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Executives

Marty Beskow - Vice President of Finance and Capital Markets

McAndrew Rudisill - Director and President

Analysts

Ryan Oatman - SunTrust

Jason Wangler - Wunderlich Securities

Ronald Mills - Johnson Rice

Paul Grigel - Macquarie Research Equities

Jared Lewis - Northland Securities

Emerald Oil Inc (EOX) Q42012 Earnings Call March 14, 2013 10:00 AM ET

Operator

Greetings, and welcome to the Emerald Oil Incorporated fourth quarter 2012 financial and operational results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Marty Beskow, Vice President of Finance and Capital Markets for Emerald Oil. Thank you, Mr. Beskow. You may begin.

Marty Beskow

Good morning and welcome to the Emerald Oil fourth quarter earnings conference call. Yesterday afternoon we issued a press release and we will issue the Form 10-K by Monday, March 18 or earlier to report our financial and operational results for fourth quarter and year ended December 31, 2012. We also posted an updated investor presentation on the homepage of our website at emeraldoil.com.

On the call with me today is McAndrew Rudisill, Director and President. Please be advised that our remarks, including answers to your questions, may 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 results to be materially different from those currently disclosed in our earnings release and conference call.

Those risks include, among others, matters that we have described in our earnings release, as well as in our filings with the Securities and Exchange Commission including the Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. We disclaim any obligation to update those forward-looking statements.

During this conference call, we will make references to adjusted EBITDA, adjusted cash flow and adjusted income or loss, which are non-GAAP financial measures. A reconciliations of these amounts to GAAP measures can be found on our earnings release.

I will now turn the call over to McAndrew.

McAndrew Rudisill

Thank you, Marty. Good morning to everyone. We will begin with some general comments and then we will open the call for a question-and-answer session. While third quarter was a transformational quarter for Emerald Oil, fourth quarter can best be described as one of execution. In early October, we closed on the acquisition of 4,500 net operated acres in McKenzie County, North Dakota. A month later we started our first operated well on the acquired acreage, two months ahead of schedule.

To-date, we have successfully drilled three operated McKenzie County wells in the Bakken formation and are currently drilling our fourth well. The pressure pumping team is scheduled to be on site to fracture stimulate the Pirate well within days. Following the completion of the freshwater holding pond we will complete the Mongoose and Arsenal wells. We expect to report results of these first three wells after we have received approximately 30 days of production which we estimate will be in May of 2013, which should dovetail with our Q1 quarterly report.

Last September we set a goal of increasing our operated acreage from about 11,400 net acres to 20,000 net acres by the end of 2013. We estimate we have approximately 19,500 net operated acres based on closed and pending acquisitions which puts us on track to achieving and likely exceeding our goal. Our land teams in Billings, Montana led by J.R. Reger has been busy consolidating our acreage to the operable drilling units

Our focus during 2012 was on cashless trades of non-operated acreage for operated acreage. In 2013, we have been focused on increasing the working interest in our operated areas particularly in our operating area in McKenzie County, North Dakota. Our goal is to obtain an average working interest that approaches 75% on our operated wells in McKenzie County, North Dakota.

On a pro forma basis for pending acquisitions, we estimate we have approximately 51,000 net acres in the Williston basin. We estimate that approximately about 31,500 net acres are non-operated. Although we have transitioned our focus towards growing operated production, we continue too drive significant production from our non-operated wells.

During the fourth quarter, we added 24 gross or 1.42 net wells to production. We produced an average of 1,197 BOE per day from our 205 gross or 9.67 net non non-operated wells. This was well ahead of our goal to exit 2012 with at least 1,000 BOE per day.

Our non-operated wells produced $9.2 million of revenue and $4.4 million of EBITDA during the fourth quarter. In December, David Veltri joined us as our Chief Operating Officer. David brings over 30 years of industry experience and most recently was an Operations Executive for Baytex where he was focused on well development in the Williston basin since 2008. David and our operations team have significantly reduced our execution risk.

For example, as David controlled our McKenzie operated wells, there are multiple, highly productive wells that have recently he then completed and these are listed on page 14 of our presentation posted online. We will be using the same fracture stimulation company that completed these offset well and we are using the best that service providers in the basin under the direction of our experienced operations team to ensure our operational success.

Activity in the Williston basin continues to remain strong. As of the fourth quarter-end, we elected to participate in 26 gross or 0.95 net wells that we are drilling waiting on completion or completing. We are in the process of selling non-operated acreage and attached AFPs that total 1,224 net acres with AFPs that represent 33 gross or 1.13 net wells. Proceeds from these sales would be used to fund our operated program in the Williston basin.

During the first quarter of 2013,. we expect the average production to be approximately 1,000 BOE per day, giving effect for the pending sales of the AFPs. We are maintaining our previous production guidance to exit 2013 with 2,600 BOE per day which would be driven mostly by production from our operated wells.

On the financing and liquidity front, in November, we entered into a senior revolving credit facility with Wells Fargo with the $27.5 million dollar available borrowing base at an annual rate of 2.81% at year-end based on LIBOR plus 225 basis points.

In January we announced the sale of approximately two-thirds of our acreage in the Sand Wash basin for net proceeds of $9.2 million. We expected close on the sale later this month.

In addition we plan to monetize our other assets in non-core basins and direct the proceeds to the Williston basin. In February, we closed on a $50 million perpetual preferred investment with White Deer Energy and gained Tom Edelman, an experienced and successful oil industry executive as a board member. We are fully funded to execute our continual one rig drilling program in the Williston basin.

We have effectively completed the transition from a non-operator to an operator. We will continue to look for ways to increase our operated capital deployment. During 2012,w e took a non-cash impairment charge related to the write-down of our non-operated legacy assets in the Denver-Julesburg basin. Wrote down the book value of our Sand Wash basin asset to the sale price of our pending transaction and wrote down or reclassified certain proven undeveloped reserves in the Williston basin to better reflect our current development plan.

Even with these write-down, we were able to grow our proved reserve volumes when compared to the mid-year reserve report and now have a higher percentage of PDP reserves improving the overall quality of proven reserves at year-end. We ended 2012 with 5.4 million BOE of proved reserves with an associated PD-10 value of $88 million. This represents a 52% increase over our proved reserves in 2011.

We have cleaned the slate for oil and gas properties and plan to grow proved reserves through our operated well-development program in the Williston basin. Emerald has been executing on its strategy to meet or exceed the goals we have put in place for 2013. We believe we are on plan to deliver results. We look forward to completing our operated wells and sharing their performance with you in the next few months. We are diligently executing on our plan to develop highly economic wells with increased production, cash flow and ultimately value for our shareholders.

I will now turn the call over to Marty to review our financial plans.

Marty Beskow

Thanks, McAndrew. We ended fourth quarter 2012 with $10.2 million in cash and $23.5 million drawn on our revolving credit facility with an additional $4 million available. On a pro forma basis, for the $50 million preferred stock offering and the pending $10 million Sand Wash basin sale, we have approximately $67 million of cash

We believe that our cash on hand, cash flow from operations, proceeds from sales of non-core assets and additional availability under our credit facility will adequately fund our continuous one rig drilling program. We are maintaining our previously stated capital budget which we updated on February 4 with the $50 million preferred stock investment from White Deer Energy.

For the 12 month period ended December 31, 2013, we plan to approximately $78.5 million on 7.5 net operated wells and approximately $7.4 million on participation in non-operated wells. We also plan to spend approximately $10 million on acquiring operated acreage in core of the Williston Basin. Our entire capital budget will be focused on the Williston Basin and can be enhancement with proceeds from sales of our non-core assets.

During the fourth quarter, our average sale price for crude oil was $85.16 per barrel which was a differential discount of about $2.89 relative to WTI. We are hedged with swaps at $91 a barrel which is near to maximum allowed by Wells Fargo under our credit facility. Including the realized effect of settled commodity derivative hedges that positively impacted revenues by $25 million or $0.25 per barrel during the fourth quarter, our net realized price for crude oil was $85.41 per barrel.

At this time, I would like to open the call for questions. I will now turn the call over to Devon.

Question-and-Answer Session

Operator

Thank you. Ye will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Ryan Oatman with Suntrust. Please proceed with your question.

Ryan Oatman - SunTrust

Hi, good morning, McAndrew and Marty. A am trying to better understand what risks remain in the three wells after you successfully drilled them. Taking a step back, can you describe how you pick the target zone and provide a little bit more color on your drilling experience there? Then I will have a couple of follow-ups for you.

McAndrew Rudisill

Sure, Ryan. The target zone is at about 10,700 feet. It's between five to 10 feet above the Middle Bakken. Our goal has been to hold the drill bit in that horizontal zone throughout the entire length of the lateral which we think that we have successfully done on the three wells that we have drilled.

In terms of risks that remain, it really comes down to the fracture stimulation of these wells. We are working with the exact same pressure pumping and fracture simulation company that’s fracced the offset wells. We plan to frac wells exactly the same and we hope that the results are very similar to those of offset wells.

Ryan Oatman - SunTrust

Okay, that’s very good. As you alluded to, we have seen some very good results from Zavanna and then you have some lesser results from Samson. Can you remind us of where the latter ran in to trouble and what you guys have done to avoid similar problems or if there is differences in geology that we should be aware of?

McAndrew Rudisill

I think the well that you are referring to was the (inaudible) well to the West and we believe that well was out of zone on the lateral for a good bit of the well. On the well to the North it were completed by Zavanna and the wells to the South, we think that three or four of those wells were in zone most of the time and fracture stimulated in the same way whereas, we believe, the well at (inaudible) was out of zone about a third of the time and was fracture stimulated with slightly less profit than the other three wells in that sequence. So we are going to use the same completions that were used on the Baker well and the Larson well.

Ryan Oatman - SunTrust

Okay, makes sense. How are cost progressing relative to that $11 million guidance at this point?

Marty Beskow

We feel comfortable with that number.

Ryan Oatman - SunTrust

Okay, and then taking a bigger step back, looking at the year-end exit rate guidance of around 2,600 barrels of oil equivalent per day, what expectations, what EURs, type curves, et cetera are embedded in that guidance? Can you walk us through how the company built that expectation?

Marty Beskow

Yes, essentially we built that model on about 475,000 EUR. However, once we look at some of the results of the wells that are adjacent to us, we believe that those EURs are probably approaching closer to 600,000, maybe even 700,000.

Ryan Oatman - SunTrust

Okay, so you feel comfortable, obviously, with that guidance. Then one last one for me and I will hop back in the queue. If looking out to 2014, if you are successful with these three wells, perhaps receive some additional capital from the exercise of these warrants, what would the 2014 program look like? Or said another way, when would you be comfortable adding a second rig?

McAndrew Rudisill

Ryan, we are completely focused right now on delivering on this first sequence of operated wells and we haven’t really given a tremendous amount of thought to what the 2014 drilling program looks like yet. I would like to be able to update the market on that in the second half of this year. But I will tell you guys, ample inventory to add a second rig. It really just comes down to, I think, we first need to execute on the wells that we are drilling.

Operator

Thank you. Our next question comes from the line of Jason Wangler with Wunderlich Securities. Please proceed with your question.

Jason Wangler - Wunderlich Securities

Good morning, guys. Just curious as far as the one rig you do have now become the fourth well, what kind of contract do you have that on? Then also with the completion crews, is that just a well-by-well dealer or just looking at the services market with what you have, how you see that going throughout the year?

McAndrew Rudisill

Sure, Jason. Okay, on the rig, it’s a Patterson rig and we got a contract with them through October of this year and I think that what you will see us do is probably upgrade the horsepower of the rig potentially on the fifth or the sixth well, if we can swap into our higher horsepower rig with the same day rate with Patterson. We are currently paying $20,000 a day on that rig.

On the fracture simulation side, we have a contract with the company for the first three wells. The contract is success dependent. Then we are going to evaluate their performance and then make a decision after that point whether we continue to work with them.

Jason Wangler - Wunderlich Securities

Okay, that’s helpful. Thank you. Then just two quick financial ones, if I could. As far as the credit facility, when is the natural determination there as obviously you are starting to see a little bit more movement and you will get these operated wells online, hopefully soon. Just kind of trying to get the timing of that.

Marty Beskow

Actually, we don’t need to increase the availability on our credit facility. So most likely, it will be our mid-year 2013 reserve report that would be the driver of the future availability. So right now, we have got the $27.5 million with $4 million available above the $23.5 million we have to us now. So we are really going to be putting the production on for our first three wells and that should add significantly to our reserve report

Jason Wangler - Wunderlich Securities

That makes sense. Thanks, Marty. Then just a last one with the write-downs and things of the other assets. Is there much carrying value out there outside of just the core Williston position? I was just kind of curious just to clean that up.

Marty Beskow

Its de minimis. We really cleaned out at the end of the year.

Jason Wangler - Wunderlich Securities

That’s what I thought. Thank you, guys, very much.

Operator

Thank you. Our next question comes from the line of Ron Mills with Johnson Rice. Please proceed with your question.

Ronald Mills - Johnson Rice

Just one quick follow-up on the Jason's question. You say may not need it till then but just on your credit facility, you do have the ability to request quarterly lease terminating nations credit?

Marty Beskow

Yes. That’s right, Ron. We do.

Ronald Mills - Johnson Rice

Okay, perfect. When you look at your operated program, the way you drilled these first three wells, you are going to drill all three of them and then complete them back-to-back. When you look at the remaining eight operated wells this year, how do you plan on attacking the drilling of that? Are you just going to continue to try to drill nearby to each other so you continue to do batch completions? Or are they going to start so that some of them be completed one by one? I am just trying to get a sense as to how the timing of completions will look on those wells?

McAndrew Rudisill

All right, Ron. On timing of completions, once the central ponds are complete, and the Mongoose and Arsenal are fracced, we can really start fracing in a pretty linear sequence upon completion of the drilling of the wells. So you are going to start to see some more consolidation of the timeframe from drill to frac once everything is built.

Ronald Mills - Johnson Rice

Okay, good.

McAndrew Rudisill

And on the sequencing of drilling, we will just continue to keep drilling out the individual DS to use, the HPP each of the nine DS used and then you probably see it come back and start that drilling.

Ronald Mills - Johnson Rice

Okay, and on the interest of the acreages with the associated AFEs, CEU, you talked about, the ones that you are negotiating on and now, if you look out over the remainder of the year, since the commentary suggest that there may be opportunities to continue to do that. How much depth is there to that opportunity to continue to sell the AFEs?

McAndrew Rudisill

Ron, we think there is pretty good depth to it. We have seen a lot of interest in selling the acreage with the attached AFEs and we are trying to develop long-term partnerships with the buyers that we are working with on this. So I think that you will see continue to monetize non-operated AFEs as we receive them so that we continue to allocate the capital in to our operated program.

Ronald Mills - Johnson Rice

Okay, and then you also highlight the pending acquisitions or acquisitions that you have talked about in the past to get you up to the 51,000 acres and 19,500 of which would be operated. What's your expected timing of the closing of both of those acquisitions and the AFE sale that you reference in the press release?

McAndrew Rudisill

We think that we can close the AFE sale in the coming weeks. The acquisition, we have targeted in the second quarter. We have got agreements with the parties on the purchases as we are dealing with some pretty large entities and they have to move through a chain of command to get approval to sell and these are very small assets relative to the total size of the organization. So we are just working with some big oil companies to purchase these leases.

Ronald Mills - Johnson Rice

Okay, and then last for me. On the acreage side, you have done a great job converting from a non-op to operated and picking up more in McKenzie County. Where do you stand in both Richland and Williams County in terms of the acreage conversion that you had highlighted as possible?

Marty Beskow

Yes, on that I would say, we are mostly done on the conversion from non-operated to operated. We have done a lot already. There is probably a few places here and there that we can do but it is probably not that material going forward. Its just continually focusing on what can we do to build up our core operating acreage. So I think we should continue to look into offset, we are mostly done.

Ronald Mills - Johnson Rice

Yes, okay. So it leads more to acquisitions as opposed to conversions.

McAndrew Rudisill

Well, I think the two thing you will see is the non-operated acreage may continue to gradually decline as we sell non-operated AFEs and the operated, as a percentage of the total should continue to rise just through lease hold acquisitions.

Ronald Mills - Johnson Rice

Okay, great, all right. I will let someone else jump in. Thank you.

Operator

Thank you. Our next question comes from the line of Paul Grigel with Macquarie. Please proceed with your question.

Paul Grigel - Macquarie Research Equities

Just touching on the acreage asset sales, specifically from Sand Wash and the other third that wasn’t sold and then Heath or the Tiger. Just can you give an update on what are the standard timing? You mentioned continuing to monetize them but just touching on them in a little more detail there?

McAndrew Rudisill

Sure, on the remaining 40,000 acres in the Sand Wash Basin, there is access right issue on that acreage through a private hunting ranch to get to the BLM acreage where our leases are held. We need to resolve that issue before we can sell that property and we are working on that currently. We think that we should be able to come to a resolution over the course of this year. Then that acreage, we can look to monetize.

On the Tiger Ridge, we are not planning on selling that right now. Its got very little carrying value, very little capital into it and it is very much long-term co-option on natural gas. It’s the way we look at it. We have built the sales book on the Heath and we are going start to circulate that this quarter to the potential buyers.

In terms of expectations on that, a lot of leases in the Central Montana Heath were (inaudible), and so the average price is up $20 per acre for the original leases with similarly priced lease extension options. We don’t really have a great sense of what the value in that area right now. We are going to test the market and see.

Paul Grigel - Macquarie Research Equities

Great, thank you, and then just looking past the Caper well, here is the fourth well. Is it paper well here is the fourth well. Is the Hot Rod and Jester most likely after that. I am just trying to get what's the length.

McAndrew Rudisill

The rig is going to move to Talon and Slugger next.

Paul Grigel - Macquarie Research Equities

Okay, perfect. That’s it for me. Thanks.

Operator

Thank you. Our next question comes from the line of Jared Lewis with Northland Securities. Please proceed with your question.

Jared Lewis - Northland Securities

Good morning, guys. Just to understand the acreage theme real quick, obviously they are focuses in McKenzie but what's your thoughts without Dunn and the acreage over there?

McAndrew Rudisill

Well, as we have always said in Dunn, the northern acreage has a lot of offset well activity to it. That would be definitely an area where we could potentially do some more drilling. We don’t ascribe much value to the southern central acreage in Dunn. There is not any offset operator activity in there. Until we see some, we are not going to allocate any capital to that.

Jared Lewis - Northland Securities

Okay, good. Then just on the differentials. It has been tight across the Williston. Where do you see that, your expectations going forward?

Marty Beskow

Well, for the fourth quarter, we had about $2.89 for discount relative to WTI. We are thinking its probably going to say in about that range for the first quarter of this year. So around $3 discount to WTI and probably staying somewhere around that range for second quarter. Its really hard to know what's going to happen in the second half of this year.

Historically, the discount has been about $10 discount to WTI. In our opinion we don’t think its going to go back to that. Maybe it won't stay quiet as now current pricing as its actually closer to WTI but on average collectively for the quarterly, like I said, historically we have got about $3 discount for the fourth quarter. So that’s kind of what our outlook is right now.

Jared Lewis - Northland Securities

Okay, thanks Marty. Then real quick on the financials. G&A was a little higher than we were anticipating. Is it one-time charges?

Marty Beskow

Yes, essentially we had more legal expenses during the fourth quarter.

Jared Lewis - Northland Securities

Okay, perfect. That’s all I had. Nice work.

Operator

(Operator Instructions) Thank you. Our next question is a follow-up question from the line of Ryan Oatman with SunTrust. Please proceed with your question.

Ryan Oatman - SunTrust

Thanks for taking the follow-up, guys. Wanted to talk little bit about the Three Forks. I see in the updated presentation that there is a couple of Three Forks wells listed nearby McKenzie. Do you see the acreage as prospective for the Three Forks and have there been any tests nearby that you can provide some color on?

McAndrew Rudisill

We do think the acreage is prospective for the Three Forks. There has been some successful Three Forks wells to the immediate northeast of us. So we believe the trend continues in to our acreage.

Ryan Oatman - SunTrust

Okay, good. Then I don’t think that this pertains to EBITDA. I will throw it out there anyway. Some others in McKenzie County, away from you guys have had some issues with permits on Federal land. How do you work from a permitting standpoint? What portion of your acreage is fee versus state versus federal?

Marty Beskow

Its all three lease and we feel good about the current permitting situation for our acreage in McKenzie.

Ryan Oatman - SunTrust

Fantastic. Thank you, guys.

Operator

Our final question comes from the line of Ron Mills with Johnson Rice. Please proceed with your question.

Ronald Mills - Johnson Rice

Two quick ones. I know you state with all these deals in McKenzie County, your goal is getting to a 75% working interest in that operated position versus you were at about 50% at year-end. With the pending acquisitions, does that get you most of the way there, McAndrew?

McAndrew Rudisill

Yes.

Ronald Mills - Johnson Rice

Okay, and then lastly, just in terms of infrastructure, it is being built out in that area. What are your plans from more than both, oil and water and gas gathering and how does that play into your production profile?

McAndrew Rudisill

The gas gathering infrastructure is already built. ONEOK is our off-take partner. So all the wells will basically immediately be on gas pipeline. The oil and fresh water infrastructure is going to be built in the coming months. We are in the process of negotiating the off-take partner on that.

Ronald Mills - Johnson Rice

And is the coming months is that, you expect that to be in place by mid-year or by the end of the third quarter or what's the expectation?

McAndrew Rudisill

I think, logistically, we can probably get it done this summer, if not before. There is only about three miles of pipeline that need to be laid. So its really not that much of a logistical challenge.

Ronald Mills - Johnson Rice

Okay, perfect. Thank you, guys.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Marty Beskow

All right, well, thank you very much for joining us on our call and thank you for your interest in Emerald Oil.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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