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ZaZa Energy Corporation (NASDAQ:ZAZA)

Q2 2013 Earnings Conference Call

August 14, 2013 10:00 am ET

Executives

Jay Morakis – Investor Relations-JMR Worldwide

Todd Alan Brooks – Executive Director, President and Chief Executive Officer

Thomas Bowman – Executive Vice President-Evaluation, Geology and Geophysics

Ian H. Fay – Chief Financial Officer

Analysts

Christopher B. Cook – Zazove Associates, LLC

Philip Dodge – Noble Financial Group

Robert Kecseg – Las Colinas Capital Management, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 ZaZa Energy Corporation Earnings and Operational Update Conference Call. My name is Alicia and I’ll be your coordinator for today’s call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jay Morakis, Investor Relations. You may proceed, sir.

Jay Morakis

Thank you. Good morning and welcome to ZaZa Energy Corporation’s second quarter 2013 results and operational update conference call. Today’s call is being webcast on our website, www.zazaenergy.com and can be accessed in the Investor Relations section.

With me this morning are Todd Brooks, President and Chief Executive Officer; Ian Fay, Chief Financial Officer and Thomas Bowman, Executive Vice President of Evaluation, Geology and Geophysics.

Before we begin, I would like to remind everyone that statements made on today’s call and webcast may contain forward-looking statements as defined by the Securities and Exchange Commission. Forward-looking statements can identified by words such as anticipates intense, plan, seeks, believes, estimates, expects, forecasts, and similar references to each periods.

Any statements made are subject to a number of assumptions, risks and uncertainties, many of which are beyond the company’s control and which may cause actual results to differ materially from those implied or expressed by those statements. For a list of risk factors, please refer to our 2012 10-K and 2013 first quarter 10-Q filed with the Securities and Exchange Commission.

At this time, I would like to turn the call over to ZaZa’s President and Chief Executive Officer, Mr. Todd Brooks. Todd?

At this time, I would like to turn the call over to ZaZa’s President and CEO, Mr. Todd Brooks. Todd?

Todd Brooks At this time, I would like to turn the call over to ZaZa’s President and CEO, Mr. Todd Brooks. Todd?

Todd Alan Brooks

Thank you, Jay and good morning everyone. I will start with a few comments and then hand the call over to Ian and Tom. After that we will be happy to take any questions that you may have.

The second quarter was another busy quarter on the transactional front as we continue to streamline this company and focus on our Eaglebine/Eagle Ford East play.

In April, we commenced the first phase of our Joint Exploration and Development Agreement with the large independent to further develop this acreage. As you are aware, we have JV drilling operations underway on our relatively large Eagle Ford East block. I know everyone is waiting for information about these operations. So to put you all at ease, I want to say upfront that I will not be releasing any interim or final results on any of these wells on today’s call. We expect information regarding the results of our first JV horizontal well will be available in very near future.

We also closed on a portion of our Moulton acreage for $9.2 million towards the beginning of the quarter, and then worked with the secondary and different buyer who is interested in paying a premium for the rest of the acreage. Although the group attempting to pay a premium was unable to ultimately close, we successfully closed and funded with the original purchaser of the first block on July 26, 2013 after using the remainder of the quarter to run an open sale process and negotiate the terms of the second transaction. This second transaction closed for $29.3 million.

Given the upcoming extension costs and lease expiries, we believe that this was a good price given the current A&D landscape. Also of note the second transaction had an effective date of July 1, whereas the first transaction had an effective date of January 1. The oil revenue we received between these two dates was approximately $4.1 million.

Our strategy with our legacy Eagle Ford assets is clear and dates back to our first JV’s division of assets negotiation in July of 2012. Maximize value by obtaining as much cash and acreage as possible as we divided assets in the Eagle Ford with our former JV partner and exited the Paris Basin.

Clearly, it was the correct decision to exit this basin when we did given the current political landscape in France as relates to unconventional development.

Upon accomplishing this, the goal was to maximize the value of those legacy assets through sale or JV because the senior secured lenders required pay down based on the concept that their collateral package was changing.

We proceeded forward with an eye of on the A&D landscape and timing around expiries on the acreage blocks as we embarked on a proof-of-concept drilling program in the Eaglebine/Eagle Ford East with the goal of securing a JV partner to help develop this substantial asset.

In Q2 of 2013, we executed on this plan by securing the JV partner and by negotiating two legacy asset sales. We will continue to rationalize these legacy assets as planned through outright divestiture or sell down joint ventures as we deleverage, repay our senior secured note holders, and focus on building and developing our Eaglebine/Eagle Ford East blocks alongside our joint venture partner.

Our technical view is and has been that the Eagle Ford East with its thickness, rock properties and stacked pay is likely to be substantially superior to our legacy Eagle Ford assets in terms of ROI and EUR. The Eagle Ford East is our core asset from which we will build our production and reserve base.

We are currently in discussions with multiple parties on our Sweet Home acreage position for both part or all of this 28,000 acre block. We have also entered into discussions with the potential buyer for part of the Hackberry, Oakland block in the Lavaca County.

In the Eaglebine/Eagle Ford East, I am pleased to share that the initial phase is going as planned, and we fully expect timely drilling on the first three wells. The first well was drilled as a vertical science well that will ultimately be completed at a later date after its use as a micro-seismic monitoring well is complete.

Current pro forma for all three phases, ZaZa will hold a 25% interest in 83,000 net acres, up from 73,000 net acres as reported on our Q1 call. Our strategically located retained acreage comprises approximately 18,000 net acres and we are now evaluating a joint venture with a large independent on this block as well. In spite of not yet marketing this asset, we have received a number of serious inbound increase. That is as much I can say at present about this important retained asset, aside from the fact that I am optimistic.

Actually I use the word excited about the ultimate disposition of this acreage. I report to discussing this in more detail in the future, along with our JV well results, for which we expect some information will be available in the very near future. Speaking of details surrounding JV well results, at this point, I’d like to share our disclosure policy moving forwards in the joint venture.

On the first few wells, it will be our policy to disclose a one point test on a well that comes online along with a 30-day IP approximately 30 days after such well comes online. This one point test will be an average rate of production, but were 72 hour period, once the joint venture has determined the optimal choke size on which to flow the well back. After these first few well results have been disclosed, the company will make periodic operational updates as we deem to be appropriate, and in accordance with SEC disclosure requirements.

This is truly an exciting time for ZaZa. We’ve streamlined the Company, executed on our plan to sell legacy non-core Eagle Ford assets and have JV drilling operations underway. We’ve partnered with a world class operator on a substantial portion of our Eagle Ford East block thus positioning this company to capture a relatively large prize. I look forward to sharing initial well results and production updates from the first two wells in the very near future and throughout the rest of this year.

In the near term, we see ZaZa executing on a second cash-and-carry JV on a retained acreage, whereby the company ultimately seeks to achieve a 25% interest in an overall Eagle Ford East acreage block that is 100,000 net acreage plus in size.

Longer term, we will grow this company by utilizing our strong technical team with a balanced eye on production acquisitions and opportunities that involve first or early mover advantages.

ZaZa has great assets and great people and we’re poised for growth, as the single largest shareholder with 22,300,000 shares and counting, I am all in and I am happy to be in the front as we build this organization into a company of true substance.

I will now turn the call over to Tom for a technical and operational update.

Thomas Bowman

Thank you, Todd. Good morning to everyone on the call. We’d like to start with the technical and operational review of our recent activity, and provide a brief update on the data acquired from our proof-of-concept vertical wells drilled in 2013. After doing that, I’d like to talk a little bit about the status of the increased industry activity near our remaining Eagle Ford assets.

But first off, I’d like to acknowledge the efforts of our land and field operation staff on our recent joint venture transactions and divestitures related to the preparation, due diligence, well site quality control and delivery of the properties and documents, much of this goes on from behind the scenes, but the team delivered the results smoothly, timely, safely, and cost effectively in every case and we’d like to add that to our thanks.

Let’s start with the Eaglebine/Eagle Ford East properties. As you know, it’s slightly premature to share specific details on the operations activities of our partner in the Eaglebine/Eagle Ford East areas, but as Todd mentioned, drilling is going along as planned and we look forward to completing the first of what we hope to be many wells in the joint venture.

As previously disclosed, ZaZa’s first three operated wells in the Eaglebine/Eagle Ford East area were designed to gather the information needed to evaluate the multiple reservoirs targets in the upper and lower cretaceous. This includes the Eaglebine/Eagle Ford East, and this was to confirm the commerciality and focus on the best combined development strategies.

Our first proof-of-concept well was Stingray A-1H, which was a technical success and the data confirmed our early prognosis for potential of the Eaglebine and the Eagle Ford East plays in Northern Walker County. ZaZa feels gathering this advanced technical information together with our first phase of drilling with our partner will unlock the potential of the Eaglebine/Eagle Ford East.

The lower cretaceous fractured carbonate play referred to as the Buda Rose contains a stacked Buda, Georgetown, Kiamichi, Edwards, Paluxy and Glen Rose formations, which are now routinely perforated fracture stimulated and commingled in vertical wells.

ZaZa has nearly completed two recent proof-of-concept vertical wells, the Stingray reentry and the Commodore, both drilled to the top of the Glen Rose and both had significant indications of oil and gas on the mud logs while drilling.

After the initial drilling of the Stingray Eaglebine test, the well was reentered and drilled vertically through the lower cretaceous section below the Eaglebine, and this well was completed as a vertical commingled well. Initial production tests were conducted with daily production ranging from 11 to 30 barrels of oil and 730 and 1,939 mcf a gas per day, utilizing limited processing facilities.

After production facilities were completed, the production results of the initial tests were 21 barrels of oil and little over 1,005 mcf a gas per day. Based on these results, the Company is evaluating next steps for the Stingray reentry, which may include completion and testing of additional vertical zones and/or drilling a lateral out of this existing wellbore.

ZaZa’s second well drilled in the Eaglebine/Eagle Ford East area is the Commodore A-1 vertical well. It was designed to compare production from two different groups of lower cretaceous zones in Northern Walker County. The well focused on the deeper zones in the well, testing production from the Upper Glen Rose to the Edwards.

Two tests of these resulted in daily production ranging from between 35 to 54 barrels of oil and 956 and 1,073 mcf of gas per day. Next, the Company set a plug above these zones for purposes of isolating lower formations and proceeded to complete a series of upper zones ranging from the Georgetown up to the Buda.

Tests on the upper zones resulted in daily production results from 10 to 14 barrels of oil per day, and 650 to 830 mcf of gas per day, but this also include over 1,100 barrels of water per day. Based on these results, the Company is evaluating next steps for the Commodore well, which may include removing the plug and commingling production from the upper and lower zones. If it is commingled, we would expect a cumulatively production to be in the range of 45 to 68 barrels of oil per day and somewhere between 1,600 and 1,900 mcf of gas per day. Other options for this well may include drilling a lateral out of this existing wellbore into another formation.

I’d like to add that the production from both the vertical proof-of-concept wells are in line with the production from initial wells drilled by outside operators. Moreover, the production from these wells is limited, but the limits are result of the temporary facilities used for the production test with the centralized facilities to handle the carbon-dioxide and the water disposal, these wells can be produced, and are capable of being produced at much higher rates.

Now moving on to our other Eagle Ford assets, we continue to monitor all of our remaining Eagle Ford assets. These including our Sweet Home, Hackberry, Oakland positions in the central portion of the Eagle Ford trend. The ZaZa Boening well results are changing the understanding and adding potential to the Eagle Ford trend, both behind and in front of the Edwards Shelf edge. This well is expanding the Eagle Ford trend across our acreage position. As a result of the increased understanding and increased activity levels, we expect to capitalize on our significant lease holdings in this area in the near future.

In addition, recent industry activity in the immediate area continues with leasing the midway Navarro and the Wilcox trends adding even more value to our current leasehold positions.

As a company, we continue to monitor our current acreage positions, and work up full technical assessments across all of our current and our future acreage positions.

Now I’d like to turn this call over to Ian Fay, our CFO.

Ian H. Fay

Thank you, Tom and good morning everyone. I will begin today with a review of our three and six months results for the periods ended June 30, 2013 and June 30, 2012. I will then move on and provide updates on our balance sheet as at the end of the second quarter as well as on some other further developments, since quarter end.

In the second quarter of 2013, we reported total revenues and other income of $2.4 million versus $3.1 million reported for the comparable 2012 period. This decrease is primarily due to the loss of $2.5 million of Cotulla revenues as a result of the division of assets from our former joint venture. Partially offset by additional revenue realized from the increase in Moulton production, from the Crabb Ranch A-1H well, which is 1.1 million production from the non-op Ring Unit wells, which is 500,000, and the Boening A1H well in Sweet Home.

For both of the six month periods in 2013 and 2012, we reported total revenues and other income of $5.2 million a result of offsetting factors. On one hand, we lost approximately $4.1 million in Cotulla revenues, as I mentioned again related to the division of assets with our former JV partner, but this was offset by a $2.6 million increase in Moulton production from Crabb Ranch, $1.1 million increase in production from the Ring Unit wells and $400,000 increase from our Boening well in Sweet Home.

Operating costs and expenses for the second quarter of 2013 were $107.1 million versus $15.4 million in the comparable 2012 period. This increase was primarily related to $93.1 million in non-cash impairment charges, which I’ll cover momentarily in detail. Excluding the impact of the impairment charges, total operating expenses were down approximately $1.4 million.

For the 2013 six months period, operating costs and expenses were $115.8 million versus $59.1 million for the six months ended June 30, 2012. Similarly, excluding the $93.1 million impairment charge, operating costs and expenses were down $36.5 million.

I’ll add that consistent with my remarks last quarter, we’d implemented aggressive cost controls throughout the organization and expect to realize a 35% reduction in our G&A costs. This began in Q2, but will start to be fully realized in the third quarter as we had severance expenses and increased costs related to workforce reduction and efficiency implementations.

Now I’d like to provide some details around the cost reductions. In the category of lease operating costs, lease operating costs declined by approximately $700,000 as we no longer had operating expenses for Cotulla, which were approximately $800,000 in last year’s second quarter.

Our operating expenses for Moulton, Sweet Home, and the Eaglebine\Eagle Ford East areas increased slightly, which was offset by lower lease expenses in Hackberry and Oakland.

Our lease operating expenses were $16.70 per BOE produced versus $29.93 per BOE produced comparing the second quarter 2013 and 2012 respectively.

For the six months comparable period our lease operating expenses were approximately $900,000 versus $2.1 million, a decline of approximately $1.2 million. This was due again primarily to no longer having operating expenses associated with Cotulla. Similar to the three-month comparisons we have higher Moulton, Sweet Home, and Eaglebine/Eagle Ford East expenses offset by decline in Hackberry and Oakland. Lease operating expenses were $40.52 per BOE produced versus $34.40 per BOE produced for the 2013 and 2012 six-month period respectively.

Onto depreciation, depletion and amortization; we also had a $1.8 million decline in depreciation, depletion and amortization for the comparable three-month period and $1 million decline for the six-month period. These decreases were primarily due to the classification of Moulton, Hackberry and Oakland and (inaudible) as assets held for sale during 2013 as well as lower production results for the second quarter of 2013.

For G&A, general and administrative expenses for the second quarter of 2013 totaled $12.6 million, compared to $11.5 million for the same period in 2012. This increase is due to the following; number one, we had a restructuring expense of $3.9 million. Two, we had an accrual of professional service fees of $2.6 million, which was partially offset by the following, lower legal and advisory fees incurred in connection with the combination of ZaZa and Toreador last year of approximately $1 million, a decrease of Toreador’s contribution to G&A expense of $2 million and $1.6 million for reimbursements made under the terms of the division of assets last year for expenses related to lease acquisition costs.

G&A expense for the comparable six-month period was $19.4 million in 2013, compared to $53.7 million in 2012. In addition to the vantages, I just explained related to the current quarter, the main reason for the decrease is the elimination this year of expenses incurred in 2012 in relation to the combination between ZaZa and Toreador.

Now, I’m going to move on and provide the details for the impairment charges taken this quarter. The total impairment was a result of two major categories of adjustments; both categories being written down on their fair values. Those two areas were, one, non-producing leasehold costs, and two, producing oil and gas property. The results of these adjustments in total was a pretax non-cash impairment charge of $93.1 million, which is comprised of $56.9 million for the leasehold cost category and $36.2 million for the oil and gas properties group.

Now, let me get into some more detail. The impairments of the non-producing leasehold costs primarily relate to the reversals of booked gains recorded last year in connection with the division of assets from our former JV. As required by U.S. GAAP, we increased the carrying value of our non-producing leasehold costs from historical cash basis to fair value following the dissolution of the JV.

Accordingly, in 2012, we recorded a non-cash increase of $89 million to our non-producing leasehold costs, which had a historical cash basis of only $1 million, resulting in the new carrying value of $90 million. The impairment in the second quarter related to this was triggered by the current transactional landscape as reflected in the sales price of our most recent Moulton transaction.

In the second quarter of 2013, we’ve reduced the $89 million increase in carrying value that was recorded in 2012 by $56.9 million impairment. This resulted in a new carrying value on the books of $27.6 million.

It’s important to note however that our non-producing assets in the Eaglebine/Eagle Ford East play were not increased in value in 2012 due to the fact they were not part of the former JV, and they continue to be recorded a historical cash basis instead of fair value and have not been impaired.

Now, let me address the impairments regarding our producing oil and gas properties, which were the Boening in Sweet Home and the two wells we drilled in the Eaglebine/Eagle Ford East that Tom just reviewed that we called the Commodore and the Stingray wells.

In the first and second quarter of 2013, we completed the Boening, Commodore and Stingray wells, which were all designed as we mentioned prior as proof-of-concept science wells. We consider these wells successful because they helped us and achieve our strategic goals through obtaining significant valuable technical information, however the costs incurred to obtain this technical information exceeded the recoverable amount on the wells in their current configuration.

This past quarter we decided that we will not allocate additional capital resources to these three wells at this time and accordingly we reduced the wells total carrying amount of $41.3 million to the fair value of $5.1 million resulting in $36.2 million non-cash impairment charge.

One additional comment of note; in following U.S. GAAP, we are required to impair the assets to their fair value, but are not allowed to increase the assets to their fair value. I want to make this clear to you all because in the second quarter of this year, we entered into the JV in the Eaglebine/Eagle Ford East area with one of the largest unconventional operators in the world whereby it would earn up to a total of 55,000 net acres out of our 73,000 net acres in exchange with consideration of approximately $75 million in cash and carry value.

If we were to use this transaction to increase the carrying value of Eaglebine acreage to its fair value we would record a gain of $73 million to the entire 73,000 net acres. This fair value increase of $73 million would more than offset the $56.9 million impairment associated with the non-producing leasehold costs.

Now, continuing on the income statement. We’re reporting an operating loss of $104.8 million versus an operating loss of $12.3 million for the three months ended June 30, 2013 and June 30, 2012 respectively. For the comparable six-month period in 2013 and 2012, the operating loss was $110.6 million versus $53.9 million.

Let me breakdown the expenses now on the income statement. Total interest expense was $3.3 million versus $5.6 million and $6.9 million versus $7 million for the comparable 2013 and 2012 three-month and six-month periods respectively.

For the second quarter comparable period in 2013, we recorded a gain in fair value of warrants associated with our senior secured notes of $7.3 million versus $5.8 million in 2012. And for the six-month comparable period we recorded a gain of $18.4 million in 2013 versus a loss of $32.4 million in 2012. We also recorded a gain on fair value of embedded conversion options associated with convertible senior notes of $7 million in the second quarter of 2013, and $13.4 million for the six-month period in 2013. There were no recordings in either period for 2012.

We recorded a loss on extinguishment of debt in the second quarter of 2013 of $1.1 million and $16.2 million for the 2013 six-month period. The loss primarily related to an amendment to the senior secured notes dated March 28 of this year that triggered debt extinguishment accounting. It consisted of a loss from the modification of the terms of the warrants of $10.9 million and a difference between the fair value and the book value of debt of $4.2 million. There was no such recording in 2012 period.

Lastly, we recorded a $15,000 loss related to foreign currency exchange in the second quarter and six month periods for 2013, compared to a foreign currency loss of $117,000 and $223,000 for the three and six month periods in 2012. All of these amounts resulted in total other income of $9.9 million versus $77,000 for the comparable second quarters and total other income of $8.7 million for the six month period in 2013 as compared to total other expense of $39.6 million for the six month period in 2012.

Okay, let’s move on to operating and net income. I’ll start with the second quarter. We reported an operating loss of $104.8 million versus an operating loss of $12.3 million. We recorded an income tax benefit of $36.2 million, and in last year’s second quarter we recorded an income tax expense of $1.4 million. We reported a net loss from continuing ops of $58.7 million versus a net loss from continuing operations of $13.6 million.

Additionally, we reported income from discontinued operations, net of income taxes of approximately $600,000 versus a loss of $35.8 million in the comparable period. This resulted in a net loss of $58.1 million or a loss per diluted share of $0.57 versus a net loss of $49.5 million or a loss per diluted share of $0.49 in the comparable period.

Okay. So now I’m going to give you some of the same rundown, but related to the six month comps. We reported an operating loss of $110.6 million, as compared to $54 million. We reported an income tax benefit of $40.8 million versus an income tax expense of $35.2 million. Our loss from continuing operations were $61.1 million versus a loss of $128.7 million. Income from discontinued ops, net of income taxes was $33,000 versus a loss of $38.5 million. This resulted in a net loss of $61 million or a loss of $0.59 per diluted share versus a net loss of $167.3 million or a loss per diluted share of $1.77.

Now, let’s move on to the balance sheet. As of June 30, 2013 we had cash and cash equivalents of $3.2 million as well as restricted cash of $16.1 million; this compares to cash and cash equivalents of $34.6 million and restricted cash of $21.9 million as of December 31, 2012.

As of June 30, 2013 our total long-term debt, net of discounts was $97.6 million, of which $11.3 million is classified as current. This total of $97.6 million, however which is net of discount consisted the following; $47.3 million of subordinated notes, $23.7 million of senior secured notes, and $26.6 million of convertible senior notes.

I need to point out however that $11.3 million has been classified as I mentioned in the current quarter as current, so subtracted from the $97.6 million it brings the total principal amount of long-term debt, net of discounts to $86.3 million as of the quarter close.

Let me add a few comments related to the balance sheet. In the second quarter of 2013, we consummated the sale of a portion of our non-core assets in Moulton and entered into Phase 1 of our new JV, resulting in a combined total cash receipts of $18.8 million. We have then sold the remaining Moulton acreage in the third quarter of 2013 for cash, consideration of $29.3 million. This total included a $1.4 million deposit which we received in June, and it’s accounted for in our financial statements.

The pro forma details on the Moulton transaction, please refer to S-1 amendment which we filed today immediately after the 10-Q this morning. There has been some confusion in the past as we’ve been following these S-1 amendments. So I wanted to provide some supporting detail around the nature of the amendment for the benefit of listening and the investor community.

Because ZaZa was late with its SEC filings in 2012, it is not currently S-3 eligible. So the resale shelf for the warrant issued to the senior secured lenders had to be filed on an S-1 registration statement. Each time there is a quote fundamental change, which occurs when you file these financial information as an example to 10-Q, you must amend the S-1 by filing a post effective amendment to incorporate that new information. Unlike an S-3 which automatically updates itself when 10-Qs are filed.

We had to do it again, this quarter hopefully for the last time when we file the third quarter 10-Q hopefully we will not have to do that amendment. After that we should be able to amend the S-1 to make it an S-3. So we won’t provide any more amendments to that point.

As noted in our Form 10-Q filing, we used $4.6 million of the proceeds related to the Moulton sale in the second quarter to reduce the outstanding principal amount of our senior secured notes to $28.6 million as of June 30. As well, we used $2.4 million of the proceeds related to the second Moulton sale to further reduce the principal amount of the senior secured notes to $26.8 million.

Our primary short-term goal is to solidify our financial position and set our company on a path to accelerate new production, and build a reserve base as we had in the first half of 2014 and beyond. It has taken us the better part of a year to get to where we are today, and while there is still much work to be done, we have effectively restructure the Company all the while realigning our strategy to position us for success as we capitalize on our core asset in the Eaglebine/Eagle Ford East play.

As we have progressed, our strategy for 2013, we have executed on our commitment to rationalize our non-core assets in the Eagle Ford and position ourselves for success in the Eaglebine/Eagle Ford East. Today, as a result of this, we are engaged in multiple advanced discussions regarding transactions related to our Sweet Home acreage in DeWitt and Lavaca counties, we are separately and in parallel engaged in multiple discussions regarding our strategically located retained acreage in the middle of our Eaglebine/Eagle Ford East asset.

We’ve had to work aggressively to restructure our balance sheet as we have put the company on the path towards more regular way financing structures. We are now positioned to be properly capitalized as we enjoy the success of the development of the Eaglebine/Eagle Ford East.

In further in terms of balance sheet restructuring, we are in the midst of discussions with multiple investment banks regarding the takeout of the senior secured debt as part of a larger package that enable ZaZa to keep stride whether Eaglebine/Eagle Ford East JV partners as we align ourselves with financial partners who are focused on ZaZa’s growth.

This concludes the prepared remarks. Now operator, we’d like to open the line up for questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Michael Kotlarz] with Oppenheimer. You may proceed.

Unidentified Analyst

Good morning, guys.

Todd Alan Brooks

Good morning.

Thomas Bowman

Good morning.

Unidentified Analyst

Okay. The last couple of quarters, I know there’s been a window. I’ve seen some insider buying with the stocks trading at where it is currently. Can you maybe comment on some intentions going forward?

Todd Alan Brooks

Sure, I’ll take that one. Good question. Typically my window would open three days following today’s disclosure. After our last quarterly call my window opened and I purchased 50,000 shares on low volume in two days following the 72-hour window opening and then I got boxed out as the window closed due to the second Moulton negotiation.

I think my purchase price was about $1.40 then. I’m absolutely a buyer at these levels and higher. That said right now given the advanced cash in carry JV negotiations, we are currently in regarding our Eaglebine/Eagle Ford East retained acreage. My window will remain closed in a very short-term. As soon as my window opens back up, as I said in my prepared remarks, I’m all in. That means I hope to be able to increase my position in the coming weeks.

Ian H. Fay

And I would second that. I think certainly I can speak for myself. This is Ian. I am on the same path as Todd to be opportunistic and increase my holdings as well as over time, and I know that most of the management team is taking advantage of the windows being open when we can. So we are all aligned in our view that there is a lot of value creation coming and we’re excited about investing in the future of the company.

Unidentified Analyst

Thank you.

Operator

Your next question comes from the line of Chris Cook with Zazove. You may proceed.

Christopher B. Cook – Zazove Associates, LLC

Yeah. I’ve got a couple of questions. Can you run through the restricted cash, you said, I think was $16 million, what are the milestones that need to be achieved to unrestrict that?

Ian H. Fay

Yes. Thank you for the question. It’s $16.1 million. $15 million of that is related to the carryover escrow that was associated with the division of assets with the Hess JV. $1.6 million is related to the severance, broadly related to both the impaired space and dissolution as well as some of the adjustments we’ve made to G&A reductions and headcount reductions in the 2013 year. Essentially what we understand – the way that the mechanism works with the $15 million escrow is it’s related to a second level of lease and title transfer related to the impaired space and asset from the entity, now from $1 million and the former ZaZa asset to Hess. When those are transferred, then the escrow is released.

We understand from the history as it relates to the French Ministries and the regulators on approving these transfers, then typically the approval process takes no longer than 18 months from the initiation of the transaction. The initiation of the transaction was July of 2012 for us. So I think that puts us some where in the first quarter of 2014 for that 18 month window. So our anticipation is that we will be keeping a very, very close eye, and we have been in touch with the ministries very recently, as recently as a week or two ago, as we were working on winding down our Paris operation, we will continue to monitor that $15 million release.

Christopher B. Cook – Zazove Associates, LLC

Great. And then how much your acreage is held by production?

Thomas Bowman

Yeah in the Sweet Home the 28,000 acres in the Eagle Ford, I would say 700 of those acres?

Ian H. Fay

700 there, we’ve got HBP acreage around our Hackberry and our Conniff wells, another couple of thousands acres there. So and then in the Eagle Ford East we’ve got 1,200 acres.

Todd Alan Brooks

1,200 acres.

Ian H. Fay

So you were talking about some small percentage but still over probably close to 5,000 acres HBP total.

Christopher B. Cook – Zazove Associates, LLC

And then what – I guess what is the average the reigning term on the leases you have?

Ian H. Fay

In Sweet Home, we’ve got about 10,000 acres that have a year or more. The rest of that block has somewhere between six and 12 months on it. I believe that is the Sweet Home block. The Eagle Ford East block, we’ve got substantial term remaining, we’ve got somewhere probably on average of between one and three years left on a lot of that. And again, a lot of that is underneath the joint venture umbrella.

Todd Alan Brooks

And then to add to that as we’ve already mentioned, one of the reasons that we had determined to monetize and have been marketing in discussions around Hackberry, Oakland was that lease package was coming off in real time. So that has been diminishing throughout the course of 2013. We just add to…

Christopher B. Cook – Zazove Associates, LLC

That’s 18,000 net acres in Hackberry or…

Ian H. Fay

Hackberry, Oakland today…

Christopher B. Cook – Zazove Associates, LLC

Yeah.

Ian H. Fay

That sounds pretty close.

Christopher B. Cook – Zazove Associates, LLC

But there is all sort of six to 12 months kind of…

Todd Alan Brooks

With the exception of the HBP acreage they are all in the six to 12 months, some of it is probably a little bit longer in our Oakland block, that was the last lease block that we took in that area.

Christopher B. Cook – Zazove Associates, LLC

And how much was HBP in Hackberry?

Todd Alan Brooks

Hackberry has got two producing wells and each one of those have about 700 acres unit around them.

Christopher B. Cook – Zazove Associates, LLC

Got you.

Ian H. Fay

And also to add to Todd’s comments about Sweet Home, where we drilled the Boening well, we had told you all that in the first quarter, and through, at the end of 2012, and into the first quarter of 2013, we had come to the determination that we needed to high grade that acreage block, which has resulted in this 10,000 acre high graded area that has a longer term, that is what we have been using to spearhead our marketing efforts, and that we have also formed 12 units within that. So essentially it’s drill ready, and that has been a significant driver of lot of the interest that we have been enjoying around that discussion on monetization or some kind of cash-and-carry JV structure.

Thomas Bowman

Also given the advanced nature of the discussions and negotiations that we are having on that acreage, I expect to transact on that block in the very near future actually.

Christopher B. Cook – Zazove Associates, LLC

And when you say that block, you mean just the 10,000 acres or the 28,000 acres?

Thomas Bowman

Well, we’ve got dual conversations going. One of them is per part and one is for all.

Christopher B. Cook – Zazove Associates, LLC

So I’d assume the 18,000 acres in the Sweet Home that are six to 12 months left on their lease have substantially less value?

Todd Alan Brooks

They do, but they also have extensions available on that acreage. So there is more value than you’d probably realize just based on what we’re talking about.

Christopher B. Cook – Zazove Associates, LLC

How about Hackberry? It looks like 16,600 is not held by production with six to 12 month life left on the lease, so there are extensions there and how much?

Todd Alan Brooks

Well, I would agree with that. I mean it’s the value, it’s also in the GAAP place. So we’ve taken a pretty pessimistic look at that area, but we still see a lot of potential in the Wilcox and in the midway Navarro. So we’re seeing a lot of interest come back into that area now that people are looking at shallower targets. So we see that there is value on that acreage.

Ian H. Fay

The Hackberry block has always been a little bit of a different animal.

Christopher B. Cook – Zazove Associates, LLC

Yeah. Okay.

Todd Alan Brooks

Part of the reason of course that we’ve taken the hard view that we need to impair these assets is reflection of this line of question of course.

Christopher B. Cook – Zazove Associates, LLC

Right. And then what kind of CapEx, do you guys foresee in the second half? I mean it doesn’t sound like you’ll be drilling anything in the Eagle Ford, and then presumably the wells drilled in the JV are going to be paid for or by your joint venture partner. What kind of capital spending do you foresee in the second half of 2013?

Todd Alan Brooks

CapEx is going to vary.

Ian H. Fay

Is going to be discretionary land dollars.

Todd Alan Brooks

And that kind of it.

Ian H. Fay

Eagle Ford East.

Todd Alan Brooks

We basically set ourselves up now with this reduction as we’ve completed the wells that Tom reviewed for you all in a situation where we’ve got a steady state, we’ve got our cost controlled, and we don’t have little to know a non-discretionary capital expense requirements to take us into the end of the year. So we are in a very stable position now through all the hard work we have done in moving the balance sheet around and transacting.

Christopher B. Cook – Zazove Associates, LLC

Got you. So your CapEx could be close to zero or could be multiple millions of dollars, I guess tens of millions of dollars if you decided to either drill a well on the 18,000 retained acres, and/or complete the Stingray horizontally or something like that?

Thomas Bowman

No, the CapEx is fully a function of discretionary land dollars as far as CapEx associated with drilling on the retained acreage. When we talk about the retained acreage, I expect to transact on that without drilling on it further.

Christopher B. Cook – Zazove Associates, LLC

And why transact on it now when you got not in that stronger financial position?

Thomas Bowman

That’s due to the nature of the inbound increase and the quality of the companies that does inbound increase are coming from. I don’t think we can find better partners than who is calling.

Todd Alan Brooks

And again obviously we have always maintained that this was, we wanted to maintain maximum strategic flexibility with this retained asset. We would be irresponsible if we weren’t actively evaluating these increase. The increase were very compelling and so it’s a day-to-day evaluation of what’s the best return, what’s the best and most timely way to monetize or extract more value for the benefit of the shareholders. So that’s why we need discussions, because they are compelling.

Christopher B. Cook – Zazove Associates, LLC

And fair enough. And I assume you said it was going to be sort of cash and carry deal, I guess similar to the existing joint venture that you have.

Todd Alan Brooks

Right, but at a higher metric than the Phase I metric.

Christopher B. Cook – Zazove Associates, LLC

Okay. And then, it sounds like G&A you said in the Q, I think you are going to fund $10 million in the second half. Obviously that’s roughly $5 million per quarter. That still seems awfully high relative to your guys – obviously your revenue and cash flow. I was just curious as to how much room there is on G&A?

Ian H. Fay

In terms of the G&A, again we did achieve the reduction. We reduced our salaries by 59% through the quarter and in the process we’ve taken the – we’ve closed the Corpus Christi office and the Dallas office. So we believe we’ve done a significant job here of creating a lean a company as possible at this time given our movement into the temporary kind of non-op phase that we’re in right now. So, to answer your question I think there is not a whole lot more room on that $10 million.

Christopher B. Cook – Zazove Associates, LLC

Okay. And I think I have one other question. Yeah, with respect to the credit line, as you remind me how much of dollars from asset sales have to go to pay down that credit line? So, for instance, if you are successful in selling Sweet Home or Hackberry or monetizing a portion of your 18,000 retained acres in the Eaglebine, what kind of funds need to go to pay down the balance of the $26.8 million that’s now outstanding?

Ian H. Fay

So the balance now outstanding is actually down to, I think $26.2 million. To answer your question that’s a nuanced answer. Each asset is different. For example, Sweet Home, we need to pay the senior secured from – down to $15 million if it’s an outright sale. If it’s a joint venture, there is not a pay down required. In the Eaglebine, we are required to pay 10% of the cash received, but nothing in association with the carry. So it’s that kind of a thing, different assets have different rules.

Christopher B. Cook – Zazove Associates, LLC

Okay. All right. Thanks. Good luck, guys.

Ian H. Fay

Thank you.

Operator

Your next question comes from the line of Evan Jones. You may proceed.

Unidentified Analyst

Good morning, guys. I was looking at the CapEx for this quarter of $20 million. Could you break that out between land dollars and actually drilling dollars? Obviously, you increased some of your acreage in Eagle Ford East, as we are now calling it, from I think 18,000 net retained from 15,000. Can you give me a little breakdown of that?

Ian H. Fay

Steve, you want to…

Unidentified Analyst

What you spend on land in the quarter?

Ian H. Fay

Q2 CapEx, is that what you’re asking about?

Unidentified Analyst

Yeah.

Ian H. Fay

What’s the land CapEx?

Unidentified Analyst

Yeah, land CapEx.

Ian H. Fay

Okay. So roughly, again it’s easier to answer that question for the year.

Unidentified Analyst

That’s fine.

Ian H. Fay

So land CapEx for the year was approximately $5 million and then the drilling CapEx was in the magnitude of $36 million.

Unidentified Analyst

Okay. And then you mentioned that kind of think, when you were going through your debt, you mentioned $26.6 million converts. But that's the bifurcated amount, right? The face value of that is $40 million?

Ian H. Fay

That’s correct. That’s net of discount.

Unidentified Analyst

Great. Okay. That’s all I have. Thanks.

Ian H. Fay

Thanks.

Todd Alan Brooks

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Tom Nye. You may proceed.

Unidentified Analyst

Yes. Thanks for taking the question. I am little concerned about the pace with which the joint venture activity is moving forward. And I know that it's basically Phase 1; they have got until the end of the year. But assuming that they move to Phase 2, what incentive does your JV partner have in terms of completion of wells 5 through 6 by X date?

What pushes them to move forward with additional growing? Because, as I have looked at the success of the partner that you are working with, they have had fantastic results, but it sounds like they are having them outside of the Eaglebine area. So my concern is, how long is this development actually going to take place once you get past the end of this year?

Todd Alan Brooks

What incentivizes our partner is the return on the capital that they deploy when they put the drill back to work. One thing that’s interesting is to go back and use history as a guide and look at every play that the partner has entered into. Success begets success.

Unidentified Analyst

Yes, but I guess the question becomes, again, once you get past the end of this year, assuming that your partner drills three wells according to the agreement, then they have got to – so they pay you the $20 million for wells four through six. But what is to say that it won't take them a year and a half to get to well number six? Is there something in the agreement that they have to complete well six by such and such date?

Todd Alan Brooks

Yes, they have a year to complete that sixth well in order to move into Phase 3, that is an outside date.

Unidentified Analyst

Okay.

Todd Alan Brooks

Also once they complete the third well in Phase 2 they have. I believe 30 or maybe 60 days in order to tender consideration for Phase 3 and moving into Phase 3.

Unidentified Analyst

Right, but at the worst

Thomas Bowman

Let me jump in and add to Todd’s comments. Obviously, we can’t speak for our partner in any of this. So what you are hearing is logically what an entrepreneur in oil and gas veteran like Todd, we would answer if you are asking him the question without motivation.

Todd Alan Brooks

It’s a challenging question, because I truly can’t speak for that.

Thomas Bowman

Right. But I can add to it to Todd’s comments and say logic would suggest that if you have got upwards of 100,000 net acres, then you’ve got a debt going on with leases that have term. For a sensible company of size like our partner, it makes sense to accelerate the pace once you got comfortable with the way to execute. So that is our belief. Now it’s not – again I can’t speak for them, but that is how we think about it.

Unidentified Analyst

Yeah. Okay, well and I would assume that speaks to the fact that perhaps you are looking for a separate JV partner for your retained acreage so that maybe they move a little bit quicker and accelerates the pace, maybe, of your original JV partner. But it sounds to me like a worst-case scenario is that at the end of 2014, you may have as few as six wells drilled and they are basically sitting on just the value in the land and they have got better opportunities elsewhere.

Todd Alan Brooks

That’s the worst-case scenario and it also doesn’t take into account us transacting on the retained acreage.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Philip Dodge with Noble Financial. You may proceed.

Philip Dodge – Noble Financial Group

Yes. Good morning. Thanks for all the comments. My question is also on the JV. If they go ahead with Phase II, one of the provisos is that they pay for some seismic, I guess up to $1.15 million. And I’m curious whether that’s seismic that’s already been done or whether this is an ongoing program and whether it’s 2-D or 3-D?

Todd Alan Brooks

Actually the proviso is that we are carried for work for work program and that includes seismic or a number of other gathering lines or a number of other things. So it’s not proviso that mandate seismic work. That said, Tom, do you have any commentary on seismic?

Thomas Bowman

There’s the anticipation, and again we’re not speaking for a partner, but the big proponents of 3-D seismic. There is a lot of activity in the area north of us and adjacent to us on the west side. There is large multi-client (inaudible) is going on in the field right now, and there is a lot of optionality whether they join one of those or do proprietary survey or utilize those dollars for other information, there is plenty of opportunities out there. We would be a, ZaZa would be a proponent of adding 3D-siesmic data across our block.

Philip Dodge – Noble Financial Group

Yeah, I guess, my main question is how much has already been done, and what’s the probability that more will be done?

Thomas Bowman

Currently across our block there’s been no 3D-siesmic. There has been 2D-siesmic, but that’s historical data.

Philip Dodge – Noble Financial Group

Okay.

Todd Alan Brooks

And we’ll be running micro-seismic in the future, so that may change the design.

Philip Dodge – Noble Financial Group

As the wells are drilled?

Todd Alan Brooks

Yes, that’s correct.

Philip Dodge – Noble Financial Group

Yeah. Okay, thanks very much.

Todd Alan Brooks

Thank you.

Thomas Bowman

Thank you.

Operator

Your final question comes from the line of Robert Kecseg with Las Colinas Capital. You may proceed.

Robert Kecseg – Las Colinas Capital Management, LLC

Hi, guys. I wanted to ask you a question kind of in parallel to what you are doing with your JV partner. I listened to that presentation that you had on your website from the guy, I think it was Mr. Toon, kind of gave an explanation of the region and the geology there. And he mentioned one company that has had a lot of success and he separated into two major prospects. And the one was the new one that you are talking about, the vertical, that Buda, all the way down into the Glen Rose. But the other one that this other company has exploited quite successfully was horizontal, more resource play in the Eagle Ford-type shale that was shallower than that. And so, I guess what I’m after here – is this being looked at in the same way that the shallower, probably more dependable zone is the horizontal play and the deeper, newer Limestone play is the vertical?

Todd Alan Brooks

Well, yes, currently.

Robert Kecseg – Las Colinas Capital Management, LLC

For you.

Todd Alan Brooks

Yes, for us, it would be the, what we call Eaglebine/Eagle Ford East is the shale play, it’s typically we are looking as a horizontal play and currently we have been looking at the lower cretaceous, the Buda Rose play as a vertical play. However some operators are in fact drilling horizontals in selected zones in the lower cretaceous Buda Rose play. So we are seeing some optionality there for both vertical completions commingling and/or horizontals in selected zones.

We felt like the vertical aspect was the best way to test them in initial proof-of-concept wells. When you come back in for production, zone isolate or select one particular zone such as say the Buda or maybe the Georgetown and Glen Rose and drill horizontal wells in that. It’s that pay. Above the shale play is the typical Woodbine Sand/Silt play, which is yet another play in the area that’s been exploited by many offset operators including the Crimson’s and the Energy & Exploration Partners and Halcon’s and such, so that’s distinctly different.

So when you look at all these things, there is nine different producing formations out there, any of which could be done vertically or horizontally.

Robert Kecseg – Las Colinas Capital Management, LLC

Yes, I was just trying to learn the prospect there and maybe give the shareholders of ZaZa a little bit more confidence, because the things like we are kind of lacking lot of confidence somewhat those prospect is, kind of according to the stock scoreboard as well I call it, so….

Todd Alan Brooks

That’s good.

Ian H. Fay

Go ahead, Todd.

Todd Alan Brooks

We look forward to being able to talk about well results in a timely manner as soon as we are able to do that.

Robert Kecseg – Las Colinas Capital Management, LLC

Yes, that's what I'm purposely talking about the video that people can access that you put on your website in parallel to what you are doing, so you don't have to talk about what you are doing, because I know that has to wait. So I'm just trying to better understand the likelihood of results from these various zones. And when the guy was speaking about Halcon in the shallower area horizontally, it sounded like the results there were probably a higher probability because it is more well understood. Is that a good way to put it?

Ian H. Fay

Halcon’s results are in the Halliday field are more of a true horizontal Woodbine play. Whereas our target on our block is the zone above the Buda, which is what we call our lower Eaglebine or what Halcon calls their El Halcon, what’s also very – it’s the Eagle Ford. It’s the Eagle Ford East.

Robert Kecseg – Las Colinas Capital Management, LLC

Okay.

Ian H. Fay

So there is a difference between Halcon’s Halliday field and their El Halcon. Halliday’s Helcon is similar to our target on our block currently.

Robert Kecseg – Las Colinas Capital Management, LLC

Okay, great. All right, thank you.

Todd Alan Brooks

Thank you.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Jay Morakis for closing remarks.

Jay Morakis

Great. Thank you everyone. Thanks for joining us, call today. We look forward to our Q3 call and to continuing discussions with all. Thank you.

Todd Alan Brooks

Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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