FX Energy's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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

FX Energy, Inc. (NASDAQ:FXEN)

Q3 2013 Earnings Call

November 7, 2013 4:30 PM ET

Executives

Clay Newton – VP-Finance and Chief Accounting Officer

David Pierce – President and CEO

Analysts

Jason Gammel – Macquarie

Kim Pacanovsky – Imperial Capital

Chad Mabry – MLV & Company

Glenn Williams – Sidoti & Company

Dan Mittag – Oppenheimer

Operator

Good afternoon ladies and gentlemen and welcome to the FX Energy Third Quarter 2013 Financial and Operating Results Conference Call. Today’s call is being recorded.

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

Let’s start with production. As indicated during our call last quarter, our production in the third quarter was down from that of last year. Total oil and gas production for the quarter was 1.1 billion cubic feet equivalent, an average of about 11.5 million cubic feet equivalent per day, that’s a 13% decrease from the third quarter of last year’s rate of 13.2 million cubic feet equivalent.

Production declines of the company’s Zaniemysl and Roszkow wells in Poland were a significant cause for the reduction. Also, production was curtailed during the quarter for two weeks at our KSK wells for annual maintenance. Total production for the first nine months of 2013 was 3.4 billion cubic feet equivalent, an average of about 12.6 million cubic feet equivalent per day. That’s about 2% lower than last year.

Looking forward to the fourth quarter production numbers, our production rate will be improved by two factors. First, the annual scheduled two-week maintenance period on our KSK wells was completed during the last quarter. So, those wells are back on production. Second, our Lisewo-1 well should be in production by the end of this month. We expect production to be at a rate of about 5.4 million cubic feet a day gross with our net production from that well equal to 2.6 million cubic feet per day. As a result of these two events, we expect our production rate to be about 14.0 million cubic feet equivalent per day as we exit 2013.

We told you on March 31st and again on June 30th that our year-to-date oil and gas revenues reached record levels. We are pleased to say it again, our year-to-date oil and gas revenues reached record levels for the year-to-date at September 30, 2013. Oil and gas revenues were $25.7 million for the first nine months of 2013, compared to $24.8 million for the same period of 2012, an increase of 3%.

Natural gas prices in Poland were higher during the first nine months of 2013. Remember that our U.S. 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 U.S. dollar during the reporting period. During the first nine months of this year, we recognized a 6% increase in natural gas prices over the same period a year ago. The increase was created by a combination of a 2% higher average in the Polish tariff along with weakness in the U.S. dollar compared to the same period of 2012. In addition, revenue declines this year at Zaniemysl were more than offset by revenue gains at both KSK and Winna Gora, where our average price per Mcf is approximately 20% higher than at Zaniemysl. The expected higher production and stable pricing, we should show improved revenues for the first quarter of this year.

As is customary on these 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 U.S. financial reporting purposes to convert everything we do in Poland into U.S. dollars. Very important for our shareholders to recognize that 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 may have a significant impact on our bottom-line. Sometimes exchange rates are quite volatile, other times exchange rates may be fairly stable for several months at a time. For example, in the first nine months of 2013, we recorded foreign exchange losses of only about $1 million compared to foreign exchange gains of about $12 million in the first nine months 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 fluctuates. However, these non-cash items have no impact on our revenues, cash flows or on our ability to execute on our capital budget.

As we discussed during our last call, we finalized our new reserve base lending facility during the third quarter of this year. Our new facility comes with a $65 million borrowing base, $23 million of which remains available to us and gives us the ability to increase that number during the course of the facility up to $100 million.

I’ll wrap up with a few final words about our cash flow and liquidity and capital resources. Net cash from operating activities was $2.9 million compared to $5.8 million last year with a decrease due to our higher exploration spending this year. As of today, we have as I mentioned earlier $23 million of borrowing capacity in addition to our $19 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 expected to make $60 million to $70 million of capital commitments this year. We believe we are on track to make those commitments. We expect our total capital spending to come in somewhere between $45 million and $50 million this year significantly higher than the $36 million we spent during all of last year. The balance of the 2013 commitments will be incurred during early 2014.

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

David Pierce

Thank you Clay. Good afternoon I’m David Perce CEO of FX Energy. Thanks for joining us today. The thesis behind FX Energy the idea that took us to Poland is that Poland’s hydrocarbon resources are under explored and under developed. We think our drilling in discovery results clearly support this thesis. We’ve been increasing our exploration and development efforts in Poland and plan to continue increasing the pace.

We have focused the majority of our resources today on the Fences concession aiming to build a production base that will fund our growing exploration effort in the Poland. In fact the Fences has been self-funding for the past several years, what’s more it is contributing to exploration outside the Fences concession. As a result we’ve been able to increase the pace of our operations both inside and outside the Fences concession. We are drilling more wells and have a bigger backlog of better prospects to drill than ever before. Obviously we expect this will lead the growth in production and revenue which then can find even more exploration and development. That’s the big picture of FX Energy as I see it, it has taken us longer to get here than we anticipated. But I believe we now have the land, data and resources to sustain a positive cycle of growth. In the next few minutes I’d like to add some color to this picture and provide a bit more detail.

Most of our production in Poland comes from five wells in the Fences concession averaging about 2.3 million cubic feet per well net to interest. We are within a few weeks of starting production from a sixth well Lisewo-1 that should bring us up to about 14 million cubic feet equivalent per day as we end 2013. Then we have another well Komorze-3 to bring online in the next two to three months in addition we’re currently drilling two more Fences wells Lisewo-2 and Szymanowice-1 if successful they should start producing mid-2014 and early 2015 respectively.

Next year we plan to side track the Zaniemysl to a higher structure of position assuming success Zaniemysl should resume production quite quickly. So, over the next year or so we anticipate adding up to five more wells to the five now producing in the Fences concession. We expect to see our production and revenue grow and that revenue should be more than sufficient to maintain the increased pace of drilling we anticipate in the Fences. We’ve been drilling about 1.5 wells per year in the Fences over the last 10 years. This year we’ve already drilled one Fences well and we have two more drilling now. We have four more wells scheduled for drilling next year in the Fences concession.

In addition we have a backlog of five more redefined structures in the Lisewo area alone. On top of all that we have more 3D seismic to interpret and rework and still we’ve covered only about half of the Fences acreage. We have never before had such a large inventory of 3D defined prospects and we think this backlog may help us persuade our 51% operating partner to step up the pace even further. Clearly we are excited about the potential that continue growing our production and reserves in our core Fences concession.

The Fences concession has consumed a line share of our resources but still we’ve manage to push it – in our four other concession areas where we continue our effort to find and develop another base of production. I’d like to put the spotlight on the two most advanced of these blocks the Edge concession and the Block 246 concession. The Edge concession includes four separate blocks covering about three quarters of a million acres in Northern Poland. We hold the 100% of the working interest and operate, we believe this area shows the greatest potential for us to develop another base of production.

Seven months ago we drilled a discovery well the Tuchola-3K. We tested gas with 55% hydrocarbon content the rest is nitrogen and some evidence of good porosity and permeability in a 10 meter zone near the bottom of the Zechstein. Specifically we saw no pressure drop during the flow test.

On the other hand we have only the logs and a few side to our course so we can’t be definitive about porosity and permeability. The well looks like it can flow at high rate higher than the 5.5 million cubic per day rate that we used in testing but we can’t say for sure without course and further production testing. We also saw good reservoir quality in gas saturation in the 90 meters or so of Devonian immediately below the zone but we also saw intervals of high water saturation in other words great promise but lots of data still needed.

We have now completed and interpreted approximately 110 square kilometers of high definition 3D seismic in this area part of a 220 square kilometer survey still underway. You can see the new Tuchola 3D seismic map in the investor presentation now downloadable from our website. That map also shows the next drilling location Tuchola-4 which will start drilling in the next two to three months subject to permitting. We expect to be testing Tuchola-4 in the first half of 2014 between the new 3D seismic and the data from Tuchola-4 we should be able to make a good estimate of this discover in about six months or so.

We will need perhaps as much as 200 Bcf of gas in place to achieve the kind of economics we have in the Fences concession. It will take this much to support building up the nitrification plant and perhaps 80 to 100 kilometers or so of pipeline. Tuchola alone is unlikely to be enough. The alternative the setup onsite power generation would diminish our gas values. So, we have been examining our existing 2D and 3D data on all four of the blocks in the Edge concession.

We are looking for indications of other similar leads and has already identified a handful. We hope our current 3D survey now in progress will confirm one or more of these new prospects that would allow us to drill at least one and possibly two new prospects outside the Tuchola area and the Edge concession in the coming year. I wish I could say with sure data we found another Fences area I can’t not yet, what I can say is that we’re excited about the potential of the Edge concession. In the first half of next year we expect to see drilling and seismic results that should go far in telling us whether we might be able to develop a production base in the Edge concession.

The Block 246 concession has yielded some encouraging data and is now our second priority outside the Fences for further exploration. This slot covers about a quarter million acres immediately south west of the Fences concession and we hold 100% of the working interest and operate. The most mature play is in the southeast quadrant of Block 246 it is essentially the same play as in our core Fences concession but much shallow work 1500 to 2200 meters. Just one year ago 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 77% to 78% methane content in the Rotliegend.

We acquired about 80 kilometers, 80 square kilometers of new 3D seismic in that area and should have a 3D seismic map available in the first half of next year. The mapping should give us a good indication, what if we might have a new area to develop the production base.

Assuming we map some good structural targets we hope to get a well started in the first half of next year. We have another play in Block 246 based on the just completed Gorka Duchowna well in the northwest quadrant of the block. This well was designed primarily to test the Carboniferous which is the source of our gas in the Fences concession as well as the gas in PGNiG’s Bronsko and Koscian fields about 5 kilometers to the north. The well tested 70% hydrocarbon gases and 30% nitrogen with no water and a 29 meter tight gas zone. The well has been completed so it can be fraced next spring when night time temperatures return to above freezing levels. Meanwhile, we have [cores] going to the lab which should give us a much better data about reservoir quality. We’re encouraged by the presence and quality of the gas and by the absence of water. We’re not as happy about the reservoir quality but we’ll take a close look at the economics when the lab results come in.

I’d like to offer a few milestones to watch as we move into the New Year. This month, we expect to begin producing Lisewo-1. In the next couple of months we should start producing Komorze-3 and we should test the Lisewo-2 well. During the first half of 2014, we anticipate testing the Szymanowice-1 and Duchowna wells in the Fences concession. In the Edge concession, we should be testing the Tuchola-4 well and starting another Edge concession well. Also in the first half next year, we expect to release a 3D seismic covering Main Dolomite and Rotliegend prospects in Block 246 and start drilling a well on one of those prospects. 2013 has been our most active year ever and the milestones that we just gone through for the first half of next year suggest we can improve on that.

To close, let me review our plans in Poland. In the Fences, we have five wells producing now, two more to start producing over the next couple of months and perhaps as many as three more wells that could start producing in the next year or so. We are drilling two new wells now and have four more scheduled for next year. The multi-well program in the Lisewo area is the biggest relatively low risk project we have yet undertaken and could generate substantial increases in the reserves and production over the next several years.

Outside the Fences, we will soon start with Tuchola-4 well in the Edge concession. We plan another Edge well and a Block 246 well both to start in the first half of next year. We also anticipate more drilling later in the year based on results. Our work following up on the Tuchola-3, Frankowo and Gorka Duchowna wells holds significant potential and it could open up new production areas for us. We are pleased to have so many 3D defined prospects along with the drilling schedule ramping up in the capital resources to support our increase momentum. We really appreciate your patience and we thank you for helping us get here.

Operator, we can take some questions now.

Question-and-Answer Session

Operator

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

Jason Gammel – Macquarie

Hi, thanks. Hi, David.

David Pierce

Hi, Jason. How are you?

Jason Gammel – Macquarie

I’m doing well. Thanks. How are you?

David Pierce

Very well. See you in London in a month.

Jason Gammel – Macquarie

Indeed, so am I. David, just a couple of questions for you on the drilling program. First of all on the Gorka Duchowna well and I apologize, I was always [indiscernible]. You did mention, I believe that you were planning on obviously doing some testing on the quarries but – do you have any plans in the meantime to do any sort of simulation work on the completion there. Do you think it will frac in that well to see where you hang up?

David Pierce

We anticipate fracing the well but we don’t want to do that operation right now. There is no reason for us to push ahead on that one with the cold weather here. I’m just concerned about running up cost on that. When we get to spring time the temperatures are good, we will frac that assuming that the quarries are supportive.

Jason Gammel – Macquarie

Okay. Make sense. And then I just want to ask on the wells that you mentioned in the Edge concession and in Block 246. Just in the Edge concession, have you actually picked out the drilling objective you add to this be potentially Lisewo and then similarly in Block 246, have you actually identified the specific objective that you will drill?

David Pierce

Yeah, we have. Our investor presentation has a map for the Edge concession where our targets are going to be Lower Zechstein and the Upper Devonian. And so it’s a package of rock that maybe is couple hundred meters stick all together, it’s more or less continuous. And we’re following up on the Duchowna-3 well later. So, most likely we’re looking at the Ca1 in the Upper Devonian and we’ve got the location set out there. In the – in Block 246 our targets are going to be in Main Dolomite and Rotliegend but that said, we haven’t got the final maps from our 3D seismic. We lifted the Edge seismic throughout inline ahead of the Block 246 seismic because we’re most excited about the Edge. But we should have maps in the first half next year in time to get a well started in the first half next year and that assumes that we see targets hopefully both in the Main Dolomite and Rotliegend but the Rotliegend would be primary.

Jason Gammel – Macquarie

Got it. Okay. That makes sense. And then just one final one if I could and this may actually be for Clay but just looking at the cash flow statement relative to the studying so far on investing activities essentially versus the $40 million the expected capital expenditures, looks like you’re tracking about $17.5 million so far year-to-date. Are you expecting that there is a high level of drilling activity that you essentially accrue in the fourth quarter, that will make up the difference or am I just missing something on the financial examples.

Clay Newton

No, there is couple of things. There is $17 million in the cash flow statement but then you also if you look at the income statement, there is another $17 million of exploration costs. So, you add those two together, you’re at about $35 million. And based on what we expect to see in Q4 that’s how we get to arriving at a number somewhere between $45 million and $50 million for the year.

Jason Gammel – Macquarie

Got it. Okay. That makes sense. I’m sorry I misquoted that as 40. That was all I had guys. Thank you very much.

Clay Newton

Thank you.

Operator

And the next question which will be from Kim Pacanovsky with Imperial Capital.

Kim Pacanovsky – Imperial Capital

Hi. Hi, David how are you?

David Pierce

Very well, Kim. Thank you. And you?

Kim Pacanovsky – Imperial Capital

Very well. Thanks. I’m just trying to say first some of the comments about the number of wells that could come on next year. At first you said 5 and I guess I’m looking at really the only definites would be Szymanowice, Tuchola and Komorze, is that correct?

David Pierce

Well, let’s sort of walk through them. We’ve got Lisewo-1….

Kim Pacanovsky – Imperial Capital

Which is this year?

David Pierce

Which is this year. And then in the next two to three months, we’ll have Komorze-3. Those are wells that we’ve tested and now – we’re under construction there on that well

Kim Pacanovsky – Imperial Capital

Right.

David Pierce

Now, the other wells that I mentioned, first of all Zaniemysl that was a well that was in production, we planned to sidetrack it next year through a higher structural location. And if it’s successful…

Kim Pacanovsky – Imperial Capital

Right.

David Pierce

It should go right online very quickly. So, we haven’t done the sidetrack yet obviously we don’t know that we’re going to find more gas there alone hidden high on the structure usually does that job but we’ll have to see. And then the other two wells that I talked about were Lisewo-2 which is drilling now and Szymanowice which is also drilling now and if those wells are successful then Lisewo-2 we would expect to see come online in the second half next year.

Kim Pacanovsky – Imperial Capital

Okay.

David Pierce

And Szymanowice if it’s successful and we should find that out probably first quarter next year. It will take approximately one year to get that into production that puts us early in 2015.

Kim Pacanovsky – Imperial Capital

Okay and could you remind me of the target size of Szymanowice and also I don’t know what the target size is of I can’t pronounce this one Duchowna?

David Pierce

What Duchowna, there you go.

Kim Pacanovsky – Imperial Capital

Duchowna, okay Duchowna.

David Pierce

Yeah Duchowna is a structure it is way in the south of the concession and it’s kind of on trend with Zaniemysl and Roszkow. So, it’s not a large structure but its, but that trend at least based on two data points there – is accounted for most prolific wells Roszkow started at 15 million a day Zaniemysl started out of 10 million a day. So, Duchowna is kind of a one off but it could be a very nice one. And we haven’t said anything about preliminary estimate of what we think the size is. I may be take a look at Zaniemysl and Roszkow it wouldn’t be larger than either of those.

Kim Pacanovsky – Imperial Capital

Okay what kind of rate would be expect Komorze to come in on?

David Pierce

Komorze we’re expecting it to start producing at about 1.5 million cubic feet a day and that’s a gross number.

Kim Pacanovsky – Imperial Capital

That’s gross yeah I knew that, well it’s a small one okay. And then finally what is your base decline rate looking like right now?

David Pierce

Well we tend to run very flat – I mean for most of the year and then when we do the maintenance shut-ins then we’ll come back with a new rate and that rate will usually be flat for about 12 months, but I guess somewhere in the 7% to 10% rate.

Kim Pacanovsky – Imperial Capital

Okay. Great thanks a lot.

David Pierce

You bet.

Operator

At this time we’ll move forward to Chad Mabry with MLV & Company.

Chad Mabry – MLV & Company

Thanks good afternoon. A quick follow up to the first question on the full year CapEx 2014 and $34 million or so for the first nine months that implies kind of a chain for Q4, just curious what the breakdown is going to be there seismic versus kind of drill bit CapEx?

David Pierce

In Q4?

Chad Mabry – MLV & Company

In Q4.

David Pierce

Well based on our activity at the moment I would say that about two thirds of that will be drilling and one third seismic and other costs.

Chad Mabry – MLV & Company

Okay so maybe about 5 million, 4, 5 million, 5 million.

David Pierce

Sure, sounds okay.

Chad Mabry – MLV & Company

Okay and a follow up on the Gorka Duchowna, it looks like nice discovery there. You talked as far as prospect size about 50 Bcf and about $6 million on the cost there just curious I guess first of all that cost is going to include the frac and then if you can provide any more clarity or visibility around what kind of size you think that resource might be there?

Clay Newton

The estimated drilling cost did not include fracing. So that will be incremental and I think we need to get lab work back before we think about the details and therefore the cost of the frac. In terms of size I don’t think we’re in a position to talk about that until we get the frac done and see what kind of rates we might be able to achieve. So, there really is much more information now, this was really kind of a proof of concept well, what we think in that area is that you got the Bronsko and Koscian fields immediately north of us and we see it there is Carboniferous source rock a bit of thinner bedded sands and shells and so the idea is that there may be sand lenses in the Carboniferous as you come down our way that would lend themselves to drilling and production and this is really the first direct shot at a Carboniferous well anywhere in that region. So there is a lot that we don’t know right now.

Chad Mabry – MLV & Company

Okay that’s very helpful. And then finally if I could David on this in your prepared remarks what’s the target size there on the Edge concession looking you’re looking for in order to develop that?

David Pierce

Well don’t know the exact number but say 200 Bcf of gas in place. I remember the methane contents about 55% and we’re going to have to build the denitrification plant up there. The existing once in Poland are a quite a bit south of us and so you need a quantitative reserves to justify this. At the moment we’re not saying how big we think Tuchola is but that structure – well and it depend it depends on what’s whether the Devonian is productive at the moment we’re not saying that but it sure looks interesting I guess is all I can say.

I rather suspect we’re going to need other fields beyond Tuchola to hit that level and I would hope to drill one or two prospects next year that would get us there or lead us to believe that we’re going to get there. So, that’s kind of a wait and see but I think by the, as we get to the end of the first half next year we should have Tuchola-4 tested we’ve got new seismic there, we should have new 3D seismic on at least one and may be two or three of our additional and I think from that whole combination we ought to be able to kind of look forward and talk about the plan.

Chad Mabry – MLV & Company

Got it that’s helpful. And I appreciate it.

David Pierce

Yeah.

Operator

This time we’ll take a question from Glenn Williams with Sidoti & Company.

Glenn Williams – Sidoti & Company

Good afternoon David.

David Pierce

Glenn how are you?

Glenn Williams – Sidoti & Company

I’m doing well. I just had a few questions a lot of them were already spoken to. I guess one would be appetizing the first I guess 110 kilometers of seismic in Edge concession is there anything that you’re seeing thus far in a seismic basis that gives you an indication that it would resemble the Fences concession in anyway?

David Pierce

Well the resemblance is not going to be in the producing horizon. It’s clearly going to be different. We’re looking in the Edge we’re looking at two intervals in the Zechstein that would be the CA2 and CA1 and the Upper Devonian. That’s what looks really interesting now. The CA1 is the interval that we tested and it seem to test really well in Tuchola-3. So it will be our primary target in the Tuchola-4 well. We’re hoping that it will thicken up as we get to the crust of that structure, we don’t know that we’re hoping that.

Our secondary target there is going to be that Upper Devonian and the Tuchola-3 we had more than 90 meters of what looked like due to reservoir quality and good gas saturation the challenge is that in that well we see intervals inner bedded intervals where you’ve got water saturation. So, it’s kind of a head scratcher and it will be pouring essentially that whole interval in the Tuchola-4.

Going back to the Fences it’s a much simpler proposition you have simply Rotliegend sands shooting right underneath the Zechstein meaning you’ve got a great seal on top of it. So, it’s really pretty simple on the Fences and it’s a much bigger challenge up in the Edge at least so far give us a handful of wells up there and I think we’re going to have a much better understanding of how to tackle it and the goal after all and this is where the similarity comes in, in the Fences after more than dozen of wells we’re running just under 70% success rate on wells we’re hoping that in the Edge concession that we can do something quite similar where we have a predictable success rate different horizon but a predictable success rate and where the wells are really high rate producing wells. And at least based on the data that we saw in the Tuchola-3 well, there is certainly evidence that you can get pretty high rates of production. We’ll know a lot more when we drill Tuchola-4, get orders throughout and get a more fair drilling production testing.

Glenn Williams – Sidoti & Company

Okay, that’s fine. And I guess if I just add just one other, maybe speak to that differences in the well pricing in the Winna Gora and KSK in comparison to Zaniemysl and we should expect the same at Lisewo-2 well?

David Pierce

Yeah, I can speak to that.

Glenn Williams – Sidoti & Company

Okay.

David Pierce

In our early days in Poland I was the guy who negotiated gas prices with POGC. And the fellow along the other side of that negotiation was Zbigniew Tatys and he was a fairly tough guy and I got fairly crabby prices. Today, Mr. Tatys is the Country Manager for FX Energy in Poland and he has managed to negotiate much better prices. Well that’s the history of that differential. I mean Clay, do you want to talk about the amounts of those differentials.

Clay Newton

Yeah. So, at the moment the gas sale agreement that we have with the Zaniemysl well calls for us to get 70% of the low methane tariff, adjusted for energy content and the current gas sale agreements that we have for KSK and for Winna Gora and we expect for Lisewo-1 and Komorze as well provide for a gas price equal to 86% of the low methane tariff.

Glenn Williams – Sidoti & Company

Okay, that’s fine. That’s actually all I had. Thank you very much for that.

Clay Newton

Okay. Thank you. Appreciate it.

Operator

At this time, we’ll move to Dan Mittag with Oppenheimer.

Dan Mittag – Oppenheimer

Hi, guys. I have a couple of questions, first on the Edge, Tuchola-K3 and then the ultimate drilling of 4. What are the prices of drilling those versus – I know that you are minority partner in the Fences concession but what’s a low cost in the Edge concession?

David Pierce

In the depths that we’re currently looking at we’re expecting to run about $8 million of well and we have a 100% of that. In the Fences concession the wells are in general cost $10 million maybe a $11 million but we only pay 49%.

Dan Mittag – Oppenheimer

Okay. And then you guys completed the gas plant in the Fences area?

David Pierce

We have several gas plants there but I believe you’re probably talking about the gas plant that’s going to service Lisewo-1.

Dan Mittag – Oppenheimer

That’s it, that’s it. I’m sorry.

David Pierce

The pipeline that goes from the new gas plant to the main trunk line, that pipeline is completed and it has been filled with gas now. The facility itself I believe the construction is 100% complete and what they’re doing now is the safety guys in the environmental I mean everybody is down there inspecting it. And as soon as we get through the inspection, which then we’ll be able to start producing it.

Dan Mittag – Oppenheimer

Is that a long process I mean…

David Pierce

It depends on how quickly these guys are to sign off on it. We don’t expect it to run more than all of say couple of weeks.

Dan Mittag – Oppenheimer

It’s not – we’re not talking three months either.

David Pierce

No, we – I feel quite confident that we’ll see production from Lisewo-1 this month two to three weeks’ time.

Dan Mittag – Oppenheimer

Back to the total of three, is that well similar to the old Apache in terms of the water that you mentioned?

David Pierce

Well, no, not really.

Dan Mittag – Oppenheimer

Okay.

David Pierce

The Apache well did not drill down – let me put it backwards. When we drill the Tuchola-3 well we were looking exactly at the Apache well saying do we want to get into the – if the technically the formation was the Ca2 or the Main Dolomite. And the Apache well that was portion permeable at gas flowed at a good rate. In our location at Tuchola-3, it was tight. Now, we then continue to drill deeper and knew the bottom of the Zechstein in the Ca1, that’s where we have a 10-meter zone that is fully gas and had real good production test. But immediately below that is the Devonian and Apache didn’t drill into either the Ca1 or the Devonian they stopped right there at the Ca2. So, there is a thought that you might be able to find the same formation that we see in Tuchola-3 back over there at the Apache well, maybe not I mean we don’t know but it’s over really looking at different horizons.

Dan Mittag – Oppenheimer

Perfect. Thanks a lot.

David Pierce

You bet.

Operator

At this time we’ll take a question from [indiscernible].

Unidentified Analyst

Hi, David and Clay. How are you doing today?

David Pierce

Good. Thanks. [indiscernible].

Unidentified Analyst

It’s going well, lot of years 12 years I’ve been watching you guys and new guys. So, hopefully we’re at the brink I hope. I got – I have two questions. On Lisewo-2, I may have been a little late but we’re almost there. What was the update or when do you expect to have something definitive on that, I may have missed it.

David Pierce

We should be testing in the next month or two, most likely before year end.

Unidentified Analyst

Okay. Little bit later than you anticipated, it seem like you’re on the brink on your 29th release.

David Pierce

We went into some gas in the Main Dolomite in that well, this is not far above the Rotliegend their target rise. In that – in the Fences, typically the Main Dolomite is not very big, it does not have commercial quantities of gas in the Main Dolomite but it often has a little H2S in it and you don’t want to take a chance of letting that gas contaminate the Rotliegend. So, if we have to stop for a while and this has happened to us couple other times in the Fences and you’ve got to bleed off that gas, get the pressure down and then summit it thoroughly. So, yeah it slowed us down a bit.

Unidentified Analyst

Okay. Thank you. Just on cash flow CapEx. If I read this right, it seems like with what you’re doing in drilling and other cap – it’s going through the income statement you’re running maybe $4 million or $5 million of positive cash flow and then we’re about I guess $17 million or so in additions. So, if you look at that it might be 14 or 15 year-to-date you maybe – I don’t know what you’re looking at, maybe 20, 22 a year it all depends I guess on how these wells go. But I was looking at the line, the line is about 42, you can go to 65 so you have 23 more, you can pull off that and you have cash flow from operations. How do you Clay and David feel about going forward into next year in terms of just being able to fund everything on what financing you have in place. And beyond that if you go to 40 and what does it take you to expand the $40 million into $100 million?

David Pierce

Well, let me start with our expectation. Now it’s that everything that we’ve talked about in terms of upcoming operations, we can see funding from that for that from our existing cash, had them on our credit facility and ongoing revenues. As far as what it takes to increase the credit facility from $65 million to $100 million it would take to bring up more reserves. And of course that’s what we hope to do with specifically with Szymanowice, with Tuchola-4, Duchowna. So, – and that’s why – that’s why we built that accordion feature in. And so that we didn’t have to go back and pay new fees. We expect to be able to develop new reserves in the coming year and therefore have a bigger credit facility available pretty much automatically. I mean we’ve got a, you got to get to the independent engineers to report on stuff but those are mechanics.

Unidentified Analyst

That goes up kind of throw out with the reserves you have up to a certain level, is that what you’re saying that once it’s proved out you can then expand it fairly automatically or not?

David Pierce

That’s the idea yeah. It is not automatic you have to apply for it and you have to, you have to have the reserve reports but it’s essentially a prorate increase based on increases in reserves.

Unidentified Analyst

And your next reserve report official coming out at the end of the year?

David Pierce

That it will and but we would probably we’ll have Zaniemysl or I’m sorry Szymanowice and Tuchola-4 both coming in the first half and if those add appreciably to reserves or appear to do so we will probably get an interim report and that’s the kind of thing that, we ask if its automatic it’s not but if we do an interim report then that’s something that we could take to the bank and that would give us the ability to expand the facility.

Unidentified Analyst

Okay thank you very much.

David Pierce

You bet, thanks for calling.

Operator

Our final question will be from [indiscernible]. Please go ahead.

Unidentified Analyst

Good afternoon David how are you doing?

David Pierce

Very well John you?

Unidentified Analyst

Good, good not too bad. Couple of questions how much structure do you expect to gain on your Zaniemysl side track and how far, how much of the side track is it as far as bottom hold from your current bottom hold?

David Pierce

I don’t have an exact answer to either of those questions. Well we have approved the side track. Our team is right now going over the existing 3D seismic. Over the years we’ve picked up some techniques that vastly improve the detail. So, we’re looking at that right now in the next several months we’ll have, we should have a definitive answer to that to both where we think the exact of that center lies and how far up it is.

On the older mapping we had some significant room to get higher and that’s all I, that’s really all I can say right now I prefer to answer that when we have the final maps on that. Now I have to say that the group is not participating in that effort. That’s something that we’re doing on our own and but we’d like to have that done and be able to give that in front of the partners before we do the side track.

Unidentified Analyst

Are they permanently out there or do they have some kind of a back end…

David Pierce

No, no I’m sorry. All three partners have agreed to the side track.

Unidentified Analyst

Okay.

David Pierce

But it’s just we wanted one more chance to look at the data and see if we wanted to tweak exactly where we aim at.

Unidentified Analyst

Is there every call in some brochures, map, presentation or whatnot a number of years ago you had a well logged – on there as I recall that was a pretty thick interval that you’re producing out of it, is that right?

David Pierce

Yeah that is right.

Unidentified Analyst

So, okay. So that’s why I’m asking how much structure you might be able to gain on that and I would have assumed it’s got to be I won’t say what I think but anyway. Along those lines on your presentation map David you have two rather intriguing outlines, been out there for a while and I wonder if you might be able to talk and one of them it is looks like it’s pretty much to the west of Zaniemysl pretty nice little outline there and another one to the south west or south east rather kind of looks like a tomahawk. And I was wondering if you’re working actively it looks like you’ve got some 3D over the one to the west pretty decent outline relative to some of these other areas that you’re active in can you talk it all about that?

David Pierce

Yeah, yeah began to do. If you look at the, kind of draw a line, everything to the north the areas – you’re talking about the area in the ultimate southwest corner of the …

Unidentified Analyst

227 yeah.

David Pierce

If you go north of that and east of that that’s where all of these structural features lie and that’s what we’ve been drilling successfully and we see a lot more of those and then that’s really been our focus. But if you go down, you’re talking about that’s where in a general fashion the Rotliegend pinches out that is it gets thinner and finally disappears that’s not true and I’m trying to describe something but it sort of pinches out some of it passes through. There is a high block of Carboniferous that sort of makes that happen. And we – well years ago we drilled a couple of stratigraphic targets down there and you can see a little red blob that’s in that area where we drilled a well and got a well that would be capable of producing but not very much. And so we’ve got those are the areas where we think there is potential for us stratigraphic play and that’s what the new sits make us looking at.

Now there are structural features there as well so much better. Stratigraphic targets – you find the biggest fields in stratigraphic tracks around that but they are very difficult they’re very challenging because you’re trying to get not too thick and not too thin you got to get it just right and also the rock quality changes moving that direction. So, we’ve left that kind of, until we were bigger and stronger and could handle some risk down there and we haven’t seen the results of that seismic yet. So I can’t say today whether those are going to be viable targets or not but it’s…

Unidentified Analyst

Yeah I understand it. Rotliegend pinched up down that when you got down that far so that’s my bad on that. One last little question and that is looking at the release today on your oil field services – I was a little perplex I know most of that stuff in Montana that the revenues were pretty light in the third quarter costs were up and so forth kind of looks like that was a gravy train its turned into a loss situation. Can you shed any light on what’s going on in that regards and it’s not real terribly meaningful but just kind of curious given all the activity going on in the Montana, Bakken and so forth area?

David Pierce

Yeah well if you remember about a year ago one to two years ago, we took a look at the Bakken up in that area.

Unidentified Analyst

Right.

David Pierce

And we got a couple of partners and we did some of the drilling for that effort. It didn’t come to anything but we did more work and therefore had more service revenue. Typically, but we use our rig and have done for years and we drilled wells from time-to-time we use the same crew that we use for field operation so we don’t have employees hanging out. And cost will go up during quite times because when things are busy we go out and drill, when things are not busy then you do the maintenance.

Unidentified Analyst

Well that was my question I was just wondering if you don’t have anything immediate activity going on in your own interest or you’re not engaging them in other operator’s activities or is it just too far removed from the hot spots?

David Pierce

Well we’re clearly not landing hot spots. But I can tell you that in that area the Bakken play which had heated up quite a bit has gone cold and just the normal drilling you see in, that we’ve seen year in year out has slowed down. Will it pick up again? I’m guessing it will but I don’t know that. So we’ll just have to see. It’s not something that we drive and it’s not – like you say it’s not a big deal. We’re there – we have to have a fair amount of equipment just to maintain our stripper production up there, we do all of our work ourselves and that’s why we have what we call are service company and mostly provide services to ourselves there. But whenever there is demand for, we’ll provide services to other company this and we’ll continue to do so on the future.

Unidentified Analyst

Thanks. Very good. That’s all I got. Thank you.

David Pierce

Well, thank you all for spending the time with us. We appreciate it. And we like I say we appreciate your patience and the support. I do think we’re on to something at year end. This has been a good year and next year should be a lot better. Thank you.

Operator

And this conclude today’s conference call. Thank you all for your participation. You may now disconnect.

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