FX Energy's (FXEN) CEO David Pierce on Q2 2014 Results - Earnings Call Transcript

Aug.11.14 | About: FX Energy, (FXEN)

FX Energy, Inc. (NASDAQ:FXEN)

Q2 2014 Earnings Conference Call

August 11, 2014 4:30 PM ET

Executives

Clay Newton – Vice President-Finance

David Pierce – President and Chief Executive Officer

Analysts

Kim Pacanovsky – Imperial Capital, LLC

Eric B. Anderson – Hartford Financial Management, Inc.

Chad L. Mabry – MLV & Co. LLC

Daniel Witt Mittag – Oppenheimer & Co. Inc.

Joseph G. Reagor – ROTH Capital Partners LLC

Rick Sherman – Oppenheimer & Co. Inc.

Operator

Good afternoon, ladies and gentlemen and welcome to the FX Energy Incorporated Second Quarter 2014 Financial and Operating Results Conference Call. Today’s conference is being recorded.

And I would now like to turn the conference over to Clay Newton, Vice President, Finance. Please go ahead, Mr. Newton.

Clay Newton

Thank you, Jennie. Thank you all for joining us today. I am Clay Newton, VP of Finance here at FX Energy. Welcome to our 2014 second quarter and first half 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. The examples of these statements include those regarding exploration, drilling, development, or other projects or 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 two sections. First, I’ll talk about the numbers, production, revenues, and operating costs, along with some discussion about non-cash charges. I’ll close by discussing our liquidity and capital resources, and our recent preferred stock offering.

I‘ll start with production. Oil and gas production for the first half of 2014 was 2.3 billion cubic feet equivalent and average of about 12.9 million cubic feet equivalent per day, compared to 13.1 million cubit feet equivalent during the first half of 2013. Full production at the company will save one well helped offset declines at the Zaniemysl and Roszkow wells. However, production was unexpectedly curtailed at the Kromolice-1 well for 40 days during the quarter in order to make some flow line repairs. Without the production interruption at Kromolice-1, our daily production would have averaged 13.3 million cubit feet equivalent per day during this period.

Looking forward, we plan to begin production from Lisewo-2 in the next four weeks to six weeks, which should add approximately 1.7 million cubit feet a day to our net production once it begins. Despite slightly lower production, we posted record oil and gas revenues during the first half of this year. Oil and gas revenues were $18.3 million for the first six months of this year, compared to $17.6 million for the same period of 2013, an increase of 4%.

Total revenues for the first six months of 2014 were $19.7 million, compared to $17.7 million in the first six months of 2013. Natural gas prices in Poland were higher during the first half of 2014, remember that our U.S. denominated gas prices are a function of the current Polish low-methane tariff, which serves as the reference price for our gas sales agreements and the relative strength or weakness of the U.S. dollar during the reporting period. The average price received in Poland for the first half of 2014 was $7.49 per Mcf, compared to $7.08 per Mcf for the first half of 2013, an increase of 6%.

The Polish low-methane tariff increased by 3.1% effective February 21, 2014. In addition, period-to-period strengthening in the Polish has slightly produced the higher U.S. dollar denominated average price in the first half of 2014. You’ll notice an increase in our lease operating cost from the last year to this. As we mentioned during our last call, while our drilling rig in the U.S. was mostly idle during the first quarter of this year, our crew in Montana was extensively working over many of our producing wells with the view towards slowing our production decline – our oil production decline.

Much of the increase in operating costs this year is due to those workovers along with new costs that our Lisewo-1 well and some additional workover costs that are Winna Gora commercial wells in Poland. A few words as we do each quarter about non-cash charges. Our financial results continue to be impacted by non-cash charges. in the first half of 2014; we recorded foreign exchange losses of about $1.9 million, compared to foreign exchange losses of about $12.6 million during the same period of last year.

Please remember that almost all of these foreign exchange losses are related to the dollar denominated intercompany debt between FX Inc. and FX Poland and other dollar-denominated debt at the FX Poland level. These charges will continue to vary over time as the exchange rate between the U.S. dollar and polished value changes.

As a reminder, 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 intercompany loan balance is lower. This swings in the 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 execute on our capital budget. Concerning our liquidity and capital resources, our cash provided by operating activities of $3.7 million decreased by about $500, 000 from the first half of last year to this year.

Our cash balance was about $6.8 million at the end of June, our working capital was about $10.4 million, and we currently have $15 million of remaining availability with our credit facility before giving any effect to our its whole of discoveries, which we may include in our borrowing base before the end of this year.

In addition, our liquidity was enhanced further last month after we closed an underwritten public offering of 800,000 shares of our 9.25% Series B Cumulative Convertible Preferred Stock at a public offering price of $25 per share. The aggregate gross proceeds from the offering were $20 million with net proceeds after deducting estimated underwriting discounts, and commissions and operating expenses were about $18.4 million.

Cumulative dividends of 9.25%, or $1.9 million per year will be payable to the holders of the preferred stock. The new production of Lisewo-2 should produce new cash flow, well in access of the dividend requirement, which will allow us to use all of the proceeds from the offering to accelerate exploration efforts in our Edge concession in Poland, which David will discuss in more detail.

With that background, I’ll now turn the call over to David, for some operational updates.

David Pierce

Thanks, Clay. Good afternoon, listeners. I am David Pierce, CEO of FX Energy. I’ll begin my remarks with an update of operations in the Fences license. As you know, we started drilling the common well about two weeks ago. If you’re looking in a map, Karmin-1 is on the southern boarder of the Fences license over toward the eastern Edge.

If you don’t have a map, you can find one in the newest investor presentation now available on our website. The target is we’re leaving the sandstone under depth of approximately 2,460 meters relatively shallow. Our two other shallow wells in the Fences license are Zaniemsyl 3 and Roszkow 1, both of which had much better than average reservoir quality reduction rates and reserves.

If Karmin-1 is commercial, we’ve planned to tie it into an existing production line approximately, eight kilometers to the North West and we think production could start about one year after driven relates. Next is the Baraniec-1 well, which should start drilling in about three weeks. Baraniec-1 is located in the Northeast of the Fences license, near the Lisewo production facility. This will be our fifth well in the Lisewo area. It approves to be commercial; we planned to tie into an existing line approximately 3 kilometer to the Southwest. As with Karmin-1 production gets start about a year after rig release.

Miloslaw-4 is planned as our third Fences well this year. This will be our first well in the Miloslaw area in the North Central part of the Fences license. If Miloslaw-4 is commercial we have to tie in about 6 kilometers or 7 kilometers to the Southwest. Miloslaw-4 is the largest of several prospects identified on 3D seismic in that area. So in the success case we have a number of other locations to drill nearby.

Moving to the West Central part of the Fences license, we find Zaniemysl-3, one of our oldest wells license. This well produced about 21 Bcf of gas before watering out last year by tracking to a higher bottom location was approved by the partners, but you laid by a rig tender that resulted in higher than anticipated prices. But contracts now been signed for the Zaniemysl-3 sidetrack and we expect this operation to be completed before the end of the year. The well is already tied into production facility, so if it successful we expect production to restart promptly following rig release.

Finally, construction works is underway to start production from the Lisewo-2 well. We anticipate first production in about 30 days to 45 days. We expect to see an initial gross production rate estimated at about 3.4 million cubit feet of gas per day. To summarize operational activity in the Fences license, we anticipate first production from Lisewo-2 in about a month or so with Zaniemysl-3 resuming production before year end, if the sidetrack is successful.

The Karmin-1 well is drilling now. Baraniec-1 should start about three weeks, and our first Miloslaw area well is scheduled to start drilling before year end. Each of these wells in the success case is about one-year from rig release to first production. We hold 49% non-operating interest in the 850,000 acre Fences license, and in all the wells, just discussed, other than the Zaniemysl-3 well and the 45,000 acres surrounding it, in which we hold the 24.5% non-operating interest.

The Fences license is our core area because it accounts for nearly all our production and reserves and we believe it has much more potential. We have acquired 3D seismic over an area of about 10 miles by 40 miles, roughly a 1,000 square kilometers stretching from the KSK area in the Northwest to the Lisewo area in the east. Most of our 62 Bcfe, net to the reserves comes from this area, and we have a backlog of prospects here with an estimated risk potential of a 100 Bcf net to our 49% interest.

The Fences is obviously a key component in the FX story provides stability and growth potential with lower risk, compared to our higher risk exploration projects. Fences license is our bread and butter and we planned to continue growing this product.

Let’s turn now to our Edge license in Northern Poland, where we hold 100% working interest and approximately three quarters of a million acres. Much like the Fences license, the Edge license has all the essential elements source, migration, trap and seal. We believe it has substantial hydrocarbon potential and over the last couple of years we have focused more and more of that resource on this area as we have achieved more and more positive results.

We started assessing the Edge license with existing well and seismic data. Two years ago, we acquired a small amount of grid; we then drilled the successful well on that small grid, last year’s Tuchola-3K. We followed it up with about 50 square kilometers of 3D seismic, and earlier this year drilled another successful well the Tuchola-4K. Immediately after positive results from the Tuchola-4K, we started acquiring a 240 square kilometer 3D seismic grid centered on the Tuchola field.

We identified eight new leads on this seismic and already returned four of them in the drillable prospects. The Angowice prospects. Last week we announced that we will test the first of these Angowice prospects with the upcoming Angowice-1 well starting in about 60 days. We are successful Angowice most likely will be tied into the facility that we are now designing for the Tuchola wells approximately 10 kilometers to 12 kilometers to the east.

We are working now to turn the other 3D leads into drillable prospects over the next couple of months. We planned to get another well underway before the end of this year. In a month or so, we will start a new 300 square kilometer 3D seismic program consisting of grids over identify leads in each of the four blocks in the Edge license. This will give us 3D seismic coverage over approximately 18% of the Edge license, and meanwhile we are working on plans for the production facilities and pipeline to take the whole of field production to market.

We are moving as rapidly as we can to identify and develop the hydrocarbon potential across our Edge license, because we believe it could be big. That was the primary reason for the recent preferred stock offering to increase the pace of 3D seismic acquisition and drilling.

The Angowice cluster where we will drill our next well could contain up to an estimated 200 Bcf of gas in place across the four structures. We have also identified a number of other similar leads with aggregate potential up to TCF. So there is more work to be done to turn them into drillable prospects. It’s exciting to be working in an area which has this much of side potential. I should caution that we are still in the early part of learning curve and there is certainly plenty of risk in front of us. But we have drilled two successful wells in the Edge license and we believe they will make money at current prices even burdened by all new infrastructure process.

We have more prospects and leads that look very promising. We have evidence to the Edge area in general appears to have all the essential elements of the good hydrocarbon system and could have the kind of potential overall that we targeted in some of our earlier high risk, high potential exploratory wells. Our goal in the Edge license through the remainder of this year and into the early part of next year is to drill two more wells on our existing 3D seismic and acquire new 3D seismic on each of the four blocks in the Edge license that we anticipate will give us more drillable prospects.

In conclusion, I would like to point out that at the end of this year; we expect to add reserves from the Tuchola field. We might have even more reserves to add this year, if any of the Karmin, Baraniec, Zaniemysl sidetrack or Angowice wells are successful. Our production rate through the first half of the year is virtually the same as last years record first half and we have more production to add from Lisewo-2 in about a month. We have a very active drilling schedule in front of us with several important wells to drill.

Looking at the company overall, the forecast is quite positive in terms of production, revenue, reserves, and good prospects to drill. I want to thank you all for helping us get here. And Jennie, we can take some questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Kim Pacanovsky with Imperial Capital.

Kim Pacanovsky – Imperial Capital, LLC

Hi good morning, everybody.

David Pierce

Hello, Kim, how are you?

Kim Pacanovsky – Imperial Capital, LLC

Great, thanks. How are you doing, David. Okay. First question on Angowice, today you said 200 – I’m getting feedback, are you hearing feedback, David?

David Pierce

No, we’re not hearing feedback.

Kim Pacanovsky – Imperial Capital, LLC

Okay, all right. Then I’ll just keep talking. On Angowice you said 200 Bcf gas in place and could you just remind us what the recoverable was on Tuchola was that plus 60% or something?

David Pierce

Well, we don’t have our independent reserve report to all of it, but quite commonly in the Fences, they have said 60% would be the 1P number and 70% would be the 2P number. This is quite a different reservoir I don’t know what the independence are going to say. We used only 60% to be conservative, but I expect it could be higher than that.

Kim Pacanovsky – Imperial Capital, LLC

Okay, well that was actually going to lead into my next question, which is how you think your engineers are going to book to a whole lot?

David Pierce

Well, I can’t say how the independent guys are going to book.

Kim Pacanovsky – Imperial Capital, LLC

Yes.

David Pierce

So I mean I wouldn’t – get in front of that question, but we believe that we have been conservative in saying 12 Bcf recoverable against 20 Bcf in place and I think both of those numbers are conservative. But, that’s let me say that we’ll have to wait until we get RPS to give us their answer.

Kim Pacanovsky – Imperial Capital, LLC

Okay. And then, could you just give us an update on where you are with the Tuchola facility in design pipeline like we’re permit – we are permitting is where actually physical design plans are who has been hired that kind of thing?

David Pierce

Yes. it’s much more complicated than you might imagine. but we have made good progress on the design; I think we know the particular approach we’re going to use to the nitrogen removal unit. we have examined half dozen different possible pipelines and we’re down to two now that are actually a bit shorter than we had earlier thought, maybe even quite short and a part of that is once you get out there and start investigating markets, there are smallest markets around.

So I’m not in a place now where I can say, we’re at the certain percentage on the permitting, or the design, or anything else. but we have basically top two all of the stakeholders I suppose, I mean all of the buyers, people along the pipeline route of the guys who – the U.S. and Canadian people who produced the guts of nitrogen removal unit, and it’s taking shape well. but it’s probably going to be in the early next year before we can – we’ve decided on a particular route, we will probably order parts of the nitrogen removal plant of anytime between now and the end of this year to kind of get that moving along. bottom line now is we still feel pretty good about getting started right at the end of 2016 early 2017.

Kim Pacanovsky – Imperial Capital, LLC

Okay.

David Pierce

That’s about timeframe for us.

Kim Pacanovsky – Imperial Capital, LLC

Okay. great, thanks. and then one other quick question on Lisewo-2, the growth rate $3.4 million a day, could you just remind me what would you be producing that well, if you could produce to that, what you wanted to produce to that?

David Pierce

I don’t think we’ve ever said, and I don’t know that there is a particularly productive wealth for me to go down here.

Kim Pacanovsky – Imperial Capital, LLC

Okay, I got you loud and clear. All right. thanks, David.

David Pierce

You bet, talked earlier.

Kim Pacanovsky – Imperial Capital, LLC

Yes.

Operator

Thank you. And we’ll take our next question from Eric Anderson with Hartford Financial.

Eric B. Anderson – Hartford Financial Management, Inc.

Appreciate taking my question. Sticking with the Edge license discussion, have you guys considered down the road, if things really start to click, would you bring in possibly partners either financial players, or other energy companies that if you see the capital requirements is sort of being a little bit beyond what you maybe want to finance from internal sources and/or capital raises?

Clay Newton

The short answer is yes. We’re very open to the idea of having a partner out there. we really wanted to get some measurement of the potential here. I’ve said it any number of times, we think it’s pretty big and sure like to have strong evidence of that before getting into some kind of a deal, because obviously, you can get much better terms that way. but over the medium term, we sure want to see that all area get explored as rapidly as possible. In a perfect world, you’d go out and shoot all the 3D and then you come back with a bunch of rigs drilled all the wells and it should be pretty obvious. Obviously, we’re not that big, we can’t do that and – but I think the day might come and the fairly short-term where we can make that demonstration, and then I think we’d certainly be open to considering a partner.

Eric B. Anderson – Hartford Financial Management, Inc.

How many well, additional well, do you think you need to get down before and may have an update as that – you will see like you’re not giving away to store entering into some type of an arrangement?

David Pierce

That’s a hard one to say. I guess it depends a lot on how the next Q3 wells come in, if we really are – if we understand the seismic correctly, if we have a reasonably high success rate, if the volumes that we’re encountering, both production rates and reservers turn out to be pretty good, we can get there quite quickly with a handful of wells. If not, then maybe, we haven’t gotten what we think and that’s yet a different story. So I’d hate to put an exact number on it, but I’d sure like to get to it – I’d like to get to the place quickly where we can really make a demonstration. this is a great place to be.

Eric B. Anderson – Hartford Financial Management, Inc.

Okay. Well, I appreciate you taking my questions. Thank you.

David Pierce

You bet.

Operator

Thank you. We’ll take our next question from Chad Mabry with MLV & Company.

Chad L. Mabry – MLV & Co. LLC

Just had a couple of questions on production, it sounds like, if I heard quite correctly that X downtime in Q2, you’re still back up over 13 million a day, just a couple of questions around that. In Q3, do we expect any kind of maintenance downtime this quarter and then are you kind of modeling in sort of from Lisewo-2 this quarter?

David Pierce

Yes, we are. At the end of the quarter, we expect we’ll say we have two to begin production. In terms of our maintenance this year in Q3, we will have formalized the too short of four and the Lisewo-1 well; those three wells should be down for about two weeks.

Chad L. Mabry – MLV & Co. LLC

Okay, that’s helpful. And then on the cost side, on those workovers in Q2, is that going to be more of a recurring program, or just sort of a one-time event for Q2?

David Pierce

I don’t think so. I think the one consideration is that keep in mind that most of the operating costs in Poland are fixed for well. And when we have a well like Komorze that isn’t producing at the levels of our other wells than the operating cost per Mcf there tend to be a little higher than they are at the rest of the properties. So Q3, Q4 per Mcf numbers might be a bit higher than they have been in the past, but they should be lower than they have been in the first half of this year.

Chad L. Mabry – MLV & Co. LLC

Okay. that’s all I’ve got. Thanks, guys.

Operator

We’ll take our next question from Dan Mittag from Oppenheimer.

Daniel Witt Mittag – Oppenheimer & Co. Inc.

Good afternoon. My first question is a follow-up to one I’ve asked before, in the Edge concession to Tuchola-3 and to Tuchola-4, are they connected?

David Pierce

Still loving answer to that for sure.

Clay Newton

But I’m just going to say the Tuchola-3 well encountered what appears to be lower Zechstein, and then came back into some anhydrite and we don’t see that anhydrite over Tuchola-4, it is entirely possible, it is a separate deposit and we tested the Tuchola-3, but not nearly to the extent, we tested Tuchola-4. So all I can tell you is that reserves at Tuchola-4, we’re sure applied it to – I mean we tested the Tuchola-4, don’t know for sure, whether we tested Tuchola-3. And within our company, we have people that take divergent views. I don’t think we’ll know the answer until we actually get into production and can look at the behavior of both of those wells.

Daniel Witt Mittag – Oppenheimer & Co. Inc.

Well your next prospect in edge concession is 12 kilometers away?

David Pierce

Yes. about 10 kilometers to 12 kilometers, yes.

Daniel Witt Mittag – Oppenheimer & Co. Inc.

So, I mean I’m guessing that certainly wouldn’t be connected, or do you see anything in seismic that would indicate that that would be connected?

David Pierce

No, no. they should be entirely separate deposits, and most likely separate – there’s four Angowice prospects and they should be separate from each other, based on what we now know. Now maybe, getting depths right out there is remains a challenge. I suppose it’s possible that the Angowice prospects do connect each other. We’re a long way from being able to think that.

Daniel Witt Mittag – Oppenheimer & Co. Inc.

Okay. And my second question has to do with the shareholder vote that was held several weeks ago. Is that something that the Board is considering, or will you honor it, what’s your thoughts on that?

David Pierce

What part – particularly part you’re talking about?

Daniel Witt Mittag – Oppenheimer & Co. Inc.

The election of retention of one of your Board members.

David Pierce

Okay. Yes, we’re going to take up that issue with the upcoming Board meeting, which is about 10 days from now. So that’s on our agenda and we’re certainly not going to ignore what the shareholders have to say?

Daniel Witt Mittag – Oppenheimer & Co. Inc.

Along that same line is there – have you discussed with some of the older Board members with succession plan?

David Pierce

We have and again, that’s something that we take up, generally on a semi-annual basis, just to have a chat about it. So yes, it’s something that’s in the foreground of our thinking and reviewed regularly at the Board meetings, and certainly, will be reviewed again, at the upcoming Board meeting.

Daniel Witt Mittag – Oppenheimer & Co. Inc.

Okay, thank you.

David Pierce

You bet. Appreciate the call.

Operator

We’ll take our next question from Joseph Reagor with Roth Capital Partners

Joseph G. Reagor – ROTH Capital Partners LLC

Good afternoon guys. Most of the key things I think, touched already, but one small note, I noticed you have decent revenue come out of the oil field services, I believe you guys afford third-party wells, is that correct?

David Pierce

Correct.

Joseph G. Reagor – ROTH Capital Partners LLC

Is there – do you guys have a forecast for the remainder of the year as far as wells you guys might drill?

David Pierce

It’s difficult to say, because in drilling, it’s active up in that region. we are active and when it’s not, it’s not; I can tell you that, I think we expect Q3 to look much like Q2, but beyond that at the moment it’s hard to predict.

Joseph G. Reagor – ROTH Capital Partners LLC

And what kind of margin do you guys make on that?

Clay Newton

It’s about a 35% margin.

Joseph G. Reagor – ROTH Capital Partners LLC

At the operating level?

Clay Newton

Yes.

Joseph G. Reagor – ROTH Capital Partners LLC

Okay. And then just can you guys walk me through I guess the basis for the 40 days of downtime for maintains was that expected and exactly what was replaced?

Clay Newton

It was not expected. We replaced some flow lines that run from the well head into the production facility, we have a small production facility at each well and they accumulate into more of essential production facility, but there were a few leeks, minor leeks and it took us longer, a lot longer to replace them than we expected it to. Usually something like that can be done in a week to 10 days. There was some equipment supply issues and other things happening, so it was quite unusual for that process to take as long as it did.

Joseph G. Reagor – ROTH Capital Partners LLC

And as of the end of the quarter is that well backup to fall operating rate?

Clay Newton

Yes, yes.

Joseph G. Reagor – ROTH Capital Partners LLC

Okay. All right, that’s all I had remaining. Thanks, guys.

Clay Newton

Thank you, Joe.

Operator

And our last question comes from Rick Sherman with Oppenheimer.

Rick Sherman – Oppenheimer & Co. Inc.

Yes, good afternoon. Do you have an estimate on what your overall production would have to get to, to where you are producing substantial positive cash flow and/or reportable profits?

David Pierce

This is David and I’m not an accountant, but in order to have positive cash flow profits, you’d basically have to stop drilling new wells. I think, there is a concept of EBITDAX in oil and gas business, which is earnings before income tax and depreciation and exploration expense. And this year we expect to generate about $25 million of EBITDAX or free cash flow that we continue to fund exploration costs.

Net income, on the other hand it’s real crapshoot because as a successful efforts company when we drill a well, if the well is successful and we capitalize the cost, but when the well is a dry whole, then it’s an expense. So we might have a lot of discreartionary cash flow and make money or report net income if the wells we drill on a particular year are all successful.

On the other hand if we have not such a great year in terms of drilling we could still report positive cash flow, but a net loss. And then the other thing that factors in to reporting the net loss is another thing is completely out of our control and that’s the fluctuation of foreign exchange rates because of our intercompany debt and the way that works. If the fullest body strengthens than our net loss will be very small or we might have a net foreign exchange gain, on the other hand if there is a big swing in the U.S. dollar strengthen significantly against the as a lot of you do, then we could have a big foreign exchange loss and that goes right to – from a financial reporting point of view that becomes part of a net loss.

Rick Sherman – Oppenheimer & Co. Inc.

Sure. I just think the more important number is positive cash flow more than anything else the generation of free cash…

David Pierce

Yes.

Rick Sherman – Oppenheimer & Co. Inc.

Would be much more important, but that’s brings up something just from all the other people just trying to ask you a still profitable question more than anything else. The company has been public company for over a decade with consistent management and board. There has been – the stock itself as clearly closer to its all time low than its high for any long-term investors who wasn’t just a trader. What if somebody was looking to invest in your company, what is the – your best case as to why, what’s going to be different going forward, what’s the premise of somebody making in investments, what’s the case that you’d make that you’re going to enhance shareholder value over the medium term?

David Pierce

Well, I think the answer to that is as always been that we’re in Poland to explore and to find something big over there. And in past years, we have from year-to-year drill big sort of single event wells, a well into a big structure that if we’re successful it has a dramatic ramp up in potential reserves.

I think today, it’s a little bit different in style, but the Edge concession for me seems like its quite similar to that idea, if we are right and the next few wells support that and things move in the direction that the first two wells that we drilled out there pointed to, we can have something quite significant. And in that case whether you take on a partner who incoming into a deal establishes evaluation that is quite significant or whether you make some other kind of a deal and start selling of deals, either way I think that can have the kind of impact that we’ve been after for some years.

That’s not really what the Fences concession is like, I mean they where the non-operating partner. Yes, it produces good cash flow and our reserves have grown there, but to find something that gives you kind of a shift change that’s the Edge license hopefully or on the past we drilled two Milo or we drilled struvites there been a half a dozen wells that we’ve drilled that have that kind of potential, in the end there were dry holes, so they were not commercial or whatever. But that’s what we are focused on and I think we’re quite fortunate to have the Edge licenses and to have that style, because I mean I suppose it could be fantastic if it were zero, one kind of binary result. But I think you can have that kind of signs, and I think we may be able to see that over the next two or three wells.

Rick Sherman – Oppenheimer & Co. Inc.

I appreciate you articulating that, does the difference in the technology with seismic, since the days when number of years ago when you had more, is the percentage of success through technological advances has taken some of that risk out of where you ultimately drill?

David Pierce

Absolutely, and I wouldn’t compare to 20 years ago or 10 years ago, if you look back even just a handful five years, partly advances in seismic, partly that we are – because the demand is there in the edge for using the best quality seismic that we ever have and it makes all other different. In the Edge license there are several handfuls of old wells that were drilled, and we look at them now, well, a lot of wells were drilled, what in the world are we doing there, are we smarter than those guys or maybe not smarter…

Rick Sherman – Oppenheimer & Co. Inc.

Yes, that’s – I‘m sorry to interrupt, but that’s exactly what’s the peak, what’s the doubting is that major than other things have fallen over the years and basically walked away. So…

David Pierce

I wasn’t – few weeks ago, and we looked at all these old wells in the Edge license and every one of them has drilled in a low spot when you get to the basic style. And you say, we plan to (indiscernible) drilled well. They would able to look that, they were looking at the tri-asset core; they were looking at other horizons much shallower whereas it happens you have highs that sit right on top of lows in the basic in the Devonian. And yes, the seismic makes world different and we’ve drilled two successful wells based on that new seismic. You cannot drill at least in that area; you cannot drill on 2D or on anything that you really got to have good high quality seismic. And even that is not – I mean that’s not going to give you, it’ll never give you 100%, but it gives a lot better and I think that is playing much to our favor at the Edge license.

Rick Sherman – Oppenheimer & Co. Inc.

Great. Thank you for taking my questions.

David Pierce

You bet. I think that’s it. Jennie, you still here?

Operator

I’m here, sir.

David Pierce

I think, all done.

Operator

All right, wonderful. And ladies and gentlemen, this does conclude today’s FX Energy Incorporated second quarter 2014 financial and operating results conference call. We thank you again for your participation and you may now disconnect.

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