TransAtlantic Petroleum Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov.15.12 | About: TransAtlantic Petroleum (TAT)

TransAtlantic Petroleum (NYSEMKT:TAT)

Q3 2012 Earnings Call

November 15, 2012 11:00 am ET

Executives

N. Malone Mitchell - Chairman and Chief Executive Officer

Wil F. Saqueton - Chief Financial Officer, Principal Accounting Officer and Vice President

Chad W. Potter - Vice President of Financial and Investor Relations

Analysts

Mario Cordova

John Malone - Global Hunter Securities, LLC, Research Division

Jonathon Fite

Jamie Somerville - TD Securities Equity Research

Operator

Good day, ladies and gentlemen, and welcome to the TransAtlantic Petroleum Ltd. Q3 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Malone Mitchell, Chairman and CEO. Sir, you may begin.

N. Malone Mitchell

Good morning, ladies and gentlemen. This is Malone Mitchell, CEO of TransAtlantic. As most of you are, I am also frustrated by our timeliness in filing our third quarter Q. It may be confusing to understand, but actually, some of the improvements in our process have led to a cleaner accounting look at both our past and at our current period. It may be hard to understand given the timeliness, and, frankly, we believe that we will have completed the process by the end of the year and going through our 2012 audit, which will leave us with a clean and a well-functioning accounting group. I'll turn that over to Wil to discuss later in the call, and we'll be glad to take your questions.

As you'll notice from the results that we posted, the estimates that we did have an improvement in our financial performance for the quarter. If we take a look at the operations of the company, first, looking at the Thrace Basin, we've begun drilling our first well of our development program, which is scheduled to be an 88-well program in the Tekirdag Field. Most of those wells are scheduled to the 2,000- to 2,500-meter, and we've began the first well there and [indiscernible] surface casing.

We also reached total depth yesterday of 3,250 meters on our first deep test on our Hayrabolu structure. We don't have logs out yet, but we do know from the shows while we were drilling that we are overpressured through the lower Mezardere sands. And we do believe that, that structural area will represent probably the second field that we will announce some time in 2013, a more formal development program on as we have done in Tekirdag.

In the Sivas Basin, where we have conducted the joint operations with Shell. We've completed shooting our seismic. We're turning that data over, and we expect it in the first quarter of 2013 to reach some geological conclusions that will lead us to being able to discuss whether we're going to go forward with drilling in that basin.

In the Southeast Turkey basin, our Goksu-3H continues to do well. We posted a new presentation that shows early production rates from that well. We've had that well on a 22/64 choke. It's producing at about a 36% oil cut. We expect to complete our pipeline tie-in to our main production facilities this month. That may allow us to increase that. Today, the well produced -- or yesterday, this morning's report, the well produced 544 barrels of oil, which is near the high that the well has produced. It's producing at 190 pounds flowing tubing pressure, 900 pounds shutting casing pressure. So good performance on that well. It's still very early, and we're not able to project where the ultimate outcome or what the ultimate results on a broader development will be. We do plan in 2013 to drill approximately 6 additional horizontals delineating the immediate Goksu field area. And we have completed just West of that on our new Molla license. We just completed last week shooting approximately 150 kilometers of 2D seismic. That'll delineate our structures on our West Molla block, and we do expect to start shooting 3D there in the second quarter of 2013.

Our Bahar well, you'll notice again, we're reporting that we're preparing to frac the well, and I want to give you a little more granularity on what's going on there. We wound up having to run a liner on that well when we originally drilled the well. When we originally perforated and completed the well, the well would flow 2 to 3 barrels of oil per day. After a very small initial breakdown, which we had a packer failure on our tubing, the well's productivity increased to 25 to 30 barrels of oil per day without water. We recently -- we had spent a good bit of time imported a packer from Weatherford, I believe, into Turkey, which took us close to 45 days. I was supposed to hold a 10,000-pound differential. That packer also failed in stimulating. We were able successfully to inject a couple 100 barrels of just KCL pad into the well. Following that and flowback, the well's productivity increased to closer to about 75 barrels of oil per day, still without water. We're in the process now of running a 4.5-inch tie-back liner that we believe will allow us to frac that well, and we certainly expect to see some reasonable results out of that. That entire area is overpressurized. And as we reported numerous times before, all 4 of the potential horizons that are productive had oil tests as we drilled that well, and we're still working on the initials.

In the Arpatepe field area, which is also Bedinan production, in October, the Arpatepe-6 was completed, and then we drilled that well in 2011. We're not the operator there, and the operator chose to complete the well in October. That well's flowing approximately 200 barrels of oil per day with negligible water from a lower set of perforations in the Bedinan interval.

In Central Turkey, our Konak well is drilling below 7,200 feet, about a 9,500-foot objective. We have about another 200 to 300 meters to go before we encounter what we expect to be our objective in that well, which is the Jurassic. And on that well, that's a exploration well keyed off of an oil well that had oil down depth that we've tied too seismically, and it will either be good or [indiscernible] on that.

Our Durakoy well is 2 miles from the Syrian border. We're drilling at approximately 3,000 feet this morning on that well. It's a Triassic test, which is one of the 2 horizons: the Jurassic and the Triassic that

produce a significant amount of the wells and a significant amount of the hydrocarbons in Kurdish region of Northern Iraq and Syria. The oil wells on our block really about just penetrated the Cretaceous at a shallower interval. And so far, we've not had any civil unrest, and, again, we are located about 2 miles from the Syrian border. So we'll continue drilling that well, and we'll expect it to take several more months to reach TD at about 4,000 meters.

Our Alibey well on the Gaziantep area, which if you remember was the first horizontal well we drilled. Our Goksu-3 is actually the second horizontal well we drilled. In that well, we were able to complete, we said 7-inch, and we're able to drill and complete that well without requiring fracture stimulation. Our Alibey well, because we reentered an old well and drilled it, we had to case that well, and we are now beginning completion on that well and would expect to have some results in the next month or so.

In Selmo, we have 11 wells frac-ed. Of our 14-well program, we have about 3 more to go. The average incremental production increase so far on the 11 wells has been about 60 barrels per well -- barrels of oil per day per well, and that's about 60% of what our preplan expectation was. So it's falling a little short, but it's still very good economics. We have 4 more wells to go there, and in 2013, we have 7 additional wells that are existing that we would expect to frac. Now all of our 2013 planned wells in Selmo, our horizontal wells based on the success we've had in drilling S-curves there and the success we've had in executing on a very cost-efficient basis, our first horizontals in the Goksu area and in the Gaziantep area. So all of our 2013 planned development there with the exception of a deep well is horizontal wells.

In Bulgaria, if any of you have seen, there's been an official notification of the awarding of a production concession on 160,000 acres, our Koynare license. We'll start work to recommence drilling our Deventci #2 well, which was suspended after surface casing, at approximately 2,000 feet. Now this was suspended for some time due to the force majeure and the early legislative actions in Bulgaria, some of which have been overturned, which allow us to resume normal production operations in Bulgaria. Now we plan to appraise our R1 discovery well and to construct a sales pipeline in 2013 if the appraisals and the completion on the R1 warrant. Now we've received, as many of you have, the government press releases. We do not have the final paperwork back in our hands. So I think it's appropriate to caution that we need to wait and see all of that paperwork to confirm exactly what it says. But we are excited to be able to get back to work in that country. If you remember, financially, we had to write that investment off at the end of 2011, and we also took several contingent liability setbacks on our financials for penalties that we may incur for not being able to perform certain work. So it has been a while since we've worked on it, but we're glad to see that now. As many -- if you've read the government press release, you can see it was important for the government for the local gas to sell at a discount to imported Russian gas. Of a discounted price that we've agreed to, on a percentage of our gas, equates to between about $8 and $8.50 an MMBtu. So we still deem that to be a very commercial price for natural gas.

Now we do believe that's the first production license onshore in Bulgaria in approximately 20 years. We've had some criticism for not being active. We've not been able to talk about it, but we have finally got that done and we are -- again, we are cautiously optimistic that we're going to be able now to develop a long-term relationship in Bulgaria that will eventually lead to an area of value creation for the company.

Now on JVs, we have 2 very active parties at this point that we're negotiating with and talking with, but we do not have anybody signed so far. We only get one good chance to do this, so value is always the point of negotiation. And, again, once we reach some point definitively of either entering into agreement or not having successfully been able to complete that process, we would notify the public.

We have initiated our budget planning for 2013 and furnished that to the board, and we would expect to have some budget guidance and activity guidance for the public about the middle of December.

So with that, I'll turn the call over to Wil Saqueton and be glad to take your calls when he's through.

Wil F. Saqueton

Thanks, Malone. As announced in our press release, TransAtlantic needs additional time to file our third quarter 10-Q beyond the 5-day extension provided by Form 12b-25. The reason for needing additional time is due to errors that have been preliminarily determined to be immaterial to previously reported amounts in prior accounting periods but do result in an understatement of previously reported 2012 net income.

Now the nature of the errors affecting net income from continuing operations are largely noncash and relate to timing issues. Our Turkish accounting staff largely have a statutory tax educational background, which is cash-based accounting. Now as we have trained our Turkish accounting staff and dug into the accounting details, we have discovered transactions that should have been recorded in prior periods per U.S. GAAP standards, which is accrual-based. Thus, certain transactions should have been recorded in prior periods when the triggering event occurred and not when an invoice was paid, for example. We did not uncover any individual errors that were material, but rather, it's the cumulative effect of various individually immaterial errors that have resulted in additional disclosures required in our third quarter Form 10-Q.

So we need more time to complete and review our financial statements in related footnotes to ensure we have captured and disclosed everything properly. We have been and continue to work diligently and reasonably expect to file the Form 10-Q during the week of November 19.

Until we file the 10-Q, we can only provide range estimates of our third quarter results, which are as follows and as we've disclosed in our press release.

We expect third quarter revenue to be between $30 million to $35 million; net income from continuing operations to be between a net loss of $3 million and net income of $3 million; total net income to be between $5 million to $10 million; and adjusted EBITDAX to be between $20 million to $25 million.

Our cash balance at September 30 was $26.2 million, our long-term debt remained flat at $32.8 million and we continued to have no short-term debt.

I'll now turn the call back over to Malone.

N. Malone Mitchell

Thank you. We'd be glad to take questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Neal Dingmann from SunTrust.

Mario Cordova

This is actually Mario sitting in for Neal this morning. A couple of questions. You guys looking at any new exploration blocks or plays going forward or is it -- for the meantime, is it just to not look at anything and kind of keep working, which you guys have currently?

N. Malone Mitchell

Well, of course, we have been focused. Our original effort in the country and our continuing effort is to be focused on more resource top plays, such as we're now initiating on Tekirdag with the 88-well program or, as we believe, we'll develop in the Hayrabolu structure or in our Southeast Turkey Molla structures that are associated with either the Mardin, such as the Goskus producing [indiscernible] or Dadas or Bedinan sand immediately below the Dadas. We do have some conventional. Both our Konak and our Durakoy wells are conventional exploration targets that would generally have a binary outcome. They would either be large producers or dry. We would expect to drill at least one more exploration well, irrespective of the outcome of the Durakoy well on our Idil block on the Syrian border in 2013. As I said in the call, we've finished what has been over a year of shooting 1,200 kilometers of 2D running aeromag mapping structures in conjunction with Shell on our Sivas Basin blocks, which are about 1.6 million acres. So we have done a lot of the work associated with developing that from a basin into something that is potentially a drillable lead. I don't want to say that we got there yet, but we spent all of 2012 doing that. So if that develops, we would expect some exploration inventory in 2013 from that. Obviously, we think there's a great deal of promise, as does the Bulgarian government, on our Koynare block in Bulgaria. So when I sit and I look at our budgets of what we have available and what we believe is impactful for the company for 2013 with our Idil blocks, with our Sivas blocks, with continued delineation that we expect on our more resource top plays and with our Bulgarian opportunities, I think we have a pretty good high-impact exploration inventory for a company our size that would leave us the ability to drill it within the cash flows that we have. So I guess the answer is we're always looking, but frankly, we think we have a pretty good, high-risk, high-outcome exploration inventory right now. So I don't know that we're really looking for a lot of exploration inventory right now.

Mario Cordova

Okay. That's really helpful. Switching over really quickly to the cost side of things for service costs. Do you guys -- are those costs locked in for -- going into next year as of now or still in negotiations?

N. Malone Mitchell

Well they're in negotiations because of the -- the process flows in the -- obviously, the company has access on the service costs that it depends upon backing at a best price basis, and those are done on more or less a call-out basis. There's no obligation on the company. Presuming that the company winds up approving a budget that has a certain rig line or certain services that are contractible for a longer period of time, the company will tender for those services, and it will tender for other suppliers in addition to backing as it normally does. With a company able to look at a longer commitment rather than a well-to-well commitment, it's likely that it will see some benefits from costs. One of the things that we are doing is we're -- we've added to our drilling staff and we've changed a number of the things we're doing with drilling and completion. And we quite frankly believe we can be considerably more efficient in 2013 on the wells we have than perhaps we have been in 2012.

Operator

Our next question comes from John Malone from Global Hunter Securities.

John Malone - Global Hunter Securities, LLC, Research Division

Just a couple of questions on the JV process. You'd mentioned that you're in active discussions with 2 separate parties. Does that imply that you're negotiating for the entire exploration JV with 2 different parties? Or would you break it up into more than 1 tranche and have 1 party JV one part of it and the other party JV the other? And the second question from that is, as you mentioned, December is sort of a budget -- reaching a decision on a budget. How much of that is going to be informed by the JV discussions? Does that imply you have to be done with a JV by then?

N. Malone Mitchell

We started a process. I think we were fairly clear with the public of showing our entire inventory and trying to secure a single JV partner for the entire inventory, and in that process, we had a number of groups that were interested in 1 asset or another asset but not the entirety of the package. We have -- the groups that we have now, I think, are probably most focused on what are the resource plays we have in the Southeast, and we've got to go back out and reach back out to some of the groups that previously we have quit discussing when they informed us they were not interested in the entire package to look at doing individual JVs on some of the outlying properties. So we do not have -- the groups we're talking to right now neither is interested in the entire package. Now as far as our budgets, we've built our budgets around a process that we believe is going to allow us to conduct a more robust development and exploration program in 2013 than we have in 2012, and it grow our production, which we did not do in 2013. Although you'll notice this morning, I think on our report, our production was approximately close to 4,700 barrels net this morning. So that's a decent increase from where we were averaging in the third quarter, and we continue to see improvement there. But we're going to build a budget that is going to allow us to largely fund that out of our existing cash flow without [indiscernible] too mention debt. And as we are able to successfully realize JVs, we will accelerate that program. We went through a great deal of effort in 2012 to get our balance sheet to the point where we were, we believe, long-term sustainable in funding, and I don't intend to take us away from that -- kind of that path again. So we're going to build a budget that we can execute based on the cash flow we have. And then if we're successful in getting some JVs for them, we'll accelerate.

John Malone - Global Hunter Securities, LLC, Research Division

Okay. Switching to Selmo quickly. I think if I heard correctly, you said you got 4 of the well program remaining and added an incremental 60 barrels a day per well. Is that correct? And what does that bring up the per well to in Selmo right now?

N. Malone Mitchell

Well, daily production's about 2,800 barrels. About 600 of that is attributable to the fracs that -- incremental production from the fracs that we've executed. We haven't had a rig in Selmo in over 6 months time now drilling because the rigs have been needed in other areas. So did that answer your question?

John Malone - Global Hunter Securities, LLC, Research Division

600 -- I mean, 2,800 is sort of the incremental -- the fracs [indiscernible]?

N. Malone Mitchell

And with the separation -- one thing that is probably information that's useful, with the separation of TransAtlantic and Viking, Viking has either acquired or is in the process of acquiring an additional 6 rigs that will go to the -- that are available to the Turkey market. Now a number of those rigs are contracted to other operators, but all of those rigs are 1,000- to 1,500-horsepower top drive equipped rigs. So we should have the ability to develop on the individual plays that we need to develop in 2013.

John Malone - Global Hunter Securities, LLC, Research Division

Okay. And you mentioned release. You have 4 rigs currently running, 2 in Thrace, 2 in the Southeast. Can you say whether the budget that sort of baseline budget that doesn't include the JVs? Is that, you think, the number of rigs you'll be running or under the baseline budget can you add anything?

N. Malone Mitchell

Under the -- and I really want to caution you. I mean, we've -- that's all subject to board approval. We expect a substantial increase in the well count, and that would imply running a few additional rigs internally. Now that is all subject to the review and approval of the board.

John Malone - Global Hunter Securities, LLC, Research Division

Okay. And last question is on Bulgaria. You mentioned -- you still hadn't gotten all the paperwork in place. Does this production license imply that there may be some leeway in terms of fracture stimulation available to you in Bulgaria? Is this going to be conventional production? And where do you think you can get to, to realize that 850 in a Btu price? Like what production level do you think you can get to?

N. Malone Mitchell

Of course, we're producing currently out of the discovery well, but it's a very small amount we produce in CNG. And in 2011 -- no, 2010 maybe or '11, we acquired the pipeline right away to be able to construct the pipeline from the general field area discovery. Now what attracted us to the particular prospects we have there, there were multiple geological and multiple engineering objectives that what really attracted us to that particular prospect to start with was not dependent upon frac-ing. The reservoir that the Deventci is discovered in is a [indiscernible] dolomite. And when we look at the historical completion efforts to us, it reminds us a great deal of what we've been active and successful in over the years. And generally, the [indiscernible] reservoirs in West Texas, now it's a Jurassic, but, in general, that does not require fracture stimulation. So what we believe the primary promise of the horizon was or what the play was, was not dependent upon fracture stimulation. Frac-ing would generally make something better. We're not there, the government's not there, on the ability to frac. I think that it's reasonable that they will get there over a period of time, as will the rest of Europe, but that -- we don't have to have that to develop the Koynare area potential for number of the horizons. Now there's other parts of the overall exploration license that are probably much more dependent upon frac-ing, but that's not necessarily a key necessary element of the Deventci field area.

Operator

Our next question comes from Jonathon Fite from KMF Investments.

Jonathon Fite

Mr. Mitchell, I'd like to spend a little time looking at the dislocation between the current market price for TransAtlantic and the value of your asset base. Just to kind of refresh a couple of things, you have a proved reserve value of about $1.75 a share, as I see it from the 10-K, not considering any uplift from the P2 or P3 reserves. And it seems like most of your activities for 2012 have really been focused on proving out these probable, impossible assets. Is it fair to say that by the end of the year, giving your efforts in the P2 and P3 space, that that P1 value is likely to increase?

N. Malone Mitchell

Well, in the Selmo field, the predominant amount of our work has been conversion from -- has been conversion, and it's primarily conversions from proved undeveloped to proved. So in Selmo, which is our largest single producing asset, we have a fairly defined tank. Now one of the things that we will do in 2013 is start moving some water. And with the horizontals, that may move some categories up, but there, you're really -- when you think about it, you're really not converting some sort of probables or possibles into proves. I think that it is true that we will have reserve adds in -- particularly in the Goksu area and we'll see in the Bahar area of what we do there. Thrace Basin, obviously, we're in the process of developing a field area that we believe will incrementally add reserves that were not on the books, and it's still a little hard to tell what we'll do in the Hayrabolu area. So I think I'll defer that. I don't know, Ian, if you got a comment on that or...

Wil F. Saqueton

Yes, in terms of the Thrace Basin, we have to find to contingent resources on some of the outlying areas that Malone has mentioned earlier in the call. So we'd like to see our appraisal programs and our exploration programs move from kind of the 3P the 2P, and we'll continue to work from that basis. I think what we're doing in Selmo next year could possibly redefine how we think about the producing intervals. We're going to do a deep test in Selmo which may or may not have an impact on the overall reserves picture. We're going to apply a couple of different technologies to Selmo that haven't been employed before, chiefly, horizontal drilling. And any time we're able to access more reserves with less money, that has an impact on the overall reserves picture. So I kind of see those 2 areas and then our Gosku appraisal program as being paramount for our reserves change.

Jonathon Fite

Okay. So we'll assume that the P1 value is likely moving upwards but we'll leave that unquantified for now. And given what you've talked about earlier and what we've seen over the last couple of quarters with your very clean balance sheet, basically, debt-free balance sheet, let's just start the conversation with the defined P1 value of about $1.75 a share. It seems -- if you could easily be worth this value, if your production was close to 6,000 barrels per day but you're currently about 25% below that run rate around the 4,500 BOE per day, given this difference, one might expect a comparable discount in the share price going from kind of $1.75 to $1.30 but you currently trade significantly below that. Some analysts point to the Syrian conflict on Turkey's borders as creating this overhang, some point to regulatory uncertainty in Turkey and Bulgaria as potential overhangs. As you look at kind of lower production rates or MidEast concerns or regulatory issues, can you comment on what you believe are appropriate concerns versus those that are misplaced and what are you doing to combat these concerns to deliver shareholder value more in line with the value of the asset base. At least on the proven cycles, you've got $1.75 a share?

N. Malone Mitchell

I think that certainly at least 2 additional things need to be mentioned there. One is, our continuing problem with getting our financials filed on a timely basis, it certainly doesn't build confidence in the market. I think, probably, one of the single largest issues, and I will tell you that, of course, we look at the universe of other European small-cap companies every day. We focus on that, more than we do, maybe what U.S. comps are trading at or anything like that. And I don't know, Chad, correct me if I'm wrong, but I believe that virtually every company trades at a discount to their P1 right now. I think, is that accurate?

Chad W. Potter

Not necessarily, but there's a significant amount.

N. Malone Mitchell

Yes. I think probably one of the greatest issues associated with it is the reduction in the daily volume of the shares. I think it's difficult for -- what the volume of shares that are trading when share volume declined from 1 million shares a day to -- yesterday, I think it was 98,000 shares, it's very difficult for people who want to trade in the stock to be able to build or to exit a significant position on a basis that is appropriate to what they want to do from a portfolio management standpoint. And from that standpoint, I'll let kind of Chad comment on what our thoughts are, or what do we think is doable or not doable with regard to daily trading volume or from that standpoint. Now from a company performance standpoint, I think you see that our efforts are redesigning or reworking, particularly in the Southeast around more horizontal, more high-impact, more high-productivity index wells that we think will be able to do a better job of moving our production profile or per well drilled, than what we were getting out of the verticals, but Chad, could you comment on?

Chad W. Potter

What, I think you definitely hit the high points -- as you see continued progress on the financial front and on the operation front, I think volume will come to you as well but we also need to continue with -- get out the message after -- go into business with shareholders exactly by generating that interest and continuing to show that the outside is there and we've made some very significant steps on the operational front that show that it can and will be realized and it's certainly helping through.

N. Malone Mitchell

Normally, the comment we get back, as we go present, as we make either road shows or we go present as people like the condition that we're in, they think that we are not -- that we're sustainable based on our financials, we have a lot of upside. Their frustration is normally in the ability to build or exit or trade a position based on the daily volume. So I would say that if we can, that daily volume probably matters as much as anything.

Jonathon Fite

Well I counter that but -- 50% discount to your P1, that would be a bigger opportunity than whether or not there's 100,000 shares trading or 500,000 shares trading, I mean, it's kind of a gross mispricing. On the last call, you discussed the merits of a stock repurchase at the company level and you said that you wouldn't take on any debt to fund the repurchase and I would completely agree with that strategy. But it seems since the company is getting little credit for its proved reserves and no credit for the money you're spending exploring your unproved reserves, I mean, you could generate a much higher return by simply taking the cash flow that you generate and repurchase shares. I mean, at these prices, you get a risk-free, 100% upside, if not greater, if you think that P2 and P3 stuff is actually worth something, versus a much lower, sometimes, much riskier return while cutting new wells. I mean, at these prices, can you comment on that?

N. Malone Mitchell

I would comment that the business of TransAtlantic is exploring and producing oil and gas. The business of shareholders is buying and selling shares. So the focus of TransAtlantic Petroleum is going to continue to be, and we find a manner to strengthen our balance sheets and have good uses of our invested capital. When we have the inventory that we have, I think that, that's the appropriate use of the company's funds. The appropriate use of the company funds are not to be stock traders.

Jonathon Fite

Okay. So last point, I guess, following up on that. I mean, a few years ago, the value drivers of this oil and gas exploration company were fairly easy to understand, you had reserve base of x, you had production abilities of y, it was, "here's our plan, we're going to convert the assets to cash flow." It was a very easy story to understand and also fairly easy to hold you accountable for your plans. And we know what's happened over the last 18 months or so and the story shifted away from a production focus to more of an exploration focus, one that attempts to upgrade some of the 2P and 3P assets. But in executing the shift, the story's become a lot more murky, much more murkier to understand. You guys seem reluctant to assess the impact of these efforts on the value of the company, kind of quantifying, well, what is this going to do with the P1 or what's going to be converted. So how do shareholders know if the focus of the company is not on exploiting what seems an obscenely cheap price, but to do these exploration efforts? How do we track your efforts and know if you've had any -- if you've added any value?

N. Malone Mitchell

It's kind of a compound question you asked. I presume that you would monitor whether we've either been successful or unsuccessful by looking at quarterly production numbers. We have our third-party reserves done, as full reserve reports, rather than just audits, which many companies do, and which is a distinct difference. I don't know exactly what answer you want, but we try to lay out where we think that we see value in the inventory that we have, and we're going to continue to focus on pursuing, bringing that to a greater value than what it is.

Jonathon Fite

So I mean just as a follow-up, I mean, looking at production and looking at the once a year reserve reports, on a year-over-year basis and sequential basis, production's flat to down and we need to wait, probably until the 10-K gets filed to see what the total shift in 3P, 2P, 1P evaluations are. But if you're saying, "Look at production and production is flat to down." Have you been successful this year?

N. Malone Mitchell

No, we've not been successful at growing our production. Now we have started growing our production again. Production declined largely, our natural gas production declined. And that was to a large degree because we went through a fairly aggressive exploitation of behind pipe inventory in the third and fourth quarter of 2011. And we have a lot of zones behind pipe, particularly in the Thrace Basin natural gas asset base and we completed those wells. We got a fairly fast increase in production and then those wells declined. We went through a fairly long process of trying to understand and establish what the well performance we might expect out of a continuous drilling development program in the Thrace Basin, in the Tekirdag area would be, rather than just co-mingling a bunch of wells to start with and drilling. We think we've finished that process and concluded that we can execute a development drilling program, which will grow our production. I think we've outlined what we expect the results of that to be in our presentations. We have, what we believe is -- and we have believed for a long time, it is a significant asset in the southeastern part of Turkey. It does not, it does not -- it cannot converted on the same basis or same speed that you can convert it in the United States. Nevertheless, one of the things, one of the reasons that we are in Turkey or in these countries is, we have the ability to hold very, very large assets with a reasonable amount of cash expenditure. For all of 2013, we expect to be able to hold all of the core assets that we have with capital expenditures of no greater than $15 million to $17 million. You cannot do that here. So you have to give up some things in order to gain some other things. We think we will make substantial progress on being able to start realizing greater overall recognized value and greater cash flow out of those assets in the Southeast as well as the assets in the Northwest. As I said, we're -- we brought one field to the point of being able to do a development project. I don't think anybody else in Europe, other than Bankers Petroleum is probably at that point. We expect to have our second field in the Thrace based on what we see so far. We believe that some time in 2013, Hayrabolu field may be at a point where we can discuss a more methodical development plan in Hayrabolu. Again, if you look at who's able to do that in the environs that we're in, very few people are able to do -- we're slow, but we're faster than everybody else over there. So -- and again, when we look at what we hold and you look at the amount of capital that we have to do it, we would certainly like to go faster. We would certainly like to have a higher stock price. But we also think we need to kind of live within what our cash flow and our balance sheets dictate, enable us to survive year in year out.

Operator

Our next question comes from Jamie Somerville from TD Securities.

Jamie Somerville - TD Securities Equity Research

I'm just wondering, the press release is from the Bulgarians seemed to suggest that -- has there been a gas sales agreement put in place? I know you're waiting on final paperwork. Have you got gas sale agreement or working on it?

N. Malone Mitchell

Yes, Jamie, we signed last week, after fairly long negotiations, we signed an agreement to sell a substantial amount of our production to Bulgar Gas, which is the -- basically, the national gas company. And we agreed to sell gas to them at a number that's equivalent to what Melrose sells gas from their offshore field. It is a discount as they -- it was important for them. And it -- frankly, obviously, the way we tend to think in the United States, would be that it would make all the sense in the world to pay your domestic producers a premium for the gas you have to import. That is not the way that they thought about it. So we spent a good bit of time dealing with and negotiating what the pricing would be. Again, pricing is still so good there that we did wind up deciding that if it come to who could hold their breath longest, the government or us? We felt like the government could probably hold their breath a lot longer than we could. So we agreed to sell a portion of our gas to the government gas company, Bulgar Gas. And as I said, a price that, on an exact number based on the last exchanges around $8.40 in MMBtu. Now that can change based on -- that changes daily to a certain degree based on currency valuations. So yes, we have signed an offtake agreement. Now in order to effect that offtake agreement we've got to build, I believe it's about a 14-mile pipeline from our field area. We secured the pipeline right away for that, previously, but we need to confirm and understand what kind of the potential of where we are at. It's got a lot of potential on paper, we need to confirm that with actual well results.

Jamie Somerville - TD Securities Equity Research

Okay. And is that the reason why you didn't mention Bulgaria in -- when you went through potential reserve additions, you need the appraisal well or results first?

N. Malone Mitchell

That's correct. All we have...

Jamie Somerville - TD Securities Equity Research

Or is [indiscernible] at year-end, now that you have production concession on the gas sales agreement?

N. Malone Mitchell

All we have reserved in Bulgaria is minor amount of gas associated with the Deventci #1, that we're able to produce through our CNG facilities. Now, a realistic time frame is that -- realistically, if we're able to get -- and quite frankly, we've laid all this stuff down. We've had -- nobody has been picking up the files and trying to contract rigs and get ready to get back on the well for some period of time because we've not had the certainty that we had an agreement in place to do that. So we have to basically pick back up those files and restart getting after the activity level there. Realistically, I think you're talking about drilling, testing through at least the midpoint of next year. Our estimations to build a pipeline of that magnitude. We know in Turkey that it takes a year to build a pipeline like that. Some of our advice -- and talking to the ambassadors from Bulgaria or the U.S. to Bulgaria would advice us that, that's not an inappropriate time element. So I think it's hard for us to say that -- at best, what we're thinking is in 2013, we're probably going to have tests and if we have any meaningful production, it's going to be near the end of the year. And I don't want to speculate on what that means from a [indiscernible] type reserve report, no. Obviously, the Bulgarian government and based on the geology that they have, has made estimates that we neither think are -- we don't have a tendency to disagree with them, we just can't confirm them.

Jamie Somerville - TD Securities Equity Research

Okay. Well, lastly, maybe, with their minimum volume amounts committed in the gas sales agreement, or you left yourself pretty flexible in that front?

N. Malone Mitchell

No, no, no. It's a best efforts basis.

Operator

Our next question comes from Doug Schlegel [ph], private investor.

Unknown Attendee

Malone, let me follow up on Jamie's last question. You already have a pipe in place there for the pipeline?

N. Malone Mitchell

No, we have the right of way purchase, which are the right to go through the land owners, and I don't know if all of that is private land or if it's a combination of private and public land. But in general, like in Turkey, a large time-consuming process is the acquisition of right of ways. And as I said, we had made a decision 1.5 years or 2 years ago, to go ahead and spend the money to do that, so we've acquired that. I think again, we probably wrote all of those expenditures off at the end of 2011 because that was required under -- I think, Wil, is that be correct, would we have wrote those right away?

Chad W. Potter

If it was related only, probably not. Because we only wrote off what was related unproved properties of mainly [indiscernible].

N. Malone Mitchell

So ideally, that would give us a head start, but Doug, we need to dig the Deventci #2 and we need to complete it. A 14-mile pipeline still a fairly reasonable expenditure and we need to make sure that the volumes justify building the pipeline. That's the proper path to go and we certainly expect that they will. But you still need to do that in the minimum for us to pull the trigger on building them -- building a pipeline. From there, it's a matter of ordering pipe, getting it in, clearing, ditching, welding, as I said and including the right of way acquisition process, in Turkey, to build the pipeline -- the last pipeline we built of that magnitude, the Alpullu line, from the day we said go, it took 1 year. So -- in the United States, if it was in West Texas, that would probably take 1 month and if it was in California, it would probably take 20 years. So that's not necessarily something that's out of the range of...

Unknown Attendee

Looking at Hayrabolu, Ian -- or actually, let me -- Ian in his presentation at the shareholders' meeting, had mentioned that there's an oily leg, the Kazanci oily leg in Temrez. Have you all defined that anymore?

N. Malone Mitchell

I don't know. We just got through drilling the Kazanci #5, which was really -- we were testing in an area that we believe would be predominately gassy and one of the things that we were trying to understand, the Hayrabolu field, unlike the Tekirdag field, Tekirdag field is normally pressured. The Hayrabolu field exhibits a significant amount of over pressuring. We're much closer to the generation where the hydrocarbons are generated. We still have a number of, as I said, essentially, wells to define what the resource is in Hayrabolu. The well that we just got through, drilling, our first deep wells confirmed we do have over pressured gas. All we have is our mud log and our pressures that we encountered while drilling right now. We should have some electric logs out and some sidewalk cords out over the course of the next couple of days. The next well or 2 we drill there will give us a look at that lower oil leg and then we'll -- as I said, we believe that probably about midyear, we will have some sort of a reasonable thought process as to what kind of what the future development looks like for a Hayrabolu structure.

Unknown Attendee

Great. And then one last question. In the presentation, Anatolia Energy had mentioned that Exxon was still looking -- and I think this was in Southeast Turkey. Do you all get a sense or a feel along those lines with regards to their interest, or continued interest?

N. Malone Mitchell

No, we don't know more than -- TPAO has told us that they've done a deal with them. We've seen no official announcement. Over time, it tends to be what TPAO has told us is accurate but I don't know more than that. I know that we've -- I don't know more than that.

Unknown Attendee

Actually, how about the Bakuk pipeline? BOTAS running that down there to tie that in.

N. Malone Mitchell

Well the pipeline from Turkey is still at Diyarbakir. So it's still as far away today as it was when we made the Bakuk discovery. So basic answer there is no progress. And so therefore, we converted the Bakuk into a production license, the entire anticline. So we have no obligatory spending. But that also implies no opportunistic ability to sell gas until something is resolved with the pipeline, most likely built to secure gas from the Kurdish region into Turkey and then put in a spur into our ability to deliver gas from Bakuk. Now our targets at our Diyarbakir well on our West Bakuk license is we believe to be oil. Obviously, there's a potential that they're either dry or that they're wet or that they're gas. And if they're gas, we would have similar problem to what we have at Bakuk, but we certainly believe, based on the fields immediately across the border in Syria or in Kurdistan, that we believe we would be looking for oil if they're productive. So don't have anything -- good news there. Now we do believe that in 2013, that we may be looking at constructing a gas pipeline from our Molla area to connect with the grid back in Diyarbakir and that -- from where our Bahar well is, is about a 17-mile run of pipe.

Operator

Our next question comes from Tanner Berger [ph], private investor.

Unknown Attendee

Just had a quick question, can you address whether some of the production issues in Turkey can be attributed to a majority of the expats rotating out of country, relying more on Turkish crews, and maybe unfamiliar with some of the newer technologies and working behind the learning curve?

N. Malone Mitchell

No, no. We have and are changing a number of the ways in which we manage some of the engineering and drilling completion practices so that we do have rotating U.S. expats and we do have U.S. expats looking at that. That is true that some technology is new, but in general, I think if you look at the #1 thing associated with production, it is all easily -- it's all easily focused. The bulk of it is focused on the fact that we did -- currently, how many rig completions did we do on the third and fourth quarter approximately in the Thrace Basin?

Wil F. Saqueton

We had about -- we had a pretty extensive behind pipe inventory after the closing of the TBNG acquisition. And we are able -- with basically our staff there, to do about 30 to 40 of those a month. But I think in terms of pace of activity...

N. Malone Mitchell

Total was 75.

Wil F. Saqueton

Total was 70 to 80.

N. Malone Mitchell

70 to 80 rig completions?

Wil F. Saqueton

Two a day.

N. Malone Mitchell

And in a lot of cases, those were 2-foot sands, 1-foot sands, 3-foot sands, that were secondary behind pipe zones. They were not associated with the deeper -- so if you look at our overall inventory, the one area that you see that is the biggest, that accounts -- for basically, if you look at net, all of our -- nearly all of our decline has been the Thrace Basin natural gas production out of the fields where we had that recompletion inventory. And that's not to say that we haven't had some in some other areas, but that's the biggest part of it. And that's not -- that really doesn't have anything to do with staffing. I think a good part -- I would direct your attention to what our G&A expenses are when we file our Q versus what they were early. And I would tell you that one of the things that I think you can attribute to the management that Mustafa Yavuz and Selami Uras, and those guys have done, is that we actually made more money, we're making more money with less, significantly less production than we had at the end of the year. So that tells you, I think, that we built a base there, that as we grow production, we'll be able to translate that to the bottom line. Now are there things that we wish our staff there had better knowledge on? Of course, and we've addressed the process that will increase their knowledge and that goes from the accounting staff to the production staff to the drilling staff. Does it happen overnight? No. Is it -- and do we think we can improve in 2013 from what we did in 2012? Yes, we can. Again, we have now got X Williams man basically looking over all of the drilling programs. We've got -- Justin Davis is in charge of the production completion staff. So I think we have -- I see those things on the bulletin boards and quite frankly, it's easy to grasp that, but I don't think it's the point. I think if you want to look at where's your production decline, that's production -- it's -- the production decline is from all of those -- if you look at why did the production grow very rapidly in the third and fourth quarter of 2011, it's because we popped a whole bunch of those 2-foot sands. And why did the production decline very rapidly? It's because we've depleted a lot of those little 2-foot sands.

Unknown Attendee

Just one more question about Syria. Has the conflict in Syria caused any significant business disruptions? And if so, what steps, if any, are being taken to ensure that future conflicts and events don't disrupt maybe production on the border areas?

N. Malone Mitchell

Well, we have no capacity to dictate what happens in border areas other than to provide security for our people on our operations in the Southeast. So we do that on our Diyarbakir well. We've not had an issue there yet, but I cannot guarantee you that we will not have an issue. We've obviously had some issues in the past in various areas. It happens to be where the oil is. So our choice is either to pursue -- going where the oil is or to not do that. Conversely, I think that it's probable U.S. producers either lose all or part of their intangible deductions in the U.S. this year while Turkey has basically gone the other way with their tax incentives. So it's always a give and take. Now Selmo area and Molla area, those areas are 200 to 300 miles away from the Syrian border, so I don't think that's probably got that impact. The biggest impact that we have had on actually operating right on the Syrian border is -- and we obviously had some people that were assigned to those rigs, whose families believe that was not the thing they wanted their husbands or children to do, was to sit on a drilling rig, 2 miles from the Syrian border for 4 months. So I don't know that I blame them a great deal there but it's what our license obligations call for and so far, we've had a peaceful operation there.

Operator

I show no further questions and would like to turn the conference back to Mr. Malone Mitchell, for closing remarks.

N. Malone Mitchell

I appreciate everybody's dialing in today. I apologize again for the unconventional financial information. We do not intend to have a call post filing of the 10-Q. I do believe that you will see improvement in performance there that will not displease people. And again, if anyone would like to discuss that, obviously, as those are filed, or have greater questions, please contact Wil, myself, or Chad. Wil will be -- you'll be in Turkey for a couple of weeks pretty shortly thereafter.

Wil F. Saqueton

Yes.

N. Malone Mitchell

You'll probably need to -- if you can email that in, we'll arrange a call back if somebody has difficulty reaching somebody in the group. So we, again, thank everybody, and wish you a good afternoon.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.

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