CAMAC Energy Management Discusses Q1 2013 Results - Earnings Call Transcript

May.14.13 | About: Erin Energy (ERN)

CAMAC Energy (CAK) Q1 2013 Earnings Call May 14, 2013 11:00 AM ET

Executives

Jason Lee

Kase Lukman Lawal - Founder, Chairman, Chief Executive Officer, Member of Nominating & Corporate Governance Committee and Director of Camac Energy Holdings Ltd

Earl W. McNiel - Chief Financial Officer and Senior Vice President

Analysts

Frank Sims

Operator

Good day, everyone, and welcome to CAMAC Energy's First Quarter 2013 Earnings and Operations Conference Call. Just as a reminder, today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Jason Lee, Corporate Finance Manager for CAMAC Energy. Please go ahead, sir.

Jason Lee

Thank you very much. Before we get started, I want to highlight that this conference call includes forward-looking statements and estimates of future performance. There are numerous risks associated with forward-looking statements and forward estimates, and there can be no assurance that the statements or estimates will be realized. A listing of many of the risk factors you should consider, as part of the material discussed in this conference call, has been outlined in our earnings release and in CAMAC Energy's SEC filings, and we incorporate these materials by reference for all discussion in this call. All statements in this conference call relating to oil and gas resources, prospects and potentials are not references to proved reserves as defined in the applicable SEC regulations and are not permitted in CAMAC Energy's filings with the SEC.

At this time, for opening remarks and introductions, I would like to turn the call over to our Chairman and Chief Executive Officer, Dr. Kase Lawal. Please go ahead, Dr. Lawal.

Kase Lukman Lawal

Thank you, Jason. Good morning, everyone. Thank you for joining us today for CAMAC Energy's First Quarter 2013 Earnings Conference Call. I'm joined today by CAMAC Energy's Senior Vice President and Chief Financial Officer, Earl McNiel.

On our year-end call, about 1 month ago, I reviewed the company's progress during the 2012 fiscal year and provided an outlook for 2013.

Today, I will provide a brief update on our progress thus far this year. After that, Earl will provide a financial and operational review of the quarter as well as an update on several new Investor Relations initiatives. After these remarks, we will open the line for questions.

Thus far, 2013 has been a productive year for CAMAC Energy as we move toward the spudding of Oyo well #7 in our deepwater Nigerian blocks OML 120 and 121. We began the first quarter by announcing that our partner, Allied, had signed a Deed of Assignment with the Nigerian Petroleum Development Company or NPDC and Transocean for the Sedneth 701 semisubmersible rig. Right now, NPDC is completing operations with the rig, and will deliver the rig to Oyo Field as soon as the zone operations are complete.

It's no secret that NPDC's drilling operation have taken a little longer than we anticipated. Well frankly, that's not uncommon in the region or oil and gas operations in general. We are in close communication with NPDC, and we'll let you know as soon as we have more precise clarity on the rig's availability from Transocean. As we speak, we expect the rig to be on the site at Oyo Field by July. We know this is behind the schedule that we outlined previously, but the good news is that we will conclude this 50 days of drilling prior to the delivery of the long lead completion items. And so the delay in spudding the well will not affect the timing of completion and hook up to the FPSO.

Once we receive the long lead items, our plan is to bring a rig back to the well site in the fourth quarter of 2013 to complete well #7, drill and complete Oyo well #8, and then tieback both wells to the FPSO to begin production. If all goes according to plan, 1 year from now, the company will have not 1 but 2 additional producing wells in Oyo Field generating significant positive cash flow for the company.

The other good news is that our investors won't have to wait on the completion and hook-up of well #7 and #8 to see value creation. After the initial 60-day drilling of Oyo well #7, we should be in a position to announce the Miocene exploration results from the well. As I mentioned on the last call, Miocene is the switchboard for all production in the Gulf of Guinea, with fields like Bosi, Ereng and Bonga, all producing over 100,000 barrels of oil per day from that structure.

In our blocks OML 120 and 121, we have over 2.2 billion barrels for resource potential, mostly in the Miocene certified by Netherland, Sewell & Associates. During the quarter, our technical team has continued its work reevaluating the 3D seismic on the blocks to identify new Miocene prospects and leads, some of which are double and triple the size of the largest prospects currently identified.

A Miocene discovery in Oyo well #7 will significantly de-risk the Miocene potential in the rest of the OMLs, and it has the ability to attract a partner and accelerate explosion drilling. We are very excited about these results as we think it will be the key to unlocking immense value for our shareholders in coming years through relatively low-risk, high-impact exploration in a proven hydrocarbon province.

Briefly, I want to provide an update on activities in the Gambia and Kenya. In the Gambia, in addition to ongoing geological and geophysical study, we continue to evaluate the existing 2D seismic lines in order to delineate and optimize 3D seismic program. We will study the results of African Petroleum's exploration well, targeting the 500 million underlying prospects in Block A1 expected to be drilled in the second half of this year. As we said on the last call, as we de-risk our Gambian blocks with more data, we will pursue partnerships with reputable exploration and production companies. We expect any partnership to allow the company to recover past costs, reduce future capital commitments and accelerate exploration drilling activities.

In Kenya, we recently announced that Sander Geophysics Limited completed its acquisition of airborne gravity and magnetic geophysical surveys on our Kenya onshore Blocks L1B and L16. These surveys cover essentially the entire acreage of both blocks and have satisfied the post-exploration period's gravity and magnetic survey requirements. The results of these data transaction, and I expect them in the third quarter of this year, will be used to optimize the placement of 2D seismic lines. This work will coincide with evaluation of existing seismic and well data on Block L1B to identify leads for closer study.

Our deepwater offshore Blocks L27 and L28, our technical team is undertaking a regional geologic study in advance of our participation in the 2D multiclient seismic acquisition sponsored by the Kenyan government. This government-led acquisition covering both blocks will allow CAMAC Energy to acquire 2D data much sooner and at much lower cost than would otherwise be possible. We expect the acquisition to commence within the next 12 months.

As in Gambia, we will also be observing the results of the near-term drilling activity of core and adjacent to our blocks, both onshore and offshore Kenya. In the transitional zone and offshore, Ophir and Apache both have potential high-impact wells planned for the second half of the year adjacent to our Block L16. The most near-term and most interesting exploration well is targeting the large Kiboko oil prospect on offshore L11B, which is operated by Anadarko. Block L11B is immediately in-board of our own deepwater Block L28. And we believe a successful discovery there will have significant implications on the prospectivity of our own acreage.

In Kenya, we're also receiving inbound interest from international operators looking for farm-in opportunities in East Africa. We are holding informal discussions and expect the quantity and the quality of the interest to increase as we de-risk our acreage with more data. Any partnership formed will have the same objectives I described earlier.

In addition to these operational activities on our current assets, we continue to be focused on business development. Our reputation, relationship and experience in building indigenous capacity in Africa are some of our greatest assets, and we will be negligent if we didn't continue to leverage them to grow the company and diversify our asset base.

As we disclosed previously, the company is pursuing several additional asset acquisitions in East and West Africa, each at different stages of maturity. We previously disclosed our Memorandum of Understanding with a state-owned company in Mozambique to jointly pursue oil and gas projects in that country. And we will continue to update you as these opportunities progress.

In closing, I want to reiterate my enthusiasm about CAMAC Energy's near-term and long-term prospects. It has taken the company multiple quarters to acquire the assets in Kenya and Gambia and advance the drilling operations in Nigeria. But as a result of those efforts, our shareholders are now on the verge of benefiting from the significant catalysts over the next 12 months. Value creation will be realized from the drilling of 2 new production wells, exploration results in the Miocene, certifying increased resource potential in OMLs 120 and 121, seismic acquisition and prospect identification in the Gambia and Kenya, partnership in all 3 of our operating countries and finally, the closing of several ongoing business development opportunities.

On the other side of this event, CAMAC Energy will emerge with the cash flow, operational clarity and market platform to continue to execute its vision to create the leading indigenous Pan African oil and gas company with a diversified portfolio of producing, development and exploration projects. As we enter the most exciting phase of operations in CAMAC Energy's short history, we will continue to operate this company with integrity, commitment to communities in which we operate and a focus on creating value for our shareholders.

Thank you for listening. And now to Earl for the financial and operational review.

Earl W. McNiel

Thank you, Kase. For the quarter, we reported a net loss of $3.8 million or $0.02 per diluted share. Average daily gross oil production from the Oyo Field was 2,349 barrels of oil per day during the quarter. In March, there was a lifting of approximately 231,000 gross barrels of crude oil, 22,600 barrels net to the company's interest at sales price of approximately $108 per barrel. This resulted in revenues net of royalties of $2.5 million.

On the balance sheet, the company had cash and cash equivalents of $2.3 million as of March 31, 2013. Net cash used in operations was $1.1 million during the quarter.

And finally, our G&A costs for the quarter increased by $1.2 million from the prior-year period to $3.7 million, mainly due to an increase in legal and consulting expenses and stock-based compensation expense.

As Kase discussed, CAMAC Energy expects to execute a series of value-creating events over the next 12 months, including 2 new production wells, exploration of the Miocene potential in OMLs 120 and 121, new resource estimates, high-impact third-party wells, data acquisition in Gambia and Kenya, partnerships and business development opportunities. As I mentioned on the last call, in light of these upcoming catalysts, management will be marketing the CAMAC story aggressively to new investors so that shareholders will realize this value creation in the share price.

Not only will these efforts improve shareholder returns, but the increased liquidity from higher volumes and higher prices will give us greater flexibility to raise much needed capital in the future. To that end, CAMAC Energy has recently engaged the Investor Relations firm, Renmark Financial Communications, to focus specifically on marketing CAMAC Energy to the retail shareholder community.

Renmark has a deep and experienced team and a strong track record of raising awareness and helping improve share performance of several African-focused resource companies. Renmark will literally be communicating our story to thousands of influential retail brokers in both Canada and the United States, the prime investors to take advantage of the company's upcoming catalysts.

In addition, management will be traveling to select cities to make the case directly to retail brokers and investors identified by Renmark. As management travels, we will also continue our ongoing program of meeting with strategically selected institutional investors in each of these cities. We believe our retail-focused effort will improve our institutional marketing success by increasing liquidity, making the stock more attractive to larger investors over time. As an additional benefit, we will also leverage Renmark's team to improve our communications with and responsiveness to existing shareholders.

Once again, I look forward to working with Kase and the rest of the management team to execute our operational and Investor Relations strategies to maximize shareholder value.

Thank you for your time, and we will now take questions. Operator, please open the line.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dmitri Seaforth [ph], a private investor.

Unknown Attendee

I have 3 questions. One, can you give an update on the monetization of the gas coming from the current production? Two, once the second well that's being drilled right now, say that's successful, and that triples the current production to about 1,000 barrels a day, assuming share price may go up, if it doesn't go up, how do you envision CAMAC going forward in financing future development? Will it be through overwriting interest, where the company doesn't have to come up any money? Or will it be through equity? Or do you think it could be through debt? And the last question is, I know African Oil and Marathon are drilling currently in Kenya right now, and they have a well that's supposed to be spudded or completed in the next 6 to 9 months. Is that close to any of your current blocks?

Kase Lukman Lawal

In terms of the gas monetization, that is something that we're taking very seriously. As you know, today, we do produce in excess of 14 million cubic feet of gas a day. And we have started making efforts. We've had some studies and we have engaged engineering companies to try and assist us in terms of optimizing monetizing this asset. It's very significant for us because if you convert it on an equivalent basis to oil, we are really talking about in excess of 6,500 barrels of oil equivalent a day. So that is very significant. And while we change and move into another FPSO, part of that negotiation that is going on right now is to actually install a gas processing unit on the new FPSO, so that we can be able to take optimum advantage in terms of monetizing these very significant assets to us. In terms of the second well.

Earl W. McNiel

Yes, in terms of your second question, Dmitri [ph], you're spot on. We're looking -- we're very excited about having the additional production from Oyo 7. And maybe you missed Kase's comments, but he mentioned that when we bring the rig back to complete Oyo 7, we will also drill another well, Oyo 8. So we're looking forward to having the additional production from Oyo 7 and Oyo 8 and the cash flows that come with that. And we're looking forward to the reserve growth that we anticipate in addition. And further down the road, we're looking forward to the exploration upside from our exploration assets. So the additional production cash flow from Oyo 7 and Oyo 8 will be significant for us. In terms of funding our exploration program though, as Kase mentioned, we will be looking to take on partners in both Gambia and Kenya, and we're blessed to have 100% working interest at this point. So we have plenty of interest to sell down, and we would anticipate that not only would that reduce the capital commitment by having a partner but that we would also recover some of the cost that we've put into these assets. So it can actually be a capital-generating event. I think your last question had to do with the well being drilled by Africa Oil in Kenya. I'm not certain exactly which one you're talking about. I assume you're talking about the Africa Oil-Tullow combined operations in the Rift Basin. And we do not currently have a block in the Rift Basin. But any oil discoveries in Kenya, I think, are beneficial.

Kase Lukman Lawal

I believe the well you may be talking about is the 10BB that was spudded just about 2 days ago by Tullow, the operator. And African Oil is a participant in that particular asset. A degree of follow-up on the trigger and the other well that -- the core discovery that was made in -- that was discovered in Kenya. While we do not have an acreage next to those assets, we are in very good neighborhood in terms of the drilling activity that is ongoing right now around L1B and L16. And we believe very strongly, as Earl just said, that any discovery in that particular country is good news to all operators and participants in that particular country. So we feel like we're in good neighborhood and in good area to be prospecting for oil.

Unknown Attendee

The Oyo 8, how do you envision financing that? Would it be with another overrunning interest or will we take a larger position in that well to get more of the return on the cash side?

Earl W. McNiel

Yes, that's a great question. I would say, at this point, due to our limited capital resources, that we would do Oyo 8 just as we're doing Oyo 7 and not participate. So our partner and operator, Allied Energy, will fund the cost of drilling that well. But another side benefit of increased production and cash flow is that at some point, perhaps by this time next year, if we're generating sufficient production and cash flow, it becomes -- the project becomes bankable at that point. And we could tap lender financing to fund further development costs. And at that point, we'd be better positioned along with the cash flow to participate.

Unknown Attendee

Have you envisioned production coming from the 7 on the last -- end of this year and first quarter next year, when do you envision production coming from the 8 well?

Earl W. McNiel

Right about the same time. We're going to drill Oyo 8 and tie-in both wells simultaneously.

Operator

Our next question comes from Anthony Golo [ph]. [Operator Instructions]

Unknown Attendee

Thank you for your report, doctor. My question is on the Miocene, we'll know within 60 days subsequent to the start of drilling whether we're successful with Miocene? And do we have contingent farm-in candidates that are going to be awaiting the success of that venture? And vis-à-vis well #8, we should not have any undue delay as far as that particular drilling.

Kase Lukman Lawal

Thank you, Anthony [ph], and thank you for your continued interest in our organization. Yes, we always have contingent candidates that are interested whenever you have a new discovery. And so this case is no different. There's a lot of anticipation and excitement about this well that we are drilling. Not only being transformational in terms of our expectations of a successful result out of the T1B and the Miocene, but also because of interest from candidates in terms of large independent oil companies. So we do anticipate that, and we are looking forward to that.

Operator

[Operator Instructions] And our next question comes from John Leone [ph], private investor.

Unknown Attendee

I'd like to get something straight. I don't know if I misunderstood the conference call prior to the last one in an article in Seeking Alpha that someone said that the exit rate for 2013 was 27,000 barrels a day. Is that right?

Kase Lukman Lawal

Not that I can recall.

Unknown Attendee

Oh, wow, because that's what I read in an article in Seeking Alpha 1 month ago.

Kase Lukman Lawal

I can't recall. But based on all the information that we provided you about 1 month ago on the end-of-year earnings call and this one, we have been very consistent in saying that we fully intend to drill the 2 wells, well #7, complete it, hook it up, and drill well #8, complete it, and hook it up. When you combine those 2, our expected production, as of those, is between 14,000 and 16,000 barrels a day. And as I said, we are producing today -- we don't need additional drilling. We are producing today in excess of 40 million cubic feet of gas today. When you divide that by 5.8 to bring you to oil equivalents, I think that essentially gives you something in the neighborhood of 6,800 barrels of oil equivalent a day. That's about all that we know as management right now, and that's our expectations today.

Unknown Attendee

So that will equal to about 20,000 at the end of 2013?

Kase Lukman Lawal

2013 is now. We are informing you that we expect the drilling rig and the completion in the fourth quarter of next year. That is the gross production that we expect from the field after those 2 wells, and you include the gas monetization into it.

Earl W. McNiel

Now we anticipate that these are not the last 2 wells to be drilled in the field. Our technical staff is currently making plans to drill additional development wells, which would bring -- continue to increase production into 2014. But we haven't put out any expectations of what that would be.

Operator

Our next question comes from Garrett Smartche [ph], private investor.

Unknown Attendee

Yes, my question is, can you tell me, is there any sign of the marginal field auctions in Nigeria for -- going to occur in 2013? And is CAMAC interested in any divestments that Shell and Conoco is currently doing?

Kase Lukman Lawal

Garrett [ph], that's a good question. I believe you are reading the same information that we are reading in terms of the articles and statements that are coming out of Nigeria regarding the marginal fields. Over the last 3 years, there's been expectation that there will be allocations, both competitive and discretionary of marginal fields. We await that. And I believe it is part of our plans to participate actively in that -- in those opportunities when they come up. So we are looking forward to that. And hopefully, to be sooner rather than later.

Unknown Attendee

As a follow-up question, do you have any preference to offshore versus onshore marginal fields? There seems to be some difficulties with operators onshore, and I was wondering if that's something that you would perhaps avoid doing and stick with the offshore instead.

Kase Lukman Lawal

It does really depends on each country. As we've just mentioned in Kenya, we are very actively exploring our assets onshore. Right now while we are -- we've just completed the gravimetric activities on those 2 blocks, and we're going to begin seismic on it. It really just depends on each situation. To date, we do not have any onshore activity and acreage in Nigeria. And the marginal fields in Nigeria in onshore, we have to look at it on a case-by-case basis while we bid for the opportunity whenever those opportunities do come up for us to bid for them.

Operator

Our next question comes from Frank Sims at Stifel, Nicolaus.

Frank Sims

The question that I've got is that there was an announcement a couple years ago about this rather substantial amount of oil with the 3D seismic grade A report. And that's going to be a well that you're going to go down in -- once you've gone through the well that we're currently producing from, you're going to continue down to get some kind of an idea of what the real story is down there. How long is it going to be before, if there is this oil that we're hoping is there, how long will it be before you will actually start pulling oil from that field?

Kase Lukman Lawal

Thank you, Frank. We are very, very active and we have an excellent technical team here at CAMAC Energy. The report you are referring to may have been the NSAI stratified report of in excess of 2.2 billion barrels resource that was done, I believe, about 2 years ago. In line with what we have just mentioned in our statement, that is the Miocene. The Miocene will be tested for the first time in this well #7. So there's a lot of excitement with us, and I believe with the investing public that wants to know the outcome of this. So we are looking forward to it, and that Miocene will be announced as soon as we know. And I bet you'll be the first to know.

Earl W. McNiel

Yes, just to be clear though, Frank, we don't anticipate producing from this Miocene target. What we're attempting to do is leverage off the fact that we're drilling an Oyo development well in this location, take advantage of that well, test the Miocene. If we prove that there's oil in the Miocene, then that significantly de-risks some rather large -- some very large Miocene prospects that we have elsewhere on the block. And we would then look to bring in a partner to help defray the cost and the risk of drilling one of those large Miocene prospects. And we don't have any firm plans yet, but that could -- that is, we're thinking we'd like to drill one of those exploration prospects in the Miocene in 2014.

Frank Sims

And that is if you get the kind of review once you go down there and look at it that would suggest, "Okay, we should definitely do that." Is this a field -- obviously, other people know about it. Is this a field that could end up getting delayed because of our lack of immediate cash several years, 4, 5, 6?

Earl W. McNiel

Again, we don't have a firm target date for that well -- for an exploration well. We'd like to drill one in 2014. We do need to -- we would like to bring in a partner in addition to Allied. But I guess in the best case scenario, we would not really have to contribute any significant amount of cash. It would just depend on the situation when the time comes, how much -- to what extent we participate.

Kase Lukman Lawal

But it's really -- that's a really good question you're asking us, Frank. The mere testing of the Miocene in well #7 is extremely significant. To the extent that we are successful in that testing, that is very transformational. It is our expectation that there will be tremendous interest from prospective industry partners that may want to join us. And therefore, we expect that sooner rather than later, we'll be able to appraise those testings, and those test results will be able to give us an opportunity to take advantage of those massive resources that we do expect.

Frank Sims

You may have said this early in the call, when would you expect to have that information?

Kase Lukman Lawal

Once we complete well #7 that we expect to spud in July.

Frank Sims

You believe you'll have results in July?

Kase Lukman Lawal

We will know whether there are some -- no, we will spud in July. About 60 days thereafter, we expect to complete the well and be able to have an idea of the Miocene.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Jason Lee

I'd like to thank everyone for participating in the call this quarter, and I just -- speaking for Kase and the rest of the management team, I would just say that we're extremely excited about the value creation prospects for CAMAC Energy at this time. It's been a -- it's taking a little longer than we all would have liked to put the pieces in place, but we're poised at this point in time for a profile of increasing production, increasing reserves and exploration upside potential. So stay tuned. It should be an exciting ride. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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