FX Energy's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: FX Energy, (FXEN)

FX Energy, Inc. (NASDAQ:FXEN)

Q2 2013 Results Earnings Call

August 8, 2013 04:30 PM ET


Clay Newton – VP - Finance

David Pierce - CEO


Jason Gammel - Macquarie

Joel Musante - Euro Pacific Capital

Raymond Deacon - Brean Murray, Carret & Co.

Daniel Mittag - Oppenheimer & Company


Good afternoon ladies and gentlemen and welcome to the second quarter 2013 Financial and Operating results conference call for FX Energy. Today's conference is being recorded and now I'll turn the conference over to Clay Newton, Vice President of Finance. Please go ahead, Mr. Newton.

Clay Newton

Thank you, Matt. Thank you all for joining us today. I am Clay Newton, VP of Finance here at FX Energy. Welcome to our 2013 second quarter earnings call. This call will follow the usual format. I'll talk about just a few key financial items. A substantial detail is available in our earnings release and 10-Q that were filed earlier today and can be found on our website. After that, David Pierce, our CEO will provide some operational updates. We will 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, developments, or other 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 and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

I have divided my remarks today into three sections. First I will talk about the numbers, production, revenues and non-cash charges. Second I will discuss our new credit facility and lastly I will spend a few minutes talking about our liquidity and capital resources.

Let’s start with production. Our production in the second quarter was up from last year. Oil and gas production for the quarter was 1.1 billion cubic feet equivalent, an average of about 12.2 million cubic feet equivalent per day, that’s a 2% increase from the second quarter of last year, but lower than the 13.1 million cubic feet that we estimated in our call last quarter.

The decline was due primarily to reduced production at the Zaniemysl well, along with the Winna Gora well being shut in for 2 weeks for maintenance and testing. This work had originally been planned for the third quarter of this year. Total production for the first six months of 2013 was 2.4 billion cubic feet equivalent, an average of about 13.1 million cubic feet equivalent per day. That’s about 4% higher than last year.

Looking forward to the third quarter production numbers, our production rate will be impacted by two factors. There is scheduled maintenance on our KSK wells which will cause the three wells to be shut in for a couple of weeks. Secondly, our Zaniemsyl well has now stopped production due to the inflow of excessive water. As a result of these two events, we expect our production rate to be about 11.5 million cubic feet equivalent per day for the full third quarter.

I’ll leave the discussion about operational plans for the Zaniemysl area and our planned upcoming production increases to David.

Once again, we posted record oil and gas revenues during the first half of this year. Oil and gas revenues were 17.6 million for the first six months of 2013, compared to 15.8 million for the same period of 2012, an increase of 11%.

Total revenues for the first six months of 2013 were 17.7 million, compared to 17.2 million in the first six months of 2012. Natural gas prices in Poland were higher during the first half of 2013. Remember that our US dollar-denominated gas prices are a function of the current Polish low methane tariff which serves as a reference price for our gas sales agreement, and the relative strength and weakness of US dollar during the reporting period.

During the first half of this year, we recognized a 10% increase in natural gas prices over the same period a year ago. The increase was created by a combination of a 4% increase in the Polish tariff and weakness in the US dollar compared to the same period of 2012. In addition, production declines in the first half of this year at Zaniemysl were more than offset by production gains at both KSK and Winna Gora, where our average price per Mcf is approximately 20% higher than at Zaniemysl.

As it's customary on our conference calls, I'd like to spend a few minutes discussing currency issues. Our functional currency in Poland is the Polish zloty, despite the fact that everything we do in Poland is zloty based, including the generation of revenues, our operating costs, drilling costs, construction of production facilities, overhead cost and so on we are required for US financial reporting purposes to convert everything we do in Poland into US dollars. It's very important for our shareholders to recognize that the fluctuations caused by movements in exchange rates can mask the progress we're making in Poland. In addition to the ongoing impact, sometimes positive and sometimes negative on our reported revenues, operating and administrative cost and CapEx, we will continue to see non-cash foreign exchange gains and losses that have a significant impact on our bottom line. For example, in the first half of 2013, we recorded foreign exchange losses of about $12.6 million compared to foreign exchange gain of about $1.5 million in the first half of 2012. 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 balance sheet items at the FX Poland level. These non-cash gains and losses will continue to vary over time as the exchange rate between the U.S. dollar and Polish zloty fluctuate.

However, these non-cash items have no impact on our revenues, cash flows or ability to execute on our capital budget. We were pleased to announce early last month that we've finalized our new reserve based lending facility. Our new facility comes with a $65 million borrowing base and gives us the ability to increase that number during the course of the facility up to $100 million.

We were excited to have BNP Paribas’ Geneva office lead the transaction as they are the clear market leader in central and eastern European reserve base lending just as we were pleased to see ING's continued commitment to the company.

Compared to our previous lending facility, we were able to drop our upfront fees by about 30%, reduce the interest rate by 6%, the commitment fee by 25% and increase the borrowing base by 18%; every little bit helps. I might add that all $65 million is available to us now. In addition, beginning with our next 10-Q, we will remove the current portion of long-term debt, which will in turn increase our working capital.

I’ll wrap up with a few final words about our cash flow and liquidity and capital resources. Net cash from operating activities was $4.2 million compared to $4.5 million last year, a slight decrease due to our higher exploration spending this year. As of today, we currently have $23 million of borrowing capacity in addition to our $24 million cash balance and our expected higher cash flow beginning later this year.

All this is available for ongoing projects in Poland. At the beginning of 2013, we announced that we expect to make $60 million to $70 million of capital commitments this year. We believe we are on track to make those commitments.

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

David Pierce

Thank you, Clay. Good afternoon. I am David Pierce, CEO of FX Energy, thanks for joining us. I am going to start out today with a list of our near-term field operations in Poland. We’ll start with non-Fences operations then look at the Fences in more detail.

Earlier this year, we drilled a discovery well, the Tuchola-3K in the Tuchola block of our 100% owned and operated Edge concession in Northern Poland. This discovery grabbed our attention. Even though we only did a short production test, we saw no pressure drop during the flow test itself and we did not see a boundary effect within the 1,500 meter radius of investigation.

We are giving the Tuchola project maximum priority because we need more data to properly gauge its significance. We have now completed field acquisition of nearly 60 square kilometers of 3D seismic in this area. We plan to acquire a total of approximately 110 square kilometers of 3D seismic in this area over the next several months but we’ve already moved the first 60 kilometers on to processing and interpretation in order to accelerate the drill site selection process.

We hope the seismic interpretation will quickly yield one or more drillable locations. If it does, we have time to get one or two wells started there yet this year. On the other hand, locations may have to be pried out of the seismic with detailed and reiterative processing and interpretive work in which case drilling could fall into next year.

In any event we are quite excited about the real possibility of opening a significant new exploration play in Poland. Moving now to our 100% owned and operated Block 246 concession, late last year we drilled the Frankowo-1 well. The downhole data was positive both for hydrocarbons and for reservoir quality in the Main Dolomite and the Rotliegend.

We believe the elements are in place for another possible significant exploration play. We have now completed field acquisition of about 80 square kilometers of 3D seismic in the Frankowo area. The focus of this seismic is the Main Dolomite and the Rotliegend in the south east quadrant of the block.

Now, we have given priority to the Tuchola seismic so we may not have the Frankowo seismic interpreted in time to get a well started this year but a well this year is possible. In any event, we will be excited to see what the seismic reveals and get our first targets tested.

Turning to the northwest quadrant of this same Block 246 concession, we should be finished next week on drill site preparation for the Gorka Duchowna-1 well. This will be a 2,700 meter test of the Main Dolomite and the Carboniferous. Gorka Duchowna-1 is located about 5 kilometers or so south of wells in the Bronsko and Koscian fields where PGNiG has discovered or reported 1 trillion cubic feet of gas. Rig up and spud should be before the end of this month. We should be in the Carboniferous in the fourth quarter.

I’d like to draw your attention now to the Fences concession. We will stay on this through my remarks. In the Fences Concession drill site preparation is now complete on the Lisewo-2K well. We should be rigging up next week and then start drilling. Lisewo-2K will be our second well in the Lisewo structure, originally discovered two years ago by the Lisewo-1 discovery well.

We will be drilling to a depth of nearly 4,000 meters on a 3D defined Rotliegend structure. We should reach the Rotliegend target horizon before year end. This well is expected to accelerate production from the Lisewo structure, but not add new reserves. To that end, we are already working on production design and permit matters even though we have not yet drilled the well. Elsewhere in Lisewo area, drill site preparation should begin next week on the Szymanowice-1 well. Szymanowice-1 is expected to spud within the next two months and we drilled nearly 4,000 meters, target is a large structure immediately southeast of the Lisewo field.

Szymanowice should provide clues about how these structures connect with each other if they do and about how they feel. These are important issues and could have a big impact on how much potential we actually have in the Lisewo area. We think it could be significant. We should reach the Rotliegend about year-end.

Now we've been working closely with the operator, the Polish Oil and Gas Company or PGNiG on both the technical and management levels to accelerate the Lisewo project. In addition to the four wells already drilled or about to start, PGNiG is moving ahead with environmental and concession permit work on a 10 well program. If the permits and approval come through in time, we might see drilling start before year end on the first well of this new program. Otherwise, the next Lisewo area well after Lisewo-2 and Szymanowice-1 will be in 2014.

Either way, both companies are now focused on this project area and I believe we will see a robust level of drilling and production activity over the next 30 months. Outside the Lisewo area, in the western part of the Fences concession, we have an existing well called Zaniemysl-3. This well drilled a Rotliegend structural path and has produced about 10 million cubic feet a day for five years straight, but in recent months about halfway through its seven year production, the rate started to fall, the well is watered out and it’s current downhole location and is now shut-in.

Last year’s reserve report estimated the older recovery for Zaniemysl-3 at about 25 bcf of gas proved about 30 bcf of gas on a 2D basis. The well has in fact produced 20.7 bcf of gas, 4 bcf less than the proved estimate and about 9 bcf less than the 2D estimate. There should be more reserves in this structure although we cannot access them at this downhole location.

So we have a plan, there are three partners in the Zaniemysl well. This is the one well in the Fences, where the FX interest is 24.5% rather than 49%. We and the operator planned a plug back and sidetrack to another downhole location or it may be possible to recover several billion cubic feet of additional gas at relatively low cost.

We are prepared to move quickly on this operation, but we do not yet have the third party signed on, so I can’t say right now whether drilling or side tracking will start before or after year end, but I think the Zaniemysl-3 sidetrack will a relatively near term operation.

And now the final item on our list of near term field operations. We have completed construction on the Lisewo gas pipeline and we are nearing completion on the Lisewo facility itself. We anticipate to start a production around the end of next month and meanwhile we expect to start construction before the end of August on the Komorze plant and pipeline which will tie in the Komorze-3K well into the Lisewo facility. We have also started the design and permit process to bring gas to the Lisewo facility from the two wells that are about to start drilling in the Lisewo area that is Lisewo-2K and Szymanowice-1. We were assuming that these two wells will be commercial but of course we cannot know that until will be drilled and tested.

I think this list makes the point that this is shaping up to be our most active year ever. We have already drilled two new wells this year and tested the Plawce well. We will start drilling three more wells in the next month or two and it’s possible that one of the three additional wells could get started later this year.

We also anticipate first production from two new wells this year and we started the design of permit work to bring another two wells online next year even though we haven’t drilled them yet. All of this together makes for a big step up compared to last year’s activity.

Obviously most of this year’s momentum increase comes in our core Fences concession, I would like to talk for a minute about the opportunity that we think remains in the Fences concession. We feel like we are in a good place in the Fences. As a reminder this concession covers 850,000 acres a large and very prospective area. We have been fairly successful drilling conventional Rotliegend structural traps, nine commercial discoveries at a 13 wells or a 69% success rate.

As of the end of last year we had discovered just under 200 bcf of gas rose in the Fences concession. This works out to a gross of approximately of 21 bcf of gas with the present value of about $72 million per successful well.

Production has grown at a fairly steady pace since 2006 and should continue growing this year and next based just on the wells we’ve already drilled. In 2012 the Fences produced net revenues of more than $30 million. Looking backward, the Fences has been a very good place for us to invest.

In the near term we are stepping up activity specifically in the Lisewo area. We've drilled two of the structures successfully, in just a few weeks we will have two rigs drilling in the Lisewo area, and we're within weeks of first production from Lisewo.

Momentum is certainly building. While I'm not in a position now to talk about the number of wells we might drill next year, I do think the Lisewo project area alone will have a positive and welcome impact on our level of activity over the next two years.

The Lisewo area gives us drill sites for the next couple of years or so, but we see more opportunity beyond that outside the Lisewo area. We have a 190 square kilometer 3D project called Miloslaw, that has finished processing and is now being interpreted.

We also have a 225 square kilometer 3D project, Donatowo-Rusocin, that is now in process, I think it is reasonable to expect that we'll find new drilling targets from these seismic projects. We're particularly excited about the Miloslaw project, which covers the northwest part of the Fences concession where we previously have identified the Miloslaw and Plawce East. The main point is that we have a good backlog of seismic that should yield additional drilling locations.

Beyond that well 3D seismic now covers about half of the Fences concession, so we still have the other half yet to explore. We expect to continue acquiring new 3D seismic for some time to come. On top of that we don’t think we are finished with the existing seismic. For example we are in the middle of a project to reprocess all of the existing 3D seismic as if it were a single grid.

Given the advances in seismic processing and interpretation that we see every year, we think we might be able to get much more out of this older 3D seismic, such as in the Sroda-Kromolice area and the Winna Gora area. Overall, we think the Fences concession will continue to yield lots of opportunity for a number of years.

Within the Fences concession itself, as well as in our other concessions in Poland, our goal remains to find areas where we can explore at reasonable cost with a reliable risked expectation of developing significant commercial reserves. This looks to be an eventful year. We have three wells about to spud, two more wells to start production and perhaps as many as three more wells that could start drilling later this year. The multi-well program in the Lisewo area is the biggest relatively low risk project we have yet undertaken and could give us good increases in reserves and production over the next 30 months.

Our follow up work to the Tuchola and Frankowo wells holds significant potential and could open up new production areas for us. We are pleased to have these prospects and the capital resources that support our increased momentum. We thank you for helping us get here. Operator we can take few questions now.

Question-and-Answer session


Thank you. (Operator Instructions). We’ll take a question from Jason Gammel with Macquarie.

Jason Gammel - Macquarie

I just want to do a little bit number of reconciliation here, so whoever wants to take it that’s fine, I am trying to first of all maybe get to Clay’s comments about the 60 million to 70 million of capital commitments for this year. Could you maybe talk a little bit about how much each of the two Fences wells that you about to spud are projected to cost and then maybe also the Block 246 well at Gorka Duchowna.

And then also just in terms of production numbers, David, do you think you will see first production from Komorze this year or do you think that will be more of a 2014 event and can you talk about the contribution that you saw from Zaniemysl well in 2Q, just to try to figure out what it will do to 3Q and 4Q estimates.

David Pierce

Back of the envelope, each of those wells you mentioned is going to be about $5 million net to our interest, the Fences wells actually cost about 10, we pay half of the 100% wells and this will be true in the Tuchola area as well, should be about 5 million, a little (inaudible) of that. Can you remind me your second question?

Jason Gammel - Macquarie

Just trying to get around to some of the production numbers, so do you think you’ll get first production from Komorze) this year and then the Zaniemysl contribution.

David Pierce

Komorze, yes, we do expect to see it come on this year, it may be quite late in the year and may not make much of a contribution, but we do expect to see it on. And then we expect to see these next two wells, assuming they are successful online next year and I don’t’ have a quarter date for that yet, but they should go on pretty quickly.

Zaniemysl recently has been contributing about a 0.5 million a day net to our interest; this is over the last several months. We only have a little less than a quarter interest in that field.

But once we get our partner ready, we are just going to do a simple side track and the greatest thing about it is that we don’t have to do any production permitting because it’s the same old well. So as soon as we get the side track done, assuming that we get in to a new area where we can produce the remaining gas, we should be in production fairly quickly. But that said partner negotiations could drag on a little bit. But we’ll just have to see on that one.

Jason Gammel - Macquarie

And may be just one more quick one and then I will get off and let someone else ask a question. But if you are able to actually identify well site in the Tuchola area, do you think there will be rig availability.

David Pierce

Yeah, we are on top of that and we expect to be able to come up with two rigs. I can’t see us trying to spud more than that yet this year. But we're real focused on trying to get a couple of wells started and at least to one of down and testing before the end of the year. As I said, the seismic could be problematic, we don't know yet. But in the not too distant future we will know and all I would guess that within a couple of months we can provide better guidance on that. But it is our number one priority.


And we’ll take a question from [Phil Dodge] [ph] with Noble Financial.

Unidentified Analyst

Good afternoon and thanks. David could you discuss are there any further plans for the [inaudible] prospect, whether you're still evaluating it or whether it's disappointing?

David Pierce

No, [Plawce] [ph] was disappointing; we had a neighbor to the North, if you remember, we drilled a couple of horizontal wells and vertical wells. And the biggest problem they seem to encounter is that in each of these wells they would run into fractures that brought water up from below. Now the [Plawce] [ph] well had close to 500 meters of tight Rotliegend sand and we ran a drill stem test and did not see any water. So at the well bore there wasn’t any water. But the frac job clearly took us out far enough that we did encounter fractures that apparently are bringing water up from quite some distance below and the water just overpowers any gas that you might get out of it. So to me it's just doesn't seem to bear any further serious investigation. Now we do have that Grundy well over on the east side of the concession which had an even thicker section of even tighter Rotliegend rock and we think there is a quite band that goes across the northern part of the concession. I am not smart enough to rule out that whole area at this point but I will say it is probably about as low on my priority list as it could get.

Unidentified Analyst

Nothing soon. And then on Zaniemysl if you partner the sites not to participate I guess, there are three possibilities, sidetrack is drilled or you go to a third or you go to a half? Do you favor or give any of those three at the moment?

David Pierce

I think if we have the opportunity, we would increase our interest as much what’s available. Certainly, we want to go ahead with the operations quickly as possible and we're prepared to step up and I don't know. We haven't had that discussion yet with the PGNiG and I don't think that’s where it will end up. I suspect that they will come into it because I mean, every operation has its risks and certainly there are risk in this operation but if you look at the bang for the buck on this, it's pretty good. So we would expect to be on this deal and with as much as interest as the situation allows.


At this time, we will move forward and take a question from Joel Musante with Euro Pacific Capital.

Joel Musante - Euro Pacific Capital

I just had a question about the Gorka well. I haven't heard you talk about it a lot and I was just wondering how deep it is and what do you expect, what kind of target you are looking at and open for there?

David Pierce

Sure. Let me kind of respond to that in that Block 246 concession, if you look at the northwest corner of it, we’ve got two big fields to sit right next to it. And Bronsko and the other one Koscian and they are producing the Main Dolomite, but they appear to be producing Carboniferous gas.

In addition some of those wells actually penetrated the Carboniferous and saw gas in the Carboniferous. So we will post there, there is not a ton of seismic out that way and there just isn’t enough whole information to let us take the next step and so that’s what we need to do, this is rank well get well, based on the enclosed Carboniferous production. We want to see what's in the upper few hundred meters of the Carboniferous, typically its sands and shells and if we can find sands to trap there, then we would be on to something.

If we do see some positive data, I’ll rather suspect that first thing we do, like we have in other places just go back and get some good seismic, but in this situation the first step for us is the down whole information. So you got a pencil in a fair amount of risk on this well, a lot of risk on this well, but as a project its got some good things going forward. I think we are high in the Carboniferous, we are high to those two fields and we will be looking for Main Dolomite there as well.

So we will see what we see but or let’s say the (inaudible).

Joel Musante - Euro Pacific Capital

Are you looking at 2D seismic and if you are, do you see any other structures in the area that may this attractive in terms of having running room going forward?

David Pierce

We don’t see a structure here. We are on to 2D seismic. We only shot a couple of lines out here ourselves. There is some older seismic that we [noticed]. So we have a general sense of lay of land but we don’t have anything that any of our technical people would call real seismic at this point other than a few 2D lines. So we are not looking at structures either at this location or nearby.

If we see traffic in the Carboniferous, yeah, it could be structural but like its not it would be stratigraphic and because we got a shale in those (inaudible) right above it. So its really, we are gathering information at this stage and if I have the answer to all your questions we probably wouldn’t be drilling this well, we would 2D seismic and be better able to pick our targets.

Joel Musante - Euro Pacific Capital

Okay and how much do you expect the well to cost?

David Pierce

It will be under 5 million but let’s call it, its easy to remember and it’s a round number.

Joel Musante - Euro Pacific Capital

Well, that’s good. Just to move to Lisewo, the satellite structure that are around there, you have another aside from the two wells you are drilling, you probably have another eight wells or so that you can drill around there. But it’s my understanding they had to get some permits before you drill those and I just to see if and if I can get an update on how that process is moving on?

David Pierce

Yeah. The next two wells that we're drilling in Lisewo are the final two under the current concession permit. So PGNiG has supplied for an amendment that would us an additional 10 wells to get drilled here. I think we've already selected 8 locations that process started at the beginning of this year and we expect to see it completed and approvals in hand before the end of this year. How much before the end I don't know. If it was significantly if it’s in the couple of months could we get a well in perhaps.

We are scheduling technical meetings with PGNiG on a pretty regular basis now to go over the seismic in this area, our interpretation of it, our estimates of gas in place, our prioritization of which of these structures to drill in and which order, in some cases, we may need more than one well [unstructured]. So it is now we're kind of treating them as if it were a single field at this point.

You can call it a field, you can call it a project, but we're kind of focused on the whole thing all at once. And what we're hoping is to have the appraisal and development of this area largely behind us by the end of 2013.

Now I'm talking about drilling now. But production is not lagging far behind; I don't think we'll see any wells in Poland takes us at least two years to get from a successful well to first production and 2.5 is not unreasonable. Here in this concession I think we can see with the Komorze well that we're cutting that number about in half and I think we can do at least that well with subsequent wells. So I think we will see a lot of activity up here the balance of this year and in to the next two years.

Joel Musante - Euro Pacific Capital

Okay. And so going forward, you said you were also evaluating some other areas within the Fences block and is that also going to be an issue having the permits in those areas as well or is that, once you get this surround a permits, you are good for those areas as well?

David Pierce

Well, in other areas, I mean it's hard to speak universally, but in general we have permits available under the existing concessions. We try to stay ahead of that game. We're looking at lots of different areas in the Fences and I think although most of our attention is going to get focused on Lisewo. For example, we've got a well that’s right on trend with the Zaniemysl Roszkow well, we show a little 3D there. I didn’t mention that but earlier this year and I think we will see that well get drilled next year. So we will continue to be active away from the Lisewo area as well but not that much compared to what we're doing in Lisewo.

Joel Musante - Euro Pacific Capital

Okay. Well, that’s all I had, and I appreciate it. Thanks.


We will take question from Ray Deacon with Brean Capital.

Raymond Deacon - Brean Murray, Carret & Co.

I was wondering if you could talk a little bit more about the progress of infrastructure conversations over Lisewo and once you -- do you wait until these two wells are drilled and then make some decisions or do you have any from like how much gas you might be able to move out of the area?

David Pierce

We built the Lisewo facility and the pipeline that runs out of there, with the pipelines all done and we have sized that though in the expectation of been able to take all the gas that we can produce based on our current estimates of what's contained in that area.

The Lisewo facility itself is big enough that on a modular basis we can add terminals for each well that we bring on. So the capital expenditure is going to be much lower with subsequent wells and time to hook up is going to be much lower, because for example we are about to drill Lisewo-2 and Szymanowice-1, but we started the permit work on the production side of that of those wells some months ago anticipating they will be success, well they may not, we certainly can’t guarantee that they will be, but that’s our expectation and so to save time. We are doing some work early.

You can measure the size of the structure and make a pretty good guess about what you think you might recover from it. And on that basis go ahead and do a lot of the design and permit work ahead of time. It was still going to be six months to a year on each of those getting demand, but once we get them drilled and down then we will look at our permit process at that point and be able to give some good guidance on when each of those would come on and we will repeat that process as we drill other wells in this Lisewo area.

Raymond Deacon – Brean Murray, Carret & Co.

Right. So when you say you’ve sized the facilities for what’s contained in the area, do you mean in the one well that’s been or in mean for the 10 prospects that ultimately get drilled or is that one you mean?

David Pierce

We can certainly cover half of those prospects. We get some completely unexpected production rate. It would be a simple matter to turn that pipeline but that said we also have in mind the possibility of tying another or building a new line out of the Lisewo facility and head in the different direction to good sized power plant that if we have enough reserves we might want to go there.

So we had liked two or three more wells drilled, have another serious look at the seismic once we have more downhole data. And so maybe in a mid next year sometimes like that we might do some revised estimates of what we think we have there and then (inaudible), but our goal is of course has been to get production coming as quick as we can, cover at least a handful of these wells and then if there is something more or better to do down the road we can do that as well. It turns to be bigger than we currently think then we might want to do some work.

But I don't think any of that is going to incur any significant delays because it's going to take a couple of years, at least. So I think we'll be through the end of 2015, just drilling wells. As we go we will be hooking this up to the existing Lisewo line. As I mentioned it's sized to handle at least half of doze of these wells.

Raymond Deacon – Brean Murray, Carret & Co.

Got it. And just one more question, with thoughts on partner, are you thinking at all about looking for partner on the Edge concession or 246 or Block 229?

David Pierce

No, no and possibly. We really like the Edge concession, we really like the 246 concession. 229 is wilder and it's more expensively deeper, and potentially pretty large. But if we had somebody who wanted to go there and pay for some seismic in a well, we certainly talk about reducing our interest for that. And I'm assuming here of course that we continue to have relatively lower risk places to put our money. And with another well or two in the whole area that could easily qualify as a lower risk area at that point. We're not there yet, but we could.

On the Rotliegend, we've got a fair amount of experience in that, it wouldn't take us long to feel very comfortable with that area and the same is true with the (inaudible). It's a well understood play.


Next we will (inaudible) Williams with Sidoti & Company.

Unidentified Analyst

Just had a few questions couple of mine are already answered. In relation to, I guess going back to Tuchola, should we be looking at that as more of a first half 14 story or do you still some pretty significant chance of some results in the behalf of ‘13 and also just in terms of the seismic, is that primarily, I guess there is primarily 3D seismic being run there?

David Pierce

Yes. What we have shot there now is 3D seismic. We will continue shooting 3D seismic and we're actually in the permit process to add more 3D seismic to the pond. So I expect to see a shooting seismic there, clear through the winter. Maybe a little off and on but all of the peaks. At this moment, we can conceivably get a well drilled and tested this year. I am not saying that’s going to happen but it can happen if the seismic yields results fairly quickly and that’s a greater unknown. We don’t know what our site will look at because we're looking in a new area.

We have some existing 3D, we have some 2D. But we're really trying to fine tune this stuff because we think we got something quite interesting there, if it goes slick. By the end of September, we will know one way or the other, whether we're going to see test results this year or whether it will fall in the first quarter of next year. That’s about it as good as I am telling you. We are doing everything we can to make that happen quickly, if it doesn’t, it doesn’t and nobody is going to kill over dead over it but we should try.

Unidentified Analyst

Okay. That’s fine, and also I guess you can just talk briefly about the oil field services business or revenues that would look like moving forward in ’13 as well?

David Pierce


Clay Newton

That is so hard to predict, because it’s completely a function of the activity that’s going on in northwestern Montana, we are doing. It’s a 100% related to drilling activities that we are doing for other people not for ourselves. And when drilling is active then our services group is fairly active and when things are quite, quite. So you can see the first half of this year was fairly quite compared to last year. I can tell you that we are drilling right now for some folks up there. So Q3 should be quite a bit higher than Q1 and Q2, but beyond that at this moment it’s really difficult to say.


We have time for one more question, it will be from Daniel Mittag with Oppenheimer & Company.

Daniel Mittag - Oppenheimer & Company

Yeah. Lot of my questions were answered. Who is your, whose the third-party in Zaniemysl?

David Pierce

Its [CalEnergy], I think they are in Australia now, originally they were in the UK, they are the subsidiary of Berkshire Hathaway via MidAmerican pipeline I believe. And they were in Poland, they came in, I think about the same time we did, they farm-in to a little 45,000 acre chunk of the Fences back when we didn’t have the money to finish up farm-in obligations and they paid for the Zaniemysl well.

So that’s about what they own in the Fences is a 24.5% interest in this little block around Zaniemysl and if look out in the investor presentation, there is a little map that shows you what piece that is. They drilled outside the Fences own their own, they drilled a number of wells in Poland.

I don’t believe that they have production other than the Zaniemysl well.

Daniel Mittag - Oppenheimer & Company

And then on the Tuchola, would you anticipate any Edge concession, any kind of results in terms of may be drilling a second well before the end of the year?

David Pierce

Like I said, I think our goal is to get a couple wells started before the end of the year and try to get one of those down to where you are testing before the end of the year, that’s the goal and it is an achievable as things stand today. But in a month’s time we will be looking at the seismic, we will be doing the interpretive work and it just depends on how challenging that is. If it takes a longer time then as the clock runs, we still may get a couple of wells started before end but not finished.

And may be the seismic says there is nothing to do here. No, I don’t think that’s going to be the case but I certainly can’t guarantee that we are going to find a giant field her, but…

Daniel Mittag - Oppenheimer & Company

Is this more complex seismic then say what you have in Fences?

David Pierce

The seismic is higher density, higher full seismic, so it's a little better quality seismic. But the issue is not that, the issue is that we are not looking at the Rotliegend, the Rotliegend is pretty simple to deal with on seismic. It is such a dramatic shift, from the Zechstein right above to the Rotliegend, that it's and my technical team will forgive me for saying this, but it's relatively easy. The challenge there is to get the depthing just right and that is the big challenge.

And here we're dealing with something quite different and we don't really know yet, how big a challenge that's going to be, because part of it, we want to see if it's possible with the seismic to actually appear into the reservoir itself and distinguish places where we have good reservoir quality versus places where we don't. And I don't know whether that's going to be possible, nobody does yet, we just have to start working with it. And do what we see. So I'm anticipating that by the end of September and better right this down or else somebody will yell at me, but I would expect that we would have some guidance on the timing in this whole area by the end of September.

Daniel Mittag - Oppenheimer & Company

Okay. Thank you

David Pierce

And thank you all for being on this call today, appreciated. Things are going very well for us and staking. Operator, thanks. Good night.


Ladies and gentlemen, this does conclude today's conference call. Thank you all for your participation. You may now disconnect.

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