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Executives

Trent Yanko – President and CEO

Analysts

Brian Kristjansen – Dundee Capital Markets

Dan Tsubouchi – Haywood Securities Inc.

Grant Daunheimer – GMP Securities

Shailender Randhawa – RBC Capital Markets

Legacy Oil Plus Gas, Inc. (OTCPK:LEGPF) Q2 2014 Earnings Conference Call August 12, 2014 11:00 AM ET

Operator

Good morning. My name is Stephanie and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Legacy Oil & Gas Incorporated Second Quarter Results Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Trent Yanko, President and CEO, you may begin your conference.

Trent Yanko

Thank you. Again, thank you everybody for your participation this morning on the call. Just getting right into the highlights of the second quarter, typically as you know with spring break up condition every year showing up in our Q2, there is usually a little bit of down sign from weather related issues and lack of activity in the quarter. And we were consistent about that this year, but I think still very good operational results in the quarter and I’ll highlight that a little bit later on, on the specifics. But from an overall perspective, we were from production, we were up 11%, the quarterly production was up 11% and year-over-year 20,224 Boes a day, cash hold up 5% just over $75 million and that’s with about $12 million of hedging losses or $0.07 a share that were in those results. So cash flow per share were at $0.46 is up 2% with those inclusive of those hedging losses.

Netbacks still very, very impressive at $57 and $0.08 of Boe, that’s up 11% year over year and earnings were up nearly $19 million which was up over 850% from the prior year. And our undeveloped land has grown quite significantly as a result of success Crown sales leasing program and the Highrock acquisition now at 500,000 net acres of undeveloped land in the company. And these results, as good as they are, only included about 18 days of production from the Highrock acquisition that we closed in the quarter. But again the financial results had the full impact of the so a bit of a skew on looking at the quarterly sort of debt cash flow, but when we look at the full year, it does make a lot more sense.

With the hedging losses and a full quarter production of Highrock, cash flow would have been $20 million higher and with the flooding that we did face due to the heavy rains in Saskatchewan and Manitoba that knocked our production down about 300 Boes per day, but we’ve been able to restore all of that now. And we did have some outages at some third party gas plants that did weigh on the results. The Quirk Creek plant the process of Turner Valley gas was down for a scheduled turnaround, but in Saskatchewan the Steelman gas plant was down for some unscheduled maintenance and it did have an effect on our results. But production has been restored at both of those plants and the impact from the flooding is behind us and we are back being very, very active in the field.

With that being said, we did drill 29 wells, or nearly 26 net wells in the quarter with a 100% success rate. We’re currently very active in the field having peeking out at 8 rigs drilling and 12 rigs doing workovers and completions. In Turner Valley, we’ve had again a continuation of the excellent results in Turner Valley around 12 wells with our improved drilling and completion techniques that are getting us well above these tight curve. The wells that we drilled in the quarter were a lot of horizontals. We have drilled these in the past, in 2013 and 2012, in areas of reservoir where we have only the two upper zones present or most perspective we’ll do a lot of horizontal. Very respectable rate there 190 Boes to 275 Boes per day do a lot of lateral wells, but given the fact that they are much less from a cost perspective and only $4.6 million the economics are as good as our triple lateral wells that we’ve been drilling through the last couple of years.

That allowed us to prove up a lot of inventory in different parts of the field where we don’t always have that lower zone presence. So, again with that ratings in Turner Valley and the wells we’ve drilled in Q1 continue to hang in at very impressive rates at between 350 Boes to 400 Boes a day after few months now. So again very, very strong production from these wells and looking very good from a perspective as an addition to that. In Midale, which has been active area for us in the last couple of years, we did drill 11 wells and four of those had 30 days or more of production. And we were seeing on average rates around 300 Boes a day on average per well and we’re carrying 165 barrels a day for a tight curve. So again, great outperformance here.

We have a number of wells that are in process of being completed and falling back, and two of those have already been swung into production over two weeks of 350 plus Boes a day so again very strong production. We have been able to since the beginning of this year and now more on the repeatable basis been able to reduce costs in the Midale. The exhibition costs have come down $150,000 so now we are (inaudible) $20 million all in to drill these Midale wells and the economics are quite spectacular. With more than 350 wells in inventory and small fraction we do have a lot of running room on the plate.

We were active in North Dakota in the Spearfish. We haven’t been doing anything in Manitoba given the impact due to the weather. Again, wells are coming in right on tight curve, showing improved production profile over time meaning these wells continue to clean up over time, we have 90 day rate stronger than 30 day rate. So again, a very encouraging trend in the Spearfish in North Dakota. And as you recall this is an area that we’ve gone now and consolidated more of the opportunity of Spearfish would be acquisition of Corinthian. And now has expanded on our footprint Spearfish where we have seen better well results and we are seeing reduced costs. So our Midale wells are trending in very consistently under $1.6 million, and we’ve been able to drill the short lateral wells on $1.2 million. This does give a boost to the economics and was one of the main drivers in expanding our holdings in the North Dakota Spearfish.

Waterfloods not a lot of activity, but we are continuing to do some additional conversions. We are seeing some response in the Midale, that flood started in March of this year and we’re already seeing production increasing in the offsetting in producing wells and some conversion. Other wells and other injection conversions scheduled for later this year and we’ve seen very, very flat production profile from our Bakken waterflood at both Taylorton. So again more conversion on the Bakken for the remainder of the year as we accelerate on our waterflood implementation.

Three Forks just want to touch on that briefly, the Torquay play or the Three Forks play called in U.S. We’ve done additional geological, core review very, very rigorous evaluation and now incorporating our various steps of 3D seismic database into that. We’re quite excited by the opportunity that we see at Taylorton Pinto where we have more than 60 net sections so we feel are prospective in the play and which is complemented by our 10 sections or five net sections we’re now over at Flat Lake. We have spud our very first Torquay well which will be an extended reach two mile well in the Torquay at Flat Lake. That well is currently drilling again we are making plans to test the Torquay at Taylorton Pinto later this year.

When we look at the acquisition that we’ve been able to acquired, both at Highrock and Corinthian very strategy acquisitions giving us expanded exposure to the Midale, Bakken, Spearfish and some conventional target, very good acquisition network associated with those deals. And we’re quite pleased with the way the things are turning out and how we increase our opportunity set in all those areas. At the same time, we did improve the balance sheet as we continue to strengthen the balance sheet, we’re able to expand and accelerate our growth objectives in here. So things are playing out strongly for us. If you look into here in Q3, again another busy quarter, while probably busier than we were in Q1.

We’ve got at least 15 Midale wells coming on production in the quarter. We’ve now drilled two extended reach Bakken horizontal wells at Taylorton, which we are in the process of one being deployed back now the others being completed with a 50 stage frac. So we’ll have results on those in the quarter and then as I mentioned the Torquay well at Flat Lake is drilling ahead. So we are definitely very well position to meet our guidance that we upwardly revised, with the hit on the tail with the Corinthian deal. So our average production is expected to be 23,100 Boe per day and our exit production is 27,350 Boes per day. That exit results in 27% royalty year-over-year. We’re still on track to spend $390 million. We are still under-spending cash flow and we are still improving the balance sheet as we join the strong top-line growth numbers and balance sheet improvements and still being able to highlight the impressive results from the drilling inventory.

So with that overview, I would open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Brian Kristjansen with Dundee Capital Markets. Your line is open.

Brian Kristjansen – Dundee Capital Markets

Could you comment on your operating costs and where you see them trending for the year and into next year?

Trent Yanko

Yeah, thanks, Brian. The OpEx was impacted in the quarter by the flooding one time type event associated with the heavy rains and ultimately the flooding. We see Q3 and we’re forecasting Q3 and Q4 to be improvements over that. Q2 was lower than Q1 and we are – This isn’t a permanent change to the business, it’s an impact of weather and us being having to navigate that with our workovers and just production activities. So we should be some $15 for the year and we are working to get those down. If you go back to looking, if you go post 2011 where we have the maps of flooding in Saskatchewan, we put six, seven eight quarters in a row to continually reduce operating expenses as we got off to the back of that flooding. So we anticipate to see the same trend repeat itself again, as we get through these seemingly never ending weather issues.

Brian Kristjansen – Dundee Capital Markets

Got it. Thank you.

Trent Yanko

Thanks.

Operator

Next question comes from Dan Tsubouchi with Haywood Securities. Your line is open.

Dan Tsubouchi – Haywood Securities Inc.

Trent, I have two questions. I recognize you don’t have 2015 budget yet. But given sort of the strong results in the Midale and the waterflood, can we look to some sort of higher level activity in 2015 on those plays than you did in H1? And the second question I’ll just give it to you is, can you give us any color on what level of drilling you continue the Torquay for the balance of ‘14 and looking into 2015?

Trent Yanko

With respect to the Midale, there is a heavy level of activity in 2014. So from a percentage basis I don’t see us doing a whole lot more in 2015 from our first look right now. So we don’t have a budget in place, so we’re on track to spend about $120 million in the Midale of our $390 million budget. So that is a fairly significant portion and by that proportion we will continue into 2015. And so when we look at Torquay, it is still too early to tell. Our goal is to get the well drilled at Flat Lake and get a couple of wells drilled in Taylorton Pinto and evaluate the results and then how that in hand to set budget for 2015 as we move ahead. The nice thing about Taylorton area is that the infrastructure is all in place, as we decide to ramp up program in the Torquay, the cycle times will be quite attractive given that we have such a big footprint with the Bakken already.

Dan Tsubouchi – Haywood Securities Inc.

Thanks. One other follow up question before I leave is, what about waterflood pilots? Can we look for you have success in all of them can we look at higher levels of pilots as we look in ‘15?

Trent Yanko

Yeah, we will. We’re building on the success of that and the toughest injection conversion to do is the first one. So we’re seeing response in two to six months and all of these plays it is almost an unperceivable impact to short term production. And as we get more and more water injections conversions under our belt, we’re seeing the production in the fields sliding off quite dramatically. So that does give us ability to move more rapidly. We will be picking up the pace as get through 2014 and definitely into 2015, given that we have established from a laboratory simulation level that our small pilots have been expanded to larger ones they are working. And then we have great long term analogies around in the Bakken eight years of waterflood history in the Three Forks eight years of waterflood history in Midale 50 years of waterflood history and in Spearfish 25 years of waterflood history. So we’re very comfortable with level we’re seeing in the play, but also more important what we are seeing on our land.

Dan Tsubouchi – Haywood Securities Inc.

Thanks.

Operator

Your next question comes from Bruce Claw who’s a private investor.

Unidentified Analyst

I’ve got a couple of quick questions here. Number one, when I look back after the Corinthian acquisition, we were told basically that we were probably looking at about 1.4 for the debt annualized cash flow situation going down to 1 or 2, depending upon potential of the Elmworth properties. Now today I see you’re talking about 1.5, can you explain that differential please?

Trent Yanko

Yeah, what has changed has been the strip pricing is down $6, $7. So, that has factored into that calculation. So, very minor change but again, we’re being very cognizant of the direction and trajectory of pricing and also with our spending program. But the fact that we are understanding cash flow still with lower prices and having good well results, we’re comfortable with where ultimately our level at by the end of the year.

Unidentified Analyst

Okay. But you’re still talking now 1.5 and you don’t really know this strip pricing could turn the other way and we could end up down 1.3 or 1.4?

Trent Yanko

Absolutely. But we’re just using the most current information we are right on top of where we are and where that is heading without trying to forecast higher prices without trying to forecast higher prices or trying to rely on higher prices.

Unidentified Analyst

Okay. So when we are looking I think you were mentioning it works to about 27% production growth and so on. That sort of offset we’ve got close to 25% share outstanding growth at the same time. So our actual production growth per share is only up probably less than 5% is that right?

Trent Yanko

From an instantaneous backward looking basis, yes, again with the fact that quarterly numbers that are backward looking all shares from the deals being upfront. We kind of look forward and if we kind of look ahead to 2015, we should see low double digit growth on a production per share cash flow per share basis.

Unidentified Analyst

Okay. Now I’m looking too and it would appear actually that I read it but hopefully you’re actually underestimating some of your exit productions because I see you’re mentioning you’re already at the moment at about 26,000 current production?

Trent Yanko

I think we’re getting comfortable with where we are on the exit obviously our goal is to meeting and work to beating our numbers. But with the profile of the spent tailing off through the year, the trajectory of the growth will be in line to allow us to meet the quarterly expectations but at the same time hit our both average and exit production guidance.

Unidentified Analyst

So you’re sitting at 20 it says now your current production in excess of 26,000, you’re talking about an exit rate of 27,350. It would seem to me your additional Midale wells themselves should allow you to get there without too much problem?

Trent Yanko

Yeah, we’re pleased the well has always been. We are having the results in the field and we’re comfortable where the full year and exit guidance is sitting.

Operator

Your next question comes from Butch [inaudible] who is a private investor. Your line is open.

Unidentified Analyst

Hi good morning. Thanks for taking my question. Trent, I was wondering if there’s been any more discussion with respect to implementation of dividend in the foreseeable future considering the two acquisitions and also getting your debt more in line with compared to your peers?

Trent Yanko

Yeah, I think the dividend question is not at investors’ minds again with the strong growth profile, the accretive acquisitions that we’ve been able to get again in the door. We do feel though that the company is with its free cash flow dates that we do generate free cash flow that we could use as equally good dividend paying company as a growth company. But for us the foundation of all of that starts with the assets high quality assets with strong netbacks and very good roll out economics associated with the inventory allowed us to generate free cash flow. And with the added benefit of the waterflood, moderating corporate fund over time, we will have more and more free cash flow as we move ahead. We do still have a lot of growth opportunities in front of us and very visible and very strong growth profile associated with them. And our ability to execute in these plays has been demonstrated for 12 quarters now so we feel that we’re going to continue ahead as we have in the past, but are cognizant of what ultimately the best way to add more value to shareholders and we continue to look at a whole breadth of options not just the dividend model.

Unidentified Analyst

Thank you very much.

Trent Yanko

Thank you.

Operator

Your next question comes from Grant Daunheimer with GMP Securities. Your line is open.

Grant Daunheimer – GMP Securities

Hey Trent, two questions, first, wondering of the current 26,000 barrels a day, are any of the 15 Midale expected in Q3 included in that number?

Trent Yanko

There will be a that are on like the flow back mode so yeah I mean given that we’re in August, there is a couple of those wells in there.

Grant Daunheimer – GMP Securities

Okay, not many I would assume. Second what does it take finally for Legacy for your internal budgeting and your tight curves, I mean we’ve had step functions changes I would say across all your core plays, they’re being consistent. What does it finally take for you guys to get comfortable enough with that to change your own tight curves and may be reflect the improved results in the production budget?

Trent Yanko

I guess we’re conservative to – we are driven by the data we do really look at the statistical analysis in all our sites. We do spend a lot of time ensuring that when we do the delineation, it’s in different areas, it’s in different portions of the reservoir and it is testing different completion practices. So when we do use the delineation phase and follow development we’re very confident in the tight curve that we are putting forward. The tight curves in the presentation are – they are minimal. We are in excess of number of tight curves to that plays When we are looking at Turner Valley, it takes sort of blended case of 250 Boe well and make 400,000 barrels and CapEx of about $5.5 million which will be a combo duo lateral triple lateral wells and these are about $8 million return are approaching 70% $95 So we know that we are ahead of the tight curves in Turner Valley, we know we are ahead of the tight curves in the Midale. We will start to update those because the data is pointing us in that direction. But we have always been driven by actual results by not crossing our fingers and holding we can achieve it, we actually demonstrate it first and then move the tight curves.

Grant Daunheimer – GMP Securities

Great. Thanks very much.

Operator

[Operator Instructions]. Your next question comes from A. Hawkins who is a private investor. Your line is open.

Unidentified Analyst

Hello. I’ve got an interest in both LDX and legacy. So at the end if you could just cover what your perception of LDX and where it goes in the future I’d appreciate it. But the longer question is on the States property that you have which is primarily Bottineau County, but from your map it looks like you may have a little bit to the left of that. I’m wondering about the prospects of the other horizons other than the Spearfish, and I’m also wondering about the southern core parts of the Bottineau County property, but five miles south of southern most producer. And the term of the leases whether you are going to extend the term or whether you are going to let some expire or increase your drilling pace. It looks to me like you will be fortunate to drill near where you have producers let’s say within two or three miles of those within the original term and you will be faced with either extension or having some leases still. That’s all I’ve got.

Trent Yanko

With respect to the Bottineau County, there is other horizons that are perspective on the land base both the Legacy and the recently acquired Corinthian piece. And with a very extensive program and we have come up with a number of Mississippian age target that we are reading right now for potential developments. On the southern portions of the land and the land dates in general in the U.S .and all our plays we are always high grading our end development plans we are always looking at acquiring additional land letting certain pieces go re-leasing extending but not really small portion of our capital spending land in our capital budget this year would be probably 5% of our total capital costs would be related to land. So it is a relatively small cost to carry our land high grade upgrade it, extend it etcetera.

So that’s not a big worry for us but you pay a lot of attention and manage it proactively. With respect to LDX just quickly we are getting prepared here in the next few weeks to spud the first of two wells that will be drawn into the formation direct offset to the 14 of two that we brought on late December, early January which has been a very successful producer three four producer in the U.S. and those are the immediate offsets. So we are just waiting for the rig to get finished drilling another well for the competitors and we’ll pick that rig up in two three weeks and start drilling the first of the two wells.

Unidentified Analyst

Okay. Thank you very much.

Trent Yanko

Thank you.

Operator

Your next question comes from Shailender Randhawa with RBC. Your line is open.

Shailender Randhawa – RBC Capital Markets

Thanks. Good morning, Trent. Just three questions for me so, first on the CapEx you mentioned, Q3 will be busier than Q1 so how should we think of the remaining 175 million of the budget in the second half of the year? And then secondly, you talked about the increased inventory at Turner Valley, could you may be quantify what you see in terms of additional locations? Lastly, just on royalties, we’ve seen a lot of activities in Southeast Saskatchewan, do you have royalty business there that’s meaningful and would you consider may be gross overrides to fund development at takes place?

Trent Yanko

Thanks. With respect to CapEx, we’ll be pretty busy in Q3 or probably $135 million or $140 million and the remainder would be in Q4, so pretty active. Q1 is waiting some facility expenditures so we’re probably going to drill more wells in Q3, but spend less on facility. So that sounds a little bit of work going forward. Regarding the Turner Valley, we’re still generating and it’s updated it’s a number from 2010 we’re talking about 86 locations in the area. Our internal inventory would be probably more than doubled that. But again, just given that we are still in the early stages of picking up the pace of development out there that would still represent more than 10 years of drilling inventory. We do though believe that there is inventory well beyond that. We have wells in all three zones that have interwell spacing of 100 meters apart and we’re not seeing any interference.

And they’re also in between vertical wells that have made 500,000 to 2 million barrels of oil no interference. So there is still a huge, huge resource of oil in plays at Turner Valley and probably our estimation of inventory is understated but as you would like to call, we like to be conservative when we look at tight curves and inventory. And finally, yes there is more activity in Southeast Saskatchewan than in the last few years but it’s an area that we’ve been really familiar with and have worked on the last 20 plus years. So, we’re going to use the competition will that be an area that we would look at royalty, don’t know given that we’re on bunch of different place with a lot of different.

From a macro perspective somewhere economics but from a macro perspective differences in place and EURs etcetera it’s something we’ve looked at but I can’t say that we are necessarily pursuing that area right now. That area might be more applicable for a joint venture given the depth of the inventory at 70 80 locations, that may be an area that might be appealing from a joint venture perspective versus most of the royalty perspective.

Shailender Randhawa – RBC Capital Markets

Okay. And then just on your own freehold position, in Southeast Saskatchewan is that material and potentially monetization candidate?

Trent Yanko

It’s not material. We do own some piece in Poland and lease is alright but it’s very, very small. So that would not be an option for us.

Shailender Randhawa – RBC Capital Markets

Okay. Thanks.

Operator

Your next question comes from Bill (inaudible) who is a private investor. Your line is open.

Unidentified Analyst

Good morning. I was wondering if any of your debt was rated, and if so, what it was rated at?

Trent Yanko

No, our debt we do have $200 million turn note but it was not rated it was one single party deal that we completed a few years ago Canada Pension Plan.

Unidentified Analyst

Okay. Thank you.

Operator

There are no further questions at this time.

Trent Yanko

Great. Okay. Well then with that, I’d like to thank everyone again for the participation on the call today. As you’ve heard us, we still continue to build that operational momentum, have a lot of positive things coming forward in Q3 and Q4. Still quite excited about all our plays and the results we’ve been having and we do look forward reporting back with our Q3 results and do appreciate the support of our shareholder needs and do want to continue to put up the results that we’ve been doing now for 12 quarters. So we’re very, very excited about the trajectory of the company. Thank you.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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