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ZaZa Energy Corporation (NASDAQ:ZAZA)

Q3 2013 Earnings Call

November 12, 2013 10:00 AM ET

Executives

Jay Morakis – IR

Todd Brooks – President and CEO

Ian Fay – CFO

Kevin Schepel – EVP, Exploration and Production

Analysts

Doug Bocchino – Casimir Capital

Evan Jones – Jefferies & Company

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2013 ZaZa Energy Corporation Earnings and Operational Update Conference Call. My name is Dominique and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, [Operator Instructions]. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Jay Morakis, Investor Relations. Please proceed sir.

Jay Morakis

Thank you. Good morning and welcome to ZaZa Energy Corporation’s third quarter 2013 results and operational update conference call. Today’s call is being webcast on our website 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 Kevin Schepel, Executive Vice President of Exploration & Production.

Before we begin, I would like to remind everyone 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 be identified by words such as anticipates intense, plan, seeks, believes, estimates, expects, forecasts, and similar references for future 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 Form 10-K and 2013 first, second and third quarter Forms 10-Q filed with the SEC.

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

Todd Brooks

Thank you, Jay. Good morning and thanks for joining us today. With me this morning are Ian Fay, our Chief Financial Officer, and Kevin Schepel, our EVP of Exploration and Production. I’ll begin with a few comments and then turn the call over to Ian who will discuss our financial results. Ian will then pass the discussion over to Kevin who will give a technical update describing ZaZa’s approach to proof of concept wells and how all this fits into our resource play business model.

At the outset, I would like to take this opportunity to discuss ZaZa’s business model along with a brief history of our execution as relates to this in order to properly frame our position today. Once this is clear, it is easier to project where the company is heading next year and the years that follow. I feel it is important to provide you with this detail because ZaZa has undergone quite a few fundamental changes over the course of our first 18 months as a public company. Unless you have been living it every day, the business model and therefore the investment proposition may be unclear to an outside investor.

Our strategy has always been to identify areas of interest early and perform detailed geologic evaluations about an area before deciding to move further. Upon completion of our evaluations we make a go or no-go decision. When we reach a go decision our strategy is to acquire a large contiguous acreage position that is scalable and can be both material and strategic for our major partner, should we decide to sell down or eventually out of the asset.

Our internal threshold for potential recoverable reserves for our last two projects, the Eagle Ford and now the Eaglebine has been in the 200 million to 1 billion barrel range. Upon amassing our initial acreage position, ZaZa then moves into the proof-of-concept phase. By proof-of-concept I mean the drilling of one or a few wells designed to substantiate the initial geologic evaluations of the block and lay the foundation for a partnership, either at the appraisal phase or the later full field development phase.

Assuming proof-of-concept is successful the focus then moves into appraisal and finally development. While Kevin Schepel will have a lot more to say about proof-of-concept in a few minutes, let’s take a look at ZaZa’s success in execution record to date.

At the end of 2010, and 3/2011 we drilled 11 successful proof-of-concept wells and 19 successful appraisal wells in northern, central and southern LaSalle County before handing over development operations there to Hess in November of that year. Also in 2011 we drilled a successful proof-of-concept well in eastern Gonzales County. At the time considered a full Eagle Ford step out called the Crabb Ranch 1H well. This well is a great producer and continues to track toward 500,000 barrel EUR. This well de-risked our Moulton prospect which we sold in 2013 for approximately $38 million. Our original cost basis in this property was nominal.

In 2012, we drilled two successful special proof-of-concept wells. One of these was located in northeastern DeWitt County, the Boening 1H, which was another Eagle Ford step out. The Boening well was an important data point in consummating our new Sweet Home joint venture because it proved up the low resistivity, organically rich lower Eagle Ford play in that area. I will add this. Since, we drilled the Boening well numerous prolific wells have been drilled in the area, including several by our new Sweet Home JV partner. I’ll talk about this new Sweet Home JV in more detail shortly.

At the end of 2012 and early 2013 we drilled two proof-of-concept wells in Walker County in entirely new and highly complex and exciting play. We named it the Eaglebine. The information obtained from these two proof-of-concept wells was critical in our marketing of the project.

As expected from our earlier geologic evaluation modeling of the area, when we drilled these two proof-of-concept wells we encountered five different zones that have the potential to be highly commercial discoveries. These five zones are named from deepest moving shallower number one: The Glen Rose; number two, the inter-bedded and organic rich Kiamichi or Edwards, which is also known as the [indiscernible] line; number three, the Buda; number four, the Woodbine Maness Shale and number five, the Eagle Ford.

Turning our attention to 2014, there is no doubt that the next 12 to 14 months will be an extremely exciting time for our company as we expect next year to be a year of continuous appraisal and development for both of ZaZa’s joint ventures.

Currently, appraisal drilling operations continue in Walker County and the JV has both vertical and horizontal wells on the drilling schedule. Our business model is sound and our exploration machine is working well. ZaZa has always in the past and will in the future use grassroots geologic evaluation, first mover leasing in proof-of-concept drilling as primary drivers for creating significant shareholder value…

Now, I would like to summarize our three principle transactions from the third and early part of the fourth quarter. Number one: sale of Moulton assets. In the third quarter, we closed on the remaining portion of our Moulton acreage for $29.3 million. We’d previously reached a separate agreement to sell additional Moulton assets to the same party for $8.8 million bringing the total purchase price for the entire asset to $38.1 million. The proceeds of this transaction provided Zaza with greater financial flexibility and allowed us to pay our senior secured lenders down further which in turn enabled us to successfully transition our focus to the Eaglebine. Second, and as disclosed on this morning press release our new Eagle Ford for JV and our Sweet Home prospect area.

During the third quarter we consummated a joint development agreement with Sabine Oil & Gas. Our first reserve backed to proven operator who is running multiple rigs in the area offsetting our acreage. Under the terms of the agreement, Sabine received 75% working interest in approximately 7,600 net acres and will be the operator of the play. Zaza retained 25% working interest in the JV acreage, received a drilling commitment for two horizontal Eagle Ford wells to be drilled and completed on/or before April 15th, 2014 and will receive a [full carry] for drilling and completion of our interests in these first two wells. Zaza also received $750,000 credit for our interest of post-completion infrastructure costs and $300,000 credit for our share of land lease upkeep in JV acreage. We expect to the spud four horizontal wells in the Sweet Home area by the end of the first quarter of 2014. Two of these four wells, we expect to spud in the fourth quarter of this year.

Third and most significant are the developments in the Eaglebine. Over the past two quarters, I have discussed our JV outlining each phase of our initial agreement. I am pleased to report that during the third quarter and subsequently we reached the amendments to our initial agreement growing and accelerating the joint venture. Phase II is accelerated and Zaza assigned to our JV partner approximately 20,000 net acres for cash consideration of $17 million and approximately $3 million of interest in 15 producing wells owned by our partner and located outside of the parties AMI.

Additionally, under Phase II our JV partner will drill horizontal wells and in one vertical well in the JVs AMI, carry our interests in those wells and provide a miscellaneous work and land carry of up to $1.25 million. Our counterparty may, however, elect to drill one or more vertical wells in order to achieve carry parity value for drilling horizontal wells. To complete its former obligation in respect to the third well is part of Phase I our JV partner will also pay for an additional $1.5 million of Zaza’s cost for one or more additional vertical wells as well as make it $1.5 million cash payment to Zaza.

Phase III was also accelerated and Zaza has assigned approximately 7,800 net acres from the former Phase III acreage for which we will receive approximately $11 million of interest in the 15 producing wells from part of Phase II. In addition, our JV partner has the option until January 31st of 2014 to acquire an interest in the remaining approximate 12,300 former phase III net acres at a fixed price per net acre.

Lastly, our JV partner acquired approximately 19,000 net acres in interests in related wells in our AMI and has assigned to us 25% working interest in these leases in wells. In consideration for our participation in these leases in producing wells, Zaza assigned approximately 13,875 additional net acres to our JV partner and paid approximately $700,000 in cash.

Following these transactions, Zaza’s average daily net production over the month of October was 631 BOE per day, 48% oil. The production is coming from multiple zones, including the Glen Rose, Buda, Eagle Ford and Eaglebine. We expect this production base to grow over the coming months as additional wells are completed in multiple zones and brought on to production.

Well, the company has previously reported individual well results, our general approach going forward would be to report regional and companywide production results only. This is in keeping with the strict confidentiality requirements of our joint ventures which are designed to protect and maintain the competitive edge that our joint ventures have achieved by virtue of ZaZa being an early mover in each respective area.

The Company continues to execute and we now stand in a position that we believe that is superior to where we were when we started out Joint venture with us in the Eagle Ford. We’re pleased with the quality of both of our current JV partners and look forward to the continued drilling of appraisal wells on both of our JV blocks during 2014.

Although these are early days in the Eaglebine our technical team is very optimistic about the area. And we continue to look for regional bolt-on acquisitions. As many investors generally recognize now the current North American upstream environment is one in which operators in general are opportunity rich or long on acreage and drilling inventory and are relatively capital short.

This creates an opportunity to acquire quality acreage and resources at reasonable prices as it seems that for now the bargaining power has shifted in to the buyers favor. We also continue to strongly evaluate new potential plays when our balance is recapitalized in more favorable terms our team is prepared to be a first mover once again.

Currently we’ve identified one new play in particular that we are highly interested in as we work to continue to repeat our successful proof of concept strategy, that focuses on finding sweet spots in emerging place. Although supply is to the full right now there is always room at the top for tier 1, high rate of return assets that have scalability and plenty of running room.

With that I will turn the call over to Ian for review of our financials. Ian?

Ian Fay

Thank you Todd and good morning everyone. Our Form 10-Q and press release contain a details related to our three and nine months results for the periods ended September 2013, and September 30th 2012. So I’ll provide a high level recap on this call. I’ll spend more time addressing our balance sheets and what our plans are to optimize our capital structure. I’ll then turn the call over to Kevin Schepel.

In third quarter of 2013, we reported oil and gas revenue $1.1 million versus $2.2 million for the comparable 2012 period. And for the nine month period in 2013 and 2012 we reported oil and gas revenue $6.3 million versus $7.4 million. For both the three and nine months periods revenues were impacted by the previously outlined shift and strategy as we sold off some of our non-core assets.

Moving forward we expect to have operating results from our joint ventures which are expected us to offset this decline. Operating cost and expenses for the third quarter of 2013 were $15.2 million versus $22.3 million in the comparable 2012 period. The primary reason for this decline is the $13.1 million reduction in our G&A expenses as well as declines in our lease operating expenses and in depreciation and amortization.

In the 2013, third quarter we took a non-cash impairment charge of $9.2 million compared to a $2.2 million impairment charge in the comparable 2012 quarter. Both impairment charges related to lease expirations in our core areas. Excluding the impact of the impairment charges, total operating expenses were down approximately $14.1 million or over 70%.

For the 2013 nine month period operating cost and expenses were $131 million versus $81.4 million in 2012, an increase of $49.6 million. Primarily as a result of increase in non-cash impairment charge of approximately $100 million, excluding the impact of non-cash impairment charges our operating expenses and expenses for the comparable nine month period were down $50.6 million or almost 64%. This was primarily driven by the decline in our G&A expense of $47.4 million.

I would like to add that during the fourth quarter, we may record a significant gain related to the monetization and associated to fair value accounting associated with their assets in the Eaglebine/Eagle Ford East play.

Now let me mention a few other points highlighting the non-cash nature of certain significant income statement components in the interim periods. Number one, we recorded a loss on extinguishment of debt in the 2013 third quarter of approximately $400,000 versus $15.2 million in the prior year period. And for the nine month comparisons, in 2013 we recorded a loss from the extinguishment of debt of $16.6 million versus $15.2 million in the comparable 2012 period.

The 2013 loss primarily related to fair value adjustments following a pre-payment of our senior secured notes in the second quarter of 2013. Number two, in 2013 third quarter we also recorded a gain in fair value of warrants associated with our senior secured notes of $1.4 million versus a gain of $27.1 million in 2012. For the nine month period the gain was $19.8 million versus a loss of $5.3 million.

And number three, we recorded a gain on fair value of embedded conversion options associated with our convertible senior notes of $1.4 million in the 2013 third quarter and $14.8 million for the nine month in 2013. There were no recordings in either period for 2012. For the 2013 third quarter we reported a net loss of $20.6 million versus a net income of $133.8 million. For the nine month period in 2013 we reported a net loss of $81.7 million versus a net loss of $33.5 million.

I’ll now move on to the balance sheet. All figures for the periods ended September 30th, 2013 and December 31st, 2012. We had cash and cash equivalence of $6.6 million and restricted cash of $15.5 million. This compares to cash and cash equivalents of $34.6 million and restricted cash of $21.9 million.

Our total debt was $97.0 million after subtracting the issuance discount of $17.1 million. This is consisted of number one $22.4 million of senior secured notes number two $27.3 million of convertible senior notes, number three, $47.3 million of subordinated notes. $9.9 million of this total has been classified as current because of our obligation to repay part of our senior secured notes by February 28th 2014.

As we’ve communicated consistently over the past few quarters our strategy has been to de-emphasize and monetize our non-core assets and use cash generated from asset sales to fund our general cooperate activities and to reduce our debts. As a result of executing this strategy we recognized combined cash proceeds of $49.6 million through the third quarter of 2013 from the sale of a portion of our non-core assets and the first development phase of our Eaglebine/Eagle Ford east wood venture.

And during our fourth quarter we accelerated this joint venture resulting in Zaza receiving additional $16.3 million in cash which excludes $1.5 million we’re pleased to receive in the third quarter. In addition to the cash we received working interest in producing wells with the PDP present value of approximately $17 million.

As of October 15, 2013 on a pro forma basis our cash balance was approximately $21 million and this excluded restricted cash of $15.5 million. We set on our course roughly two years ago and entered into a number of strategic transactions along the way. We first unwound selected non-core assets to the dissolution of our JV we’ve had which enabled us to add to our dominant position in East Texas, and aggressively pay down debt. We then looked to rationalize our remaining assets determining what was core to our future growth and success.

As a result over the past year we’ve almost completed the non-core divestitures using capital rates to fund operations expand our acreage position and improve our balance sheet. Our focus now is on optimizing balance sheet and capital structure in order to replicate our proven growth model and be more optimistic.

That is why we have opted to file a universal shelf registration statement today, up to $150 million. We’re looking at any and all avenues that will enable us to raise additional capital that will add new term, we’re sensitive to minimizing diluted outcomes. Within the following six months our goal to shift our balance sheet to a place where we can access the capital markets in the most efficient way by pursuing a multi-facetted approach including bonds, preferred stock and potentially equity, we have a clear path to pursue a series of transactions that are responsive to the potential for economic dilution that would put the company in a better competitive position and that will enable ZaZa to obtain opt able financing as the company grows in the coming years.

This positioning is essential for us. Especially for now that we have two joint ventures advancing to the appraisal and development stages. We want to retire some of our more expensive debt use cash from operations to enhance what we build and have additional resources available to us to go and pursue growth opportunities.

The evaluation of all opportunities however, we made using a written driven approach. We’re constantly reviewing a variety of options for growth but until we have the right capital structure in place and the team on hand to implement our strategy we’re taking a deliberate and disciplined approach to execution. Transactions must be accretive and to the extent capital to build we’ll look to do so net cost neutral in a manner as possible.

I’d now like to turn the call over to Kevin Schepel so he may discuss the technical points associated with our valuation process. Kevin?

Kevin Schepel

Thank you Ian, and good morning to everyone on the call. Our third quarter was busy on the technical side, as the Eaglebine play in east Texas has experienced a ramp-up in activity on the 42 companies operating here, with an average of 28 rigs running throughout the quarter. Now that traded data with a number of these industry sources in the detailed mapping and modeling continues for our technical team.

These new data points continue to highlight the prospectively potential of the east Texas area, multiple zones we’ve been looking at for quite some time now. While Todd outlined the business model earlier, I’d like to dial in and discuss some of the technical details associated with our evaluation process.

Our early appraisal wells armed with conventional and ordinary core data advanced to the chemistry, [indiscernible] and custom petrophysics, the designed to confirm produce ability and obtain the technical information needed to assess commerciality. Focused on detailed integration of physical rock properties, fluid composition and rock mechanics, these wells provide the information needed to evaluate organic content, mineral composition, frac ability and the optimal completion design for the target intervals.

But often the first wells in the prospect, they’re key fundamental corner stones for proving at the play and driving future expansion and development. Now this process and methodology is one that’s been very successful with us, and we continue to implement new technology and best practices as we pursue additional unconventional resourced opportunities. It’s really the curiosity towards these new horizons coupled with the implementation of new technology that drives our team and define ZaZa as a company.

Now I’d like to provide some details of our valuations to date. Our first Eagle Ford JV was focused on several large blocks of Wausau County in accord of the Eagle Ford. We drilled and completed 28 proof-of-concept and appraisal wells from 2010 to 2012. The team cut and analyzed over 2,000 feet of conventional core and recovered over 800 (inaudible) 4, 2.17 sidewalk orders.

Now at that time, this was more physical rock data in Eagle Ford that had previously been acquired by the entire industry. Through the sharing and integration of this data with our service providers, our team worked hand-in-hand and tested a number of new volume technologies, which are now the standard formation valuation, in unconventional resource plays.

The physical core data was also contributed to an industry consortium, to aid an established our time frequent strata graphic correlation for the Eagle Ford paying horizons. We also implemented the first ZIPPER frac, by alternating two well stimulations from the same pad, using a frac treating valve designed internally by ZaZa.

In the 28 wells drilled, our average first month’s production was 3,000 barrels per well, or 65% higher than the industry offsets in the area. And following the appraisal, our JV partner began full filled development on the Wausau acreage .

In August 2011, ZaZa drilled, cored indicated the Crabb Ranch A-1H well in Gonzales County. This was the first appraisal of the Eagle Ford where the reservoir thickness was less than 75 net feet. The Crabb Ranch A-1H was completed as a 5,000 foot tow-up lateral, making just under a 100,000 barrels of oil in the first year of production and was the longest, natural forming oil-well in the area at the time.

We also had interest in six adjacent, non-op wells, and again through the combined effort with our JV partners, Magnum Hunter and Southern Bay was now Halcon. We proved the commerciality of the eastern extension of the Eagle Ford play, which is now one of the most active areas in the trend.

We began our next expansion effort in the late 2011, with the drilling and completion of the Boening A-1H appraisal, which is in our Sweet Home prospect in DeWitt County. The well was the first to test the low registry organic to Eagle Ford, and that’s very similar in composition to the Eaglebine in east Texas.

The redistributing and target interval was less than five holes, and this is far below the typical cutoff of the traditional Eagle Ford. Now ZaZa stepped out of the boundaries of the play by evaluating the effects of changing faces and rock characteristics on the electric log measurements.

Now we knew the traditional log cut off eliminating the Eagle Ford play were about to change and with this would give us, give the company a head start. At the time the three home prospect was also in an area previously viewed by others as predominantly dry gas, so in addition to the advance composition work on the 475 feet of potential core taken in the pilot. We used an advanced drilling mud evaluation service, we fully based these characterization to the Eagle Ford section.

From the core and fluid data, we confirm the organic carriage in to the shales themselves retain heavier, liquid rich hydrocarbons, which are only released during the drilling and production of the well. The Boening A-1H well was drilled to a total measured depth of 18,797 feet, with a 5,163 foot affected lateral section. An under controlled pull back and restricted only to the upper portion of the lateral, the well achieved initial production rates of 264 barrels of oil a day and 2.cubic feet of natural gas.

The Boening well confirmed our early prognosis for the potential of the below the redistributing Eagle Ford in the three home area, with higher and unexpected liquids yields on production. The GOR for the Boening has been running at less than 2,500, it’s pretty exciting

ZaZa has since high graded its Eagle Ford sweet home acreage and the tiered development units and expects to further delineate that acreage into 2014, and of course as Todd mentioned we’re happy to announce that we’ve negotiated terms for our next JV partnership and the appraisal for the Sweet Home acreage, with plans to drill four horizontal wells offset to the Boening over the next eight months.

So ZaZa next turned its attention to the large, continuous acreage position it had accumulated in east Texas in the Eagle Ford low arbitrageurs [ph] place. Our first proof-of-concept well, the Stingray A-1H was a technical success and the data confirmed our early prognosis of the potential of the Eagle Ford east and Eaglebine plays in Walker County.

While drilling the well, we encountered liquid rich mud log shows through the entire lateral section, the logs and low recourse confirm the presence of organic rich shales of significant resource potential. And we feel its advanced technical information that we obtained on the Stingray, was a key component in attracting and approving arguments for partner for further evaluation in establishing the best drilling and completion practices in the area.

So ZaZa is now entering the second phase of appraisal, which we are confident will further enlighten the potential of the east Texas Eagle Ford play. But in addition to the Eagle Ford, horizon in which we tested in the Stingray well, ZaZa also targeted this area because of the lower cretaceous fractured carbonate play, which contains a stacked Buda, Georgetown, Kiamichi, Edwards, Paluxy and Glen Rose formations, these formations routinely perforated fracture stimulated and commingled in vertical wells.

ZaZa drilled and completed two proof-of-concept wells, the Stingray reentry and Commodore, both drilled at the top of the Glen Rose. Results of these wells were used to evaluate the multiple reservoir targets in the upper and lower cretaceous, to confirm, converse commerciality and focus on the best combined development strategy.

Now as we continue the appraisal the lower cretaceous, the focus would be on obtaining the technical information needed to high-grade the multiple drilling and completion strategies for all of the various play intervals. Now while Todd previously discussed the status of our JV developments in the Eagle Ford and the Eaglebine, the company also continues to evaluate other acquisitions in the area outside of JV.

On particular interest in our acquisition strategy is the ability to drill both vertical commingled wells and the horizontal wells, with the completion in the more organic rich section that the Eagle Ford, Kiamichi and the Edwards.

Now I’ll hand it over to Todd with some final remarks. Todd?

Todd Brooks

Thank you both Ian and Kevin. I’ll wrap up the prepared remarks by saying that we’re making great progress and advancing the company’s business plan on all fronts. I’ll now open up the call for any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Doug Bocchino of Casimir Capital.

Doug Bocchino – Casimir Capital

Hi guys, you mentioned the potential gain in Q4, can you give us a little more color on that?

Ian Fay

Sure, hey Doug this is Ian. Yes we did mention a gain, it’s expected we’ve provided detail around that on in the 10-Q on page 22. The range of values that we’re expecting for that potential gain is between $28 million and $33 million.

Doug Bocchino – Casimir Capital

Alright, thank you.

Ian Fay

You’re welcome.

Operator

Your next question comes from the line of (inaudible) of Cole Capital.

Unidentified Analyst

Hello good morning gentlemen, thank you for the detailed introduction regarding two of the areas that you’re encouraged by specifically the Sweet Home area in DeWitt County and in Walker County. Can you clarify what sort of acreage you still retain, that you have not, that you have unleashed that you still not determined to partner with anyone at this point yet?

Ian Fay

Sure in the Sweet Home area, which is the DeWitt and Lavaca area, we have 16,000 acres right nearby. Some of that is gassy, we put a value of about $4 million on that, we consider it non-material. And then over in east Texas, in Walker County, we still own the Phase III acreage that I mentioned on the call, which is approximately 12,000 acres and change, that our JV partner has an option to purchase at a fixed price in January of 2014.

Unidentified Analyst

Got it and if you do raise additional cash in the months to come, approximately what has it been costing to recent acreage in these portions of East Texas in the last six months?

Ian Fay

East Texas is highly competitive right now, and due to the competitive nature of that, I’ve got to keep that strictly confidential.

Unidentified Analyst

Okay, fine.

Ian Fay

I wish I could share more.

Unidentified Analyst

Okay, well best of luck.

Ian Fay

Thank you.

Operator

Your next question comes from the line of Evan Jones of Jefferies & Company.

Evan Jones – Jefferies & Company

Good morning guys, one thing struck me in the press release, you talked about maybe reaching out to convert holders about an exchange in the senior debt. Why do you feel you need to do that, I mean you’re paying 90% out of now they are out of the money, I mean what’s your, what are you thinking there?

Ian Fay

Hey Evan, it’s Ian, we are talking about un-encumbering the balance sheet in general terms and freeing up the balance sheet in the investors in the company across the value preposition to trade more freely in the marketplace. I think because of the aspects, the characteristics of the convert that you just mentioned, we think we can structure a better security for the convert holders, that may drive liquidity and better valuation. At the same time freeing up our balance sheet, so that we can have a better access to capital more efficiently.

Evan Jones – Jefferies & Company

Okay, and then when you signed the JV with the partner that you won’t name, the original one was they are going to have three wells done by January 2014 we’re now in the middle of November. And we’ve not heard anything results wise. I mean clearly value in this company is what they’re doing Eaglebine that’s obviously your biggest, retained acreage position.

Is there any time line on when we’re going to get any kind of results and now the fact you’re going to not do results by well anymore, you’re going to do it by area. I mean I just modeled the picture I mean was there any kind of like time line when we’re going to get what they are doing there and how is it going it’s really the value of the company is that.

Todd Brooks

This is Todd. Yes I’ll take it. What I can say right now the JV is on schedule making progress and tracking as both parties have always envisioned and planned. And to the extent that we will come out with an exact well update right now we’re not at the exactly in a place where we can do that, its highly competitive we’re very encouraged and everything is moving full speed ahead. That’s really what I can say right now.

Evan Jones – Jefferies & Company

Has there been any competitor wells drilled around your Walker County acreage that you can share with us any results there?

Kevin Schepel

Yeah this is Kevin look we continue to monitor the activity all around so there is several companies that are drilling obviously Halcon’s joined in the same interval and Brazos County we’ve got St. Mary’s active to the southeast there’s several legacy wells that are being drilled in this actual section north of us. So there is a lot of activity if you look at the activity map right now it’s over 24 rigs actually actively the Woodbine or the Eaglebine. Moving further our most recent Investors presentation we’ve actually got a slide in there with all of the competitive activity so that may give you a pretty good deal for it.

Evan Jones – Jefferies & Company

Thanks guys.

Operator

[Operator Instructions] And your next question comes from the line of [indiscernible] private investor.

Unidentified Analyst

Yes I am curious with your looking into any kind of hedging with the whole process booking.

Kevin Schepel

We are indeed as we go into the productive timing as we enter in the 2014 we certainly have explored and we’re currently actively discussing installing a commodities hedging program so I would expect to look out for that some time in the first half to 2014.

Unidentified Analyst

Hey great. Thanks.

Operator

There are no additional questions at this time I would like to hand the call back over to Mr. Todd Brooks, President and Chief Executive Officer for closing remark.

Todd Brooks

Thank you operator I’d like to thank everyone for joining us today. I appreciate everyone’s interest. And I’d like to thank all of our shareholders for your confidence as we march forward and continue to execute on all fronts as we built this exploration company. Thank you and good day.

Operator

Thank you for your participation in today’s conference. This concludes the production. You may now disconnect. And have a wonderful day.

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