which no one has taken a hard look at in quite a long time, any interest from anybody on any of those properties in any form?

King Grant

We took those properties and turned them to somebody else and just kept the royalty, so he is trying to find partners to help him drill it.

John Polcari – America Capital Management

Okay. All right, thank you, sir.

King Grant

Thank you, John.

Mike Decker

Thank you, John.

King Grant

I appreciate everybody attending this morning and look forward to talking to you in the coming weeks and at the yearend call. Thanks, everyone.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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