ZaZa Energy's (ZAZA) CEO Todd Brooks on Q2 2014 Results - Earnings Call Transcript

| About: ZaZa Energy (ZAZA)

ZaZa Energy Corporation (NASDAQ:ZAZA)

Q2 2014 Earnings Conference Call

August 14, 2014 10:00 AM ET


Todd Brooks – President and CEO

Paul Jansen – CFO


Good day, ladies and gentlemen. Welcome to the Q2, 2014 ZaZa Energy Corp. Earnings Conference Call. My name is Greta and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to Todd Brook, President and CEO. Please proceed.

Todd Brooks

Good morning everyone and welcome to ZaZa Energy’s second quarter 2014 conference call. This call contains forward-looking statements. For a detailed description of our disclaimer please see our earnings release issued yesterday and posted on our website.

Joining me on the call today is Paul Jansen, ZaZa’s newly appointed Chief Financial Officer. I’d like to take a moment to congratulate Paul on his recent promotion; Paul congratulations. I’ve enjoyed getting to know Paul well over the last two years and I’m pleased to have such a capable individual on my side. Speaking of capable individuals, also with me this morning is Kevin Schepel, our Chief Geoscience and Technology Officer.

The second quarter was an important quarter for ZaZa filled with quiet progress, fundamentals and blocking and tackling. The majority of today’s call will focus on this progress and the foundation that we continue to build. On March 21 of this year we spud our McAdams 1H well, which is the same well we press released last week. On May 24, completion operations were commenced and included fracing of 4,800 foot interval in the lateral with 23 stages. Without going into details the frac was pretty basic and we believe there will be efficiencies and improvements made as the area gets developed. After laying the gathering line the well began flowing to sales on July 16. This well is completed in the highly fractured Buda carbonate reservoir system, which has decades of historical production from conventional vertical hole completions and open hole horizontal wells.

As we shared last week, the well achieved 24 hour peak production of approximately 1,786 Boe per day, which includes 459 barrels a day of 49 degree gravity oil, 4.7 million a day of natural gas and 569 barrels a day of NGLs. NGL amounts are estimated based on 1,260 MMBTU gas analysis and the proceeding results reflect the current gas processing recovery ceiling of a 120 barrels per million of gas produced. We expect NGL recoveries to increase as additional gas processing capability is added next year.

The well has been tested and continues to be tested on varying choke sizes between 1464 and 6464 or absolute open flow. The pressures, both tubing and casing regardless of choke size remain strong varying between 1,080 to 1,380 PSI for flowing tubing pressure and 3,190 to 3,350 PSI for casing pressure. This constantly high casing pressure is an indication of strong bottom hole pressure which is a good thing.

At this point, the well continues to cleanup and has recovered 27% of the frac load back. Given the carbonate nature of this reservoir we expect to recover more than 80% of the frac load back. The McAdams well is a significant development in our JV and to our company as it proves up important concepts and creates the beginnings of value through production. While the well’s initial performance highlights the benefits of advanced drilling and multi stage completions, as noted in our press release these results are very preliminary. In addition to the Buda reservoir that the McAdams targeted ZaZa’s technical team remains extremely positive about several other lower cretaceous targets.

And let’s not forget about the Eagle Ford. We’ve always been excited about its potential and new Eagle Ford East data points continue to confirm many of ZaZa’s initial resource assessments. Speaking of wells, the JV wells number 1 HR was spud on May 28 and right now completion operations are under way. The next well in the drilling schedule is the Colburn number 3H with planned spud date of early September.

In addition to the drilling program progress is taking place in East Texas on other fronts. By mid-November we expect to receive the data from a 3D seismic shoot across material portion of our East Texas JV acreage which will help us plan our 2015 well locations and designs. Our JV partner is also currently working with local utility companies to run electricity to the entire field. In the South Texas Eagle Ford our Sweet Home JV wells are tracking on EUR curves in which we are estimating approximately 650,000 BOE of which 40% will be oil.

The two wells were averaging 175 barrels of oil per day and 2 million a day of gas and ZaZa plans on proposing to install artificial lift on both wells in the near future. Our company wide production numbers have remained steady over the second quarter, averaging 698 BOE per day with a peak of 950 BOE per day.

After a period of natural decline during the quarter we have seen a recent increasing trend. As new wells come online, as various recompletion and work over operations are instituted we expect these numbers to continue to rise. Over the second quarter multiple workovers were accomplished in the old BlueStone well bores and ZaZa has identified about 10 more optimization opportunities we would like to see happen in the near future, two of which I mentioned are in Sweet Home.

Given our successful East Texas well results the company continues to invest in new acreage leases. Recently in ongoing we have elected into new acreage acquisitions inside our East Texas AMI alongside our JV partner. The joint venture continues to grow with total net acreage of almost 144,000 with approximately 36,000 being net-net to ZaZa. In both cases upon completion of previously elected assignments. The JV has also renewed a substantial number of leases in the amount of 4,700 acres. Additionally, we acquired 1,300 net acres of new leases. Both of these payments were funded by our East Texas JV carry.

We anticipate additional renewals of approximately 4,500 net-net acres to ZaZa for the remainder of this year. ZaZa also is continuing to add to its new 100% owned acreage positions, North and East of its East Texas JV AMI. We now have a total of approximately 10,000 wholly owned net acres in Southeastern Leon County, in Houston County and in Northern Trinity County in our core East Texas stack pay focus area. Active and ongoing discussions continue with multiple parties about vending these positions into a new JV which will be our fifth joint venture in the last four years.

As relates to our stock we announced yesterday that we will file a Certificate of Amendment to our Certificate of Incorporation to affect a 10 for one reverse stock split. This share consolidation does not fundamentally change our capitalization or stockholder value. By increasing the price per share we can solve our compliance deficiency with the NASDAQ. Upon consummating this share consolidation we expect to make our stock available to a broader range of institutional and other investors and position the company’s trading metrics more in line with its peers.

We have had requests for some time by institutions wanting to invest in ZaZa to take this action. We are implementing this reverse split at a timing we have achieved 110 increase in average production, at an approximate 50% G&A reduction as compared to the same 2013 period a year ago. We also decreased our debt by another 7.1% compared to this time last year. So a sizeable increase in production, substantial decreases in G&A and operating costs and expenses and we’ve paid down more debt. This is quality movement in the right direction.

So all-in-all the second quarter was another solid quarter of foundational progress. We’ve accomplished a significant amount of work that should position us well in the years to come and every day we continue to push forward and advance our growth objectives. At this point Paul will go over our financial results and then I’ll be back with a few wrap up thoughts. Paul?

Paul Jansen

Thank you Todd and good morning. Our second quarter and six months results are covered in our press release and our Form 10-Q. So I’ll briefly summarize our financial performance and then turn my focus to the balance sheet before returning the call over to Todd for closing remarks.

Revenue was up $1.4 million for the three months comparison and $1.6 million for the six months. The quarter-over-quarter improvement was driven by a 110% production increase. Revenue increases in East Texas of $2.9 million were partially offset by the divestment of our Northern properties resulting in revenue decreases of $1.8 million. The reasons for the 31% revenue increase for the six months periods are similar, with increases in East Texas of $5.5 million, partially offset by $4.1 million decreases related to the [open] divestment.

Operating cost and expenses were down significantly. For the three month period operating costs were $10.5 million for 2014 compared to $107 million for 2013. For the six months periods operating costs were $16.9 million for 2014 compared to $160 million for 2013. The decreased operating cost for the three and six months period compared to the same periods in 2013 were driven by impairments and G&A reductions.

In the second quarter of 2014 we impaired 1.5 million of non-producing lease hold costs in South Texas as a result of lease expirations compared to the 2013 second quarter in which we impaired $93.1 million. The remaining $5 million decrease relates to decreases in G&A expense of $5.8 million partially offset by higher DD&A.

I will discuss G&A expenses and the results of our cost reduction plan in more detail shortly. But for now I would like to highlight the almost 50% cost reduction we have accomplished in since the program began in April of last year.

For the six months comparisons we’ve recorded impairment charges of $3.1 million in 2014 compared to $93.1 million in the comparable 2013 period. These impairment charges represented $90 million of the almost $99 million decline in total expenses. The remaining decrease in operating expenses of $8.9 million was primarily driven by G&A reductions of $6.4 million and a gain of $4.1 million related to our East Texas joint venture. In our Form 10-Q we report adjusted G&A to provide a benchmark and normalize the G&A for non-recurring expenses and benefits and non-cash expenses.

We use adjusted G&A to track our progress towards our cost reduction plan that we started back in April 2013. At that time we had a goal of 35% cost reduction. Since the first quarter of 2013 our adjusted G&A is down 48% and our headcount is down almost 47%. The decrease in adjusted G&A is very similar to almost 50% increase in GAAP G&A for the six months comparison. Adjusted G&A for the second quarter of 2014 was $3.7 million and described in more detail in our 10-Q. Our adjusted G&A is an important metric as we consider this a better benchmark to assess our cash needs for the second half of the year than GAAP G&A.

Returning our focus to the income statement for the three months comparisons; for the second quarter we reported an operating loss of $6.7 million for 2014 compared to an operating loss of $105 million for the comparable 2013 period. We reported a net loss of $9.2 million for 2014 compared to a net loss of $58.1 million for 2013, an improvement of $48.9 million. For the six months period we reported to an operating loss of $10.1 million in 2014 compared to operating loss of $111 million in 2013.

Finally we reported a net loss of $10.6 million in 2014 compared to a net loss of $61 million in 2013, an important of over $50 million.

Now for the balance sheet. As of June 30, 2014 we had a cash balance of $6.3 million compared to $15.2 million as of December 31, 2013. The June 30 cash balance excludes the proceeds on the $7.5 million capital markets transaction that we announced this past July and proceeds from a legal settlement of almost $800,000.

And now something I know everyone is interested in, our cash projections for the remainder of the year. We plan to incur approximately $6.2 million in cash G&A expenses and $4.4 million in cash interest payments. We intend to fund these payments from cash on hand of $6.3 million and projected net cash flows from oil and gas sales of approximately $5 million. Additionally, we closed a $7.5 million capital market transaction in July. We have already collected $4.6 million in cash in July and expect to collect an additional $2.5 million in October. We also expect to deploy our remaining $10 million in carry cost in the third quarter. So far in the third quarter we have deployed approximately $7 million of our carry balance, resulting in a current carry balance of approximately $3 million which we intend to allocate to the Colburn 3H well, the well that Todd mentioned will be spud early September.

Our total debt decreased from $98.4 million at year-end to $90.6 million as of June 30, a decrease in principal amount of almost $12 million. Total debt as of June 30 includes the current portion of $13.9 million compared to $10.2 million at year-end. This current piece of $10.2 million at year end was paid down in the first quarter of 2014. Although $13.9 million of our debt is classified as current, the notes are not due until February 2017. We’re actively discussing longer-term financing solutions with multiple parties. These solutions include refinancing debt, deferring an option to close certain of our debts in 2015 and securing additional financing to continue our East Texas development inside and outside of our joint venture area.

I will now turn the call back to Todd.

Todd Brooks

Thank you, Paul. One other subject before we open it up for questions. Since the beginning of our East Texas JV I’ve often heard expressions of frustration regarding the lack of substantive updates concerning progress in our East Texas joint venture. When companies have proprietary technical information they want to protect it. ZaZa and its partner have spent more than $100 million on appraisal wells to better understand a number of different targets in this East Texas area. It’s precisely this type of work that gives us a competitive advantage in East Texas.

No company wants to give others a free ride on the back of its time, effort and capital. Our East Texas JV partner is an industry leader, in part because it has been able to effectively protect its sensitive data. We chose to partner with them because we believe they are the best in the business at cracking various codes in emerging unconventional plays. In doing so ZaZa entered into a joint venture agreement that contains very restrictive agreements limiting its disclosures. Every press release, every SEC filing, even the words I am speaking right now go through a collaborative screening process with our partner. As a general matter our disclosures have been limited to only data that we’re legally required to disclose such as the McAdams well result last week. This is the price of having arguably the best operational and completions partner in the industry.

We hope that our investors can appreciate that the long-term value of partnering with the best outweighs the short-term inconvenience of limited information. With that said as I said earlier, we have the JV wells 1 HR well undergoing competition operations now and then Colburn 3H scheduled to spud early next month, so we anticipate new updates in the very near future. At this point I’d like to take any questions you may have.

Question-and-Answer Session


(Operator Instructions). And your first question comes from Chris Cook with Zazove Associates. Please proceed.

Chris Cook – Zazove Associates

Hi. Thanks for taking my question guys. Do you expect the time between spudding well and getting results from flow back to decrease – you mentioned the dates on McAdams as being spud March 21, and I think it started – we didn’t get results really until just recently. I was just curious if that time frame should start compressing.

Todd Brooks

Yes. Absolutely thanks Chris. On that well we were delayed by some right-of-way issues and we had to lay a gathering line and we had to work with the land owner out there for that. So that pushed us back on that well but we most certainly expect to spud the first production to decrease significantly moving forward.

Chris Cook – Zazove Associates

And you would think that gets to what potentially 45 days or 60 days or even less?

Todd Brooks

Conservatively spud to first production around 60 days to 90 days.

Chris Cook – Zazove Associates


Todd Brooks

And then ratcheting back incrementally moving forward.

Chris Cook – Zazove Associates

And then at this point it sounds like you have got the Josey Wells – Josey Wales and the Colburn 3H covered. You didn’t give expectations for capital spend in the fourth quarter. I was just curious if you have anything budgeted for that that you want to share?

Todd Brooks

Sure we’ve got – we’re looking at the Toby 1H well which has been publicly permitted to spud after we get the 3D seismic data that I talked about us getting in November. Really maybe let’s run through the number really quickly.

Chris Cook – Zazove Associates

I am just want to make sure you are going to get the 3D seismic in September or November?

Todd Brooks

We’re expecting it in November.

Chris Cook – Zazove Associates

In November, okay.

Todd Brooks

So really from the cash revenue side of the ledger and the expense side of the ledger we’ve got $5 million of run rate in net revenue that we’re expecting, cash balance of $6.3 million at the end of the second quarter. The capital markets transaction that we consummated the first tranche of which we’ve received $4.6 million we expect another $2.5 million in October, so that’s a total of $18.4 million. And then from a cash G&A expense perspective we anticipate $6.2 million, cash interest payments $4.4 million, acreage renewals $2.5 million. So that all adds up to $13.1 million.

So the delta between the $18.4 million and $13.1 million is $5.3 million. We’ve got discretionary leasing of about $2.5 million. We’ve also got an extra $800,000 worth of lawsuit settlement and so the CapEx for drilling is really that incremental amount.

Chris Cook – Zazove Associates

Got you, so roughly $3 million, $3.5 million bucks.

Todd Brooks


Chris Cook – Zazove Associates

Which I guess at current well cost buys you one to 1.5 wells?

Todd Brooks

It buy us one to 1.5 well and then to the extent that we drill more than that we can ratchet back the discretionary leasing component.

Chris Cook – Zazove Associates

Right, okay, thanks.


(Operator Instructions). There are no questions at this time.

Todd Brooks

Okay. Well thank you very much for joining us and we look forward to the call in November and if anyone has any other questions or follow-up we’re here to take any questions. You can call us any time. Thanks.


Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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