FX Energy's (FXEN) CEO David Pierce on Q1 2014 Results - Earnings Call Transcript

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 |  About: FX Energy, Inc. (FXEN)
by: SA Transcripts

FX Energy, Inc. (NASDAQ:FXEN)

Q1 2014 Results Earnings Conference Call

May 08, 2014, 04:30 p.m. ET

Executives

Clay Newton – VP, Finance.

David Pierce – CEO

Analysts

Chad Mabry – MLV & Co.

Joseph Reagor – Roth Capital Partners

Dan Mittag – Oppenheimer & Co

John Bair – Ascend Wealth Advisors

Rick Sherman – Oppenheimer

Operator

Good afternoon ladies and gentlemen and welcome to the FX Energy Incorporated First Quarter 2014 financial and operating results conference call. Today’s conference 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, Melissa. Thank you all for joining us today. I am Clay Newton, VP of Finance here at FX Energy. Welcome to our 2014 first 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 our 10-Q that was 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, development, 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, revenues, operating and exploration costs along with some discussion about non-cash charges. I’ll close by discussing our liquidity and capital resources.

I’ll start with production. Oil and gas production for the first quarter of 2014 was 1.2 billion cubic feet equivalent and average of about 13.6 million cubic feet equivalent per day. While these figures represent a production decrease of about 2.5% from last year, they also represent a 26% increase from the fourth quarter of 2013.

Oil and gas production for the first quarter of 2013 was about 1.3 billion cubic feet equivalent and average of about 14 million cubic feet a day, while 2013 Q4 production was about 1 billion cubic feet equivalent or 10.8 million cubic feet equivalent per day.

The addition of production from our Lisewo-1 and Kormoze-3 wells is making a measurable impact in our production and revenues. We expect our production in the second quarter to be down a little bit from first quarter levels, one of our wells the Winna Gora will be shut in for a couple of weeks for its annual maintenance and pressure testing.

In addition, we’ve been working on some flow line repairs at our Kromolice-1 well. We expect that well will have been shut in for about a month by the time the repairs are completed. Looking forward, we plan to begin production from Lisewo-2 later this year to Szymanowice-1 early next year. Gas from both wells will be processed at the existing Lisewo gas production facility.

Revenues. During the first quarter of both 2014 and 2013, our oil and gas revenues and total revenues were $9.5 million. Higher natural gas prices in Poland offset the small decline in production we discussed earlier. The average price received in Poland for the first quarter of 2014 was $7.42 per Mcf, compared to $7.18 per Mcf for the first quarter of 2013.

The Polish low-methane tariff, which serves as a basis for the Company’s gas sales agreement increased by 3.1% effective February 1, 2014. In addition, period to period strengthening in the Polish zloty produced a higher US dollar denominated average price in the first quarter of 2014.

You will notice an increase in our lease operating cost from the last year to this. You’ll probably also notice very little oil field services revenues this year. While our drilling rigs in the US have been mostly idle so far this year, our crew in Montana has been extensively looking over many of our producing wells with a view towards slowing our oil production decline. Most of the increase in operating cost this quarter is due to those walkovers. We also have cost this quarter associated with our Lisewo-1 and Kormoze-3 wells that were not on production during the first quarter of last year.

As on the side we are happy to let you know that our drilling rig is back to work and we see an active schedule in the increased revenues ahead of us. You will also notice a marked decrease in our exploration cost this year. This is a good thing. Last year, we drilled the Lisewo well which was a dry hole and its costs were about $3 million. This year, it’s a hole of four wells is not a dry hole.

A few words as we do each quarter about non-cash charges. Our financial results continue to be impacted these non-cash charges. In the first quarter of 2014 we recorded foreign exchange losses of about $1.2 million compared to foreign exchange gains of about $9.1 million during the same quarter of 2013. Please remember that almost all of these foreign losses are related to the dollar denominated inter-company debt between FX Inc. and FX Poland and other dollar denominated debt at the FX Poland level. These will continue to vary over time as the exchange rate between the US dollar and Polish zloty changes.

In addition during the fourth quarter of last year, we converted approximately $45 million of loans between FX Energy Poland and FX Energy Inc. to equity. The conversion was necessary in order to make future interest payments from FX Energy Poland to FX Energy Inc. tax deductible in Poland.

Going forward since our inter company loan balance is lower, the swings in these foreign exchange gains and losses should be tempered somewhat. In any event, please remember that they have no impact on our revenues cash flows or ability to exercise, to execute on our capital budget.

Concerning our liquidity and capital resources, our cash provided by operating activities are $4.4 million, decreased by about $100,000 from the first quarter of last year to this quarter. Our cash balance was about $14.3 million at the end of the quarter, and we current have $15 million of remaining availability with our credit facility. Before giving any effect to hold the discovery which we may include in our borrowing base before the end of the year.

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 Pierce, CEO of FX Energy. There’s a lot to cover today, so we’ve just now released an operations update that contains detailed information especially about our Tuchola project. Please take time to review that news release. For this call, I’m going to start with an update on the Fences license and then devote the rest of the call to the Tuchola project.

Fences license is our bread and butter. It provided most of our 33 million in oil and gas revenues last year. We have a significant backlog of drill ready prospects and the face of drilling is increasing. We drilled one well in Fences in 2012, three wells in 2013 and we have four wells planned this year plus a sidetrack.

We expect the Fences to continue growing in production revenue in the reserves. Our first well this year is Baraniec, located in the Lisewo area. We’ve already grown four wells in the Lisewo area, we have a production facility in operation and we have a backlog of half a dozen more ready to drill 3D targets.

Site preparation and wake up are currently underway at Baraniec where we expect to start drilling in about a month. After rig release on Baraniec we’ll move over to the nearby Ciemierow location also in the Lisewo area. If Baraniec takes above the average amount of time we should be on Ciemierow in the fall.

Meanwhile, the Karmin well should start drilling in about 75 to 90 days. Karmin is located near the southeast corner of the Fences license on trend with our highest rate producing wells in the Fences. So we have high hopes for another high rate producer.

Our fourth well this year is in the Miloslaw area northwest of Lisewo. Like the Lisewo area, the Miloslaw area holds a cluster of 3D defined [undrilled] structures. The Miloslaw well will be our first in this area. We scattered locations there two months ago, and the operator has started its internal geological project documentation on two drill sites. We hope to see the first of these two started towards the end of this year.

Finally, the Zaniemysl well that we shut in last year is scheduled to be sidetracked to a higher bottom hole location. The project was tendered but the bids came in higher than budgeted and were rejected. We are about to re-tender this project and we expect to see the Zaniemysl sidetrack get underway in the third quarter.

Turning now to production. We are on track for first production from Lisewo-2 late third quarter this year. We expect to see it start at an estimated gross 3.4 million cubic feet of gas per day. Our second well, Symanowice-1 is planned to start production in the first quarter of 2015. That well currently is being sidetracked to a new bottom hole location because the other 20 meters of the sandstone reservoir is cemented by height rig at least near the well bore.

Below 20 meters in the reservoir, in this well bore the reservoir has the usual good for our scene premier (indiscernible). This phenomenon of cemented fall fracture systems is responsible for the compartmentalization commonly encountered in South North sea Rotliegend fields and may also be responsible for the lower production rates in our own Kormoze-3 and Winna Gora-1 wells.

We hope the sidetrack will land us in clean Aeolian and sand reservoir. We are also reworking the 3D seismic using cutting edge seismic attribute analysis in the hope of imaging these cemented zones more precisely so as to avoid this problem in the future.

Finally, we’ve have a Kromolice-1 shut in for flow line repairs as Clay mentioned. We expect to be back at full production this week end, but we will have had the well shut in for about a month and there will be some impact on our second quarter production numbers.

That’s our Fences license update. Outside the Fences license we have four big exploration wells. Our goal in all of these has been defined a new exploration area comparable to the Fences. We may have found a candidate in the Edge license. Though we are deferring further operations for now, other than ongoing data interpretation on three of our four exploration blocks in order to focus our capital and other resources on what we think our higher potential opportunities in the Edge and Fences license.

And that brings us to our Edge license in Northern Poland where we hold a 100% working interest in about three quarters of a million acres. Last year we drilled the Tuchola-3K well, which tested gas with good flow rates and show a good porosity and permeability in the lower Zechstein. We also saw potential in the upper Devonian.

With that encouragement, we acquired 240 square kilometers of new 3D seismic and in February this year we started drilling the Tuchola-4K well. The Tuchola -3K and now the Tuchola-4K have both tested gas at high rates from the lower Zechstein upper Devonian. Based on those tests our engineers tell us that the two wells together should produce approximately 24 million cubic feet a day when production begins. That’s almost enough to triple our current net gas production.

The gas these well produces about 45% nitrogen and about 55% hydrocarbons, including butane, pentane and hexane. The gas also contains small amounts of helium. With proper processing facilities, we could sell high methane gas from [Presto] liquid gas products and helium. At today’s prices, this should result in a gas price comparable to our Fences gas price on a per producing – basis.

Again, this will almost triple our current annual gas revenues. We do not yet have a reserve estimate for the Tuchola deal. The test we have done give us estimated initial production rates, but simply don’t address reserves, however we plan to carry out a sustained flow shut in and high precision pressure test on the Tuchola-4K well specifically designed to determine a reserve estimates.

We also plan to measure down hole pressure in the Tuchola-3K while the Tuchola-4K well is testing. That should tell us whether both wells produce from the same accumulation. The general plan of development is to deliver gas into the high methane gas distribution system after we extract helium which is about 02 plus percent and after we have stroked liquid or compressed gas products and removed nitrogen that’s about 45.4%.

As I mentioned a moment ago, this package of products gives us a sales price comparable to our other gas sales on a per produced Mcf basis. Our production facilities and nitrogen removal plant and the necessary pipeline are estimated to cost around $35 million, most of which would be spent in 2016 following about 18 months of permitting. The permitting process is starting now. If all goes well, we could see first production as early as year end 2016. Of course we hope to have more discoveries between now and then, which might share these facilities and also benefit from the permitting we will have already done.

Meanwhile we have already received enquiries from a number of potential gas buyers and facilities contractors. It is nice to get attention; it’s also nice to have time to consider all our options. Meanwhile, we are considering next steps to take on the exploration front. We are working on a new 240 square kilometers 3D seismic survey surrounding the Tuchola field.

Acquisition has finished and we should be through interpretation and ready for drill site selection in just a couple of months or so. We plan to drill two more wells in the Tuchola region this year, and we already have some leads. These two wells are already in our 2014 capital budget, although as I noted earlier we are deferring field operations on our other exploration concessions.

Based on what we know today, the Tuchola field and the 730,000 acre Edge license were look immensely promising. The basic geological elements would underpin this discovery may signal the potential for a major hydrocarbon opportunity. We are very enthusiastic. We want to move forward briskly with both exploration and development, at the same time we recognize the risks associated with pursuing a new exploration play.

Over the next few months, I think we’ll be able to clarify our plans to tackle this opportunity. To close, let me quickly review our plans in Poland. In the Fences concession we anticipate first production from two wells in 3Q ’14 and 1Q ’15 respectively. Zaniemysl could also resume production before year end if the sidetrack is successful.

We have four new wells planned for 2014 drilling in the Fences of which two were in the Lisewo area and one is in the Miloslaw area and one the Karmin well is in the southeast of the concession. In the Edge concession, that the whole of four wells has confirmed what the whole of three suggested, but we have very high production rate wells from carbonates and the lower Zechstein and upper Devonian. We are starting permit works for the facilities in pipeline for the Tuchola field and if everything goes our way we can be in production as early as the under 2016. We have a large 3D seismic projects surrounding Tuhola and we hope to make drill site selection in the next two to three months. We plan on two more Edge wells this year as we consider our overall exploration strategy.

Overall, our future looks very bright. Thank you for your patience and thank you for helping us get here. Melissa, we can take some questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question from Chad Mabry with MLV & Co

Chad Mabry - MLV & Co.

Hey guys congratulations on the discovery at Tuchola. Just had a few follow ups on that offset date that came out after the close? I guess first on the combined rate of 24 million a day, is that gross or is that going to be net of that notion extraction that you talked about?

David Pierce

The 24 million a day, that’s the gross number. That’s the gas as it comes out of ground and when we are in the news release it talks about the value of that. The value is based on the gas as it comes out of the ground. So it’s apples-to-apples.

Chad Mabry - MLV & Co.

Okay. That’s helpful. And then also on the 4-K I know you were targeting a secondary objective in the Devonian meeting to report from that?

David Pierce

No. We actually didn’t get any information from the middle Devonian. We lost circulation very close to that target and decided that it was not worth taking any risk on the well or spending extra money on that given that we have apparently a wonderful reservoir up higher. So we didn’t get any good or bad information.

Chad Mabry - MLV & Co.

Okay, great. And then I guess just lastly on the 35 million CapEx for the facilities work there in 2016, just curious if there is anything else that you will need to spend before that’s just going to be well cost?

David Pierce

No, I – that 35 million covers while we anticipate for development not only for these wells but potentially for other wells who could tie into that same facility. Of course, if we make up the discoveries we’ll have to have small production facilities just right there that the well had. But the main lines and the main nitrogen or removal, [feeling] an extraction circuit they will cover more than just the Tuhola wells. And I think between now and the beginning of 2015, we are only looking at permitting cost as far as development goes. And that runs in the some tens of thousands of dollars but its’ not a very big number.

Chad Mabry - MLV & Co.

Got it, very helpful. Thank you.

David Pierce

You bet.

Operator

Thank you. And we’ll take our next question from Joseph Reagor with Roth Capital Partners

Joseph Reagor - Roth Capital Partners

Good morning or well good afternoon guys. How is it going?

David Pierce

Hi, Joe.

Joseph Reagor - Roth Capital Partners

So obviously positive quarter, positive production increases, good revenues complies you to saying Q2 will be down. Do you guys have any idea what the magnitude of that impact will be?

David Pierce

I can ball park it. I would say that if – just a quick off the cut ball park, I would say our net production will be about 13 million cubic feet a day equivalent for the quarter.

Joseph Reagor - Roth Capital Partners

Okay. And then that’s helpful. And then think about the other properties you guys own that are exploration outside of the Edge concession. Are you guys maintaining your leases there, are there any – often in the next 12 to 18 months that they could end up dropping just because you are more focused on the highest prospect of Edge concession.

David Pierce

Yes we haven’t made any final decisions yet. It really is early days. So we are just kind of thinking about everything and considering before we can hold where we want to push forward on and what we might do with these other concessions. I don’t have a good answer for you yet probably at the time of our next call we will have answers to those questions.

Joseph Reagor - Roth Capital Partners

Okay, fair enough. And then one last one, on the Edge concession on the – wells. You have given a capital budget now but you don’t have, you don’t have the reserves numbers yet and from the way I understand is, is that more complicated to calculate those and it would be if this was similar to what you are finding in the Fences concession. So do you guys have a timeframe for when we should expect a reserve update?

David Pierce

Yes, I don’t want to pin it down too tightly, but as we get through the completion of this well in the next say couple of weeks, about the last thing we are going to do there is run this test. The test is going to take the better part of two weeks, and we need to allow little time for analysis. So if I were to give you a target it would be about four weeks from today, but don’t hold too tight to that if we have a few days delay one way or the other, it doesn’t mean anything.

Joseph Reagor - Roth Capital Partners

So a month or a month and a half is -- their target timeframe?

David Pierce

I think so. We plan to, once we get the test done and the analysis done we’ll announce those results as an internal estimate. Now we’ve done a plan not to wait for year end to get the independent engineers on board. We plan to go do those as quickly as they can move after we have our own internal work done? So we’ll -- that will be a separate announcement most likely. I wouldn’t expect much discrepancy between our internal estimates because the tests we are running are although they are based on a very small reduction in the total volume of gas, they tend to be reasonably accurate. So I would hope to see that we have good agreement between our internal estimates and our [views].

Joseph Reagor - Roth Capital Partners

Okay. And what’s the cost for the third party analysis roughly?

David Pierce

For the Infinite engineers.

Joseph Reagor - Roth Capital Partners

Yes, what’s there (indiscernible)

David Pierce

Oh man. If I say its way too high, which is my feeling about every service provider that we have then they are going to be mad at me. 25,000 probably, its about the same as lawyers.

Joseph Reagor - Roth Capital Partners

Okay. Well thanks for answering the questions guys.

David Pierce

Thanks, Joe.

Operator

(Operator Instructions) And we’ll take our next question from Dan Mittag from Oppenheimer.

Dan Mittag - Oppenheimer & Co

Hi guys, I have a couple of questions and I’ll be brief. From your 3D seismic and we talked about maybe changes in the game plan and T-4 came in. Can you say with any certainty that T-3 and T-4 is part of the same field?

David Pierce

That’s a really good question. The likelihood is that they are part of the same reservoir, but there are some differences. I mean there is some similarities and some of the data looks quite similar and deals like it ought to be the same field. Some of it looks different and we just don’t know. So when we tell the whole of four we’ll put gauges down the bottom of the three well and that will tell us with pretty good certainty whether they are draining the same accumulation or whether we would get two separate accumulations on our hand. I mean, I know which way I bet but I’m not sure that matters a whole lot. Based on the tests we have done so far you can see that the wells are drawing from a real wide search area. So I don’t think there is going to be a problem draining whatever accumulation we have at least pretty broadly. But we’ll announce that when we have got the steps run and see what that brings.

I mean part of the issue that you are kind of getting at is, we’ve got multiple horizons in this well or these wells or the wells that we plan to drill. I mean if you look around the Edge concession we have potential in the Ca2 to Ca1, the upper Devonian and the middle Devonian and potentially some of the – out there somewhere. And that’s just getting started, that’s just right where we are. Sometimes theses reservoirs are going to run together or potentially run together like the Ca1 and the Devonian. Sometimes they are going to be separated by an [hybrid] or just by just in some density from other zones.

It’s a real interesting area, it’s real complex. These carbonate reservoirs account – in terms way above their weight in terms of worldwide production. So we are happy to be there, but no question its complex. And I’m going – got the not the technical job.

Dan Mittag - Oppenheimer & Co

Well the reason I was asking is if you are going to go after other potentials in the Edge concession that you’ve identified from 3D or as kind of a shot it looks like the T-4 did that type of thing or whether you were endeavoring to prove out as much as you can the size of this particular field?

David Pierce

Well we already think there maybe other potential in this field beyond the horizons we are looking at or as you move eastward for example. On the maps that we’ve put out you can see that there is potentially another accumulation on the eastern end of this block that maybe both separated from the Tuchola-3 and 4.

That is a good question. Part of it depends on what these reserve numbers show on the 3 and 4 well. If we have adequate, let’s call it adequate. We have adequate reserves there then maybe we’ll leave other work on the Tuchola structure itself or nearby maybe we’ll leave that for later and go look for some other structures, other targets to drill. That would be my preference. But if in anyway we feel like we don’t have the reserves that we really want to have going into development, then we would certainly consider drilling other targets in and right around the Tuchola 3 and 4 wells.

Dan Mittag - Oppenheimer & Co

Okay, I see. I have one other question and I’m not a geologist but I’m just going to read you what you wrote and this is not a good candidate for volumetric approach to reserve estimation. Would you elaborate on that so that I and if I can get my hand around that?

David Pierce

Sure. The reservoir that you are bringing is pretty uniform. It’s some depositional rocks that really haven’t been flushed with very much. And you have some confidence maybe from other fields in the neighborhood that there you are dealing with a relatively uniform reservoir. There is a fairly straightforward matter that takes your seismic figuring out the shape and size, the geometry of reservoir looking at lots and figure out where the gas water contact is. You do a little math and wow you’ve got the gross for volume and the pressure will tell you how much gas can be – in there and below those pressures. And so it’s a fairly straight forward calculation.

Carbonated reservoirs, one of the reasons they are so prolific is they don’t have only made it to our cities, they have that but they also have often times big fours or bugs inside of them. They often are naturally fractured, I mean highly fractured and these additional pipes of porosity well I have to be overall porosity. So you’ve got more than the logs are going to show you, but you don’t really have a good way to measure that. It’s all you got it seismic and your logs.

So in that situation, well you have to do the kind of testing that we do quite regularly in our producing fields. In those fields every year we’ll shut them down for a while. We know exactly how much gas we’ve taken out. While they are shut down, we’ll measure the bottom hole pressure, well let it set down and stabilize and we’ll measure that pressure. And of course from year-to-year that pressure will decline and so you there’s a formula that you can use to say, okay, if the pressure declines by X and I know that that volume has declined by why I can now back into what must be the total volume that was there in the beginning. And of course the more you extract, the more accurate that become.

We’re doing that same test, we’re just doing it on day one rather than year one or two or either three. And so on day one, the amount of gas when you are going to just flair it’s not a year’s production, it’s a few days of production. But again there’s a formula and for any given reservoir size if you produce a certain percentage of gas that you think is in place there and then measure the pressure drop, although the pressure drop is going to be very tiny, you are going to use really high precision gauges to measure it. And that will point you towards what the total reserves ought to be. That test becomes more and more accurate as time goes by and more and more gas is drained. And for the benefit of any patrolling engineers out there they are always happiest when you produce the last Mcf of gas because then it’s very accurate.

Dan Mittag - Oppenheimer & Co

Okay. Well congratulations. I am – I have waited a long time for this and I hope to have some pleasant news in six or eight weeks. So good luck guys, thanks.

David Pierce

Thank you.

Operator

Thank you. And then we’ll take our last question from John Bair - Ascend Wealth Advisors.

John Bair - Ascend Wealth Advisors

Thank you. Congratulations David, it’s nice to report here on (indiscernible). I got one question is, do you see any and just to clarify I guess one of the first question this afternoon on the volumes, its roughly 45% of the gas volume you had estimated 24 million a day but roughly half of that is nitrogen, am I thinking right here so that ultimately lets just round it and say, 12 million a day could be the high methane, going to the high methane line, am I thinking on that this.

David Pierce

More or less right, yes above 45% nitrogen. There are two ways we can go about talking about the gas we produce here. One way, is to talk about all the component parts and price each of them individually and then figure out what percentage of the total gas stream it consists of that particular product. What we are doing today is not that. We are coming backwards and we are saying out of this total 24 million cubic feet a day stream. But given the products that are in there and given the percentages that are in there, we think that the price of – the sales price of each Mcf of most gas that comes out of the well 24 million of them, we think that price is going to be about the same as the price of the gas that comes out of the well ahead in defense.

And I might ask, well how can that be, because this is 55% that’s 80%? Well, here we are going to get, we are going to get little helium that’s a big price. We are probably going to produce some liquefied or compressed natural gas products, they go for higher prices. The energy content of the gas in Tuchola is higher as a percentage than the energy content of the dry gas in the Fences wells.

So and then finally we are going to be selling into the high methane line rather than the low methane line. So you take all those together and you come up with price per Mcf from these wells – the actual stream is coming out but its comparable to Fences.

John Bair - Ascend Wealth Advisors

Well I just wanted to get back – I understand the component aspects in that regards. Have you just been able to determine yet what kind of well I mean as it is like – its very significant gas over ratio – or condensate per million type factor that you have been able to determine yet or is that something that you hope to be able to disclose in [FD Thrust]

David Pierce

Well we are not sure that we are going to seek, we have seen traces of condensate. We’re not at this point we are not saying that we will be selling condensate. We maybe selling liquefied natural gas which is a different thing entirely. It may because we have seen traces, because we have all these high ends in the methane, the butanes and hexanes and so on it suggests that there maybe condensate here to be produced. We won’t actually know that, we might think of that, we might know that from the upcoming test. But equally we might not. It just depends. The thing I’ll learnt about condensate if there is any there until we actually get into production. And that’s not much of a problem because we are moving, I don’t know if you remember some years back we had a well called Wilga in Eastern Poland. And it produced both gas and condensate, but we have taken that facility down and brought it over here and we’ll be setting that facility up. So we’ll have the capability of extracting condensate per tons.

But on the other products, the helium and liquefied natural gas is on. We know with a high degree of certainty what the relative volumes of those products are in this mix. And so it’s a pretty straight forward process to calculate on a given Mcf of raw gas, what percentage is going to be helium what’s that value, what percentage are you going to be able to sell as LNG or CNG and what’s that price and so on.

So if you get into all the details you can bogged on the numbers and it’s just much easier to back away from the whole thing and say, if we’ve done that math this is about the price that we’re expecting to get. But keep in mind; we haven’t contracted anything with anybody. I am simply saying that given market prices for these products today, this is about what I would expect to get when the time comes that we do sign up with buyer.

John Bair - Ascend Wealth Advisors

All right we had some liquids (indiscernible). One last quick question. Lisewo-1 and Lisewo-1, Kormoze-3 is it too early to get a feel for how well those are holding up as far as production rates, I mean are they working as expected and there is a possibility of opening them up a little bit more or not?

David Pierce

Well even though we are not the operator, I dare say and given that we never been successful at trying to increase rates on any of their wells, I think the answer is clearly, no that’s not going to happen, we are not going to be able to increase rates beyond what the operator has already said. As far as the test in Lisewo-1 came on when late last year I think it was. We will and most likely there will be a shut in and production test in the fall of this year. Kormoze-3, I don’t know the fall or later on and we’ll look again at reserves and so on. So it’s too early to make any guesses about what those wells might ultimately do.

John Bair - Ascend Wealth Advisors

But I mean as far as current production rates, I mean I have seen many kind of production decline I got on them.

David Pierce

No.

John Bair - Ascend Wealth Advisors

In a way they are steady in other words.

David Pierce

Lisewo-1 is holding in very steady. Kormoze-3 is not as much. It started out at a much lower rate than we originally anticipated. And we think that Kormoze-3 may have exactly the same problem that we found Szymanowice. And as I mentioned in the call, we are - Szymanowice because what we have encountered there as I said, and high grade cementation and the upper part of the reservoir and we’ve not seen that before. We’ve not seen that directly. And we think its related to nearby fracturing and folding. We know that it’s not that uncommon in the southern – or to see that. So the two solutions that we working on for Szymanowice and potentially to be applied to both Kormoze and Winna Gora is number one, think about if its worthwhile to sidetrack or otherwise get into a portion of the reservoir that’s going to be clean at the top.

The other thing and I have – and I’m hopeful that we can come up with a seismic solution where we are applying seismic attribute processing to see if those, cause we got real good 3D seismic properties well. Is there a way that with seismic attributes we might be able to see the different character where you have this and high grade cementing? Again, my first thought is that its probably related to fracturing because typically high grade firms are sealed and typically they don’t intrude into the well. But whatever it is if we can spot them on seismic then you can avoid that problem in the future, because from what we can tell the rest of the reservoirs is just fine, but where the cementation occurs the upper part of the reservoir it is not going to get ay deliverability even though you’ve got gas hidden wherever the reservoirs claims, you just can’t get the food here and if you go down low in the well and try to produce there, you must that much closer to the gas water content. That makes sense.

John Bair - Ascend Wealth Advisors

Well absolutely.

David Pierce

Over the next several months I think through the balance of the year we’re going to be working on these problems and see if we can get them fixed for Szymanowice and Kormoze-3 and even Lisewo-2 is going to come online and again it’s a little lower rate than we have anticipated. But it’s going to be an okay well. We just – I don’t know if this is a very localized phenomenon. I mean there is more stuff I don’t know than I do know, but we are tackling it.

John Bair - Ascend Wealth Advisors

Typical in the front areas, but anyway congratulations and good luck.

Operator

Thank you. We’ll take our next question from John [Henenberg] with Stifel and Company.

Unidentified Analyst

Hi, this is [Richie]. The next two wells that you are going to be drilling in the Edge this year hopefully it will start within three months I think you said two to three months. Are they wells in totally different rig it was, and the Tuchola 3 and 4 were thought to be in the same rig [floor]. And then the question is if just a second pull out of that, if that’s true and you are successful with either or both of them which would tend to think that you have very-very low at the field that’s going to have a lot of production. What if the of any interest, any major company with the problems in the Ukraine and Russia and it’s being in the middle of Europe. So just want to totally take you out or buy that field? Thank you.

David Pierce

Well that’s sort of a normal endgame for small companies. They typically get eaten by the fish once they are of a certain size. And I think I think the issues in the Ukraine made gas even more valuable product. So yes I think it could attract some attention. I think maybe what we have will attract some attention. It certainly attracted attention from downstream people. And we’ve had an enquiry or two from industry people who wanted to join. We haven’t had anybody today to talk to us about acquiring the company. Boy, its early day here. I’d really like to get some exploration under our belt; its more wells drilled out there and then really get a sense of what we have before we had to face that issue. But yes, I mean that’s a typical – its this kind of stuff that attracts attention and leaves M&A. Hopefully we’ll have a little time before we get to that. Is that responsive or…

Unidentified Analyst

Yes, that’s basically and I think the next two wells in different rig it was..

David Pierce

Well we don’t know. We haven’t picked locations and won’t pick location until about two or three months from now. As I mentioned earlier, its possible that there are other good targets to drill in and around this Tuchola field itself. And certainly they are on our radar screen. I think, personally I think we get more banks and the bucks stepping out and looking for other fields that are separated from this one. But that’s a decision that will get maybe in a couple of three months.

Unidentified Analyst

Thanks very much.

David Pierce

You bet.

Operator

Thank you. We have one final question from Rick Sherman with Oppenheimer

Rick Sherman – Oppenheimer

Yes, hi. One of my questions was just answered as to the for many here with the ups and down and I was wondering what the end game was for ultimately for next strategy. But on a technical note is there anything about in terms of regulations or etcetera or in terms of how you technologically frac or not frac or how you are able to drill that’s comparable to anything that you can do here in the space, or I know you said in some of the European countries its more limited in terms of regulation revenues to not being able to do certain types of fracking and things like that. And so any of that that goes on in Poland or is this fairly open in the same way as lets say the Bakken is or some place like that.

David Pierce

Good question. The shale play that was attempted in Poland kind of brought this all the way here over the last several years. And Poland is – that is open to fracking as the US is. France, the door is shut; Germany is kind of tearing on the line. But Poland as they regulated, they are paying close attention to it, but there have been several dozen wells that have been drilled either vertically, horizontally but in all cases frac. We actually are not doing that.

Our Fences well, we haven’t had to frac any of those. These Tuchola wells, we did – they clearly don’t need it, because there is so much natural fracturing. And if you look – who got, it’ unimaginable that they would be improved by fracking. So I don’t think we personally are going to face that problem going forward. We are sticking to conventional reservoirs and by and large, those don’t need fracking. But its’ available there, the technology is available; the service companies and while I do well well it is monitored and regulated. Its no – it’s essentially no different than in the states.

Rick Sherman – Oppenheimer

Okay. Thank you very much.

David Pierce

You bet. Thank you all for being on the call and for your questions and we’ll talk to you again in a few months. Thank you.

Operator

This concludes today’s conference and thank you for your participation.

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