FX Energy CEO discusses Q4 2012 Results - Earnings Call Transcript

Mar.14.13 | About: FX Energy, (FXEN)

FX Energy (NASDAQ:FXEN)

Q4 2012 Earnings Call

March 14, 2013 04:30 PM ET

Executives

Clay Newton - VP of Finance

David Pierce - CEO

Analysts

Chad Mabry - KLR Group

Dan Mittag - Oppenheimer

Ken Pakanowski - MLV and Company

Douglas Macpherson

Joe Dancy - LSGI Advisors

John Bair - SKA Financial Services

Operator

Good afternoon ladies and gentlemen and welcome to the Fourth Quarter and Year End 2012 Financial and Operating Results Conference Call. Today’s conference is being recorded. And now I will turn the conference over to Mr. Clay Newton, Vice President of Finance, please go ahead Mr. Newton.

Clay Newton

Thank you, Kelsey. Thank everyone for joining us today. Kelsey said I’m Clay Newton, VP of Finance here at FX Energy. Welcome to our 2012 earnings call.

This call will follow the usual format. I’ll talk about just a few key financial items, as substantial detail is available in our earnings release and our 10-K was filed earlier today and can also be found on our website.

After that, David Pierce, our CEO, will talk about our CapEx for this year and provide some operational updates. We’ll also have a Q&A at the end of David’s remarks.

I’d like to remind investors that during today’s call we will be making statements that are forward looking and consequently are subject to risks and uncertainties. Examples of these statements include those regarding exploration, drilling, development or other projects or operations that may be subject to the successful completion of technical work, environmental, governmental or partner approvals, equipment availability, or other things that are or may be beyond our control.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risks set forth in our Form 10-K and in our other filings with the SEC. We urge you to consider these factors to remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

I've divided my remarks today into three sections. First I'll talk about the numbers, production and revenues and non-cash charges. Second, I'll spend a few minutes talking about our liquidity and capital resources. Lastly, I'll review the reserve numbers from our reserve report news release from earlier today.

Let’s start with production. We had record oil and gas production again during 2012. In fact this is the fourth year in a row that our production has increased. During 2012 we produced a total of 4.8 billion cubic feet equivalent, up from 4.4 billion cubic feet equivalent in 2011. The 2012 figure represents an average daily production rate of approximately 13 point million cubic feet equivalent per day. It's a 9% increase from 2011, all of which is attributable to full production at our KSK wells in Poland.

Oil and gas production for the fourth quarter of 2012 was up about 12% from the fourth quarter of a year ago, 2012 Q4 production was just under 1.3 billion cubic feet equivalent, an average of about 13.8 million cubic feet equivalent per day. Our 2011 Q4 production was just over 1.1 billion cubic feet equivalent or 12 million cubic feet a day. So far this year our net daily production has averaged about 14 million cubic feet equivalent per day which is what we expect to average for the first quarter of this year. Production began at our Winna Gora well in January. Construction is underway, our Lisewo facility where we expect to start producing on both our Lisewo-1 and (inaudible)-3 wells later this year.

Regarding gas pricing in Poland the Polish gas tariff was 16.9% higher in the fourth quarter of 2012 compared to 2011 and 21% higher for the full year, however the US dollar equivalent increase for both the quarter and the year was lower than the tariff change due to the year to year strengthening of the US dollar against the Polish Zloty during 2012. During 2012 as denominated in US dollars, the average price we received for production in Poland was $6.81 per mcf compared to $6.19 per mcf in 2011 an increase of 10%. The Polish gas tariff from which we derive our gas prices was reduced by 3.3% beginning on January 1st of this year; however our reported US dollar denominated gas prices will continue to be affected by currency movements in addition to tariff changes.

With significantly higher gas prices and much lower operating costs in Poland than those in the US, our higher margins translate directly into higher exploration and development spending ability in Poland. The increased production and gas prices were the major contributors to our record oil and gas revenues and total revenues during 2012. Our oil and gas revenues were $34.5 million, up 16% from last year; total revenues of $36.6 million were 3% higher than our 2011 total. A few words as always about non-cash charges, our financial results continue to be impacted by non-cash charges. In 2012 we recorded foreign exchange gains of about 16.3 million compared to foreign exchange losses of about 23.4 million last year in 2011.

Most of our 2012 gains are placed in the second half of the year with the gradual strengthening of the Polish zloty. Please remember that almost all of these foreign exchange gains and losses are related to the dollar denominated intercompany debt between FX Inc. and FX Poland and other dollar denominated debts at the FX Poland level. These will continue to vary over time as the exchange rate between the US dollar and Polish zloty changes, however they have no impact on our revenues, cash flows, or ability to execute our capital budget, however, they have no impact on our revenues, cash flows, or our ability to execute on our capital budget.

And certainly our liquidity and capital resources, our cash flow use in operating activities 1.2 million increased by about $1 million from last year to this year.

Our higher revenues were offsets by higher exploration cost as well as some changes in our working capital items. You will see in our balance sheet that we now have $7 million of our $40 million outstanding credit facility balance classified as a current liability.

Under the terms of our credit facility, our borrowing base is scheduled to reduce to $40 million on June 30th of this year and then to $33 million on December 31st, absent any changes to the facility we would be required to make $7 million payment of the end of the year. We do not expect to be making any principal payment this year however because we’re presenting working on a new facility of larger borrowing base and hope to have in place in the next couple of months.

Between our cash on hand, our available credit which should be increased shortly and our expected cash flow this year, we expect to have more than $75 million available to put to work as David will explain in more detail, we are well positioned to pursue an active exploration and development program during the coming year.

I will wrap up with the few final comments on our yearend 2012 reserve the years. Earlier today, we reported proved or P90 oil and gas reserve at yearend 2012 of 47.7 billion cubic feet equivalent. This is decrease of approximately 5.7 billion cubic feet equivalent from the prior year.

After production, this represents a 2% decrease from our 2011 yearend reserves. The decrease was due primarily to net downward visions of 3.3 billion cubic feet equivalent offset in part by reserve additions of 2.3 billion cubic feet equivalent from the Komorze 3K discovery well which David will discuss in greater detail.

We have upward revisions of four of our wells and downward revisions at three wells. The pretax PV10 value of our P90 reserves is $158 million. Our P50 were proved plus probable reserve, which represent the most likely the case were 79.4 billion cubic feet equivalent, a decrease of 15.1 billion cubic feet equivalent. After production, this represents a 11% decrease from our 2011 yearend P50 reserves.

At yearend 2012, with the pretax PV-10 value of our P50 reserves was $243 million. In the P50 case, we saw downward revisions at five of our wells and upward revisions at the remaining two wells.

While the downward revisions are disappointing, we recognized that early production and pressure data may skew with the early estimations of recoverable reserves. For example, at our Roszkow, well since it was drilled in 2008, we’ve seen three upward revisions and one downward revision of P90 reserves and one upward, two downward revisions of our P50 reserves.

We filed both and published in U.S. reserve reports as exhibits to our 10-K today and we will be posting the RPS report on our website shortly. So, I would refer you to those reports for the full details.

With that background, I’ll now turn the call over to David for some operational updates.

David Pierce

Thanks, Clay. Good afternoon, I’m David Pierce, CEO of FX Energy. Thanks for joining us today. This is going to be a good year for FX Energy. I’ll give you an overview.

Last year we finished drilling three wells in Poland, this year we expect to double that number and we’re up to a good start. We have two wells drilling now and another four wells to get drilled and tested during the year. Clay noted, we have the money to do this and more with over 75 million in cash on hand, cash flow, and borrowing capacity.

This year we expect to approve projects with a cost of $60 million to $70 million, of that amount we are allocating about two thirds to the Fences concession and the remaining one third to non-Fences exploration. About two thirds of the total is allocated to drilling. In other words, compared to last year, we’ll do more drilling and we’ll focus more on the lower risk Fences area.

Production is continuing to increase, we estimate this year's first quarter rated approximately 14 million cubic feet equivalent per day, up from our 13.1 average for all of last year. We’re currently under construction on our new Lisewo production facility, where two more wells scheduled to start producing in the second half of this year. We do expect some decline this year from our older wells but we forecast total production will grow both in 2013 and in 2014 from wells we've already drilled.

In terms of future reserve growth, obviously we can’t say, today what 2013 will bring? Last year our new discovery Komorze-3 didn't add enough new reserves to offset our record production combined with the net downward revision from the independent engineers. This year ought to be different because we expect to drill twice as many wells and we plan more drilling in the lower risks Fences area. That alone, provides good reason to expect better reserve growth in 2013.

All in all, it looks to be a very good year. Now, with that overview in mind, I'd like to discuss our operational plans for the year in more detail; starting with non-Fences exploration.

Last year, we had six exploration areas outside the Fences. We are cutting that to four areas and trimming two of those. But even with these cuts, we will still hold 2 million acres net. We decided to drop the Kutno in Northwest areas. We tested the best, most straightforward idea in each area but without commercial success. We think there is gas potential in both areas but they are too complex indeed. The cost of a thorough exploration program and either one is too for us; given the risks, a limited budget and our other opportunities. On the other hand, this is allowing us to focus our resources on areas where our work is giving us positive feedback.

Warsaw south has been trimmed down to two blocks covering 470,000 gross acres with four large high potential Carboniferous lead.

We know from previous drilling, that regionally there are reservoir quality sands and high meting gas with liquid. Challenge is to figure out how and where they track. We are looking at medium depths and we have a partner so the cost is much more manageable than for the Kutno in Northwest areas.

We may drill in 2013 or in 2014 depending on our own drilling activity elsewhere and on the preference of our partner. Block 229 to the east of the fences will be trimmed down to about a half block with a cluster of high potential Ca2 Main Dolomite leads. In this play, we are fairly confident that the seismic is showing us Main Dolomite build ups, these build ups typically draft. The question is whether or not they contain gas and of what quality. We need a little more 3D seismic which we plan to acquire later this year then drill in 2014.

The third area, Block 246, just southwest of the Fences, got a big boost from last year’s Frankowo well. It gave us positive data from both the Rotliegend and the Ca2 main Dolomite in the southeastern part of the block. As a result, we plan to acquire 3D seismic this year over the most promising part of the target area and hope to identify a number of drillable targets.

We plan to drill in 2014; the well should be shallow and relatively inexpensive. Our fourth, non-fences exploration area is the Edge concession in northern Poland. There are four separate blocks there and we are drilling the Tuchola-3K well in one of them right now. We planted to drill one or two of the remaining blocks later in the year and we plan to drop the fourth block.

Primary targets in this region are Ca2 main Dolomite gas and Devonian oil. There is no commercial production in the region but a number of old wells had encouraging shows. I just mentioned the Tuchola-3K well currently drilling. We had strong gas shows in the Main Dolomite but no porosity.

The Main Dolomite is known in Poland for its capricious reservoir quality, portions of the reservoirs are cemented while other portions are porous and permeable. Right now, we are using data from the Tuchola well to recalibrate the seismic to see if we can image porosity directly.

If we can detect porosity nearby in this reef trend, we might be able to come back up hole and sidetrack. Alternatively, we can schedule a new well to test the Main Dolomite nearby.

Either way we are encouraged about Main Dolomite gas potential in the Tuchola block and we plan to increase our exploration efforts in this area. Meanwhile, the Tuchola-3K well is drilling ahead in the Devonian looking for oil.

To summarize our non-fences exploration, we are drilling now in the Edge concession and we plan one or two additional wells there this year. We plan to drill Warsaw South either this year or next, depending on other opportunities and our partner. Block 246 is scheduled for 3D seismic this year and if we identify good targets we'll drill one or more wells in 2014. Block 229 is scheduled for drilling in 2014.

In all, we anticipate three or four non Fences wells this year including the Tuchola-3K wells now drilling. Our goal remains to find areas where we can explore at reasonable cost, with a reliable risk expectation of developing significant commercial reserves following the model we've established in the Fences concession area.

Okay, now we can turn to our core Fences concession. At the moment we are drilling the Neoshevo-1 well in the western part of the Fences. Neoshevo is a typical drilling target for the Fences seismically defined Rotliegend structure. It sits on trend with (inaudible) fields. We've set casing just above the Rotliegend target horizon and should be evaluating the Rotliegend shortly. Elsewhere in the Fences concession, up in the North West, the most postponed frac contested the (inaudible) gas well is scheduled for the second quarter. This is our one unconventional play and it could be quite large if it's commercial.

In addition to those two operations and with an eye to future drilling, we are currently acquiring and processing new 3D seismic in three different areas of the Fences concession. In the northwest we're processing the (inaudible) 3D seismic grid that covers several large structural leads on the basement side of the (inaudible). We have keen interest in this area because we anticipate good reservoir quality. We hope to define structural targets to test; our track record is good for Rotliegend structures. But we also are interested to see if there's a stratigraphic trap against the (inaudible), and we might be able to test both ideas together.

In addition we're processing 3D seismic over the Tuckchanov lead in the far southeast of the Fences which lies on trend with the Zen Yesmisen Raschkov fields our two biggest producers. And finally we're acquiring a large 3D grid in the Donatova Rischoen area in the southwest with both Rotliegend and Ca2 Main Dolomite potential. This new seismic is a hint of how much more there is to do in the Fences.

Our favorite topic in the Fences concession right now is the Lisewo area. But before we get into the operational details, I would like to talk about the Komorze-3 discovery. Based on our seismic interpretation and mapping, Komorze-3 at virtually the same gas column and rock volume as the Lisewo-1 discovery, so it should have had roughly comparable reserves.

But the independent reserve report attributes seven 7 Bcf of P50 reserves, the Komorze-3 compared to 43 Bcf for Lisewo-1. Two factors account for most of this difference, seismic mapping and permeability. The map generated by the independent engineers for the reserve report differs from our map by about 10 meter relatively.

That may not sound like much but has a big impact on the predicted gas column and rock volume and therefore on forecast reserves. In addition, the well has lower permeability compared to other Fences wells so the lower recovery factors predicted.

The permeability issue may lead us to consider stimulation over a horizontal well once we have some production history to evaluate, also in Europe these of the usual responses where the lower permeability is encouraged in the Rotliegend.

And that brings us to planned operations in the Lisewo area. We have already discovered and booked 50 Bcf of gross P50 reserves in our first two wells. Our 49% net interest is about 25 Bcf on a most likely basis with a pretax PB10 value of just over $70 million. You can see why we are enthusiastic about the Lisewo area.

Couple of months ago, our technical team joined PGNiG’s team in the field to scout locations for eight new drill sites on Rotliegend structural targets in the Lisewo area. These are in addition to the Lisewo and Komorze fields already discovered.

You can see our map of this area on page 20 of the latest FX energy investor presentation which is downloadable at fxenergy.com under the investors tab.

The operator seems to share our enthusiasm in his preparing internal paperwork for all eight of the purposed drill sites but the operator also has to secure environmental and ministry approvals and clear other bureaucratic hurdles before these wells can be drilled. Fortunately, we have two other Lisewo area wells in the current schedule even without the new well group. Our tender is currently underway to drill the Lisewo-2 well which is now scheduled to start in the second quarter this year. Lisewo-2 is designed primarily to enhance production rates from Lisewo field. And we have another well that (inaudible) number one, now schedule to spud in the second half of this year. The (inaudible) target is a large structure immediately southeast of Lisewo field. It’s a very interesting well for us as it should provide clues about how these structures connect with each other if they do and about how they seal. These are key issues and they have a big impact on how much upside potential we actually have in the Lisewo area.

Beyond these two wells, the FX PGNiG joint operating committee has approved plans and we have budgeted to start drilling two of the new well locations in the later part of 2013. The approvals and permits have to be secured for these drill sites so we need to cautious about the timing with all eight of the new Lisewo area drill sites. This summarized our Fences drilling plans. We have the Mieczewo-1 well now drilling. Lisewo-2 and Zaniemysl-1 scheduled to drill and test this year and we hope to start two more Lisewo area wells before yearend.

As a final note, I’m pleased to reiterate that we’re in construction and still on schedule to start flowing gas in the second half of this from the Lisewo production facility. This facility is designed to handle production the Lisewo-1 and Komorze-3 discoveries in addition to production that we hope establish from Lisewo-2, Zaniemysl and other future wells nearby in Lisewo area.

The last item I need to address is proposed new legislation regarding hydrocarbon concessions and taxation in Poland. Various proposals have been floated over the last year or so apparently and reaction to the shell plate this caused some excitement in Poland over the last few years. At the moment drafts of proposed new hydrocarbon tax law and amendment to the existing mining laws have been realized for comment. We are keeping address to these developments and we’ll express our views when and aware appropriate.

As always, we thank you for your continued support and we can take questions now.

Question-and-Answer Session

Operator

Thank you so much Mr. Pierce. (Operator Instructions). We’ll go first to Chad Mabry with KLR Group

Chad Mabry - KLR Group

I had a quick question on your credits facility and I know Clay made some comments in his preparatory remarks but it looks like your current facility is said to have semi-annual reductions of about 11 million beginning in June; just curious what kind of timeline we should expect on the new facility and then what kind of size you are targeting there?

Clay Newton

We are on track to have it finalized by the end of April. And I think we'll just stop there for now and we'll provide more details as we get a little bit closer once everything gets firmed up. But everything is looking good; we've had bank visits over the Poland, they seem excited with the progress that we're making over there and they are supportive of what we are doing and yes we are optimistic.

Chad Mabry - KLR Group

And then switching gears over to your production looking at expectations for this year with Lisewo in the Komorze-3 wells; expected to come online in the second half of the year. First of all, can you be a little bit more specific on when you expect that facility to be online and then second, can you potentially add any other wells from your upcoming drilling, I guess especially looking at Lisewo 2; any other wells that could potentially be tied into that facility at that time?

Clay Newton

Yes, we've been forecasting second half of this year to get the facility into production and then we are on track. We haven't provided any guidance, we may do so in the second quarter but we haven't so far talked about the specifics of when each well will come on to that facility. We don't expect them to be all at once we expect to see them staggered. The facility is designed to handle Lisewo 1 and Komorze-3 but it also is expected to handle the Lisewo-2 well, the (inaudible) well and there may be several others that are fairly close to that one, that. As you move down the groove that’s in the Lisewo area, we would expect to have a second facility further down to the Southeast but that's a little off in the future. The facility we've got is going to handle a handful of the nearby wells.

Operator

(Operator Instructions) We will move on to Dan Mittag with Oppenheimer.

Dan Mittag - Oppenheimer

Can you provide a little more color on the fracking operation, when you expected to be done and what you have encountered if anything right now?

David Pierce

Well, we haven’t been back into the well since we drilled it. So, the fracking operation will be brand new. It’s a vertical well, we have several hundred meters of tight Rotliegend with no water seen and we did run a drill stem tested at the bottom to kind of confirm that reading. So, we're planning to frack it in three separate intervals where we see little better porosity and permeability but it is tight through and through. I can’t give you an actual start date, the second quarter it should run two, three weeks probably and then there will be a little evaluation time but I am hoping that we'll have all of that done in the second quarter and then we’ll see what we got. We do not plan at this point to kickoff anywhere to drill a horizontal leg, we are just going to frack it as a vertical well and that’s really the issue. We have got quite a large area of this tight Rotliegend and if this well looks like it’s commercial then obviously that something that we would pursue, having said that we really like the conventional drilling that we are doing in the Fences because this has got better returns than this thing could have but this could be quite large. So, we are looking forward to it and hopefully it all gets done in the second quarter.

Dan Mittag - Oppenheimer

Secondly, on your $75 million line of credit, do you anticipate anything in the debt or equity market as to augment that?

David Pierce

No, first of all, our current credit facility is $55 million, we have drawn $40. We expect to replace that with the facility that’s a bit larger and may be expandable but even if we don’t, what’s available in that facility, together with our cash flow and cash on hand, is more than adequate to do what we have said have to do or what we will commit to this year. So, I don’t think we'll have to augment that anywhere and as Clay said, the replacement facility is on track so I think that will be taken off the table here pretty soon.

Operator

We'll now hear from Ken Pakanowski with MLV and Company.

Ken Pakanowski - MLV and Company

I have a couple of questions; the first is on Tuchola, what is the timeline to recalibrate the seismic. I assume that you've already started working on that.

David Pierce

Yes, we have, we need to get that done and we will get it done by the time the Tuchola well gets as deep in the Devonian as we're going. So, if we were to have a dead dry hole in the Devonian, then assuming that we feel comfortable we've got (inaudible) nearby which today we don't know, but assuming that then we could just come back up the hole and side track, we don’t want to keep a rig sitting there. But alternatively whether or not we find something in the Devonian if we feel like there's better porosity that's out of reach of a side track then we'd come back and just permit something nearby because that main dolomite is not very deep and we probably want to take our best shot.

Ken Pakanowski - MLV and Company

Okay and can you remind me of what rate you would expect for the Lisewo-1 to produce at, and if you had a successful acceleration well, give us some guidance on what could be coming out of that structure.

David Pierce

I think if you take a look at the RBS report. I believe you're going to see something a little north of 5 million cubic feet a day in each of the Lisewo-1 and not yet drilled Lesewo-2 wells.

Ken Pakanowski - MLV and Company

And that is gross, right.

David Pierce

Yes that'd be gross and we'd have to have that product. So a little more than two million per well.

Ken Pakanowski - MLV and Company

And on Simonavitze, could you give us an idea of what the size of that structure is related to Lesowo-1, you said it's a large structure but can you qualify that a little bit more?

David Pierce

I don’t have the numbers in front of me, the best I can do on this call is just refer to that map that's in the investor presentation, you can eyeball it as about the same size, and if you remember on the Lisewo discovery, it looked like we had a deeper contour captured in Lisewo then could be trapped by that fault between the two structures and that’s what’s kind of interesting to see what’s in Simonavitze because it looks like there potentially could be communication with the Lisewo structure itself.

Ken Pakanowski - MLV and Company

Okay and then finally last question. I haven’t heard anything on (inaudible)?

David Pierce

Yes, we’re scheduled to frac that in the second quarter and I’m hoping to see results and get them out. I don’t know they we'll get them out in time for the next call but I am hopeful that we'll have them out by the end of the second quarter.

Ken Pakanowski - MLV and Company

But it’s really actually going to frac.

David Pierce

You’ve to be starting to be careful. I refer to it as the much postpone the frac and test. News I know it’s actually going to go ahead.

Operator

(Operator Instructions). Our next question comes from Douglas Macpherson.

Douglas Macpherson

I just wanted to know one thing in the (inaudible) has the logging been completed, have they resumed the drilling?

David Pierce

We have logged down through the entire (inaudible) and then we have resumed drilling, so we’re drilling ahead right now in the Devonian.

Douglas Macpherson

Okay what kind of drilling, how many meters a day do you think they’re going to achieve down there up from now?

David Pierce

Well, it’s been going pretty well. The hole is in very good shape and the drilling has been moving along at a good pace. more than that I’m really not prepared to say but we’re getting there. We’re getting fairly close. I don’t think it’s going to be a long time before we have results on the Devonian and besides I don’t know just to guess two or three weeks maybe to have some news. I don’t know that would be definitive but that has.

Douglas Macpherson

I mean historically they’ve doing about 75 meters a day up to this point, right.

David Pierce

I am not aware that anybody said that.

Douglas Macpherson

Okay all right, nobody did I just kind of did a mental calculation all right. Okay, thank you.

Operator

Moving on to Joe Dancy with LSGI Advisors.

Joe Dancy - LSGI Advisors

Hey, you know this Polish proposal with regard to taxes etc. it’s pretty stiff from what I saw, could you give us a little more color as to, is this really going to be put in place, the timing, what we’re going to do about it if anything and if we can’t do anything about it?

David Pierce

Well, I guess stiffness is in the eyes of the beholder. I view it as a very stiff, just like you said. On the other hand, the maximum proposal, I think one of the minister said that they expected it not to exceed 40% tax. Well, now I guess if I were really be an objective I’d say that’s about what most jurisdictions charge.

On the other hand what are the chances of it actually getting adopted that I don’t know. We’ve seen proposals get changed. We’ve seen a lot of discussion. As I mentioned, I think a lot of it is being driven by all of the desire to be like Norway or be like Brazil, that’s if you have a gazillion cubic feet gas, the government wants to take it all and put it away for a rainy day and nobody has to work anymore. That looks pretty unlikely. Last year, I think they drilled 16 wells and not a success in the branch and so the play itself doesn’t look like it’s going to happen.

Given that I think the incentive to adopt new legislation may be much diminished. So, we’re keeping an eye on it. You'd have to ask somebody who is politically more astute than I am whether it’s going to get adopted; I cannot imagine that it would be adopted as it stands right now.

Joe Dancy - LSGI Advisors

It sounds like they adopt some of the proposals I've seen it, there won’t be any drilling over there, interesting. Also David, I don’t know if you can comment on, just how's the relationship with (inaudible) is it pretty good, are we getting along, do you have difficulties? I know you’re dealing with; it's sort of frustrating some times because I know things in Poland move about a third of what they do here in Texas when you are drilling a well. How's our the relationship and both now and I guess going forward, can you make a just an overview of comment on that?

David Pierce

Yes, I can. Our relationship over a number of years with (inaudible) has been quite good and recently I think it's gotten better. As I said in the earlier remarks, they seem to be as enthusiastic as we are about this Lisewo area and I’m just delighted, a couple of months ago when we went on and scattered all these new locations, that’s a real step forward for us. Now, the biggest; I am not saying beginning doesn't have its own internal bureaucracy certainly it does but it's not horrible. The bigger problem that we are faced and has increased over time is the bureaucracy imposed by the government.

Well that's not news; we see the same thing here. It's frustrating and once you get something new in place then you can learn how to deal with it and try to shorten the time as much as possible on different things but that's just a perennial problem and it's one that I see increasing in Poland and in the US and in every place I can think of it's not debilitating but it's something that we really have to content with every day.

Operator

And moving to John Bair with SKA Financial Services.

John Bair - SKA Financial Services

So, we are going back in twinning or reiterating a blotch of well and fracking it because you had evidence of pretty decent column and gas there tight sands. So, my stupid question here is you have got an Apache well in these coal areas that tested almost 10 million a day and according to your slide on your presentation there if I am reading this correctly, 90 Bcf of P-50 reserves, so why would you not go in there and twine that well if either 3K works or doesn't work?

David Pierce

Yes, that’s a sensible question. Let me back up to the beginning part of your question. We are twinning the blotch of well. We drilled not too far away from a very old beginning well in Plawce and of course we are going to go back into the well that we drill and frac that of thing. Now, it’s whole well to some distance away from the old Apache well and that was a tough issue to figure out.

You always want to get as close as you can there were somebody else found production but in the Apache well in their effort to try to get production from say 10 million a day to maybe 100 million a day; they give it a massive asset job. In the event that turned out to be the wrong thing to do because they got an ocean of water now we don’t want to get close enough to that well that were picking up the same reservoir problem that they have created and I don’t mean it intentionally, you want to stay away from that. Unfortunately, where we are, there isn't any porosity developed but once you have well control, once you have good well data, then it is possible in the main Dolomite to sort of calibrate your seismic, so that you can actually directly image porosity development within the main Dolomite.

You got to have really good 3D seismic and the seismic we've got there may not be good enough but probably is going to be okay. So, I mean that’s the kind why we pick the well, the location of where we did; but I get it with the gas shales that we've had in this well; you can see that there is gas somewhere around there and we just need to find an area with good porosity and I think we'll get us a well out of this thing. It will be lovely if we can reach something with a sidetrack that would get us there quicker but one way the other, we are going to focus some effort on this particular area, we think it’s a good one.

John Bair - SKA Financial Services

How much higher was your target or was it structurally higher than the Apache Well?

David Pierce

Well were not high to the Apache well. In the main Dolomite that’s not much of an issue because the main Dolomite, it’s sealed all around, it lies in the middle of the zactine, so it’s usually completely surrounded by salt. So, you don’t too much care whether you are high or low, to another area of porosity develop. But you do care that you have porosity and that’s what we missed and that’s what we were looking for.

John Bair - SKA Financial Services

90 Bcf is a pretty big estimate but that will be a pretty nice well from most standing-so I'll go find that stuff.

Operator

Well, ladies and gentlemen that does conclude our Q&A session for today and our call as well. We thank you all for your participation. Enjoy the rest of your day.

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