CAMAC Energy Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.15.13 | About: Erin Energy (ERN)

CAMAC Energy (CAK) Q3 2013 Earnings Call November 15, 2013 12:00 PM ET

Executives

Christopher D. Heath - Director of Corporate Finance and Investor Relations

Kase Lukman Lawal - Founder, Chairman, Chief Executive Officer, Member of Nominating & Corporate Governance Committee and Director of Camac Energy Holdings Ltd

Earl W. McNiel - Chief Financial Officer and Senior Vice President

Analysts

Alexander Montano

Shola Labinjo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Anthony Joseph Gullo

Frank Sims

Mark Fieger

Mark Robbins

Operator

Good day, everyone, and welcome to the CAMAC Energy Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Christopher Heath, Director of Corporate Finance and Investor Relations for CAMAC Energy. Please go ahead, sir.

Christopher D. Heath

Thank you, Laura. As a reminder, today's conference call includes forward-looking statements and estimates of future performance. There are numerous risks associated with forward-looking statements and forward estimates, and there can be no assurance that the statements and estimates will be realized.

A listing of other risk factors to consider as part of the materials discussed in this conference call has been outlined in the earnings release and in our SEC filings, and we incorporate these materials by reference. All statements in this conference call relating to oil and gas resources, prospects and potential resources are not references to proved reserves as defined under applicable SEC regulations and are not permitted in our filings with the SEC.

On today's call, I'm joined by Dr. Kase Lawal, our Chairman and CEO; and Mr. Earl McNiel, our Chief Financial Officer, as well as other members of our management team who will be available to take questions.

I'll now turn the call over to Dr. Lawal. Please go ahead.

Kase Lukman Lawal

Thank you, Chris. Thank you, everyone, for joining us today on this call. I would like to begin by disclosing the Oyo Field drilling and more especially, the soft sales we had in the primary and secondary objectives.

I would like to begin by disclosing the Miocene success announced this week. The Oyo-7 well offshore Nigeria in OML 120 has successfully discovered the presence of hydrocarbon in the Miocene. This was the first time the Miocene has ever been explored in OML 120, and hydrocarbons were found in 3 intervals.

This result is very encouraging and would be integrated into the ongoing studies to solidify further exploration plans in the Miocene, which has been very productive in adjoining blocks. The Miocene is the most prolific producing zone offshore Nigeria, and the presence of these Miocene hydrocarbons significantly derisk the large Miocene prospects in our blocks.

Along with bringing Oyo-7 online next year, we intend to drill and complete Oyo #8 and bring both online by mid-next year. These 2 wells will add approximately 14,000 barrels of oil per day gross to our current production. We intend to seek a dedicated rig for CAMAC Energy for most of 2014 with plans to complete Oyo #7, drill and complete Oyo #8. Once finalized, this rig contract would provide visibility to investors and shareholders and analysts of our 2014 drilling schedule and CapEx budget.

In the Gambia, we're continuing evaluation activities for offshore Blocks A2 and A5. Our analysis of all existing 2D seismic has identified one lead in each block. Both leads have been evaluated further to assess geological probability and estimate their resource volumes. We're currently in negotiations with a leading geophysical services company to acquire a new 2D seismic survey on both blocks, A2 and A5, in 2014.

In addition, the company has agreed on the 2014 work program with the government of the Republic of Gambia. Our evaluation activities are also continuing in the Republic of Kenya. We have received initial results of the gravimetric shoot for onshore Blocks L1B and L16, which have allowed us to determine the placement of 2D seismic lines by identifying faults, basement structures and intra-sedimentary volcanic layers and/or intrusions.

Three leads have been identified in Block L1B from existing 2D seismic data, and we're negotiating to acquire additional 2D seismic data in 2014 for Blocks L1B and L16 onshore and Blocks L27 and L28 offshore. We intend to form partnership for assets in Kenya and the Gambia and will continue evaluating offers from industry partners, national companies and capital providers as they are received.

I would now like to turn the call over to our CFO, Earl McNiel, who will disclose the company's third quarter results. Earl?

Earl W. McNiel

Thank you, Kase. For the third quarter, we reported a net loss of $2.7 million or $0.02 per diluted share. Average daily gross production of oil from the Oyo Field during the quarter was 2,228 barrels of oil per day, of which the company share was 314 barrels of oil per day.

In the third quarter, there was a lifting of approximately 220,000 gross barrels of oil, 31,000 barrels net to the company's interest at a sales price of approximately $112 per barrel. This resulted in revenues to the company of $3.5 million.

We look forward to bringing Oyo-7 online next year as it will profoundly enhance production and revenues and increase our earnings per share. Any success of Oyo-8, Oyo-9 and/or the Miocene prospect we hope to drill next year will further improve our financial position.

At this time, our management team and I will be happy to answer your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Brian Brooks of EnerCom.

Brian Brooks

When the well is temporarily suspended until the horizontal section commences in the first quarter of next year, is the Sedneth rig going to be redeployed elsewhere? Or is it going to stay on-site?

Earl W. McNiel

Yes. Brian, this is Earl. No, the rig will be released to go to its next location. We'll bring -- we're in discussions now for alternative rigs to bring in for the completion of Oyo-7 and the drilling and completion of Oyo-8.

Brian Brooks

Okay. And do you anticipate any delays in getting the rig back on-site or...

Earl W. McNiel

Well, we don't plan to -- the biggest delay is the long lead-time items we need for completion of both wells, subsea wellheads, flow lines, that sort of thing. And so that's why we're anticipating bringing both wells online mid-next year so that we've got time to receive those long lead items as well as to drill Oyo-8. But in terms of negotiating for a different rig, it does seem to be a good time in the marketplace right now. We actually have multiple rigs that we're in negotiations for, and I would just add that the rates we're talking about for these multiple replacement rigs are at significantly lower rates than we paid for the drilling of Oyo-7. So the timing seems to be working out very well for us, and what we'd like to do is contract a rig for a full year to support not only the completion of Oyo-7, but the drilling of Oyo-8, the drilling of Oyo-9 and hopefully one of our Miocene exploration prospects over the next 12 months.

Operator

And our next question is from Alex Montano of ROTH Capital.

Alexander Montano

I was going to focus a little bit more on the results at Oyo-7, and I have a couple of questions related there, too. You mentioned that you hit 3 different pay zones, I guess, within the Miocene. And I was wondering how that compared to what you might have modeled ahead of time. The second question was, what level of testing have you done there? So do you have an idea of what kind of production rates you could expect? And would that be individually, or would you see co-mingling those sands? And then the third one was, how does that compare to analogue wells in the general vicinity? I mean, is this typical? Is this a little bit less than average or perhaps better than average? So there's three questions there, sorry.

Earl W. McNiel

Okay. Let us know if we miss one. And between Kase and I, we'll try to answer them all. As far as the thickness of the pay zones, I mean, when you go into a well, we know what the thickness -- the anticipated thickness of the total Miocene sand was. But as far as how thick your individual pay zones will be, you don't know until you drill it. But we -- so we didn't know how much to expect. We're pleased with the hydrocarbon-bearing zones that we did encounter, and it's very encouraging to us in terms of drilling our other Miocene prospects. As far as anticipated production goes, as we made clear in the past, we do not intend to produce from the Miocene out of this well. This well will be completed in the Pliocene Oyo reservoir and be completed as an Oyo Pliocene-producing well. What we wanted to do in this well was prove the existence of hydrocarbons in the Miocene in order to derisk the very large Miocene prospects we have elsewhere on our block. What was the third question?

Alexander Montano

How did that pay kind of compare to other fields in the area as far as the Miocene thickness?

Earl W. McNiel

Yes. I -- Kase, do you have an answer for that as far as the thickness of the Miocene here versus elsewhere in the region?

Kase Lukman Lawal

Well, yes. Just like Earl said, our primary objective was the Pliocene. Thus, we've optimized our technical people, our drilling team, optimized well such that we can capture, essentially, the very significant results that we've got from the Pliocene this time. The testing of the Miocene, we've been very consistent over the last 3 quarters' earnings calls to say that we will test Miocene without casing it just to be able to get some information out of it and to be able to establish that there's hydrocarbon bearing and hydrocarbon presence in the Miocene O 120 [ph]. So we were able to successfully achieve our objective, which is the primary objective. And the secondary objective was very much achieved in terms of the hydrocarbon presence. And it wasn't optimized. Neither did we expect it to be, but we were very, very impressed with what we find over there. Now in terms of the analogy -- or the analogue totally [ph] surrounding acreage and assets, order of descent of all the deepwater production in Nigeria today is taking place in the Miocene. That tells you the significance of what we have been able to establish. So what we need to do now is by the time we are drilling and we incorporate this into the information that we gathered, we will be able to now better prepare ourselves to optimize the location and the drilling into Miocene when we get to that late next year. So for us, we are very encouraged, and in fact, we are motivated because every single production that is taking place in deepwater Nigeria right now is under Pliocene. We are really the only one that is producing in the Pliocene deepwater in Nigeria, and that just tells you the prospectivity and the success of our program.

Operator

And our next question will come from Shola Labinjo of Tudor Pickering.

Shola Labinjo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I'm not sure if the questions I have, have been answered before. I joined the call pretty late. It's really regarding the results at Oyo-7. I think it's in line with what you had guided to and what you expected, so that's pretty positive results in terms of how I read it. I was just wondering if you could talk a little bit about the phase of the hydrocarbons that you found in the Miocene with regards to kind of split between oil, gas and condensate, if you can share with that with us. And also on the Pliocene, are you expecting kind of your contingent resources or your reserves to be revised upwards now following this well?

Kase Lukman Lawal

I'll take the first one, which is that the -- we had a hole problem once we entered into the Miocene. The resistivity of the hydrocarbon was being shown. And we did not test the well nor did we do any more work. What we wanted to do is to gather information and to be able to incorporate it into what we have. So therefore, we were not able to have the wireline information that would be able to discern between oil and gas. But the 3 intervals were very pronounced, and the resistivity and the information we gather from that pretty much encouraged us to be able to now optimize future drilling into the Miocene to be able to take advantage of the presence of the hydrocarbon. And at that time, we'd be able to give all the information, gather all the information and case the well in preparation for eventual development going forward. So we did encounter hole problem because it was encased, and it was intentional because we were not -- we really didn't know what to expect, and we did not optimize it to be able to capture the hydrocarbon that we may be finding in there. Our primary objective was to increase both the results and the production primarily in the T1A. And that we achieved and we exceeded what we went in there to look for.

Earl W. McNiel

As far as the impact on our reserves from the Pliocene well, we do indeed expect a positive impact on our reserves. But I would caution that until we do the horizontal completion and bring the well onstream, it'll be difficult to estimate exactly what that impact will be.

Kase Lukman Lawal

We fully expect, though, to actually revise and incorporate this information into our reserve model and be able to come up with different numbers in the future.

Shola Labinjo - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And just to follow up to the question on the reserves and production. So it's anticipated that this well, once completed, will come on at 7,000, and you're currently doing about 2,000, 2,200, call it that. So do I see total production from Oyo Field next year, say, mid-next year at 9,000 barrels plus, between 9,000 and 10,000? Is that kind of reasonable or would we be much higher?

Kase Lukman Lawal

The intent for us, as you will recall, based on the history of this field, that is very prolific. We actually went up to 25,000 barrels a day before we had the gas problem. All those are behind us. We knew what caused that. We had lower gas in terms of T1A this time. I intend it's not to produce it as hard, as fast as it was done during the Eni operatorship days. We will be very cautious. We will actually go at about half of the 16,000 of the well #5 that Eni was producing before the gas came in. The intent of the organization is to do something between 7,000 and 8,000 a day and add it onto what we're doing. But mind you, our intend next year is to drill, in the first half, 2 wells so we will be coming on by midyear at about 14,000 to 15,000 barrels a day, possibly 16,000 depending on the results of the monitoring that the technical people are going to be doing on the production operations. So we -- and all those are going to be net to the company because the group, between Allied and CEI, we own 100% of those productions. So we fully intend for the 7,000 or 7,500 to come on next year, but we expect it to be 2 wells, which would be about 14,000, 15,000 barrels.

Operator

And our next question was will come from Anthony Gullo of Investment Network.

Anthony Joseph Gullo

My questions -- I have 2 questions. The first one is an accounting question, and the next one is a general question. In terms of the accounting question, presently, on the balance sheet, we have $184 million representing our oil valuation. Now as we go forward with the progress on #7 and #8 and possibly #9 and then later into the Miocene level, we -- is that $184 million subject to change on the upside? And if it is subject to change, would it be a function of production, would it be a function of expense, or would it be a function of reserve estimates? That's the first question. My second question has to do with the general plans for the company. Dr. Lawal, you had, in many of the other conferences we've had, emphasized the need and the strategic importance of partnerships. And as we go forward, is this still essentially on the table in terms of the -- in terms of a stimulus and the mechanics for our expansion?

Earl W. McNiel

Thanks, Anthony. I'll take the accounting question, and I'll let Kase handle the strategic question. But interestingly enough, they're not unrelated questions. We will benefit tremendously from the increased production and potentially increased reserves from Oyo-7. But you won't see any impact on our balance sheet, Anthony, and that's very simply because we didn't spend a penny for the drilling of Oyo-7. Our partner, the operator, Allied, who also happens to be affiliated with our majority shareholder, paid 100% of the cost of drilling that well. And so you won't see an impact on the balance sheet. Now of course, our reserves in production and cash flow will go up, and that's just another example of how we continue to benefit from the relationship that we have with our major shareholder even though the companies are separate at this point. And I'll let Kase handle the strategic question.

Kase Lukman Lawal

Well, I was hoping, Mr. Gullo, that you won't ask that question. You asked about 2 quarters ago and last quarter, but I'm just joking. I can tell you this much: We believe very strongly that this company would benefit significantly if there could be an arrangement or agreement between the 2 organizations that are affiliated. As I mentioned 2 quarters ago, that we are looking at strategic alternatives. We are discussing amongst ourselves, among the 2 companies. We continue to have those discussions. We have not reached an agreement, and I can tell you if those develop into something substantial, all of you will be the first to know. So that conversation continues, and stay tuned. If anything comes out of it, definitely everybody will know.

Operator

The next question is from Frank Sims of Stifel Nicolaus.

Frank Sims

The success of finding the hydrocarbons in the Miocene and the well #7, is that enough information for you to be able to improve the reserve number that we're showing anytime soon?

Kase Lukman Lawal

As I mentioned earlier, we are going to have the information that we've got at -- both on the Pliocene and the Miocene incorporated into our system, and the technical people are going to be working on it in terms of the information that comes out of it. And if there is a division that will be made, certainly, it will be published after the reserve consultants have done the work.

Frank Sims

Do you have any sense if that gets done before the end of the year in order to be captured in the annual report?

Kase Lukman Lawal

Well, I tell you these things takes about 3 to 6 months. So to do it next month, I think, it will be a miracle. I doubt it.

Frank Sims

Okay. Do you have to physically start putting oil out of the Miocene for you to get the tangible benefit of proven reserves?

Earl W. McNiel

We do not intend to produce from the Miocene from this well [indiscernible].

Frank Sims

I understand that. I'm -- what I'm saying is the Miocene -- do you develop some type of an idea of reserves? Or is there a regulatory group that takes a look at your results and then is able to say, okay, you should be able to show X, Y, Z as terms of how much is approvable reserve?

Earl W. McNiel

We will never produce from the Miocene from this location.

Frank Sims

I heard you. Yes, I heard you on that, and it won't happen until maybe as early as the end of next year. Knowing that you have the oil in there, is that enough for you to be able to show it as a reserve? Or do you have to wait to show that as a reserve until you're physically pulling it out of the ground at the end of next year, then 2 years or 5 years or whenever?

Earl W. McNiel

No, you don't have to wait until you commence production, but the main point to be aware of here is that the prospect -- the Miocene prospects that we may drill later next year are completely different prospects. And so you won't be able to add any reserves until you drill those prospects.

Frank Sims

So you do physically have to pull oil from the Miocene for the world to see that CAMAC is sitting on top of a large amount of oil?

Earl W. McNiel

You don't have to commence production, but you do have to make a commercial discovery. What we did here was simply prove that there's hydrocarbons in the Miocene on our blocks.

Frank Sims

Okay. And how soon do you get a chance to -- will it not be until -- of course, Kase just said it might take 6 months. But that would seem to fall in line with when you're actually pulling oil out of 7 and potentially 8 where we might be doing 15,000 barrels. Is that when you get a chance to add to reserves?

Kase Lukman Lawal

We're talking about information that needs to be evaluated and a third-party report in terms of reserve consultants, in terms of 3 to 6 months. Drilling Miocene will require most of this -- more evaluation of the information that we have gathered. And our primary objective right now is to continue to add reserves and increasing our production as an organization. That is very primary to us. We will continue to drill on well #8, possibly well #9, and it's only after that where we get back to something similar to where we were before, that we will be going back into that. But mind you, we will not drill any of these wells alone. We continue to talk, communicate, exchange information with potential families [ph] that are interested in our assets. It is a significant investment that needs to be made in deepwater drilling, and it isn't something that we intend to continue on a consistent basis. Our intent is to share risk. Our intent is to bring in deep-pocketed partners that share our philosophy of being able to explore and exploit the hydrocarbons that we believe is in our assets. So that is our intent. That is our goal. It's been very consistent, and that is what we are going to continue to be doing.

Operator

[Operator Instructions] And our next question comes from Mark Fieger of Raymond James.

Mark Fieger

Just one clarification is all I want to ask. On the Oyo #7, I know the rig is moving away now and Allied or whoever is going to do some structural work for a period of time, and then the rig comes back and completes. My question is the timing of all this. When do we expect the rig to come back to Oyo #7, approximately, and then finish up there and then maybe start on Oyo #8? Are we talking like February, April? I'm just kind of curious. I'm not holding you to anything. I just want to get a timeframe in my mind, and then what is the timeframe like if -- whenever it comes back, then does the rig have a month's worth of work to do or 6 months? Or just -- I'm just trying to get a timeframe in my mind to when you start commercially producing the oil out of #7.

Earl W. McNiel

Right, okay. Mark, thanks. Yes, well, as we mentioned earlier, we're in negotiations for...

Mark Fieger

For the rig.

Earl W. McNiel

Right, for a new rig. And what we'd like to do is keep that rig busy for an entire year, at least an entire year, drilling wells, completing wells, drilling exploration prospects, that sort of thing. We can't give you a firm timeframe until we complete those rig negotiations and know when -- which rig will come in and when. But I think it's safe to say that we plan to have a rig back during the first quarter to commence drilling Oyo-8 and then through the second quarter, completing both Oyo-8 and Oyo-7 and tying those back so that by the time we reach midyear, we'd like to see production from both Oyo-7 and Oyo-8.

Operator

Our next question is from Mark Robbins of Wells Fargo.

Mark Robbins

I just -- I hear a lot -- there's a lot of risk and danger and crime and just some crazy things going on there. Do you guys have to spend any money or your drilling partners have to spend any money on security or protection in the areas that you're drilling? Or have things been pretty safe?

Earl W. McNiel

You're talking about Houston crimes? Not that bad in Houston. No, but...

Mark Robbins

Nigeria.

Earl W. McNiel

Yes. Now Chicago is different. But no. Yes, Nigeria, we're far enough offshore that we've been insulated from the things that have been going on onshore in the northern part of the country. But we do take -- we can't go into a lot of detail, but we do take precautionary measures to protect our operations.

Kase Lukman Lawal

Mark, if I may add, this is the seventh well we are drilling on Blocks 120, 121. And each one of them have been very successful. Each one of them have encountered hydrocarbon, and some of them, we are producing from them right now. In terms of security, we take it very seriously, and that is something that, touch wood, we have been very lucky to date. There hasn't been a single incident to any of our operations over the last 7 years.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Lawal for any closing remarks.

Kase Lukman Lawal

Well, this is a very, very important moment and times for our organization, and I want to thank all the shareholders that have stuck by us, stood by us and given us advice in various manners. I want to thank each and every one of you for continuing to believe in what we are trying to achieve and to let you know that we will continue to do our best to earn your trust and your confidence. And eventually, we hope to create an organization where you will get a superior return on your investment. Thank you very much for joining us this morning, and I wish you all a very good weekend.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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