Particle Drilling Technologies, Inc. F4Q08 (Quarter End 9/30/08) Earnings Call Transcript

Particle Drilling Technologies, Inc. (PDRT)

F4Q08 Earnings Call

December 15, 2008 11:00 am ET

Executives

Sheila Stuewe – DRG&E

Jim B. Terry – President, Chief Executive Officer & Director

Greg G. Galloway – Vice President Operations

Thomas E. Hardisty – Senior Vice President Corporate Development & Secretary

J. Chris Boswell – Chief Financial Officer & Senior Vice President

Analysts

Jack Frasier – Seamark Capital

Anthony Marchese – Monarch Capital

[Gordon Erin – Dean Loussier]

Peter Norton – Norton Capital Management

Philip Harris – Wachovia Securities

Presentation

Operator

Welcome to the Particle Drilling fourth quarter financial results conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, December 15, 2008. I would now like to turn the conference over to Sheila.

Sheila Stuewe

We appreciate you joining us for the Particle Drilling Technologies conference call to review its fiscal 2008 fourth quarter financial results, the latest operational update of its particle impact drilling system. Before we begin I have a couple of housekeeping items I would like to go over. If you would like to be on our email distribution list to receive future news releases please call us at DRG&E and relay that information to our offices. The phone number is 713-529-6600.

An archive of this call will be available later this morning on the investor relations section of the company’s website at www.ParticleDrilling.com. A telephonic replay of the conference call will be available through December 22, 2008. Access details have been provided in yesterday’s press release.

Please note that information reported on this call speaks only as of today, December 15, 2008 and therefore time sensitive information may no longer be accurate as of the date of any replay. The discussions today may contain forward-looking information that is based on management’s beliefs as well as on assumptions made by and information currently available to management.

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, the expectations are subject to numerous uncertainties and management can provide no assurance that such expectations will provide to have been correct. Important risks and uncertainties could cause actual results to differ materially from those described in any forward-looking information provided during the discussion today.

Such risk and uncertainties may include but are not limited to Particle Drilling’s ability to raise equity capital if necessary and its ability to obtain equity financing on acceptable terms if at all. A severe worldwide slowdown in the energy services sector, working capital constraints and other risks described in the company’s filings with the SEC.

Further, Particle Drilling is a development stage company that operates in an industry sector where security values are highly volatile and maybe influenced by economic and other factors beyond the company’s control such as announcements by competitors and service providers.

I would now like to turn the call over to Jim Terry, Particle Drilling’s President and Chief Executive Officer.

Jim B. Terry

With me on the call today is Greg Galloway, Tommy Hardisty and Chris Boswell. We completed our fifth field trial and returned to Houston in early September. This fifth trial was only our second field trial drilled with an 8.5 inch PID bit and the first well drilled with our new extruder based injection system.

We anticipated some [sieving] problems with the new injection system and saw these on the first of two bits run on this trial. By the second bit run, the new injection system was working well and we achieved our second best performance of the five field trials to date. This experience was not unlike what happened when we placed the original particle extraction unit that gave us problems on field trial one.

By field trial two we no longer had problems with extracting particles being returned from the well bore. Based upon lessons learned on the last well, we’ve made some improvements to the injection systems that have increased from our maximum particle injection rate and improved reliability. We’ve also changed the way particles are fed in to the top chamber from a gravity feed to direct mechanical injection which allows us to consistently cycle the system regardless of fluid properties and improves our cycle time which also increases our reliability.

The 8.5 PID bit ran on the last two trials was developed based upon a successful 7 7/8^th designs we ran in field trials one through three in the Uinta Basin in Utah. We have in the past tested new bit designs at independent laboratories with Catoosa in Oklahoma and TerraTek in Utah. This was not the case with the 8.5 inch bits we ran on the last two trials where penetration rates were not as high as experienced with a 7 7/8^th inch bit.

We are currently in the process of fabricating a low cost drilling simulator that will give us a cost effective way to evaluate bit nozzle blast patterns and hold gage diameters in rocks similar to that we will be drilling. In the past changes to critical bit variables like nozzle size and angle were done through engineered extrapolation of existing designs or required a full scale test at an independent laboratory where the cost of limited testing could exceed $200,000.

With this internal capability we will be for the first time able to optimize bit design and nozzle configuration which should result in greater penetration rates in the field. This is a significant milestone for the company in that most of our recent effort has been focused on surface systems responsible for extracting and injecting and storing the particles. We are comfortable that the surface system has evolved to provide the performance required and look forward to focusing our attention on maximizing penetration rates and increasing bit life.

With the new injection system now proven we no longer needed the high pressure frac pump and sold that last month for $840,000. We still require a pump for testing and have secured a more suitable, less expensive unit on a short term rental basis. We continued our business development activities with the focus on operators that have both good applications and specific technical expertise and resources that augment our effort to more rapidly commercialize our technology.

Earlier this month we secured a two year contract with a major multinational energy company that meets these requirements and we began work on that project. This project is unique for us in that the application combines the need for improved penetration rates with the requirements to drill a straighter hole than has been possible with conventional technology. Additionally, for the first time we’ll be drilling 6.5 inch hole whereas in the past we have drilled 7 7/8^th and most recently 8.5 inch holes.

Our analysis shows that higher penetration rates can be expected in smaller hole sizes for several reasons, some of which include the fact that there is less rock to remove and we expect to be able to do so without having to create and remove a center rock ring as we currently do with the larger bit sizes. Integral to our new contract is the requirement to test and validate the new 6.5 inch bit by drilling very hard rock in full scale test.

Given this requirement and the short time available before next fuel trial, fabricating and utilizing our own drilling machine on site was the only cost effective way to meet our deadlines. The wells drilled in this field also tend to have significant and expensive problems maintaining desired verticality due to the high weight on bit that is required when drilling hard rock with conventional bits.

In addition, the formations are steeply dipping which further adds to the tendency for a well path to deviate from vertical. Since the PID bits require a small fraction of the weight required to make a conventional bit drill, maintaining verticality will be a function of reduced weight applied and the new 6.5 PID bit will require even less weight than our larger sizes. Reducing well deviation tendencies has always been a benefit of PID drilling but, this is the first application we should be able to significantly reduce our customers cost by leveraging that feature.

In mid October, the special committee of the board of directors retained Parks Paton Hoepfl & Brown to serve as the special committee’s financial advisor in connection with its evaluation and review of any potential strategic alternatives including a strategic industry joint venture, technology license arrangement, sale of the company and any other available alternatives.

We continue to review strategic alternatives in the best interest of the company and its shareholders such that additional resources both technical and financial will accelerate the development, commercialization and adoption of this technology. As previously stated we do not intend to disclose developments with respect to this evaluation unless and until the board of directors have approved a course of action or otherwise deemed disclosure appropriate.

In summary, we completed the first field trial of our new injection system. In just over two years we have completed the replacement of the surface system comprised of the extraction, separation and storage injection components with field proven and commercially practical equipment. There is no doubt that the replacement of the injection system was the most significant task undertaken to date and we are glad to have that behind us.

Our technical resources are now focused on the design and manufacture of the new 6.5 PID bit for the next field trial. Unlike the previous bits, this 6.5 inch bit design will be subject to more than twice the testing and optimizing iterations of any previous bit design. We also completed a successful rights offering in April and sold our remaining frac pump for $840,000 in November.

In December we secured a new contract with a customer that included funding the development of a new size and type of bit for a good application in a new geographic area. We continue to make significant progress on our effort to commercialize particle impact drilling technology and look forward to working with our new customer and to satisfying their needs.

I’ll now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jack Frasier – Seamark Capital.

Jack Frasier – Seamark Capital

I’m wondering Jim if you could share with us just a little more insight as to the kind of discussions going on with potential customers? Are there other customers you might potentially be talking to at this point? And, if so, how would their queuing if you will in line for resources work out with your now existing partner/customer?

Then just lastly, I’m just wondering if we could possibly have an update on the likely financial impact if you look out to the first half of next year from these relationships?

Jim B. Terry

Yes, we continue to talk to other customers. The reality is given our size it is very difficult to address multiple opportunities at the same time. We certainly can on the business development side but in terms of engineering and resources required to review potential projects or certainly to work on anything specific like a new bit size, we’re pretty much all consumed with what we’ve engaged to do with our new customer.

So, in short, we continue to have those conversations so we can kind of force rank the opportunities for the future but we have made a commitment to this customer and it is a fully funded commitment so that is where all of our resources are going. In terms of financing, we’re doing what we can to reduce our burn rate. Most of the burn in the last half had to do with the acquisition of components and spare parts on long lead items for our current single system.

That’s largely gone away so the bulk of our future near term cash requirements are going to go in to funding the development, the design of the new drill bit as well as manufacturing it. The funding we received from the customer, will compensate us for the work that’s being done on that project and I’m not at liberty to disclose a lot of details aside to say that some of the funding is at risk predicated at the outcome of the trials but in relative terms to previous opportunities, it’s significantly less a portion of the total project.

In other words, most of the money is guaranteed and is provided in progress payments for making milestones.

Jack Frasier – Seamark Capital

One follow up if I may, as we think of the revenues that are associated with this lead customer at this point, should we be thinking of those revenues as actually being profitable in nature or is it too early to tell that yet?

Jim B. Terry

Well, the contract provides for payment predicated on the delivery of bits and some other things. The total revenue per well, there is three involved, is right on target with our previous revenue expectations on a per job basis. It looks like commercial numbers.

Operator

Our next question is from Anthony Marchese – Monarch Capital.

Anthony Marchese – Monarch Capital

You disclosed your customer in the 8K, I think its Shell Oil if I’m not mistaken. My understanding also is that Shell is considered probably one of the most technologically advanced oil companies in the world so congratulations because I do think that says a lot for the technology.

Having said that, does Shell’s participation or if you want to call it your customers participation, has that helped to advance whatever conversations you are having with other parties? That would be the first question, has it helped you advance the conversations? Secondly, are these other parties that you are talking to oil services companies, are they oil companies, can you just characterize brief conversations?

Jim B. Terry

We’re not disclosing who our customer is in the conversations we’re having with others so that has had no impact. The type of companies that we’re talking to run the full gamut as described in what our attention was with pursuing strategic alternatives. We aren’t talking to a lot of oil and gas companies although we are talking to a limited number.

We are talking to the major and independent oil field service companies and we are talking to financers that have an active interest portfolio that includes companies that may provide some technical resources that we would benefit from. So, it’s pretty much full spectrum, we’re not making any assumptions about who might do us the most good or the least good, we are entertaining all comers at this point and have had several, many, good meetings and look forward to continuing that.

Anthony Marchese – Monarch Capital

The second question is how would you compare the contract you just received with this customer versus some of the others that you’ve had in the past? It seems like this is the best deal that you’ve been able to drive so far. I could be wrong but given the way you disclose your payments and incentives, it seems like this is probably the most profitable contract you guys have ever struck, am I right about that?

Jim B. Terry

Well, it’s very much a different contract than we’ve had in the past and that may well be the nature of the customer as was previously described. They have a need that they believe we can satisfy and it requires the development of a size bit that we’re not in a position to have developed on our own so their funding that in advance. In terms of the quality of the contract relative to others, it holds a lot more opportunity than what we’ve seen in the past.

Operator

Our next question is from [Gordon Erin – Dean Loussier].

We are [gold] shareholders and we’re very much interested in your progress and appreciate the report. There has been publicity using the term partnership, you have described the relationship with customers, is there a partnership in existence with anyone in the sense of a binding agreement with a partner?

Jim B. Terry

As I’ve said before, I think you’re talking about strategic alternatives and we’re not going to disclose anything in that regard until such time as the special committee has deemed it disclosable or appropriate so I can’t really comment on that.

Operator

Our next question comes from Peter Norton – Norton Capital Management.

Peter Norton – Norton Capital Management

Just two things, one curious on what your cash position is currently and what your burn rate is at this point?

Jim B. Terry

On September 30^th we had about $2.3 million in cash on hand. In November we sold our frac pump as I said earlier for $840,000, that gives us about $3.1 million in available cash to fund operations. As of today, we have about $1.5 in cash, we’ve been paying down our liabilities so that’s our current position as of today.

Peter Norton – Norton Capital Management

So is the need for a strategic relationship such that without it you would not be an ongoing entity?

Jim B. Terry

Well, if you put that out in time relative to the contract that we just won, it’s going to be certainly very tight but I wouldn’t say that we’ve got to have something now. As I’ve said many times before, the benefit of a strategic partners comes in several forms, one is the technology side whereby they have inherent in their company something that we would have to go out and pay for. So, it affects the quality of the outcome as well as the cash. Yes, we’d like to have more runway certainly.

As I said earlier, our previous burn rate was, since we expense everything, was largely the result of building an ordering, receiving new equipment for field trials and we’re to the point now where we’re in pretty good shape and the equipment is built and we’re satisfied with our surface system which is where most of the money was going.

The new contract takes care of what we are doing as far as the bit development in the 6.5 inch side so I’d say we’re really in pretty good shape. We’ve certainly been in a lot worse shape.

Peter Norton – Norton Capital Management

So just so I understand it, the burn rate sounds like it’s been reduced, you have some upfront funding from the unnamed customer. How long with the existing cash on the current burn rate can you continue to go on without some sort of a strategic alternative? Are we talking six months, a year, less, whatever?

Jim B. Terry

That’s very much dependent upon the drilling schedule for our new customer. The sooner that happens the more rapidly we spend funds developing the bit. The longer it takes to get to that, certainly we can last a lot longer.

Operator

Our next question is from Philip Harris – Wachovia Securities.

Philip Harris – Wachovia Securities

Can you say anything at all about what you think is the time until you do the next well test?

Jim B. Terry

We are having our first planning meeting this Thursday. Right now I would say that February, early March looks likely.

Operator

There are no further questions in the queue at this time. I’d like to turn the call back over to Mr. Terry for any closing remarks.

Jim B. Terry

Well, as always I appreciate everybody’s continued interest. We are certainly in difficult times as far as the market in general is concerned. We’ve made a lot of progress, sometimes that get’s missed. We’re very comfortable and very confident and very pleased about the new contract that we’ve been awarded and look forward to executing that to where our customer can save some money and we can make some money.

So with that again, thank you very much and I wish everybody a happy holiday and safe travels if you’re going anywhere. Thank you.

Operator

Ladies and gentlemen this concludes the Particle Drilling fourth quarter financial results conference call. This conference will be available for replay after 1 pm Eastern Standard Time today through Monday, December 22, 2008 at Midnight Easter Standard Time. You may access the replay system at any time by dialing 303-590-3000 and entering the access code 11123339 followed by the pound sign. Thank you for your participation you may now disconnect.

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