Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sonde Resources (NYSEMKT:SOQ)

Q4 2012 Earnings Call

March 22, 2013 4:00 pm ET

Executives

Jack W. Schanck - Chief Executive Officer, President and Director

Kurt A. Nelson - Chief Financial Officer

William K. Dirks - Chief Operating Officer

Analysts

Alistair Toward - PI Financial Corp., Research Division

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Sonde Resources Corp. Fourth Quarter 2013 Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Friday, March 22, at 2 p.m. Mountain Time.

I will now turn the conference over to Mr. Jack Schanck, President and CEO. Please go ahead, sir.

Jack W. Schanck

Thank you very much. Good afternoon, everyone, and thanks for calling in. Before commencing with remarks regarding year-end 2012 earnings conference call, I'd like to ask Kurt Nelson, our Chief Financial Officer, to review our cautionary remarks regarding forward-looking information.

Kurt A. Nelson

Thank you, Jack. Some of the statements you will be -- that we will be making today constitute forward-looking information within the meaning of applicable Canadian securities laws and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements include, among others, those concerning the status of the Viking farm-out in North Africa; the outcome of the Western Canada strategic alternatives; our anticipated operational plans and activities, including our development and exploration program in Western Canada, North Africa and other capital programs; as well as sources of funding, expected production growth and the strategy of Sonde and the expectation of successful future results. Forward-looking statements can generally be identified by our use of the words such as anticipate, believe, expect, plan, intend, estimate, propose, project and similar expressions suggesting future outcomes or statements regarding an outlook. Such forward-looking information or statements are based on a number of risks, uncertainties and assumptions, which may cause actual results or other expectations to differ materially from those anticipated and which may prove to be incorrect. Assumptions have been made regarding, among other things, operating conditions, management's expectations regarding future growth, plans and the results of drilling activities, availability of capital and other expenditures.

Actual results could differ materially due to a number of factors including, without limitations, operational risks, development, exploration, production, delays or changes in the plans, the uncertainty of reserves and the uncertainty of any estimates that we provide. Although we believe that the expectations reflected in the forward-looking information or statements are reasonable, prospective investors should not place undue reliance on forward-looking statements because the company can provide no assurance that any expectations will prove to be correct. We base our forward-looking information statements on information currently available and do not assume any obligation to update them unless required by law.

Listeners should refer to the forward-looking statement disclaimer in our press release issued yesterday, March 21, and our annual information form for the year ended December 31, 2012, which are located on SEDAR, for more information regarding the risks and uncertainties facing Sonde.

With that I'd now like to turn the call back to Jack.

Jack W. Schanck

Thanks, Kurt. Good afternoon, everyone, and thanks again for joining us for our year-end 2012 conference call. In addition to Kurt, Bill Dirks, our COO, is also here with us and is prepared to give some remarks a little later.

We issued a press release posting our audited year-end 2012 financial statements, management discussion and analysis and our annual information form on SEDAR this morning that are available for your review. Instead of spending time reviewing these documents, I'll prefer -- preface this call with a brief update by our team on the Viking farm-out in North Africa and the Western Canadian strategic alternatives, and then turn the call over to your specific questions about our financials or the initiatives underway.

I'd like to add the caution upfront to being -- to letting you know, we've been actively engaged, as late as this morning, in ongoing correspondence with Joint Oil about North Africa, and yesterday, with FirstEnergy about our strategic processes and cannot discuss specifics that could jeopardize these processes, and I hope you understand.

Sonde's executive officers are working diligently to formally close the Viking farm-out transaction. The closing of this transaction is a top priority for the company as it would bring a significant amount of value to our shareholders. The company has submitted the farm-out to Joint Oil for approval. The company and Viking have held a series of discussions with Joint Oil, the Tunisian Minister of Industry, the Tunisian National Oil Company, ETAP, and the Tunisian Minister of Energy, since the farm-out agreement was executed with Viking. Joint Oil has established some conditions for securing its approval to the assignment of Viking. Some of these conditions are acceptable to the company and Viking, while others remain subject to negotiations. Discussions continue with the expectation that an agreement can be concluded, which is acceptable to all parties. Sonde and Viking remain committed to achieving a positive outcome. While we believe the farm-out should be approved on its merits alone, no assurance can be made that Joint Oil will approve it or the farm-out will close. The farm-out can be terminated by the company or Viking or by mutual consent extended after March 31, 2013.

Just let me point out, we have met in our meeting with the past representatives and with the members of the recent appointed government in Tunisia. We admit, as I know you understand, that the new developments in the country naturally result in the process taking additional time. Time to build, we hope, concurrence and understanding that the opportunity under consideration by Sonde and with Viking is in the best interest of all stakeholders.

There is an agreement, as I pointed out, with Viking, the opportunity to extend the closing date beyond March 31, 2013, something that is under discussion. I remain encouraged that we will find acceptable solutions to the relevant points Joint Oil has raised, some of which have already been acknowledged and we believe this transaction can still close in the near future.

The formal closing of the Viking farm-out is a top priority and something I personally have been dedicating considerable time to, along with Toufic Nassif, Sonde President of North Africa, who has been in the country for the majority of the past month. The company continues to remain focused on achieving value from its entire assets portfolio.

Sonde has also continued its intention to accumulate large consolidated blocks of undeveloped acreage in promising plays, such as the Duvernay, Montney Wabamun, and to prepare for a number of possible scenarios upon conclusion of the Western Canada strategic alternative process. While this process prevents the company from committing to a 2013 capital program, management is encouraged by the strength of the companies, on the leveraged balance sheet and the liquid-rich drilling and development opportunities that may be available to the company upon conclusion of this process. The team here at Sonde is preparing to execute our programs post-breakup, with fresh clarity around the FirstEnergy process.

FirstEnergy Capital Corp., FirstEnergy opened the data room on January 9, 2013 for parties interested in gathering more information regarding the Western Canadian property packages that Sonde had prepared. Bids are being reviewed. The Board of Directors and management are in the process of evaluating proposals and are -- that they are receiving on an ongoing basis and getting their -- our advice from FirstEnergy. The board spent considerable time in consultation with management and FirstEnergy at the recent board meeting in defining the next steps, and they are in process. The company will announce the results of the strategic alternative process in May and any resulting future plans as they are finalized. I really cannot comment more on the process than that at this time.

It's kind of a general overview. I'd like to turn the call over to Bill Dirks for some additional operational updates, and then to Kurt Nelson.

William K. Dirks

Thanks, Jack. In Q1, as you would expect, the operations team has focused the bulk of its energy and efforts on creating the data room and running the strategic process for Western Canada. Sonde has had a modest work-over and reentry program in Q1. The focus of which has been maintaining and where possible, increasing liquids production, primarily from oils in our Manville I and Michichi pools in Drumheller.

In addition to running the strategic process, the operations team has been focused on preparing for what's next after we're completed with the strategic process, and that has involved actively preparing drilling locations, AFEs and design of wellbores and fracturing programs for what, we believe, could be an aggressive oil-oriented drilling program following the culmination of our strategic process.

In specific, the team has permitted or is in the final stages of permitting 3 horizontal oil wells in the Michichi pool, all detrital targets; 2 horizontal oil wells in the Eaglesham Wabamun pool, both oil targets; 3 Duvernay locations, 1 each in the -- what we refer to on our website as the LeDuvernay macro talus deposits at the Sturgeon Lake and Windfall reefs; and a third location in the micro talus deposits at Ante Creek North. We've also prepared a follow-up location in our Ante Creek North Montney pool to the 4 of 19 well that we drilled last year. It would be our intent, following the conclusion of the strategic process, and as soon as weather and road conditions would allow after breakup, to be in the execution of that program with an initial focus on our Michichi and Eaglesham Wabamun pools.

With that, I'll turn it over to Kurt.

Kurt A. Nelson

Thanks, Bill. We concluded 2012 with working capital of $17.2 million and an untapped credit facility of $30 million. You may recall, we reduced the facility in order to reduce standby fees. The extension of the Joint Oil Block 3-well exploratory commitment to December 23, 2015, and the pending closing of the Viking farm-out can alleviate the liquidity pressure imposed on the company by the North African commitments. The resulting flexibility will allow the company to react quickly and decisively upon conclusion of the Western Canada strategic alternative process.

Just in summary. Net income for the year ended in 2012 was $21.5 million compared to a loss of $40.6 million for 2011. These changes are shown in our press release and are dominated by the $73 million gain we posted on our undeveloped Duvernay acreage early in 2012.

With that, I'd like to turn the call back to Jack.

Jack W. Schanck

Thanks, Kurt. I think what we'll now do is turn the meeting over to any specific questions you have, and we will be glad to take on any of those questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Alistair Toward from PI Financial.

Alistair Toward - PI Financial Corp., Research Division

First question is on North Africa. I think most of your investors would suggest that you've done a good job arranging financing by way of this joint venture. I guess we all recognize that there -- with the change in leadership at the top at Tunisia, that there's some uncertainty there. Could you shed some more light on, from your understanding, what this change in leadership means? Specifically, is there kind of a need or desire on the new leadership to kind of go in a different direction from the previous leadership?

Jack W. Schanck

This is Jack, Alistair, thanks, and I'll -- let me see how -- although I will be the first to admit I'm not an expert on Tunisia or the Tunisian government, I'll attempt to give you my impressions, having met with some of the past officials and then most recently, Toufic having met with some of the recent officials. We haven't seen any big change that go in different directions. It's just -- I think more simply, new people in new jobs trying to understand what the person before them may have approved and what they might find acceptable to them. I mean, the prior Minister of Energy, we've met with him numerous times, was supportive of what we wanted to do. He is still in consultation with the new minister who's coming in, so I think that information will be passed on. The Prime Minister actually has been spoken to about the project. All very encouraged to continue to get new investment in the country. Having said that, we're still dealing with some of the same bureaucrats in ETAP and within Joint Oil. So a lot of what we're having to do, I believe, recently, is just create a lot of understanding with many of the officials that are new to their job and present the correct assurances that a combination of Sonde and Viking can meet their expectations. And there are always some new expectations that come up, but it's just a matter of kind of getting those set in place and seeing if we can't put those expectations in line with the realities of both the EPSA that is in place and the realities of the day. So I don't know if that answers your question, but I think it's -- for us right now, I recognize we want to get this done desperately because we have activity we need to get on with, but it's just -- in situations like this, it just always seems to take more time.

Alistair Toward - PI Financial Corp., Research Division

Okay. I'm just kind of thinking like, I mean, we're waiting on an approval, largely to kind of transfer the name and the operator, and I'm just wondering if there isn't a workaround that if you find yourself in a stalemate, where you could kind of structure the same deal that you have with Viking now, but you just keep Sonde as the -- I guess, the operator of record, is that something that's a reasonable workaround that would sidestep the approval process we're all waiting on?

Jack W. Schanck

Let me -- I'll try to answer your question honestly, frankly and hoping not to offend you. You used 2 words in there a couple of times that we don't like, workaround and sidestep. We recognize that there are lots of options out there, but the reality is, we put forth a good, strong, earnest, well thought-out proposal on behalf of Sonde and on behalf of Viking that could -- that we think needs to be given due course, due consideration by everyone, but we do recognize there are alternatives out there. But if we pursue those alternatives, not to be flippant, but it will be in an open, honest, forthright manner and we're not going to try and sidestep the process. If we do some things like that, it'll be well-known to everyone, including Joint Oil and any other parties, that, that's our approach. So your thought hasn't been lost on us, we're aware of it. But again, in a country with changing government, we just don't think it serves our best interests to try and sidestep any process.

Alistair Toward - PI Financial Corp., Research Division

Fair enough. Just if I could keep going on the -- just with regards to the domestic drilling program. Is it safe to say that this summer is going to see a drilling program and that we're just -- the scale and the focus and -- is yet to be defined? Or does this summer's program require a certain level of success from your divestiture program, both in Canada and internationally?

William K. Dirks

Alistair, this is Bill. Obviously, we need to know what the outcome of the strategic process is going to be before we can definitively say what our capital spending program is going to be like for the remainder of the year. But we are well aware, and we have discussed with our board and our team, the imperative that we'd be ready to go back to active drilling operations as soon as the strategic process is completed, simply because you can't let an oil company just founder and live off its decline curve for very much time. That recognition is precisely why we've spent a lot of time in Q1 obtaining permits and preparing for drilling processes and making ourselves aware of drilling rigs and preparing AFEs and doing all that. We will be running an active oil and gas operation in Western Canada, again, when we understand what the strategic process has brought us.

Alistair Toward - PI Financial Corp., Research Division

Okay. Just on the -- I know you referenced the fact that the Michichi and the Wabamun are probably the first to go. I would like to ask questions just on the LeDuvernay. You mentioned that some of the locations are in the micro talus and some of them are in the macro talus. And I'm just -- I'm curious sort of which one comes first and how we kind of go about completing these wells or how do we -- now that we're kind of working on the AFEs? And also sort of what type of costs do we think are involved with the testing of the LeDuvernay concept.

William K. Dirks

We have recommended to management here, and we'll almost certainly pursue a program of focusing on the 2 macro talus locations at Sturgeon Lake and Windfall first, Alistair, simply because the LeDuvernay is the thickest there and it makes the easiest horizontal target for a first-in-class well. It gives you the best chance of staying on your horizontal trajectory and staying in good rock the whole time. Whereas the micro talus deposits, while very compelling in terms of their reservoir properties, are thinner and are going to require more experience with drilling horizontal wells of that depth. We are preparing detailed AFEs for the first 3 wells out-of-the-box. I haven't seen the finals yet, so I don't care to give you a firm answer on exactly what they're going to cost to drill and complete. But we did say in our last conference call that we had been working on short radius designs for our LeDuvernay wells, that we hope would cut the costs that industry has been experiencing in the conventional Duvernay by several million dollars a well. And I believe that I, on the last conference call, suggested that we were trying to get ourselves in a box where the experience cost range could fall between perhaps $8 million and $10 million against an overall industry average, at least what I've seen, is closer to $12 million or $12.5 million.

Operator

The next question is from Shailender Randhawa from RBC Capital Markets.

Shailender Randhawa - RBC Capital Markets, LLC, Research Division

Jack, just can you comment a little bit on what the extension terms may look like with Viking? How long will you extend if you don't have resolution by March 31? And just remind us, what's the minimum work program for 2013 in North Africa? And when would you have to start making decisions to go ahead on those?

Jack W. Schanck

Let me attempt, as I look across the room to Bill, to answer your second question first, which would be a minimum work program and maybe give you a description of -- ask Bill to give you a little description of the type of things we've already put in motion to kind of meet that program. You want to kind of [indiscernible] seismic and the lead time items.

William K. Dirks

We've got -- at a minimum, we've got to drill Fisal and we've got too shoot a 3D in Libyan waters before the end of the year. We obviously haven't been waiting to prepare for those activities. The lead time for an offshore well in the Mediterranean is up to 12 to 14 months time. So Q1 has seen us actively working on sending out our invitations to tender for long lead time items for the drilling process, on tendering for a seismic vessel and for support services for the rig that will be required, including geotechnical, soil borings and side scan surveys and permitting processes and environmental impact assessments required for all this. It's been a very active quarter for us, and we believe that we are well positioned to continue with and complete that work, assuming we get the necessary approvals for our deal from Joint Oil.

Jack W. Schanck

In other words, we think we clearly need to be in a position to spud the well by Q3.

William K. Dirks

But late Q3, early Q4 is when we're going to have to be ready.

Jack W. Schanck

So -- but we are purchasing items and going through the procurement process for a lot of those long lead items to make that happen. As to your -- the other question, which is what we might be prepared to do to extend beyond March 31. I'd like to propose answering your questions maybe this way. I'll tell you, I've been in communication with Viking as recently as this morning about lots of issues, including issues like this, and we continue to see, on their behalf as well as our behalf, the ongoing desire to make this deal happen. I think one of the concerns people may have is, and understandably so, when does Viking just get dissuaded from wanting to continue because of the conditions there. We haven't seen any of that. If anything, they continue to be forceful, engaged, meeting us in country, being in country with us, meeting with Joint Oil and with the Ministers in there to try and make this happen. Having said that, I'm not prepared to comment on what we might want to extend to because we actually kind of think it may be in our favor, just to kind of keep that pressure on the system over there right now that says, we really need you to get to approve this because we are running out of time. So -- but I think maybe I can give you and the other investors some assurances that, as of this morning, Viking has been working very diligently with us to try and continue to progress this forward. I haven't seen any indication of -- that they have any interest in backing away from this.

Operator

[Operator Instructions] The next question is from Alistair Toward from PI Financial.

Alistair Toward - PI Financial Corp., Research Division

Just one more question. You talked about doing the Wabamun sort of early on in the program, once you have clarity, and that's a waterflood. Just want to understand what the expectation should be for, one, will we have all the injector wells all queued up? And two, is this a situation, because we're doing high-volume lift there, that we should expect the wells to be producing high rates of water and then turning to oil? Or is it something where we hope to see oil right away and just being ready for higher water cuts when they come? Just trying to get an understanding of that, the drilling on the Wabamun.

William K. Dirks

Sure. Alistair, this is Bill. Let me dispel one thing that you said there right away. The Wabamun play is not a waterflood project. It is...

Alistair Toward - PI Financial Corp., Research Division

Sorry, high water -- high-volume lift is what I was saying.

William K. Dirks

Horizontal drilling for primary production targets and the general experience of industry in vertical wells in the Eaglesham incendie [ph] pool, is that high water cuts are common and sometimes are common from the earliest days of production. And we are well aware that our ability to lift high volumes of fluid and keep bottom hull producing pressure as low as possible is an important mechanism for allowing oil to bleed in from the tighter rock that's often present. We're unaware of any wells -- any analog wells that we've studied and certainly, the wells the we are intending to offset with our first 2 horizontals, there's no evidence that they start at 100% water cut. In fact, they'll often start at very, very low water cuts and watch the water creep up over time as you get the fracture system to start to contribute to the wellbore.

Alistair Toward - PI Financial Corp., Research Division

And do you need to drill the injectors, or there must be lots of wells there that you can redeploy as injectors? Just curious what the -- is that an incremental cost to these wells?

William K. Dirks

When you say injector, I'm assuming you mean saltwater disposal well?

Alistair Toward - PI Financial Corp., Research Division

Sorry, I guess, a disposal well for all the water that you will be producing, yes.

William K. Dirks

Yes. There are -- Eaglesham area is advantaged by having a number of viable high-volume saltwater disposal zones that have already been permitted by industry. And because of the number of standing suspended vertical wellbores, we're aware of a number of locations, including the first 2 that we're going to drill, where we can convert a standing suspended wellbore to a saltwater disposal well by acquiring the permit from the ERCB. In the future, if the play becomes economically viable and a large scale horizontal infill program is happening, then we will want to design a built-for-purpose saltwater disposal system that includes pipeline running directly from producing wells to disposers. And in that case, we would be wanting to drill some new disposal wells. But even new wells are not high-cost items because the disposal zones are relatively shallow targets in that area.

Operator

There are no further questions at this time. I would like to turn the meeting back over to Mr. Schanck.

Jack W. Schanck

Thank you. I want to thank all of you for calling in and participating. And give you hopefully some additional assurance that we're aware of the concerns and the uncertainties around what we're doing in North Africa, as well as our process. But also give you some assurance that the management team, the board, is well aware of the need to create value from these assets, and we remain steadfastly focused on trying to make that happen. And I'm sure if there's any additional questions, you'll give me a call and we'll do what we can to accommodate. With that, unless there are any further questions, we will -- thanks again for your attendance, and we will terminate the call.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sonde Resources Management Discusses Q4 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts