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FX Energy, Inc. (NASDAQ:FXEN)

Q4 2008 Earnings Call

March 16, 2009 04:30 PM ET

Executives

David Pierce - President and Chief Executive Officer

Analysts

John Bayer - SKA Financial Services Incorporated

Roger Liddell - Ingalls & Snyder

Anthony Marchese - Monarch Capital

Dick Feldman - Monarch Capital

Operator

Good day, ladies and gentleman and welcome to Fourth Quarter FX Energy Earnings Conference Call. My name is Louisa and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. David Pierce. Please proceed sir.

David Pierce

Thank you, Louisa. Thank you everybody for joining us today. I am David Pierce, Chief Executive of FX Energy. Welcome to our year-end 2008 earnings call.

The remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual events to be materially different from those currently anticipated.

Those risks include among others, matters that we've described in an earnings release that's being issued right now and in our filings with the Securities and Exchange Commission including our most recent Form 10-K.

While the company believe these forward-looking statements are reasonable, they're subject to factors such as drilling schedules and results, capital plans, commodity prices, U.S. and Polish governmental policies, and changes, and other factors that may cause our results to differ materially.

During this call, I'll address just a few key financial items as substantial detail is available in our 10-K that's being filed right now. After that, I'll cover some operational updates. Clay Newton, our Vice President of Finance is out of town today, but will join me on another phone line at the end to take questions.

First an overview, then we'll come back to the details. Last year was very strong for reserve growth. We grew our SEC proved reserve volumes by 35%, to 45.9 billion cubic feet equivalent. We grew the value of these reserves; that is the SEC PV-10 by nearly 20% year-over-year in spite of taking $11 million out of our U.S. oil PV-10, we'll talk about that later.

At year-end 2008, we had $137 million of pre-tax present value in our SEC proved reserve. That's about $3.25 a share. Under the P50 valuation used in this industry, our reserves were 79.9 billion cubic feet equivalent with a net pre-tax present value of $221 million or $5.24 per share. We've built similar volume.

We have a solid acreage portfolio in Poland that we think will help us maintain our reserves growth rate, which by the way, is an impressive 34% compound annual rate over the last five years. We are off to a good start to maintain that growth rate in 2009 with our Kromolice-2 discovery.

We've got a good capital program for 2009. We have additional completed wells to bring online this year and next. We have scope for more expansion in our core area, high potential exploration wells about to start drilling, and an excellent portfolio of exploration acreage, which were promoting the industry partners.

Revenues last year were essentially flat, but we have significant production increases planned for 2009 and 2010. We're keeping a weather eye on the economy, but there too we are upbeat about the natural gas business and natural gas prices in Poland.

We have a strong, liquid balance sheet. At year-end 2008, we had over $20 million in the bank and $14 million in working capital. Between our cash, current revenue and expected 2009 and 2010 production increases, we should be in a good position to fund our capital program for 2009 and beyond. And that is on the assumption of no additional debt or equity funding.

With due respect for the uncertainties of the world economy today and our own industry at all times, we feel confident about the future for FX and the shareholders.

Turning to the details, let's start with production. Production was down last year, 31% compared to 2007. This was expected, previously disclosed and mostly due to the Wilga well in Eastern Poland. The good news is that we expect a major upward shift this year in natural gas production.

The Roszkow well scheduled to begin production before midyear is expected to increase our daily production rate from just over 4 million cubic feet equivalent per day in the last quarter of 2008 to over 11 million cubic feet equivalent per day at midyear 2009. This could increase our 2009 full year production to as much as 180% of the 2008 level.

Very few oil and gas companies can speak of that size production gain for 2009. And here I'd like to single out our outstanding team in Warsaw led by Zbigniew Tatys. Our Warsaw Group has had a big role in pushing Roszkow toward production next quarter, and will take on even more responsibility for the next several wells to come online. They do a fantastic job in the face of myriad hurdles.

Okay, revenue is next. Total revenues were essentially flat, $17.8 million in 2008 versus $18.0 million in 2007. Looking at just the oil and gas revenues, the production decline was largely offset by higher prices. A meaningful increase from our U.S. oilfield services segment, which also was boosted by higher oil prices, virtually closed the gap.

Our oil prices hit an unprecedented high at midyear. That was a benefit to the oil producers worldwide, but FX also had and continues to have the benefit of significantly higher gas prices. In particular, and in sharp contrast to the U.S., our gas prices in Poland were 20% higher last year than in the prior year. Polish gas prices remains strong today.

While we can't predict what will happen with natural gas prices going forward, we do expect the underlying political and economic forces that work in the European and Polish gas sector to continue applying upward price pressure. This is potentially very significant to FX.

In fact, let's focus for just a moment on the upward price pressure on gas prices in Poland. The U.S. gas market has to deal with volatility related to weather and the periodic threat of oversupply. The Polish gas market is completely different. There is no gas bubble in Europe. European supplies are shrinking. Russia dominates the gas market in Europe and there is no sign of the capital investment needed for Russia to maintain even the current level of gas exports over the medium term.

Poland, like many European countries, is dependent on expensive Russian gas. This obviously tends to raise the price for all natural gas in Poland. Natural gas prices in Poland now exceed those in the U.S. Even so, customers in Poland pay less than customers in neighboring countries. Obviously, there is still upward price pressure on natural gas in Poland as prices move toward equilibrium with European prices generally.

Now while we're on economic matters, we'll take just a moment to talk about Poland. First of all, I don't think any country will get through this world recession unscathed. But Poland looks to be in relatively good shape. Most of the countries in the region are very... reasonably well. Let me read a few sentences from the Economist two weeks ago.

Poland by far is the largest economy of the new EU members, is nowhere near collapse. Unlike its central European neighbors, it's big enough not to depend cheaply on exports to the rest of the EU. By European standards, its public finances are in fairly good shape. Its debt to GDP ratio is below 50%. Some polish firms and households have taken out foreign currency loans, but the figure is around 30% of all private sector lending compared with twice that in Hungary. Growth will be negligible or slightly negative, but nobody is forecasting a big decline.

And then this extract from last week's edition. Why do people confuse Poland's sound public finances with Ukraine's catastrophic ones, why do the few frugal checks with their solid banking system get lumped together with spend thrift Hungarians. There're certainly plenty of confusion to go around, I am still quoting now, but when you look carefully, I think Poland is all right. Our read on the situation is that Poland is one of the stronger countries in the region and we're lucky to be there.

Okay, let's get back to our financial statement. Reserves; we had another very good growth here for oil and gas reserves. First, the volumes. Proved oil and gas reserves rose to 45.9 billion cubic feet equivalent, an increase of 35% over year-end 2007. The company's P50 reserves likewise increased by 49% to nearly 80 Bcf at year-end 2008. P50 reserves represent the mostly likely ultimate production outcome as determined by the company's independent reservoir engineers.

Now let's look at the values. This is the fifth consecutive annual increase in the value of company reserves. Since 2003, we've grown our pre-tax proved reserves from $10 million to $137 million, with compound annual growth rate of 68%. Over the same period, we've grown our pre-tax P50 reserves from $17 million to $221 million, a 67% compound annual rate.

At year-end 2008, our pre-tax SEC proved reserves had a discount present value of $3.25 per share and pre-tax P50 reserves were $5.24 per share. Today, with the addition of our most recent discovery Kromolice-2, our P50 reserves should be nearly $6 a share. This is an impressive valuation and an enviable track record. We believe we're positioned to continue growing both.

Now, we've been talking about some of our key performance measures; revenue growth, gas price strength, reserves growth, and planned production increases. Before leaving financial statement matters, I want to address three non-cash expense items for 2008. They produced a sizable net loss for the year and they deserve some discussion.

As announced earlier, we recorded impairment charges in the fourth quarter of $14.7 million. Lower oil prices at the end of 2008 reduced the calculated productive life of our Montana oil properties. That led to a required write-down of $3.8 million in the net book value of those properties.

Out in the field, these wells continued to produce steadily at approximately 180 barrels of oil per day net to the company's interest, and I'd also note that our 10-K will show our year-end U.S. oil price at $24.58 per barrel. Oil prices have strengthened appreciably since then.

We also impaired the costs of the Grundy and Sroda-6 wells, a total of $10.9 million. Now both wells were suspended, but not plugged because initial drilling results were inconclusive. Accounting rules require that capitalized costs of exploratory wells be expensed if reserves cannot be classified as proved after one year following the completion of initial drilling. We think it is unlikely in either case that we will conduct sufficient additional testing within the one year requirement to establish economic reserves of these two locations.

The last non-cash charge is the foreign exchange loss of $24.2 million reported under other income and expense. We changed the functional currency of our Polish subsidiary from the U.S. dollar to the Polish zloty at the beginning of the fourth quarter of 2008.

The company's Polish financial statements will now be translated into U.S. dollars at period end rates rather than at daily exchange rates. The two different methods typically would not result in wide variations for items of revenue expense. However, as the zloty is now the functional currency of the Polish subsidiary, the provisions of FAS 52 require us to recognize gains and losses related to inter-company loans between the company and its wholly-owned subsidiary.

While these are non-cash items primarily related to currency exchange rate fluctuations from time to time, these fluctuations were unusually wide last year as a result of the global economic crisis.

With our Roszkow well now set to come online next quarter with the big production increase, we are now looking beyond to the next significant production increase after that. We're working closely with our partner to develop a central processing facility in the Sroda area. Up to now, we built production facilities for each individual well.

With several discoveries close together, we're focusing on a single facility that could collect gas from multiple wells. We should be able to gather Sroda-4, Kromolice-1, and our newest discovery, Kromolice-2, and possibly another well yet to be drilled in this area. This approach could give us yet another big production increase perhaps in the same range as the 7.5 million cubic feet per day expected from Roszkow.

Given our almost 80 Bcf and P50 reserves, we certainly have the capacity for significant production increases both this year and next. Now, we still have decisions to make regarding pipeline route, capacity, project cost et cetera, but we're working closely with the POGC and we hope to have the project underway shortly.

Now, earlier I mentioned our most recent discovery, Kromolice-2. This is a new discovery in a new Rotliegend structure. Testing is underway today to help determine reserves and production rates. We should be able to provide those data in the next few weeks.

We're gratified to have made Kromolice-2 discovery just as we were very disappointed to have missed the structure at Sroda-6. And these two results underline some important points about our core Rotliegend area.

First, we continue to demonstrate that there are more gas discoveries to be made in this area. We've discovered more than 200 Bcf in total on a P50 basis, of course it's not all ours, we do have partners. But the other point is that even with 3-D seismic, success is not assured every time. That is a fact of life for every oil and gas exploration company.

But we announced sometime ago we're carrying out an even more detailed analysis of the 3- data in the central Sroda area, a new round of pre-stack depth migration processing. We hope this will give us more of an edge in the ongoing effort to reduce risks.

We expect to have this data interpreted in the next month or two, so we can select drill sites. In addition, last year we shot 2-D seismic over the Taczanow prospect, an analog to our two best Rotliegend wells; Zaniemysl and Roszkow. We hope to be evaluating this prospect as well in the next month or two.

If all goes to plan, we could be drilling two new Fences wells, starting in the third quarter, both targeting Rotliegend structures. With the pre-stack depth migrated data in hand, we'll take another look at Sroda-6. You may recall we came in low to prognosis, but we found very good quality reservoir rock. We hope the new data when interpreted will show a nearby structural high and we hope it's within the reasonable side track system, but it's certainly possible the interpretation will not be positive.

This year's capital budget includes a side track in Sroda-6. But if the side track isn't drilled this year, we may need to reduce the four to five wells that we discussed in our news release at December 15. Either way, we're anxious to get this new data interpreted and see what targets we come up with.

And I also want to briefly mention two ongoing projects that may not get high priority this year due to capital constraints. We and POGC are cautiously optimistic about the potential for a tight gas play at Grundy, based on the data and analysis so far. And we are even more enthused about tight gas resources at Plawce. But both of these plays are capital intensive, and we are unlikely to be able to give either of them the priority we'd like to this year. That's the reason for taking the impairment of Grundy. Both Plawce and Grundy appear to have significant potential in our view, but we probably need to think of them this year as inventory.

For now, our priorities are free cash flow, low CapEx, and low risks. Now speaking of priorities for this year, I'd like to turn to the Ostrowiec well and the second element of our strategy, high potential exploration.

We were fortunate with the Ostrowiec farmout to land the one company in the world with both the depth of knowledge about the prospect and the ability and desire to move quickly to drilling. POGC discovered and operate two significant oil and gas fields in the area that are analogous to our target at Ostrowiec. This gave them quite a leg up in evaluating the opportunity.

The fact that POGC discovered the analog fields obviously boost our own optimism about Ostrowiec, however, we only remember this remains a high-risk well. We expect to start drilling Ostrowiec in the next 60 days. Again, this is a high-risk well, but the target, the hole could be an oil and gas field in the range of 0.5 Tcf equivalent.

The Ostrowiec prospect appears on seismic to be an analog to POGC's LMG and BMB fields. These two fields together have recoverable oil and gas reserves reportedly in excess of 1 Tcf equivalent. These Main Dolomite or Ca2 fields are located approximately 30 and 60 kilometers respectively south and southwest of the Ostrowiec location. The Ostrowiec well will target both the Main Dolomite and the Rotliegend dry.

Our format agreement covers two partial concession blocks; 163 and 164 with a total of approximately 212,000 acres. This is about 15.5% of our 1.35 million acre Northwest concession area. In the path we found out, we regained a 51% interest and we will serve this operator.

Looking beyond Ostrowiec; we still have over 1 million acres in the Northwest concession. We have a half dozen other exploration concessions with high potential. In all, we have more than 4 million net acres available for farmout.

In the last few months, we've brought the early stage exploration work to a point that we feel all of this acreage is marketable to the industry. Ostrowiec is our first successful deal and was actually agreed before marketing was fully underway. But we've been getting our land and our ideas in front of the most likely participants over the last few months, and at this point we're cautiously optimistic.

I do want to take a moment to praise our exploration team led by Jerzy Maciolek. We acquired our exploration acreage in Northwest block, Warsaw South, Kutno, the Edge because of new ideas generated by his exploration team. New ideas are the critical starting point for finding hydrocarbons and we have the best people for new ideas in Polish exploration.

Our technical team has spent a tremendous amount of time and effort to develop the data that support these exploration concepts, and to attract industry participation. We certainly would not have tackled these projects unless we believed that the hydrocarbon potential is there and that we can get the exploration done.

Bottom line is, we have large acreage positions with multiple play opportunities, and gas in Europe seems to be generating renewed interest. We'll see.

And before we close this call, I'd like to report our recent visit with the Royal Bank of Scotland, a few weeks ago in London. We have a $25 million credit facility with RBS, fully drawn as of the year-end.

Over the course of the past few months, the UK government has infused a lot of capital into RBS and today, it owns more than 90% of the bank. The bank has also a changed management. Despite a fair amount of negative press, the Economist recently reported that RBS' core capital ratio is 12.4%, about double the level of the JP Morgan Chase widely viewed as America's soundest big bank.

Our visit with RBS was very positive. They have been recapitalized and we're in full compliance with all the terms of our revolving credit facility. The team there is going through the annual borrowing base re-determination, and given our P50 reserves of $221 million versus the $25 million credit facility, we expect an offer to increase the size of our facility, which would give us more liquidity for headroom.

While we do not currently plan to borrow for exploration, we are interested to increase the funds available to develop our Polish assets.

I will close with a reminder that our strategy going forward is to continue building reserves and production, and to continue high potential explorations as funds and opportunity permit. We are currently in a good position to fund our capital program for 2009, particularly in light of our strong liquid balance sheet, cash in the bank and the increases we expect in our 2009 revenue and cash flow.

We have $20 million in the bank at the start of this year. We see good alignment between our new capital projects and our scheduled production entities. With Roszkow coming online before midyear, we expect our 2009 full production to be in the range of 180% of the 2008 full year, which means that we expect to see significant increases in our revenues, cash flow and EBITDAX.

Despite the price concerns that are weighing so heavily on U.S. producers these days, we think Polish gas prices look reasonably strong.

In the face of all the business and economic uncertainty in the world today, I'd like to tell you one thing of which I am certain. We made the right choice to go to Poland in search of oil and gas, and we're following the right strategy. We're gratified to have build up significant value and we're very excited about the upside potential for FX Energy and its shareholders.

And that concludes my remarks. I'd like to open the phone lines for a few questions. Clay Newton, our VP, Finance is available on another line to field financial statement questions. Louisa, can you get the questions?

Question-and-Answer Session

Operator

Sure. (Operator Instructions).

David Pierce

Louisa, it sounds like --

Operator

We actually just got a few questions. The first one is coming from the line of John Bayer with SKA Financial Services Incorporated. Please proceed.

John Bayer - SKA Financial Services Incorporated

Hello, David.

David Pierce

John, how are you?

John Bayer - SKA Financial Services Incorporated

I am fine, thank you. I've got a couple of questions, and I'll ask a couple of them, then I will kick out, and let somebody else come in. A question on your domestic property. So they're just kind of doing their thing or do you have any potential exploration potential there, farmouts anything like that?

David Pierce

We have, over the last several years, we have pursued on occasion an exploration idea. Typically, it's been low key, low cost. We don't have anything on the fire right now. So I guess the answer to your question is, the U.S. properties are just producing a way like they always have been. They have been a good earner for us. And I would expect with prices where they are now, they will continue to be good earners for us. I think we always run the risks. If we get down to $20 oil that we can't make money, but I don't foresee $20 oil.

John Bayer - SKA Financial Services Incorporated

Okay. So I would take from that comment that you probably don't expect any additional write-downs at this point in time?

David Pierce

Well, it would be hard to take a write-down. We wrote down our Montana property just from about $11 million down to about... I'm sorry $3.8 million down to anyway they're $300,000 today.

John Bayer - SKA Financial Services Incorporated

Okay.

David Pierce

$360,000, so yeah, it would be hard for us to write them down any further. They are almost zero.

John Bayer - SKA Financial Services Incorporated

Okay. Switching gears, I don't recall if you've given us any kind of estimate on what that central gathering plant system might, what the CapEx on that would be? Do you have any ideas or can you talk about that at all?

David Pierce

We have some idea. In fact, we run quite a few different scenarios and I have my personal favorite schematic for the facility and it has a budget attached to it. I will say that when we finalize the agreement with our partner, we'll put that budget out, but I do not expect that it will be a problem for us.

John Bayer - SKA Financial Services Incorporated

So you wouldn't have to go out and borrow additional funds? You think you can fund that out of cash flow and so forth?

David Pierce

We can fund it out of cash flow. Now, I will say that there's going to be a balance between funding... between using our revenue for exploration wells and using it for facility. Now, if we need to, certainly we can. But, I suspect we have several times more borrowing capacity than we currently use. That's me saying that let's see what happens here when we get our borrowing based re-determination done. But I think the prudent thing to do is to use borrowed funds to build facility, that's all surplus stuff and you know it, it leads to cash flow and use revenues to carry out exploration. And that's sort of the policy that I'd expect us to stick to.

John Bayer - SKA Financial Services Incorporated

Okay. One last quick question and I'll kick out and let somebody else come in here, and that is, do you have any sense of what overall gas demand within Poland is? Are you seeing any kind of drop-off in demand as we've seen here in the States?

David Pierce

Yeah. I think, in the last data that I saw suggested that the demand has declined by about 10% since the middle of the fourth quarter. We however have not seen any drop in demand. Our gas still straight into the larger national system and given that we're kind of competing head-to-head against higher price to Russian gas, I suspect that our gas is... I don't foresee a curtailment in the amount of gas we produce.

John Bayer - SKA Financial Services Incorporated

Well, that should be a good thing if you're competing against higher Russian gas?

David Pierce

Yeah, that's... the environment over there is really attractive for us as gas producer. I think, I've mentioned in my remarks that if you are a gas customer in Poland, if you are a business or if you are a consumer, even though you are paying higher prices than we're paying in the U.S., you're paying lower prices than your next door neighbors.

John Bayer - SKA Financial Services Incorporated

All right.

David Pierce

And so, there are a lot of forces that work to both keep prices steady or upward moving in Poland versus other countries. And there are forces that I've described that will tend to keep our production up versus production from other sources. I think we're in a really good environment.

John Bayer - SKA Financial Services Incorporated

Yeah. Good, I will kick out. I've got a couple of others, but I'll let somebody else come in.

David Pierce

Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Roger Liddell with Ingalls & Snyder. Please proceed.

Roger Liddell - Ingalls & Snyder

Good afternoon, David.

David Pierce

Roger, how are you?

Roger Liddell - Ingalls & Snyder

Well, I hope well. Well, I want to pick up right on your answer to John's question a moment ago. You stated something to the effect that prices received in Poland are steady and upward moving at least versus neighbors. But I'm tangled about between whether those prices are in zlotys, or euros, or dollars and part of that question is, what is the practical effect on stockholders of the change to a zloty-based financial statements or operating statements might be more proper?

David Pierce

You've asked handful of questions there, Roger. Let me try and take them in order. First, let's deal with gas prices in Poland. They are denominated in zloty. And our price has been constant since I think November of last year, and in November, we got a price increase on the period before. So, we were up twice last year and we're steady from November than now.

The price is set by a public utility regulator and it covers all sort of public utility sales of gas in Poland and our contracts are tied to those published prices. Now, since a big component of the price that's set by the regulator is Russian gas, if we see Russian gas move up, I mean it's pretty clear that they've got to move Polish prices up. On the other hand, if Russian prices should go down, or you'd argue that similarly the Polish prices should go down and that may very well be true. But I would argue that because prices in Poland are lower than in the rest of the EU, that is end user prices, what's really going on is in effect, there is a subsidy coming from the domestic producer of gas who is not getting his explorer rents on the gas he produces, and I would argue that there will be a pressure to push Polish prices up to reach equilibrium with EU. Now, all of that discussion is how I perceive that market.

Let's turn for a second to Russian prices, because although I don't know what currency Poland uses to pay for Russian gas, but I do know that Russian gas in the end is determined on the basis of U.S. dollars. So, does that argue that our prices really bottom are based on the U.S. dollar, there is an argument for that. Getting paid in zlotys, getting prices in zlotys actually isn't a helper a hindrance, because we drill and we shoot seismic, and we carry out our activities in Poland also in zlotys. So within Poland itself, our revenues go straight into exploration and development without any currency exchange gain or loss. Now, I said that as a layman, I'm sure that accountants treat the timing differently. But if you think about it, we get x amount of dollars for revenues in zlotys, we get x amount of zlotys for... that we have to pay for drilling. We don't switch in and out of currency in between.

But when you do come to accounting, this is what we're going to be doing going forward. At the end of each period, we will look at our assets and liabilities in Poland in zlotys because that's how we'll keep track of them and we'll convert the whole mess in the U.S. currency at the exchange rate in effect that day. We'll do that quarter-by-quarter and year-by-year.

So, currency conversion rates between the dollar and the zloty will have an impact on our financial statements, but it will be paper only really. Unless and until you come to the time... the only time that would really matter Roger is, if you want to pool up the tent, dash everything out convert it into all into dollars and bring it back. And at that point, yes, well the matter is not what has the currency been doing during the years up to that, but rather what is the currency right that day. And that will have a real life impact. But between now and then, I think the fact that we've revenues in zloty and we have expenses in zlotys means that on a real world basis, I'm not terribly concerned about exchange rates. Hope that's a good enough answer, because if it isn't then we are going to have to get Clay on this, it's starting getting technical.

Roger Liddell - Ingalls & Snyder

Okay, I'll let it go for that. Thank you.

David Pierce

You bet.

Operator

Your next question comes from the line of Anthony Marchese with Monarch Capital. Please proceed.

Anthony Marchese - Monarch Capital

Hi, good afternoon. What if anything, has any progress made on getting some more analyst coverage. I'm trying to figure out with the stories you have and perhaps it's my interpretation of it being a great story, but I think it is. Why aren't there more analysts interested in a company like yourselves which has literally world-class plays. What's your opinion?

David Pierce

First of all, we make considerable efforts. We put a lot of resources into getting our story in front of as many analysts as we can reach, and we reach quite a lot of analysts. Getting them to cover us is a different matter. And I think the biggest single impediment in our size, our market cap. I think if you are at 1 billion, people write on you. If you're smaller than that, it's more difficult. We do have two, I'd say pretty good candidates right now that we're working on that I've got my fingers crossed for, but until the check clears the bank, you just don't know.

Anthony Marchese - Monarch Capital

Okay.

David Pierce

I do, I mean the feedback we get is yes, great story. But the most common response is side (ph).

Anthony Marchese - Monarch Capital

Okay. Couple of other questions. Where do you see in -- where do you think you could be positively or areas of the operations where you could potentially be positively surprised in '09? Are there any that can have a major impact in '09 if things break your way?

David Pierce

Ostrowiec with a bullet. I mean that is the big prospect. It has big potential. I've got to underline the risk there, I mean.

Anthony Marchese - Monarch Capital

Right.

David Pierce

Higher risk, but that thing is potentially more than double our current size, it's much more. So that would be a big one.

Anthony Marchese - Monarch Capital

Okay. And final question, doesn't Poland at some point enter the EU?

David Pierce

Well, Poland is a member of the European Union. They are member of it along with 24 others. There is a plan for Poland to join the euro as a currency.

Anthony Marchese - Monarch Capital

That's what I meant, excuse me, yes. What impact does that have on you or does it have any impact?

David Pierce

Well, I'm sure it'll have an impact on the day they do it depending on the exchange rate between this zloty and the euro. In a real general sense, over the long haul, the relationships among currency such as the dollar, and the pound, and the euro, and the zloty, they typically don't change a heck of a lot over time.

Now, you've got currency traders who'd trade daily and they'll make or lose lot of money. But, I don't anticipate a big impact because again, what the most important point to remember is that, we make money in the same currency that we spend it in Poland. And so long as we continue to do development work and exploration work that is greater than the amount of our revenues, we want to stay in that currency because then you don't have the exchange rate problems one way or the other.

Anthony Marchese - Monarch Capital

Right, okay. Thank you very much.

David Pierce

You bet.

Operator

Your next question comes from the line of Dick Feldman with Monarch Capital. Please proceed.

Dick Feldman - Monarch Capital

All my questions have been answered.

David Pierce

Good afternoon.

Dick Feldman - Monarch Capital

I guess, doesn't the value of the zloty affect the value of your PV-10?

David Pierce

Absolutely it does.

Dick Feldman - Monarch Capital

Okay.

David Pierce

But because at each year-end, we will calculate what is the remaining useful life of our production in Poland and what is the value of that production over time. When we do that, we'd look at the currency exchange rate in effect on December 31. And so from year-to-year, yes, it will absolutely have an impact. So if you look at the exchange rate of this most recent year-end and compare it to say the middle of the year, when the Polish currency was stronger and the dollar was weaker, our reserves if we've done then say in June or July, would probably be in much larger in terms of U.S. dollars than what we actually reported in our 10-K.

Dick Feldman - Monarch Capital

I think, I don't claim to be an expert on foreign exchange. But this zloty has been as many other... along with any other currencies weak as the dollar got strong, due to this like to safety. And if were, the zloty were to retrace some of the considerable portion of the ground that it lost, that could represent a rather substantial increment to the U.S. value of your reserves?

David Pierce

You are absolutely correct. If this zloty retraced its steps and the dollar weakened then the value of our proved reserves in Poland would be greater in U.S. dollar terms. Again, I want to keep everybody focused on the fact that as we produce day-to-day, those zlotys go straight into drilling and seismic and so on. And so, if it's stronger then presumably drilling costs are going to be a bit higher. And... but yeah, we could have a significant increase to our reserve value assuming the dollar gets a bit weaker from where it is.

Dick Feldman - Monarch Capital

Right. Do you -- that basic is the one question I have.

David Pierce

Okay, glad to help.

Operator

At this time, we have no further questions in the queue.

David Pierce

Louisa, thank you and shareholders, thank you for joining the call. If you have subsequent questions, we're always here to answer as best we can. Thank you very much for joining us today.

Operator

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect. Have a great day.

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Source: FX Energy Q4 2008 Earnings Call Transcript
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