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Triangle Petroleum Corporation (NYSEMKT:TPLM)

Q1 2015 Earnings Conference Call

June 10, 2014 10:30 a.m. ET

Executives

Jonathan Samuels – President and CEO

Justin Bliffen – CFO

Analysts

Jason Wangler – Wunderlich Securities

Brian Gamble – Simmons & Co.

Ron Mills – Johnson Rice & Company

John Cusin – RBC Capital Markets

Matthew Dodson – JWest LLC

Steve Berman – Canaccord Genuity

Operator

Good morning and welcome to the First Quarter Fiscal Year 2015 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to at this time Mr. Jon Samuels, CEO. Please go ahead, sir.

Jonathan Samuels

Good morning and thank you everyone for dialing in. We appreciate you taking the time. We’ll just dive right into it. We have a few things to talk with you this morning. First just talking about the quarter, something we’re happy with. It’s a good quarter. The numbers speak for themselves. So what doesn’t show up in the numbers is this quarter is a win. It was a tough quarter, February, March, April for us. Weather was hard. It was about miserable as an operating environment as you could have. Not necessarily because it was so cold, which is unpleasant but you can deal with, but just a lot of precipitation, a lot of water, a lot of road closures and that makes moving people and fluids and commodities around quite difficult. So we’re pretty happy with it and that’s a good thing.

A couple of comments on just helping people in terms of modeling and guidance. First of all from the production standpoint, this quarter we are exactly 20,000 barrels, cumulative 20,000 barrels ahead of the midpoint of our guidance. The midpoint of our guidance is our honest best guess of what we think this business is going to do 50% (inaudible) at the midpoint. If you’re modeling and you’re way ahead of this quarter, you’re a little bit ahead of us and our guidance and we just want to ask people to take a look and think about it. On that front on the gas side, 89% of our wells are connected to gas sales. The gas mix was a surprise. The pricing was a surprise. I encourage folks to go back in and relook at numbers. The gas is not going away and the pricing is probably not going to change, at least not in the way that we can predict.

We’ll reiterate the guidance that we gave last quarter, Q2 which should be the best quarter in our company’s history. RockPile is firing on all cylinders. In May they generated something around $30 million of revenue which was a fantastic quarter for them, all three spreads fully utilized. The Caliber gas plant will be online for the entire quarter for the first time in our history. And generally Q2 is going to be very, very positive.

A couple of comments on our upcoming Analyst Day. First of all we appreciate all the inquiries of folks. This trip is unfortunately completely full and we don’t have any more room to accommodate anyone. It's just difficult to arrange hotel rooms and bus seats and other things. So we reached our max limit. I also want to just give a little bit of a preview. This is really a field trip. We’re excited to show investors and sell-side analysts our integrated model. You’re going to see RockPile sand plant, the RockPile facility, RockPile fracs, the gas plant, rigs, everything. It's going to be a great trip. If you’ve never been to North Dakota it’s going to be insightful. If you’re an E&P focused person and you’ve never seen services, you’ve never seen midstream, we think it will be insightful and we think for the folks that go it’s going to be -- we think you’ll get the integrated model once you’ve seen it. But there’s not going to be any new type curves or new data or new presentations. There are no materials separate from our corporate presentation which we will update for the quarter being prepared. So we want people going into that there’s no magic bullet or special announcement coming and just want expectations set. And with that said, again I think it will be a great trip.

We continue to see the benefits of our vertically integrated model as we have begun to execute on our simultaneous operations. Our Hagen pad this past quarter and this is Caliber supplying fresh water to RockPile frac crew, fracking at T USA well. And that well IP’d and flowed back in the Caliber pipelines and gas being sold into the Caliber gas plant. And this is one of the first times in the last three years of building this that we are there. So I mean literally the system is just being turned on right now today.

So if you’ve been excited about the growth in the past, there’s more to be excited about in the future and it’s something that we are very proud of. Have a long ways to get to where we need to be, but it is a pretty big milestone for us and something that is good and we have a great runway of weather and this is the time of year. Q1 for us you hold your breath. You hope the weather pulls in, the roads stay open and really just trying to get up to the good months in Q2 and we are there now. So we’re pretty happy about that.

Caliber continues to build its business and showcase its strategic value over the course of Q1 through gathering and stabilization. Gas gathering and produced water volumes steadily increased as more of the Caliber trunk line system was placed into service. 53 Triangle wells are connected to gas sales as we work to reduce flaring and flow gas to our plant. Our plant has had no major interruptions since commercial operations began about a month ago.

Those are my high level comments. With that, I’ll pass it over to Justin and then close with some comments before we take Q&A.

Justin Bliffen

Good morning, I will walk through the financial results from the first quarter of fiscal 2015 which ended on April 30, 2014. As Jon mentioned, we saw substantial growth in Triangle USA, our E&P business, quarterly sales volumes of 724,000 BOE, representing a 200% growth year over year. This represents average daily production over the quarter of approximately 8,130 BOE per day. Triangle USA generated revenue of approximately $61 million and adjusted EBITDA of $42 million. With our continued focus on operating efficiencies, we’ve been successful on reining in our operated costs. For the quarter we had per barrel LOE cost of $6.53 which represents more than a 25% reduction in our per barrel LOE cost since quarter one of last year.

RockPile Energy Services, our wholly owned oil field services subsidiary generated standalone revenue of approximately $61 million and adjusted EBITDA of $14 million. RockPile continues to grow its third party customer base, having served 10 third party customers to date with two new additional customers in their current backlog. Furthermore, due to its exceptional service quality and performance, RockPile has enjoyed repeat business from all of its targeted third party customers.

Caliber Midstream, our 30% owned joint venture generated approximately $1.2 million in revenue and $700, 000 in adjusted EBITDA, net to our 30% interest for the quarter. Caliber too has started to grow its third party business having recently signed four distinct MSAs with four new third party customers.

We believe standalone business segment reporting offers a clear snapshot of discrete business performance and I always point folks to Note 4 of our consolidated financials for clarification.

On a consolidated basis, our basic earnings per share was $0.17 for the quarter. When adjusted for non-cash and non-recurring items, including our $10.5 million gain on our Caliber investment and other smaller items, we earned adjusted net income per share of $0.13 for the quarter.

For the quarter, we had an income tax provision of approximately $10 million, but only had an actual tax expense due to A&T of a little more than $100, 000. For the remainder of the fiscal year, we anticipate that we will have an effective tax rate of approximately 40% in calculating our income tax provision which again will be primarily a non-cash expense.

Our balance sheet and liquidity position continue to be in great shape. At quarter end, we had over $105 million in cash and over $137 million in revolver availability. Excluding the NGP note which is convertible into shares of common stock at $8 per share, we had approximately $290 million in debt at quarter-end. Leverage metrics remained conservative at 1.6 times total debt to annualized quarter one adjusted EBITDA, excluding the NGP note which is an improvement over the last quarter.

Our strong liquidity position will continue to improve in the coming fiscal year. In May, Triangle USA increased its foreign base from $320 million to $355 million as part of its quarterly borrowing base redetermination. As Jon mentioned, and as we’ve mentioned in previous press releases, on May 14 Triangle USA announced that it had signed two separate definitive agreements to acquire approximately 46,000 net acres for total cash consideration of approximately $120 million. The strong PDP component of the acquisitions and our strong existing liquidity position allows us to fund the acquisitions with approximately $40 million of existing cash, $20 million drawn in our existing Triangle USA credit facility and $60 million from a new senior secured second lien term loan facility, which will close simultaneously with the acquisitions.

Additionally pro forma for the acquisition, Triangle’s foreign base -- Triangle USA’s borrowing base will increase from $355 million to approximately $400 million upon close by the end of the month. Pro forma for the acquisitions, our balance sheet and liquidity position will remain strong with approximately $65 million in cash and over $200 million in total revolver availability.

We continue to use zero cost collars and swaps to provide more certainty around price realizations. For the remainder of fiscal 2015, using zero cost collars, we have approximately 5,250 barrels a day hedged with volume weighted average floors of approximately $87 WTI and ceilings north of $100. And using swaps, we have approximately 500 barrels a day hedged with a weighted average price of $95. Overall, we are very pleased with the performance and positioning of the three business segments and cash generated by each will allow us to reinvest in growth without sacrificing our disciplined approach to the balance sheet.

With that, I’ll hand it back over to Jon. Thank you.

Jonathan Samuels

Thanks, Justin. A few closing remarks then we’ll turn it over to Q&A. You include these acquisitions, we are doing well over 10,000 barrels a day today. RockPile is doing very well. I gave you some of those numbers. They speak for themselves. Caliber they’re about a year behind RockPile in its development. Hired a new CEO, started yesterday, great guy, very experienced guy and has signed four third party customers in the last few weeks, which is great. And we want to reiterate that we are highly incentivized and highly focused on shareholder value and shareholder returns. And over the next eight quarters there are going to be a lot of opportunities to structurally change this business to make sure we are maximizing our value. So we appreciate everyone’s patience. I appreciate everyone’s time following this business. We are on track with plan and looking forward to what the next couple months and quarters bring.

With that we can fire up the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Jason Wangler of Wunderlich Securities. Please go ahead.

Jason Wangler – Wunderlich Securities

Just curious, you talked about it briefly as far as RockPile seeing a pretty good May. I think the road restrictions were taken off later in the month, just maybe what you're seeing from an activity level maybe across both RockPile and obviously the E&P side as the weather is starting to cooperate a little bit more?

Jonathan Samuels

Yeah. What you have is a pretty big backlog and you look at all our drill times coming down, we are not the only one. So a lot of folks are drilling wells a lot quicker than they used to and people are also drilling four, five, six wells at a time now and then fracking them all at the same time. So the rig count is what it is and hasn’t changed a lot. It’s becoming and we’ve been discussing this recently, it’s becoming a worse and worse proxy for activity in the Wilson Basin that it used to be. And so the activity levels are robust. RockPile is more or less fully utilized. It’s just a scheduling thing. You might finish on customer A’s well tomorrow and customer B who’s next their well might not be ready for three or four days. And so that’s the type of downtime we have other than scheduling type issues. They are completely sold out. They are turning away work.

Jason Wangler – Wunderlich Securities

Sure. And just maybe -- I don't think you mentioned it on the release at least, but obviously a big topic is the new completions and where you guys are in watching some of the new completions and what you guys have done from your end and also just as you move forward, what you're thinking as we start to tweak those things?

Jonathan Samuels

Yeah. We really have no updated comments from our year-end call which was 6 to 8 weeks ago. We just really need to get some production history under these wells and I think we’ll get that later this year, but nothing new today.

Jason Wangler – Wunderlich Securities

That's fair. I appreciate it, guys.

Operator

Our next question comes from Brian Gamble of Simmons. Please go ahead.

Brian Gamble – Simmons & Co.

Jon, you mentioned structural changes over the next several quarters or actually I think you said eight quarters. I know that what you're referring to is a lot of the stuff that's already happening, the continuation of that. Was there anything specific that you wanted to detail out there in regards to new things that are in the works and/or just the continued improvement from what you've seen so far over the last six months?

Jonathan Samuels

Yeah. I mean I think what that comment is referring to is that for -- if you want to share Triangle stock what do you own? You own 100% of our E&P business, 100% of RockPile and a share of the Caliber JV. Definitively in my mind these businesses are not getting full value in the stock today. I don’t talk to a single person that disagrees with it. The conversation tends to be around how do you get from where we are to that value, and ultimately it turns back to these businesses standing on their own and being separate whatever that means, whether that’s a spin out or an IPO or a sale. That’s going to come. We are motivated and incentivized to see the stock price be as high as it can be and the stock price today doesn’t reflect that. That’s just the fact. If you were to separate out E&P from RockPile and Caliber and forget about how we do that, just for the sale of the example, you separate those out, they are not affiliates anymore.

$50 million of income that’s getting eliminated this year is now on the income statement. You put a 6x multiple on that which is not an outrageous multiple for the growth rate you could argue it’s low. That’s $300 million or $3 a share just with that separation alone. So there are a lot of considerations that go into how you do that, how things are going to trade, tax, timing, but these businesses are growing well beyond what we initially planned to any of their own cost of capital, their own specific shareholders and that’s something that we are focused on and we are going to spend time on over the next we say eight quarter because those transactions are complicated and there are a lot of rules and they take time. But if we could do it tomorrow, we would say that.

Brian Gamble – Simmons & Co.

That's great. And maybe a specific one on RockPile since we're talking segments, the margins in both third party and T USA business for the quarter, both pretty solid, especially on the third-party business. Anything in particular that created that increase? And …

Jonathan Samuels

Yeah. The thing that, our accounting is so funky I still get confused by it. And we didn’t design this business because of the accounting treatment. If we did we are not very good at we do. So when you look at our consolidated income statement, it just doesn’t tell the picture. You really have to go to the segment notes and the financial statement which breaks out RockPile on a standalone basis. And that’s why we continue to do that because if we don’t plan to be a consolidated enterprise two or three years from now, the value of the separate businesses does matter and that’s how we report them. So, I think their EBITDA margin is up something like 5% or 10% maybe and to me that’s just more economies of scale. You don’t have the CEO and the CFOs salary for example that doesn’t double when you add a third spread and then you also get utilizations up.

So we talked about in our December call, let’s say we just brought our second spread. We were bearing the cost of that spread the entire quarter. We didn’t get any revenue from it. So when you put 70 people on the payroll and they don’t generate any revenue, it’s tough for margins. And then you have the same thing for half of the quarter that we are talking about right now or half of that quarter you have 70 people on the payroll that weren’t generating any revenue. For Q2 this is what we have said multiple times, Q2 is going to be really good. You have everything working finally for the first time ever as some are done completely. You still don’t have the Caliber trunk line done. You don’t have RockPile core spread here. We are going to continue to grow. There’s going to continue to be things later on, but the 70 people that you are employing to get spread four online, that’s a lot less meaningful as a percentage of the business than spread two was. So you are going to continue to see it get better and we are all on track. So hopefully that’s helpful.

Brian Gamble – Simmons & Co. International

That is helpful. Appreciate it, Jon.

Operator

Our next question comes from Ron Mills of Johnson Rice. Please go ahead.

Ron Mills – Johnson Rice & Company

Shifting a little bit over to the acquisition and how that fits into your original plans, at what point do you think you're going to move up and do some activity on the new acreage? And is the initial activity going to be Bakken focused rather than Three Forks focused? I know we had talked more about really attacking it next year, but when do you think you’d start to get on some of that acquired acreage?

Jonathan Samuels

You kind of answered your own question, Ronny. It is next year. So we’ll close on this thing June 30. We’ll count all the PDP and all the wells we are acquiring. That will be counted in the production figures for the back half of the year. At this point we don’t drill any pads or very rarely it has to be an exception. There has to be a purpose. We don’t drill a pad that’s less than four wells and it takes time to go re-space, get down spacing approval, get permits dirt work, how do you want to attack it. It’s a lot of acres as you know. There are a bunch of producing wells and we have a pretty full plate. We are human capital constrained without that acquisition. So you can pile that on top and it’s just not going to change this year’s drilling schedule. So it’s too early for us to comment on what we are going to do next year, but the acquisitions will certainly factor into those plans.

Ron Mills – Johnson Rice & Company

And I know -- can you expand just a little bit on what you're seeing out there from a Three Forks versus Bakken because I know you talked about on the call, but curious for just a little bit deeper dive into what you're seeing in the Three Forks up there based on data so far?

Jonathan Samuels

The comments I’ll give is that we like the prospectively of the Three Forks. I almost want to say more than we like the prospectively of the Bakken, which is not to say that the Bakken is not economic, but we like the potential of the Three Forks, but there’s not a lot of data up there. And so this is about logs. It’s about quarters, and logs and quarters are great, but producing wells are better. So until we fully get through our processing -- the thing you’ve got to remember about it is all the upside Three Forks anything else, we didn’t pay for any of it. So however you want to slice and dice this acquisition, when you have $80 million or $90 million of PDP value on the larger piece and you paid $100 million for it and it’s producing 1,400 barrels a day as of the effective date which is January 1 (inaudible) those are the things. To a certain extent our analysis a lot of it was unquantified upside. It can only get better than we are paying for it which is zero.

Might get a little factor in but it’s -- we have a lot of acres now. This is becoming a sizable company. Our well count by end of year -- we are going to be operating over 100 wells at the end of this year. That’s a lot of physical locations to manage. And folks, you’ve got to remember two years ago we had zero. There’s a lot of growth and I think this team has done a fantastic job. I couldn’t have been more proud of them, but there’s constraints on what an organization can do. And I want answers to the questions that you are asking. It’s exciting and it makes me curious. It’s going to be fun doing the work on that and it’s going to be fun putting the drill bit into the ground next year to do it. But I don’t have all the answers that we all want right now.

Ron Mills – Johnson Rice & Company

And then two quick ones on the service. One, on RockPile the -- that you've had about this quarter, the past couple quarters, almost two thirds of the activity has been third party. Is that a pretty good run rate until you get the fourth spread on or how dependent is that on how you go from pad to pad whether it's a Triangle versus a -- or whether it's a T USA versus a third party?

Jonathan Samuels

Yeah. That’s a good question. We have -- RockPile has three spreads working right now and one of them is working for Triangle. That’s the Alpha crew. So Alpha, Bravo, Charlie, ABC spread one, two, three in the order in which they arrived. So unless we change our rig count which wouldn’t happen until next year, if it happens at all, Alpha is going to 100% working for Triangle and Bravo and Charlie will be working for third parties.

Ron Mills – Johnson Rice & Company

And when do you -- when does the fourth one you think, I know you're already starting, but when do you think that gets delivered?

Jonathan Samuels

I’ll say it’s not in any of our numbers this year. Something like we expect equipment to start arriving in November, December. The cycle is turning. But most folks that follow the service market, we are not telling you anything you don’t already know. But the manufacturer level backlogs are up. Wait times are getting longer. The type of market, the nature of the conversation is away from spot work. It’s towards contracts and prices are going to be going up. And we are just at the start of that cycle, that service cycle that affects the E&P. We are really happy is where we are positioned. If costs go up 20% on the service side that’s good for us and not all the E&Ps can say that.

Ron Mills – Johnson Rice & Company

Right. And then lastly, the timeframe, John, to get -- you look at your second half FY15 EBITDA target for RockPile is approaching $85 million, $86 million. But if we look out the next 18 to 24 months, is it still that kind of timeframe where you think that both RockPile and Caliber are able to be at that $100 billion EBITDA run rate?

Jonathan Samuels

Yeah. no change to that timeline. RockPile definitively I think is in 2015, calendar year 2015.

Operator

(Operator Instructions). Our next question comes from John Cusin of RBC. Please go ahead.

John Cusin – RBC Capital Markets

Question is I think everybody on the call, including you guys, have said that you think the stock is materially undervalued on the sum of its parts basis. My question is, is there any capacity at the current time to buy back shares? And if so, is that something under consideration?

Jonathan Samuels

No. We really don’t have an answer to that question right now.

John Cusin – RBC Capital Markets

Okay.

Operator

(Operator Instructions). Our next question comes from Matthew Dodson of JWest LLC. Please go ahead.

Matthew Dodson – JWest LLC

Can you talk about pricing you're seeing in your oil pressure pumping, your RockPile service part of your business, please?

Jonathan Samuels

As a general rule we don’t talk about the third party market customers. we’ll say pricing is directionally going to start picking up and that’s as about as much color as we’re going to add.

Matthew Dodson – JWest LLC

Thank you.

Operator

Our next question comes from Steve Berman of Canaccord Genuity. Please go ahead.

Steve Berman – Canaccord Genuity

Thanks. Jon or Justin, how about pricing on differentials on the oil side, what are you currently seeing up there?

Justin Bliffen

Yeah. I mean, Steve, it was about $10 for oil in the first quarter and it’s still about there here in June.

Steve Berman – Canaccord Genuity

All right. And are you assuming any improvement on that going forward or you just want to be conservative and continue to think in that $10 …?

Justin Bliffen

We're price takers. Wish we knew.

Steve Berman – Canaccord Genuity

Understood. All right, thanks, guys.

Operator

It appears there are no more questions in the queue at this time. I would now like to turn the conference back over to Mr. Jon Samuels for any closing remarks.

Jonathan Samuels

thank you everyone for listening in and we appreciate it and look forward to chatting next quarter. Have a great day.

Operator

the conference has now concluded. thank you for attending today’s presentation. You may now disconnect.

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