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Double Eagle Petroleum (NASDAQ:DBLE)

Q1 2013 Earnings Call

May 09, 2013 11:00 am ET

Executives

Richard D. Dole - Chairman, Chief Executive Officer and President

Ashley Jenkins - Chief Financial Officer and Senior Vice President

Kurtis S. Hooley - Chief Operating Officer and Executive Vice President

Analysts

Donald Carson

Kim M. Pacanovsky - MLV & Co LLC, Research Division

William Kidston

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2013 Financial and Operating Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to hand the conference over to your host for today, Richard Dole, Chairman, CEO and President of Double Eagle. Richard, please go ahead.

Richard D. Dole

Okay. Thank you, Terry. Good morning, everybody. I'd like to welcome you to our call to discuss the financial results for the first quarter of 2013. And I'll give you a brief update of the current activity at Double Eagle. Joining me today is Kurtis Hooley, Chief Operating Officer; and Ashley Jenkins, Chief Financial Officer.

In our Niobrara appraisal well in the Atlantic Rim, we continue to produce from the well and evaluate results. We're encouraged by the fracture structure and the oil and gas we're seeing. Of the approximately 1,500 feet of Niobrara, the upper formations appear to be high-quality oil and good permeability. Although the lower formations do also have oil, gas and some water, the upper 800 feet or so of the formation does appear to be a good horizontal well target, but we want to wait for additional results before we commit to any programs.

Additionally, there are 2 gas zones below the Niobrara, which we have not yet produced. We have around 600,000 gross acres of exposure in the Atlantic Rim, which would approximate 100 locations.

Now to provide additional discussion, I'll turn it over to Ashley and Kurtis.

Ashley Jenkins

Thanks, Dick. We mention this every quarter, but I would like to remind everyone that all statements made during our conference call that are not statements of historical fact constitute forward-looking statements and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Our actual results could vary materially from those contained in the forward-looking statements, and the factors that could cause the actual results to differ materially from those in the forward-looking statements are described in our filings with the SEC which include our Forms 10-K and 10-Q, as well as in our press releases.

Our first quarter 2013 resulted in a net loss of $5.2 million compared to net income of $328,000 in the prior year results. In 2013, we had a large noncash loss on the change in fair value of our economic hedges of $4.7 million compared to a noncash gain of $2.6 million in the first quarter of 2012. Our clean earnings, which is a non-GAAP measure, and we believe helps our investors understand and compare operating results independent of regularly-reported noncash charges, including these noncash gains and losses on economic hedges, was relatively flat quarter-over-quarter, $3.4 million versus $3.7 million in 2012. Please take a look at our press release for a reconciliation of our clean earnings to GAAP net income.

Our oil and gas sales plus all cash settlements on our economic hedges increased 2% and totaled $9.4 million compared to $9.2 million in the first quarter of 2012. This increase is due to an increase in our realized price, which was offset by a slight decline in our first quarter production. If you remember, we purchased additional working interest in the Catalina and Spyglass Hill unit from Anadarko in the second half of 2012. Due to gross production declines in these fields in the first quarter of 2013, we did not see an increase in net production equivalent to our higher working interest. In Catalina, the production declines were related to compression and injection issues.

Kurtis S. Hooley

Good morning, everybody. This is Kurtis. I just want to chime in. As Ashley just mentioned, we did experience some mechanical issues in the field during the westerner [ph] , which included the compression and injection pump failures in our new PUD down south. And although some of the decrease is due to normal production declines, we do believe that our current workover program for 2013, we can increase production from where we were currently at in Catalina, back up to a more normal level.

We will be reentering various wells to open up some of the top coal and sand formations that had not previously been produced, as well as catch up on our well maintenance program.

And it should be noted also that in the Spyglass Hill, the production in there has also declined from this time last year. As we previously discussed, Anadarko deferred any maintenance on these wells in that unit, which was the old Sun Dog and Doty Mountain unit during their divestiture process, which ended basically in October. The current operator of the field is beginning to rework the wells and then possibly frac them, but we'll need to dewater those wells before we return to normal levels of production.

Ashley Jenkins

I also want to comment that our bank group, Bank of Oklahoma and U.S. Bank, both reaffirmed our borrowing base of $60 million in April, and we appreciate their continued support. Our next redetermination will be this October.

Kurtis S. Hooley

And also, guys, from an operational standpoint, we are continuing to review our lease holdings and our non-operated assets for increasing our value in those assets and be it through merger, divestiture or partnership.

Richard D. Dole

Okay. Thanks. Appreciate it. With that, I'll open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Richard D. Dole

It was pointed out to me that I had a misstatement, I gave a 600,000 gross acres, it's 60,000. So I want to make sure that I cleared that up.

Operator

Our first question comes from Don Carson from RBC.

Donald Carson

With regards to the Niobrara well, can you give us some color on plans for reentries in terms of costs and expectations and those sorts of things?

Richard D. Dole

Well as we've mentioned we have a couple of wells that are in proximity to the appraisal well that was drilled to the lower gas producing formations. So we're in the process of trying to figure out the best way to access the reservoir. And our current thinking is, this is a vertical well, this is an appraisal well to get a better understanding of what we have and we didn't have. We're encouraged enough on what we're seeing, that we think that this is a pretty much a natural horizontal play, not unlike other parts of it. So we have 3 wells all of which could be horizontally drilled. Now we haven't decided to do that yet because we're still assessing the production capabilities through the vertical test well. Did that answer your question?

Donald Carson

Yes. And there's no specific update on, I guess, at this time, as to current flow rates or anything like that?

Richard D. Dole

No. No.

Donald Carson

Okay. Well, can we expect that maybe on the next call or sometime before then?

Richard D. Dole

We usually want to take 60 to 90 days. We're -- there's a lot of things we're testing, different zones. We've got some water in the lower part of the zone, we're trying to pump that off. We haven't opened up the gas zones below because we have not got the permit yet to co-mingle it. So there's a lot of -- dynamics going on and I want to make sure that we understand what we have before we do anything. But we -- typically, whatever it is we'll -- whenever we issue it, given that we now think this is a horizontal play, the metrics generally used in the industry for vertical versus horizontal, and as you take your production, you multiply it by 10, and that would be what you would look at a horizontal producing well. I would guess, and we haven't put pencil to the paper, but I would guess that the horizontal wells here would be similar to a Bakken well, which would probably be in the $8 million range. So we have not really put the details together on that.

Operator

Our next question comes from Kim Pacanovsky from MLV & Co.

Kim M. Pacanovsky - MLV & Co LLC, Research Division

Could you just detail what you have, the costs that you have incurred so far in the Niobrara program?

Ashley Jenkins

Our total expense as of the quarter was just right around $11 million for the capital cost of the Niobrara well.

Kim M. Pacanovsky - MLV & Co LLC, Research Division

Okay. And do you have any particular metrics that you are looking for that you could discuss with -- that would cause you to move forward with the program or not move forward with the program?

Richard D. Dole

Well, I don't know if I have any metrics. I guess I would say that, at least at this point, we're encouraged by what we're seeing and would assume that, short of anything becoming more negative, this is a program that has -- should have a lot of running room. There's a lot to do with that. As you know, it takes a lot of capital to do this kind of stuff. And there's a lot of expertise that you need to bring to bear relative to the horizontal completion. So we're trying to put all of that stuff in place. But at least, at this point, there's nothing that we see that wouldn't encourage us to continue with the program.

Kim M. Pacanovsky - MLV & Co LLC, Research Division

And can you discuss any thoughts on joint venturing the acreage or is that just way too premature?

Richard D. Dole

No. I think that's -- yes, we're thinking about joint venture. We're putting together acreage packages and technical data; we're doing the data room, virtual data room. And we'll be looking for partners. We've actually been approached by some money partners that made inquiries, I wouldn't call it really discussions yet, because we're not prepared to discuss the go-forward plan. But we're putting a development plan together for the Niobrara, we're putting all the technical data in a virtual data room and we will be looking for either financial or strategic partners.

Operator

[Operator Instructions] Our next question comes from William Kidston from North & Webster.

William Kidston

Can you just comment on the downturn and transportation revenue from the pipeline, and also the increased pipeline operating expenses you guys incurred in the quarter.

Kurtis S. Hooley

Yes. So our pipeline revenue that we recognize is, on the financial statements, is the revenue that we receive from third parties as we eliminate any intercompany. And since the production in Catalina actually was down a little bit, so the throughput on the pipeline from the Catalina production was down also. So it's a one-for-one direct correlation between the production in Catalina and the transportation revenue. The costs went up for 2 reasons. In the fourth quarter last year there was a new rate base passed by the utility that provides electrical for us, so our electrical rates have gone up. But also we put in the -- our PUD E, which is the south PUD. It's a little bit further away so it takes a little bit more compression, a little bit more interloping [ph] to move it up, and the compression is part of the transportation cost. So those are the 2 main drivers of why the costs went up. They're fairly fixed, so as we recover the production in Catalina on a per Mcf basis, those costs will go down.

Richard D. Dole

I might add that as the field recovers and we dewater the field as a result of the mechanical problems we had at the end of last year and the first quarter of this year, we should see those production volumes go up and therefore, the revenues should get a bump on that on the transportation side.

Operator

At this time, we have no questions waiting.

Richard D. Dole

I appreciate everybody for attending and have a good weekend.

Operator

Ladies and gentlemen, this concludes our conference. Thank you for joining us today.

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