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Double Eagle Petroleum Co. (NASDAQ:DBLE)

Q3 2013 Earnings Call

November 7, 2013 11:00 AM ET

Executives

Richard Dole – Chairman, CEO and President

Kurtis Hooley – COO and CFO

Analysts

William Richey – Moloney Securities

Operator

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

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

Richard Dole

Thank you. Good morning. Thanks for joining us today as we discuss the financial and operational results for the third quarter and provide a brief update on the current activities at Double Eagle. Joining me today is Kurtis Hooley, Chief Operating and Financial Officer.

On the strategic side of the business, we continue to work with Petrie Partners, an effort to further evaluate venturing company opportunities. As a part of that process, we tested the market value of some of our non-operated properties. Because those properties are long-life and provide very strong cash flows. The company plans to retain those properties.

We also are near completion of a comprehensive undeveloped lease analysis. We plan to focus on rationalizing our lease positions through either sale farm-out or joint venture.

Now to provide a detailed discussion of the financial and operational results, I’ll turn it over to Kurtis.

Kurtis Hooley

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

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

Now before we go into details of the quarter, I would like to direct everyone’s attention to our cash flow statement in the queue. I’ve received numerous calls from proffered income and shareholders worried about to going to return to company.

If you look at the cash flows, for the nine months ended September 30, 2013, we generated $10.3 million from operations. We used $7.7 million in investing in properties and we did pay $2.8 million dividends.

I think these numbers show that we are managing our spending to stay within our cash flows. We have strong hedges in place to protect from significant downward price movements, our capital commitments as I’ll discuss later are decreasing and we have very good assets. We expect this trend to continue. And obviously we can’t predict this with certainty, the forward pricing environment. But with our hedging position, our low cost operations and consistent production, we are in a strong position from cash flow standpoint.

Now, as in the past, the Board of Directors approved the payment of the December 31, 2013 dividend which we will be announcing later.

So, our third quarter 2013, we did have a net loss after dividends of $2.7 million compared to a net loss of approximately $5 million last year. Our net loss in both periods includes non-cash change in fair-value, on our natural gas hedges, which was an about $600,000 swing downward from third quarter 2012 from Q3 in 2012.

Our clean earnings, as defined in our press release is, income of $2.7 million versus income of $3.8 million in the prior year. This 29% decline is primarily related to lower production volumes, higher production costs and taxes, which have been offset by our higher realized prices.

Please take a look at our press release for a reconciliation of clean earnings to GAAP net income. We’ve seen an increase in stock pricing and as a result our realized price is up 8%. However, this is offset by a 16% decline in our production primarily in the Catalina Unit. As we stated before, the decline at Catalina is partially offset by a higher working interest purchase from Anadarko in Q4 2012.

And the production at Catalina continues to be down during the third quarter as we continued to recover from the compressive failure and injection issues we talked about in the first half of the year. We have been focused on recovering this production and we start to see the results early in the third quarter.

We’ve also completed our work-over program, opening up previously un-produced

Upper (inaudible), the results from this project are encouraging.

Now, in the Spyglass Hill unit, Warren Resources completed drilling 27 CBM wells this year, in which we have an approximate 10.5% interest in that acreage. As we mentioned in previous calls, the production from Spyglass Hill has fallen off with the transition from Anadarko to Warren as the operator. Now we’re working with them to get the production back up.

The 27 new wells are expected to be all online and producing by November 15, of this year. Warren discussed in their call yesterday that they are having water handling challenges which could restrict the current well’s production but they are modifying the water gathering system to hopefully improve this production.

In discussion with Warren, they had indicated to us that it was their intention to drill prior to the BLM drilling deadline of June 10, 2014. The additional 23 wells needed to hold the Spyglass Hill unit in place.

Well, Warren announced yesterday that they intend to drill a total of 48 wells in the Spyglass Hill unit. We hopefully will be participating in these wells and these are expected to provide additional new reserves net to the company at an F&D cost of $1 or less. As of today, we’ve not been given their detailed plan, so the exact increase on our participation is unknown.

We continue to see steady results of our Pinedale operations as QEP completes the drilling of the Mesa-B unit. As noted in the 10-Q, all the 2013 wells are expected to be producing by year-end. This represents the completion of the expected drilling in the Mesa-B participating area. We will not have any additional drilling capital requirements during interest in this area, as the Mesa-A PA, which is scheduled to be drilled over the next two or three years, represents acreage in which we all are having to override.

Now we do have a 6.4% working interest in Mesa-C but the drilling in that PA is not expected to commence until sometimes in 2015 or ‘16, and we are carried for the capital cost in that PA.

We expect to be right on-budget with our capital spending for 2013, and we should have all the new wells on line and producing by year-end.

Richard Dole

Thank you, Kurtis. With that I’ll open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from William Richey with Moloney Securities.

William Richey – Moloney Securities

Yes, good morning gentlemen, this is Bill Richey.

Richard Dole

Hi Bill.

Kurtis Hooley

Hi Bill.

William Richey – Moloney Securities

Two questions here, one is obviously on the minds of any shareholder at this point and that is that we’ve seen a dramatic value in the evaluation of the company in the marketplace. And I think it would be something that if you gentlemen could discuss that that would be perhaps helpful.

And number two, what is the status of the Niobrara test and the permitting of the deeper zones? And from the earlier press releases that sounded quite encouraging on the oil front of the Niobrara. And I would love to hear what the updates there and what the strategic thoughts are on what to do at this point with that particular situation? So, thank you.

Richard Dole

Okay. Let’s start with number two first. We had a permit into commingle, the lower gas with the upper gas, the assets coming from the Niobrara for the last 30 days, I checked on it this morning. The permit has to go to public hearing it has not been scheduled yet. And it’s kind of a process that’s outside of our control.

The intention is to drill out the plug of the lower commingle it, we are producing small amounts of hydrocarbons liquids as well as gas in the Niobrara. Until we get it all opened up we really won’t have a full assessment. I think I’ve said previous this was an appraisal well.

We believe that eventually if the play develops what have to be done on a horizontal basis. We are in the process of putting together an effort to look for a joint venture partner. There is a lot of activity to the South. I know that Warren is looking for a joint venture partner for their deep rights as well. So, it’s an ongoing process.

The second part, I’ve never been able to explain to market, I’ll comment and if Kurtis has any other observations he can add to it. We’ve got the same assets we had two months ago. In fact we got some interesting upsides, a lot of the growth in the assets that can occur isn’t going to require as much as capital as we’ve had to do previously.

The strategic process that we’ve gone through and are going through with Petrie, often times there are a lot of rumors that come out of those processes, even though there is NDA. And the fact is that we’re in that process, we’re looking for opportunities. And so, I don’t know what else to tell you. And the cash flows are good, in spite of the natural gas prices. So it’s a battle I can add.

William Richey – Moloney Securities

You alluded to the fact that there are some pluses that might be recognized that perhaps maybe we’re not recognizing, is that what I understood, you just said here a moment ago? Could you explain that please?

Richard Dole

Well, I don’t know if we’re recognizing or not. There are a couple of areas that and these are fairly complex. But if you look at the Pinedale for example, while it has a decline it’s bring on live reserve. When QEP starts to develop Mesa-C which is the 2015 estimate, they add a lot of reserves that we don’t have any capital out like.

So, while Pinedale will decline on a normal decline rate over that period of time, then it goes back and if all the wells are as expected, we would replace a lot of the reserves we produced through in that interim period at no cost, so that’s one of the upsides.

The other upside which is harder to measure is, in the way that several units adjust when you add new acreage to it, we would be drilling it at say 10% interest, will be as the unit adjust, we’ll be giving up some of the old reserves that will be adding some of the new reserves. And there were new reserves add are far greater than the old reserve adds. So, it’s kind of like a partial carried interest if you will on the development, as long as they’re added to the Doty Mountain and Sun Dog units.

William Richey – Moloney Securities

Alrighty. And in addition, are we looking at any new operation as far as new areas that – as far as exploration, development types of situations currently and if so what?

Richard Dole

Yes, we are. But part of the Petrie process was and is to look for assets with management, assets without management. And we’re still in that process. So yeah, we are actively doing that. The land that we’ve – the land analysis that Kurtis did this year with some consultant has provided us some opportunities to do some potential farm-outs and so we’re working those very hard.

William Richey – Moloney Securities

Okay. Thank you.

Richard Dole

Thanks, Bill.

William Richey – Moloney Securities

That will help. Thank you.

Operator

(Operator Instructions). At this time we have no questions waiting.

Richard Dole

And with that I thank you for your attention. And have a good day.

Operator

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

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