Breitling Energy Corporation (OTC:BECC) Q2 2014 Earnings Conference Call August 13, 2014 10:00 AM ET
Chris Faulkner – Chairman, President and Chief Executive Officer
Rick Hoover – Chief Financial Officer
Welcome to the Breitling Energy 2014 Second Quarter Earnings Conference Call. Hosting the call today is Glenn Orr. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions) It is now my pleasure to turn the floor over to Glenn Orr. You may begin.
Unidentified Company Representative
Good morning. Welcome to Breitling’s second quarter 2014 earnings discussion. We are glad you are able to join us today. Before we get started, let me call your attention to the detailed Safe Harbor statements included in our earnings press release and in our most recent Form 10-Q. These statements in summary, say among other things that in spite of management’s good faith, current opinions on various forward-looking matters and circumstances can change and actual results may vary from expectations.
Now let me turn the call over to Chris Faulkner, Breitling’s Chairman, President and Chief Executive Officer. He will host the call today with Rick Hoover, our CFO and Jeremy Wagers, our Chief Operating Officer and General Counsel. Chris?
Thanks, Glenn, and good morning everyone and welcome to our second quarter 2014 conference call. I am going to provide my thoughts in the quarter, then Rick Hoover, our CFO will make a few remarks and we will be taking your questions.
We are continuing to take advantage of the world’s growing need for energy by investing and operating our lower-risk oil and gas properties, primarily in the Permian Basin. This quarter, we continued our strategy of growth through the drill bit and through stemming working interest and royalty position to drive our working capital.
As you recall from our last Q1 call, we started the year on a strong note as our dual-focused strategy continued to create value for our stakeholders in generating profitable growth.
During that first half of 2014, the combination of financial flexibility and our technical expertise allowed us to continue to operate on our production property and to acquire additional high-potential assets.
And this quarter, the momentum that carried us into 2014 provided us with another quarter of very strong net income, up more than 250% over the same quarter last year. Our revenue nearly doubled that in the second quarter of 2013, up 190% year-over-year.
And this quarter, revenue from all sources grew compared to the second quarter of 2013: The sale of de-risking interest in our operated properties, sales of royalty interests in wells identified by our technical teams and revenue from the sale of produced oil and gas.
Now let me talk a bit more about each revenue source in more detail. During the quarter, we continued our strategy of ensuring that the company participates in the upside of each of our operated wells, while de-risking our position by selling down our working interest. This strategy generates operating income and cash flow, as well as it helps maintain appropriate risk levels at each of the wells.
In this quarter, we sold down positions in several of our operating properties generating working capital, as Rick will discuss momentarily with each of us. Revenue was also up through the sale of oil and natural gas royalties.
The market for royalty exists in oil and gas properties continues to be very strong and our technical team has been able to keep pace with the demand. And the market for this royalty interest is consistent with our expectations and we expect to continue to provide into purchases to generate operating capital for exploration and production programs.
Now the production revenue was also up this quarter versus 2013, over 50% on just a year ago. This quarter, we reported just over $156,000 of revenue from the sale of oil and natural gas from the wells operated by the company.
Production revenue while comparatively modest right now, is an example of our growth through the drill bit. In subsequent quarters, revenue derived from the sale of oil, natural gas and other commodities will become a greater percentage of total revenue and net income and the company will focus more of its resources on operating and producing its oil and gas properties. Mostly in lower risk geographies, such as the Permian Basin where our technical team has years of experience and we can control our cost as the operator on those wells.
And I also mentioned last quarter, a pending reverse stock split and up-listing to a well-recognized exchange. This process is continuing and ongoing.
I’ll share more information about the next steps as appropriate. Now I want to share some of the operating highlights in this quarter. The Taylor County, Texas well was completed during the first quarter and continues to produce consistent with our expectations.
We also acquired another lease on an adjacent property and are planning to begin drilling a second well in that property within this next quarter. Additionally, we completed a multi-stage frack on our well in Southern Kansas and it appears to be a good producer of oil and natural gas.
However, when it was put into production, it generated a significant amount of salt water. We are currently monitoring production of the well and evaluating our options with regard to water management.
Our Permian Basin well in Sterling County, Texas is producing in line with expectations after we completed a multi-stage, vertical frack last quarter.
Current production is only from one zone, however, we are planning to re-enter the well to remove the frack plugs and combine other production zones identified during the drilling process which should increase production.
In the meantime, we had begun the process of spudding the next well on our Farmount properties in Sterling County and expect to be drilling in September. Stay tuned for more updates on future calls.
And in addition to these properties, the company’s technical team has evaluated several new properties which the company could act upon in the near-term. As we’ve mentioned in the past, that team evaluates properties on an ongoing basis, and we will continue to find properties operated upon the opportunities to grow our operating acreage in low risk, high potential geographies.
I want to hand the call over to Rick Hoover, our CFO, to take you through the numbers. Rick?
Thanks, Chris and we want to thank the stockholders. In the second quarter 2014 as compared to the same quarter in 2013, Breitling grew its revenues by $10.5 million or 190% increase and improved its working capital by $7.5 million.
Our revenues continued to grow as we continue to see demand for our products and were able to develop our available inventory. Our net income of $841,000 was an increase of $625,000, or up 290% over the same quarter in 2013. The primary difference is growth in revenue, offset by increased marketing expenses, expenses associated with being a public company and the Texas margin tax on the increased revenues.
We had greater than normal marketing costs as we informed the market of what product we had available and the production of the movie Breaking Free that will be released on the Web in 30 days and the book The Fracking Truth, currently available on the Amazon.
In the second quarter of 2014 as compared to the first quarter of 2014, Breitling’s revenues declined by $900,000, but we have to remember, in the first quarter of 2014, we were able to recognize $4.6 million of deferred revenue. Breitling was also able to improve its working capital by over $800,000.
Our net income declined $5.9 million as compared to the first quarter of 2014, but the decline is primarily due to increased drilling, marketing and to a lesser extent, administrative expenses.
In general terms, Breitling generated additional revenue above the $4.6 million deferred that was recognized in the first quarter, but we incurred additional drilling and development cost of $3.3 million, $1.8 million in marketing costs and an additional $800,000 in administrative expenses.
For the first six months of 2014, as compared to the first six months of 2013, Breitling grew its revenues by $19.4 million or 143% and improved its working capital by $7.5 million. Our revenues have continued to show the same growth as we experienced in the second quarter as we continue to see demand for our products and are able to develop our available inventory.
Our net income of $7.6 million was an increase of $7.1 million over the same quarter in 2013, the primary differences, continued growth in our revenue offset by increased marketing expenses, expenses associated with being a public company, and the Texas margin tax on the increased revenues.
We had greater than normal marketing costs as we informed the market what type of inventory we have and the production of the movie and the release of the book.
Stockholders need to be aware Breitling accounts for the oil and gas properties on the full cost method. Therefore, we have to expense every dollar of development on the properties if we have revenue that exceeds that. Therefore, we have development costs for properties today that will be utilized for sale in the future where have to include those expenses in today’s costs.
We have not added new staff this past quarter. Mr. Chris Williford, a member of our Board of Directors, has submitted and the Board has accepted his resignation due to his obligation with other business activities. I would like to express my gratitude to Mr. Williford’s contributions for our company in a very fast paced and complicated environment. I appreciate his efforts to give us 100% on every item as we took Breitling into the public arena. Chris?
Thank you, Rick. And thank you to all of you on the phone for joining us. Operator, let’s take some questions.
Thank you. (Operator Instructions) Our first question comes from the line of Robert William. A private investor.
Yes, you mentioned that your increased expenses were due to the drilling and development costs. Were these not capitalized or used as direct expenses?
Rick, do you want to fill that question?
Yes, that’s – we are not allowed to do that as a full-cost accounter. That’s why I tried to communicate that. As a full cost method, we have to expense every dollar that we spend on development on the entire pool for every dollar that we receive in revenue. So for us to realize profit, our cost of development has to be less than revenue.
But, that also means that we have few realized all of those costs as current expenses. And so, if you look at our balance sheet, you’ll see, you know, oil and gas properties, but you will see substantive reserve reports for our ownership position in those wells.
Okay, got it. Thank you.
And at this time, there appears to be no further questions. I would like to turn the floor back over to Chris Faulkner for any additional or closing remarks.
Thank you all for joining the call. See you next quarter.
Thank you. This concludes today’s teleconference. Please disconnect your lines at this time and have a wonderful day.
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