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Executives

Richard Dole – Chairman, CEO and President

Kurtis Hooley – SVP and CFO

Analysts

Mark Lear

Mike Temple [ph]

David Dantruvan [ph]

Double Eagle Petroleum Co. (DBLE) Q3 2008 Earnings Call Transcript November 7, 2008 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Double Eagle third quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator instructions)

I would now like to turn the conference call over to our host, Richard Dole, CEO of Double Eagle Petroleum. Mr. Dole, you may begin when you are ready.

Richard Dole

Thank you, Anna. Good morning; welcome to Double Eagle’s call to discuss the third quarter results. Joining me today is Steve Degenfelder, Senior Vice President of Exploration and New Ventures; and Kurtis Hooley, Chief Financial Officer.

Given the current volatility and uneasiness in the energy and capital markets these days, our stock by all our peers has suffered significant declines over the past 90 days. But the basic fundamentals and strength of this company have not changed. The past quarter was another strong quarter for Double Eagle with record production from the core assets in the Atlantic Rim. This is primarily a result of the production from the 33 wells drilled in 2007, and put into production the first nine months of 2008.

Gross daily production from the company-operated Catalina unit wells was approximately 26 million cubic feet per day at September 30, 2008. In addition, we are seeing increased production from our Pinedale interest and encouraging outlook for the Sun Dog and Doty Mountain Units.

Now, Kurtis will discuss the financial results.

Kurtis Hooley

Thanks Dick. Before I discuss the company’s third quarter 2008 financial results, I’d like to remind everyone that all statements made during our conference call that are not statements of historical facts constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements. The factors that could cause the actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K, 10-Q, other periodic filings with the SEC, and our press release.

We are very pleased to report net income attributable to common stock for the quarter ended September 30, 2008 was $1,977,000 or $0.22 per share. This compared to a net loss of $5,671,000 dollars or $0.62 per share for the quarter ended September 30, 2007. The net income attributable to common stock in the quarter of 2008 did include $941,000 dividends paid to the holders of our Series A preferred stock.

As in the prior quarter, our press release issued this morning included analysis of pro forma cash flow earnings per share. I believe that it provides a consistent, meaningful analysis of our results on a comparable basis to prior periods. As we have increased our price risk management activities, the non-cash impact of accounting for hedges under the FASB No. 133 has, and will continue to have significant impact on our GAAP earnings per share, and in my opinion, does not provide readers of our financials with an easy way to obtain the true results of the company during any periods.

For three and nine months ended September 30, 2008, we recognized gains on our derivative instruments for our mark-to-market hedges of $352,000 and $2,384,000 respectively. With the constant change of volatility in the NYMEX and CIG gas markets, this gain will change during the future periods without any corresponding actual cash or volume-related activity for a portion of it.

On a pro forma cash flow per diluted share, adding back to the GAAP net income the effect of the non-cash items of stock option expense, DD&A, deferred taxes, and deducting the unrealized gain of price risk management, the net cash flow income attributable to common stock for the quarter ended September 30, 2008, was $7,368,000 or $0.80 per share. This compared to a net income of $83,000 or $0.01 per share for the quarter ended September 30, 2007.

When we look at the third quarter results, the significant improvement over last year is attributable to several factors. Again, our net production for the quarter was 1. 9 Bcf versus 0.76 Bcf for 2007. This represents an increase of 149% over last year. This increase is primarily attributable to the success at our Catalina drilling program. We recognized average daily net production at Catalina for the third quarter of 2008 of 13.9 million cubic feet per day, a 226% increase over the 2007 production of 4.2 million cubic feet per day.

Secondly, as you all know, during the third quarter of 2008, the markets had a real volatile period around the oil and gas prices in the Rockies. But we were able to realize an average price per Mcfe of $6.45 versus $4.93 per Mcfe in 2007. We still do have 7 million cubic feet a day under fixed price contracts that we entered into in 2007 at an average price of approximately $5.84, and another 11 million cubic feet per day hedged under various instruments in Q4 that will help us continue to recognize level of average sales price.

The combination of increased volumes and realized prices resulted in net oil and gas sales increasing 209% to $11,662,000 for the quarter ended September 2008 from $3,779,000 for the same prior year period. Overall, the production volume increase accounted for 86% of our increase in revenues and the price increase accounted for 14% of the increase during the quarter.

We also continue to see low production costs and improvements over prior year results. This is due to improved efficiencies in our operations, and as well as in 2007, the quarter had some residual costs related to the work overs performed during that period. This reduction in cost was partially offset by the increased DD&A expense in the third quarter, due to the increase in production volumes and capital additions made since the same time period in the prior year.

Now, turning to our balance sheet. There are a couple of accounts that I’d like to discuss. As shown in the 10-Q, our accounts receivable balance at September 30, 2008 had a balance of $17,943,000. A significant portion of this balance relates to amounts receivable from third parties for normal production payments and reimbursements of joint interests billing costs.

There is a small portion due from our working interest owners for their allocated portion of the 2008 Catalina billing joint projects.

The outstanding borrowings under our line of credit has increased to $17,966,000 due to the costs being paid related to our 2008 Catalina development project and third party billings from wells drilled in Pinedale Anticline, as well as the Sun Dog unit in the Atlantic Rim.

Looking ahead for next year, the forecast for cash flow from operations as well as the amounts available under our current credit facility of $50 million, of which we currently have a $35 million borrowing base, will determine the funding of our 2009 capital projects. And the Board will be approving the final capital budget at a later date.

As part of our ongoing assessment of price risk, we have entered into numerous hedging instruments that we believe allows us to partially manage and anticipate our cash position in the future. We have 80 million cubic feet per day of natural gas hedged under various instruments, and I refer you to the queue for a more detailed discussion and breakout of the hedging instrument.

I will now turn it back over to Dick.

Richard Dole

Thanks, Kurtis. As you just heard the third quarter result reflects the hard work and commitment of the people at Double Eagle for the successful development and growth of the company. Management has and continues to be focused on growing our asset base, which has the potential for several more years of development, particularly in the Catalina unit. Anadarko, the operator of Sun Dog and Doty Mountain Units, continues to expand and improve their operations in these non-operated Atlantic Rim properties. We have Atlantic Rim midstream assets and multiple opportunities that could have significant potential for commercialization.

Pinedale has additional locations to be drilled with substantial potential remaining in them. And there are several offset locations in the Waltman area for the company to develop. And while these projects will require multiple years of development, we continue to review new ventures that are a complement to our company’s asset portfolio, and to the core competencies possessed by the management team.

And I’ll talk a little bit about our market awareness program. As I stated previously, there are multiple aspects about Double Eagle’s market presence that we are addressing to improve future market performance. An analysis showed that few financial institutions that invest in energy stocks actually held our stock, an indication of a long history of not being focused on the financial markets. We have a relatively small float and low trading volumes, which makes it very hard to acquire or sell meaningful positions of our stock. This is deterrent to many financial investors.

Management of actively working to improve the exposure of the company to a larger investor base. In the last quarter, we launched our market awareness program, whereby we visited five major cities, met with 25 investment and fund managers to introduce the company, and expect to give them four investor conference presentations by the end of this year. We will continue to meet the market through one-on-one and conference presentations.

It was mentioned last quarter that the Board should consider adopting a share buyback program. The board based, in part upon recommendations of several research analysts and financial institutions, concluded not to pursue a program at this time. We would have to debt finance the share repurchase program, which would divert capital away from growing the company, and it would exacerbate the float and liquidity challenges. In hindsight, that was the correct decision. But the Board will continue to monitor and evaluate this situation on a quarterly basis.

As you know, the company can only control certain aspects of the company valuation, and accordingly we will continue to focus on increasing production, reserves, executing on our projects and continuing our market awareness program. Over time, we believe the market will respond favorably to these factors.

And with that, I conclude my remarks, and we will open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) we will take our first question from Mark Lear.

Mark Lear

Hi, good morning. Nice quarter. I guess I want to try and get an idea of where you guys are in the 2008 program in the Catalina Unit and when you anticipate having some of those wells hooked up?

Kurtis Hooley

Hey Mark, how are you? This is Kurtis. We currently completed drilling all the 24 wells. We are in the progress of completing all those, and we still to do some of our testing, the injection wells are drilled. So, over the next – towards the quarter we will be testing those and bringing them on. We do anticipate that all of those wells that we drilled this year will be on by the end of the fourth quarter.

Mark Lear

Got you. And I guess given where pricing is in the Rockies and the fact that you have already kind of demonstrated some salt [ph] below from that asset, kind of looking forward to ’09, and I know you haven't put out a plan, but do you guys anticipate kind of keeping a steady program out there or scaling back a little bit, just wanted to get an idea from you guys on that.

Richard Dole

Hello Mark, this is Dick. We are in the process of ranking and evaluating every one of our opportunities, both as a strategic fit and economics and timing. And we have actually more opportunities than we have financial resources. We expect the capital to be expended similar to what it was in 2008. What we want to do is make sure that we have got it focused on those projects that provide the most return for us in the short term, in which we can manage (inaudible). Certain things about our capital budget we can't manage for example, we can’t tell Queststar where to drill in Pinedale or Anadarko where to drill in their unit. So, one of the givens is – what is their plan and that does change on a fairly regular basis and then what we do is fill in with our projects up to the point that we feel that we have reached our capacity as far as capital and cash flow. A short answer is we are still evaluating, but we will come out with our plan probably in the first quarter.

Mark Lear

Got you. And then I guess, how would you rank your operated projects, just to follow up on that, in terms of economics and priority.

Richard Dole

Well, there are more factors than just economics and priority, but obviously Catalina is a profitable project, Pinedale is a profitable project. The Sun Dog and Doty Mountain, while not as profitable as the other two, you kind of don’t have an option because if you don’t stay in the deal, you are out of the deal. So, probably $20 million to $25 million of capital will be going to projects that are non-operated that we have to stay in no matter what. So how do you allocate the rest of it? We are in the process of completing a well in the Waltman area. That will give us a sense of the economics on that project. The 24 producing wells that we have drilled in Catalina we haven't even tested, so as we get those on production, we will be able to evaluate the extent of the economics of the extension in the Pod C and see if it is similar to A or B or if it is different. And with all that data that will direct us to wherever we want to put some of our focus. We are also looking at some acquisitions of complementary assets. We are looking at commercialization of some of our midstream assets, and they will also have to compete for this capital.

Mark Lear

Got you. Kurtis, just one more for you. You have done a great job with hedging current production in some of the growth as well, but I guess what is your outlook here coming into winter – to maybe wear on some more hedging and maybe it is a tough environment, so it can’t be anticipated where you might not have the opportunity you did last year. Just any thoughts on that?

Kurtis Hooley

Well, I will have to agree. I don’t think – we are not anticipating the run up like we saw in the spring and summer of 2008, but we are very diligent on watching the market. We have kind of lowered our floor that we are willing to accept on our collars, so that we can continue to lock in 50%, 70% of our known production on the prices that not only meet the current development portion but also will help us self fund in the future. So we are actively and aggressively watching the market, making sure that NYMEX and CIG bases as those narrow, or those increase, we will continue to layer on in tranches additional hedging. We think hedging is a good mindset and good way to be.

Richard Dole

Mark, this is Dick. I might add to that. We have checked with our weather forecasters and they say that the squirrels in the East have bushy tails. So we think that it is going to get – actually there are some weather consultants that have suggested that November and December might be unseasonably cool or cold. So we are going to watch it real close. We think that there will be some opportunities in the next few months to fill in some of the gaps we have. But as you know, Mother Nature decides what she wants to do whether we agree or not, and whether the squirrels got right or not. So we think we are going to be able to fill in some of those gaps, at least we surely hope we can.

Mark Lear

Got you. Thanks a lot guys.

Operator

All right. We will take our next question from Mike Temple [ph].

Mike Temple

Good morning, Dick and Kurtis and Steve. Just a couple of housekeeping questions. Regarding the revolver, can you review with us the terms of that revolver maturity date, the spread of what you have paid, and given the indication I think on the last conference call that with a mid-year report that you had entered into talks with the – about getting a larger borrowing base up to the current 35 million. That was some available.

Richard Dole

Well, I will let Kurtis go over the details of the current revolver, but we are in discussions with the banks about expanding the credit line, based on the media report. Those talks are in discussion. They are positive and moving forward, hope they have something to find by the end of the year. But having said that, we aren’t under any critical pressure to have it expand it, and Kurtis can explain to you the term of the rates.

Kurtis Hooley

Hello Mike. The current agreement will expire in July of 2010, the $50 million facility and as Dick said. We are working with them, there is frequent new reserve report, the opportunity exists to extend the borrowing base if we so choose. The rate we currently have is 1.125% below the Wall Street prime rate, which at quarter end was I think 3.875%. And obviously that is an incredibly good rate and we enjoy that rate a lot. Both of our banks are very positive and bullish on the company. They have expressed interest in expanding the facility. And so I think we are well positioned from that capital side to move forward to whatever projects we want to go with.

Mike Temple

Okay. The last time we spoke, Steve had mentioned that there were ongoing talks with one or more potential parties, the Christmas Matters [ph], anything new to the report on Christmas Matters at this time or talks continuing?

Richard Dole

Yes, talks continue and there won’t be anything. It has been buttoned up for 2008 here and any activity would occur July of ‘09, but we are having current discussions with companies and it is not a dead duck by any stretch.

Mike Temple

Do you lose that lease if you don’t go back in sometime in 2009, was that sort of a two year –?

Richard Dole

No, no. There was – since we terminated that unit in 2007. Those leases were given a two-year extension. And you are correct that under normal terms it would have been – the short term leases would have expired in July or April of 2009. But we have been able to secure extension or suspensions based on weather and the work we are doing with some of these other companies that BLM has granted a suspension of those leases that – so we will enjoy – I think the first of them right now would start expiring sometime in very late 2009 but we are asking for another suspension site. I expect that not be a problem that we will have to face right now.

Mike Temple

Okay. Couple other quick questions, observations. Early on in the call, you had mentioned what seemed to be some encouraging remarks about Sun Dog and Doty. I know Doty has been the greater underperformer in terms of low rate. I am just curious, did I misread something into those comments or have you gotten some feedback in Anadarko? Doty in particular is looking better and was going to continue to use the frac, not just a few guys have utilized that going forward.

Richard Dole

Well, first of all, on Doty, interesting occurrence just of late and I think it is very positive that Anadarko had identified that electrical supply to about 12 or 15 wells on the southwester side that we’ve had drilled with them would not be installed until later in the year in December. And so they informed all their operators and suggested that instead of dedicating manpower to completing those wells and trying to get them on line once the snow has really deepen everything, that to re-dedicate that capital and manpower to frac another 18 wells in the developed part of Doty Mountain, which we certainly thought was positive and encouraged that action, because they could get immediate production from those wells if they frac those and they said that they were more enthusiastic than they had been, that is why they suggested that move just during the last week here, because they are still seeing some upswing of their production. But generally speaking, after they performed those fracs, the Anadarko engineers told us that they are experiencing an increase of 200% gas production and 50% increase on water production at those wells. So, they are encouraged by the first group of fracs that they have done and they saw an opportunity where they could increase production immediately and wanted to re-dedicate that capital right now. And so we will complete those other wells maybe through the winter here but probably bring them online in the first of ‘09. Those are the new drills. They will concentrate the capital on the existing well. As far as Sun Dog is concerned there hasn’t been any frac jobs on any of those wells, but they are continuing to bring those wells on. Their operation is different than ours in the fact that they – all of their wells go into a trunk line and feed into one central delivery point as opposed to PUD like ours do. But they are seeing some nice rates of oils and we expect that to continue to grow.

Mike Temple

And just one final question , maybe more for you Dick as you align the market awareness program. I am not – I don’t need to make it sound contentious, but the results of the last two quarter have never been better for the company. For anyone who objected the looks of the company, the financial balance sheet shouldn’t be much of a concern, especially confirmation that your facility is all the way up to 2010 as opposed to a 2009 maturity, which would be more problematic. My basic point for question is, the results have never been better at the drill bit. I acknowledge your statement that it is a micro-cap of a company with a very small float. But the stock sits here 50% lower than it did three months ago, little on six months ago. And I would suspect that you’ve raised the awareness of the company to more and more investors. Does it just the assets cost what it is that investor wouldn’t just get past the bullshit of when things are liquid when the stock has fallen 50%. (inaudible) to say never wants to pay stupid prices, but it would seem to me that somebody could easily pickup price target of $10, $11, and they say, I am going to buy what I want to buy, I don’t care how sloppy it is, but anything below these levels is just an absolute steal at less than $2 per Mcf proven and the company’s got a growth profile that is as encouraging as anyone else I can see out there. I guess I am trying to ask why the huge disconnects in your opinion when – no liquidity issue, I more than understand, but the stock has been haircut by 50% at precisely the time you’ve never shown better growth and better economics.

Richard Dole

I can give you my opinion, but it doesn’t mean that it is right. The fundamentals of the market – the companies are totally disconnected from the activities of the market. And we are not unique in that way. Since June 01 through September 01, we actually faired a lot better in the market. We were down about 25% and all of our peer group and the major gas producers were 25% to 60% reduced. We unluckily caught up with the rest of the pack, but we are in the middle of the pack as far as discount of the stock price. And I think one of the contributing factors for us and it is something completely out of our control to some extent, I still ponder how it works, but when we got listed on the Russell 2000, 3000, and people started to buying our stocks and putting shorts on us as a part of managing their index funds, and then a liquidity crisis immediately after that hits the whole investment market and as they get redemptions, they indiscriminately sell stocks. And because we have a small float and a thoroughly low trading volume, I think that while we got hit kind of with the tsunami from the market standpoint we got that extra bump because of being listed on those indexes, and I can’t tell you that fact. But (inaudible) and the fact that we are right in the middle of all the other energy companies, most of which are bigger than we are as far as degradation of market price from July 01, I think – while I don’t say I am happy about that, it could be a lot worse.

Mike Temple

And just final question, and then I’ll let others go on. You talked about the potential commercialization of your midstream assets. Any, (inaudible) any kind of transaction that you could do – that valuation that you thought was fine and proper was highlighted to investors that there is significant value in those assets in the current stock price that makes the company look even cheaper than it tells on its other metrics because we all begin to calculate towards a 3, 4, 5, 6 times cash flow multiple might mean to growing smaller pipeline?

Richard Dole

Yes, I think I don’t disagree with you Mike. We have been and currently very active in the plans and strategy that we are going to take forward into 2009 around midstream assets. It’s that all I can say about that now. But as you know, in the heyday of the MLPs and they got hurt just like everybody else, these annual cash flows from midstream assets whatever market prices, and they are still making 12 multiples. The last I saw they were down to about 6.5, but even at 6.5 those are very attractive. And so when we look at our portfolio of assets and portfolio of opportunities, it’s subject to complete more due diligence, the pipeline because it doesn’t carry what the commodity price is, it becomes close rival to Contango attractive investments.

Mike Temple

All right. Thank you, gentlemen.

Operator

Thanks. We will take our next question from David.

David Dantruvan

Good morning guys. Terrific quarter here. This is David Dantruvan [ph]. Following up on Mike Temple’s question in a little dimension; in the ocean you either eat something or you get eaten. And it appears that we are in a good position to be eaten, but – we are not weak, but we are just a real attractive morsel. But if you can find private companies, particularly when they’re distressed, unlike us, have you been looking at anything like that that might utilize capital in?

Richard Dole

David, we are constantly looking at both asset, private and asset deals as well as we have – I’m sure you know this, but when the equity markets and the capital markets froze, there are a lot investment bankers, probably many on this call that are looking for opportunities and ways to put people together that are synergistic, just some of the traditional activities they have or are slow at best, and we are seeing a nice kind of deal flow of ideas. I think it’s a little early yet. I think that those ideas are going to get more attractive over the next six to nine months. But yes, we are going to have – our assets are wide open on everything.

David Dantruvan

Such a synergistic deal would possible solve the liquidity issue, because if you’ve got considerably bigger, then that’s going to help with that as well.

Richard Dole

Yes, I know you are right. But what you see in the beginning of these market shifts is you starting seeing the ones that have huge amounts of debt because they are in trouble. And those are the ones that are seeking the hardest to find someone to quote to rescue the asset, and oftentimes those, given the current conditions, are too far along that there is no – and if you are not going to gain a lot by even though if the asset is attractive and has so much debt with it on a net-net basis, it really doesn’t make sense. So that’s what you see in the beginning of these shifts in market dynamics. But later on, as those sorted out either by being acquired by someone who has huge amounts of capital and can sort the debt or by rationalizing themselves in some other way, you start seeing some things that start making strategic sense that 1 and 1 actually do make 3 as opposed to 1 and 1 makes 2. So, we are going to wait for those and we’ll try and identify those that are 1 and 1 makes 3, and we will look at them very hard.

David Dantruvan

Well, it certainly makes sense to do that, and also to avoid that debt. I got a question for Kurtis. I understand Kurtis that you recently sold some (inaudible) CIG price. What percentage hedged are we overall in the company right now?

Kurtis Hooley

Overall, for the fourth quarter we are hedged around 70% of our current production at a price around $7, and we are a little bit 70% for Q1 of 2009 around the same rate.

David Dantruvan

Do we have a number on a company-wide production per day right now?

Kurtis Hooley

Yes, 20 million a day.

David Dantruvan

Okay. And last question, do we have any guidance for year-end earnings numbers?

Kurtis Hooley

Now, we don’t give guidance. But if you have noticed our last few production reports, our production has pretty much stabilized as a result of the ramp up of the 2007 drilling program. And those wells that we drilled in 2008 in Catalina and in some of the areas won’t be coming on till 2009. So, that’s kind of what the production profile would look like. But I can’t give you any guidance on the numbers.

David Dantruvan

Okay. That’s the end of my questions. Thank you very much.

Kurtis Hooley

Thanks, David.

Operator

Sir, at this time, we don’t have any more questions.

Richard Dole

Thank you all for participating. And I’ll remind you if you have any questions you think of later or follow up questions, call John Campbell here in the Denver Office of Double Eagle. Thank you so much.

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