FX Energy: Wall Street Analyst Forum Presentation Transcript

| About: FX Energy, (FXEN)

FX Energy, Inc. (NASDAQ:FXEN)

Wall Street Analyst Forum

February 13, 2007 11:50 am ET


Gerry Scott - President of Wall Street Analyst Forum

Tom Lovejoy - Chairman of the Board and CFO


Gerry Scott

Okay. Good morning, ladies and gentlemen. In our ongoing attempt to adhere the public schedule, I'd like to introduce the next company in today's program. And so to remind those of you that are here that the meetings are retrievable via webcast both the audio and the PowerPoint on our website, analyst-conference.com. So if you miss something or you want to re-attend something, you can attend the -- re-attend the webcast.

As soon as this meeting is over, there is a luncheon program between the managements and the analysts and portfolio managers. And for the oil, those of you interested in the gas companies, that's being held right in the room right behind me during that period of time.

So in any case, the next company in this morning's program is FX Energy. They are an independent oil and gas company focused on exploration and development and production opportunities in the Republic of Poland in association with the Polish National Oil and Gas Company as well as some others.

So without any further introduction, I'd like to introduce Tom Lovejoy, Chairman of the Board, and just ask him, because our webcaster asked us to ask the CEO just to remember to repeat the questions during the Q&A session so that the webcast attendees whose numbers may attempt to exceed those physically attending -- usually, they do -- can hear both the question and the answer.


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Tom Lovejoy

Good morning. I will be making some forward-looking comments. So please refer to our Form 10-K and our other SEC filings for risk factors, particularly.

FX Energy is really focused on finding, developing and producing oil and gas in Poland. Poland represents a tremendous opportunity for energy exploration, because Poland was closed to outsiders for 50 years until 1989. Modern exploration technology was not used in Poland until quite recently. It is very much like the US over 50 years ago.

There is a very interesting play that we are making in Poland, and we've had our third successful well now in the Rotliegend sand. This is a play that has been successful in Southern North Sea, where there are some 50 Bcf that have been discovered. It extends across Holland, the famous Groningen field, where 100 Tcf is in the Rotliegend play.

There is another 40 or 50 Tcf that's been discovered in both Holland and Germany, while in Poland only 5 Tcf has been discovered in this Rotliegend sand that was laid down some 290 million years ago,. It is wind-blown sand. It was explored for in Poland essentially drilling blind, because it's sealed by salts that the then seismic technology could not depict the structures underlying the salts.

We've been able to bring the technology from the Southern North Sea and been able to identify these structures. So with three successes and with the 3D program underway, we're very excited about where the company is.

There is a very strong gas market in Poland. There are some 39 million people there. They are dependent upon Gazprom for two-thirds of their gas imports and having been cut off both earlier this year regarding the dispute in Belarus and then cut off with the dispute on the Ukraine last year. There is really a great concern about energy security in Poland and in Europe as well where almost a third of their gas imports come from Gazprom.

Poland has joined the European Union. That's strengthened their economy and has put in place a number of requirements to improve their environmental conditions, and this in turn is going to increase the demand for gas in Poland. This slide depicts the gas pipelines in Poland. Whereever we’re drilling., we're about 10 or 20 miles from a pipeline. We're onshore. And so, therefore, we can hook our discoveries into a grid in Poland at a very economical cost.

European Union membership really underlines Poland's commitment to the rule of law. There are very attractive fiscal terms:about a 2% royalty compared to 18% in the US, and the income tax rate of 19% is also very attractive to encourage business and economic development in Poland.

When we went to Poland there were a number of risks ranging from could we get land on decent terms? Could we discover oil and gas? Could we drill it, produce it, sell it, get paid for it? Could we repeat it? Essentially all of those questions have been answered.

We are a very different company today then we were just a year ago because of the successes that we've had. We've been able to establish a long-term relationship with the Polish National Oil and Gas Company and that's a strong foundation that's going to lead, we believe, to additional opportunities in Poland.

We've got an experienced staff of a half a dozen people In Poland. We have a track record of drilling roughly 50% successful wells of our wildcats today. And in our Rotliegend sand, a structural trap play, we’re three out of four successful wells.

We've just hooked up two wells late last year. And so we'll be adding about $13 million of revenues to our existing revenues and should be reporting roughly $20 million of revenues for this year. We've had some good growth in reserves and cash flow. And we have a substantial number of prospects in our inventory that we want to pursue and we will be drilling as we go forward.

And I'll chat a little bit about those further this morning. To give you a brief history of our activity in Poland, we first went there in 1995. The Polish National company held all of the best lands and foreigners were limited to rank wildcat acreage.

We obtained a concession onshore just inland from the Baltic. We promoted RWE-DEA, the big German company. We drilled there two dry ,holes, went back to the Government and asked for another concession, which we obtained , down near Lublin.

We were approached by Apache who advised us that they had looked at these former Soviet Block nations and concluded that Poland was one of the best places to be, because of their historical production and their economy and their rule of law.

And they wanted to do something much bigger and with them paying the work commitments we put together, through obtaining concessions from the government and joint venture with the National Oil Company, almost 16 million acres, roughly 20% of Poland.

We were carried for a total of 12 wells and we had one success, which we have now hooked up and have producing. For wildcat acreage one success is probably typical, but what we did accomplish through several years of working with the National Company was to build a relationship, which led to them inviting us into an area in Poland that's referred to as the Permian Basin, where this Rotliegend play that I described a moment ago exists.

We obtained two areas called Fences I and II, and we call it "Fences," because the old fields that the Polish National Company found are fenced off from us. But we can use those as analogs and we can use their data. But we have to drill new fields and new discoveries outside of those. It’s a huge area. It’s about a million acres. We are 49%. They are 51%. and the operator with exception of one 54,000 acre block where we identified a prospect.

In 2003, we promoted CalEnergy, one of the MidAmerica, Berkshire Hathaway companies. They paid 100% of the cost of the well, essentially for a quarter interest reducing us to a quarter of that particular area. That well was a successful well. It is now hooked up in producing at a rate of about 10 million cubic feet a gas day. So it’s a great well and was well worth the promote that they paid.

At the same time, in 2003 or 2004, we attracted Richard Hardman the former head of exploration for Amerada Hess. He is very well known for his activities in the North Sea and in fact received the Commander of the British Empire award for discovering 1 billion barrels in the North Sea. We told him about our Rotliegend play in Poland and he confirmed it is the same play as the Southern North Sea and was sufficiently intrigued to join our Board of Directors. And he is acting as a Senior Technical Advisor to us today.

These events allowed us to recapitalize the Company, to raise $50 million. And we have continued to explore and bring in with the help of Richard and others new seismic technology and interpretation from the Southern North Sea and apply it to Poland with some great success. The core area that we are focusing on is illustrated by this slide of Fences I and II. This is a permeability map. It’s a very attractive area. The sands are aeolian or wind blown sands with excellent porosity as well as permeability.

And our analog for this area is the Radlin fields, some 390 bcf that was discovered in 1985. To discover this field today you would have a present value about a $1 billion. So one can see why we’re excited about this area. We have now drilled three successful wells in sand dunes that are similar to this Radlin discovery. And as we shoot 3D, it will be exciting to see what the size is of some of these discoveries are. And I’ll give you a little illustration of that in just a moment.

When we started working on this play, we were able to gather up all the existing data for free, with the help of the Polish national Oil and Gas Company, some 5000 kilometers old 2-D seismic. We were able to reprocess and computer enhanced to identify our additional leads and prospects. We acguired 1500 kilometers of new 2-D and targeted several wells.

We have drilled three successful area wells in this Sroda area and that gave us the confidence to commence the 3-D shoot of 100-square kilometers in the 3-D area,. The 3-D shoots can cost $ 10 million, roughly 10 times what it cost to shoot 2-D over a comparable area. But we will greatly improve our ability to image the fields and for the engineers to enhance the reserves that they will give us on the discoveries we make in that area.

We would hope have this 3D shoot by the middle of this year, identifing our drill sites in the third quarter and drilling in the fourth quarter. We hope to have two rigs working in that area, significantly increasing our pace of activity.

This slide shows you in yellow our prospects and leads in several different areas. The platform area that we have outlined in blue is a relatively stable area where the African plate is pushing up into the European plate, but the tectonic movement has not been too great.

We’re seeing several parallel sand dune ridges. And you can see those illustrated by the ovals. Our Sroda well -- Sroda-4 we think maybe a part of a much longer structure that’s along this sand dune ridge. Our Winna Gora discovery is in the same sand dune ridge as our Sroda City prospect, which you see in the block.

Our Zaniemysl discovery that we drilled with CalEnergy where we have only 24.5% interest rather than 49 is in the same sand dune ridge as our Roszkow prospect that we’re currently drilling. We announced that well and commenced drilling about a week ago. We’re down about 400 meters. It’s about a 90-day period to drill that well.

We have a play in the south that we refer to as pinchout area. There are some good analogs for that area. It’s a stratigraphic trap. It’s where the wind is blowing up against the cliff when this area was all flooded. Probably a long time ago, it was like a beach. Stratigraphic traps can be much bigger than structural traps, but historically they are much more difficult to find.

To the northwest our analogous Paproc, a 267 bcfe field, and Uzad about 110 bcfe field. So there are other plays in addition to our structural trap play.

Focusing in on the structural traps in the Sroda-3, the area that you see outlined in red on this slide, we have six structures that have been identified. Sroda-4 is commercial. Sroda-5 was non-commercial, but we got into a fault. There was gas there, but it was not a commercial well.

We’re thinking it set up a separate trap from the trap in structure we’ve seen at Sroda-4. With the 3D, we’re going to be able to better see these particular structures. We think Sroda City, which is indicated here as two small structures may be one larger structure, because there is a town there and 2D has not been able to image under the town.

We have run our 3D geophones through the town and we are gathering that data. And we should be able to see that structure better once we have obtained the 3D and interpreted it.

As we look at our yearend reserves for 12/31/06, we have about 21 Bcf of reserves, a PV10 of about $60 million net to FX. Each Sroda well should add about 16 to 20 Bcf for the well bore that would be about $40 million or $50 million per well on an SEC PV10. We would have 49% of that area. For the Sroda area, the six potential gas fields based on 2D, we think, they're going to be fields of the size of maybe 50 to 200 Bcf.

So the total Sroda area, Richard Hardman has said, he thinks we have a 90% chance of coming up with 200 Bcf.

That was before our Winna Gora discovery, which you can see just in the southeast of our 3D area. The most likely case, he believes, is about 500 Bcf. So that would be a present value potential in excess of $1 billion. Our interest is 49%.

I would hope that we're going to be able to keep the 3D crew in the field and expand this shoot down to cover Winna Gora, but whether it's likely they stay in the field now or not, it's something that we'll clearly be reviewing as we look forward later in the year 2007 and 2008.

There are a number of other projects that we have in the pipeline. I briefly mentioned the pinch-out area to the south. But in addition to that, we have an area referred to as Hinge-line area. This is where the sand, dunes and structures take a different shape because of the Wolsztyn High, a cliff where the pinch-out is, where the sand is blown up against that cliff. You move away from having these parallel sand dune ridges of Sroda area into a more complex sand pattern. I think that's a good project for 3D for us.

In addition, just in the North of the Hinge-line play is the Ca2. That's a reef play, and that's one where the Polish National Oil Company has been very successful. I think that we would probably drill a well in that play to get more data before we start shooting 3D. But it is on 3D where the Polish National Company has had their great success.

To the East in Poland, we have Block 255. It's 250,000 acres. We have an 82% interest there. The Wilga 2 discovery well in that block is producing both oil and gas. It is generating about $10 million per year of revenue. It's a lightly drilled area. It's near Northern Warsaw. So it's a good market. We're getting about $6.50 for the gas in that area. We're doing additional work around that area to identify other targets, and we think there is probably additional drilling to do on the Wilga field itself.

We've just obtained a new concession to the Northwest of our Fences I and II, 1.5 million acres. We have 100% of this concession. It offsets the BMB and the MLG fields that are pictured in the map on this slide. Those are two very large reef plays, Ca2. The present value of those fields is probably in the aggregate -- in excess of $1 billion.

So there are very significant targets in Poland. We have some very good analogs, and we're very excited about where we are today. It has taken us a while to get here, but we're beginning to increase the pace of operations.

And that's illustrated by our calendar and budget where you can see the schedule for acquiring the 3D,, reprocessing data on our Northwest concession, for completion of drilling Roszkow, for beginning of our Sroda development, and finally skipping down to the bottom for the building up facilities to hook-up our Sroda and Winna Gora wells.

We have the cash on hand to handle a significant exploration and development budget. We're generating free cash-flow. And we have established a line of credit with the Royal Bank of Scotland for $25 million, so that we have the ability to push-ahead on quite an aggressive program.

Near term events and results over the last several years. You can see the build in our reserves which is beginning to accelerate. The $60 million number that I mentioned for year-end '06, I would expect would be at least a $100 million and maybe something more as we get to the end of 2007.

And our revenues as I mentioned are jumping from $10 million in '06 to roughly $20 million in'07. As we bring on the Winna Gora and the Sroda wells and hopefully the wells where we're going to be drilling on 3D, you will see this build in reserves, revenue and cash-flow continuing to accelerate at a very attractive rate.

In terms of near terms events, we're continuing to test Winna Gora. We'll have some additional announcements on that over the next several weeks. Our potential for that -- that field is in the 20 to 50 bcf. area.

On Roszkow we're drilling. We should have results in 90 days. Itshould be down and be sized in the area of 30 to 60 bcf. We expect very good porosity and permeability from that well, because it's on the same trend as Zaniemysl.

Now the Sroda 3D will be ready in mid-year and so we ought to be able to be drilling on that in the fourth quarter. And both our Zaniemysl and Wilga discoveries will have a test of their reservoirs in summer. And we should be making a decision to be drilling offset wells for each of those wells later on in the year.

In conclusion we have a strong foundation in place. We have some substantial production revenues which is a wonderful first for us and changes the character of the Company to have free cash-flow.

We believe that the analog of the [Rotliegend of the Southern North Sea argues for a very significant potential in the reserve category. That and the other plays that we're making – we think there's several trillion cubic feet of gas that can be found in Poland.

Some of the geological studies that have been done on Poland, indicate maybe there's 15 trillion or 20 trillion cubic feet of gas remaining to be discovered in Poland. We have 3 million acres and a good relationship with the government, where we think that we can get additional, acreage and we think that the outlook for the company is very bright.

We have some substantial funds on hand and a good line of credit to really carry forward on our program. We have a very strong technical and operating capability. Richard Hardman and various consultants that we use are bringing the latest science and technology to Poland. Tatys, who runs our office in Warsaw, is the former Head of Exploration Production at the Polish National Company and is a very strong and experienced individual. And he has a staff of a half a dozen people.

Underlying everything is really a very strong relationship with the Polish National Company and some real credibility in the country for having helped them obtain some of the latest science and technology, and to have applied that and had a success in doing so. We have a very unique land position in Poland, and I think that we're on the way to building some very significant value for our shareholders.

I'll open to questions and be glad to chat a little more if people do not have a question.

This slide just gives you a brief picture of our balance sheet, showing roughly $17 million in cash. With 35 million shares out, we're trading at roughly the $7 to $8 range, roughly $250 million, $275 million market cap. We are on NASDAQ National Market. I think we may be picked up by the Russell during the course of this year. There are options that trade in the stock as well.

This slide depicts where that $13 million in added revenue is coming from this year. The Wilga production started in the third quarter. That well will be doing about 4 million cubic feet of gas a day and about 200 barrels a day. We're on 82%. Roughly $10 million of revenue is coming from that well. We'll be testing that well in August to see about drilling an offset.

The Zaniemysl well started production in the fourth quarter. That well is producing 10 million cubic feet a day. We're on a 24.5% interest. So our revenues from that well are $3 million.

Our Sroda-4, we expect that to come into production in 2008. It will probably do about 5 million a day. And that would be generating, maybe, $3 million or more to us for our 49% interest. And then the Winna Gora well, I think would probably be something similar to that, we’ll have a better idea when we see the results from our production tests that are going on right now.

This just gives you a little more overview of our Fences I and II showing the new seismic we’re shoot and the three different place that are outside the Sroda area. Clearly our initial focus is going to be on the Sroda area. Getting that 3D shot, getting wells drilled there so we can establish the reserves and the cash flow from that area.

This slide that gives you a picture of our Winna Gora discovery, roughly 31 meters of net pay. 17.8% average porosity, but up to 29% porosity into five meter inner wells. That’s really very exciting for us. It was great to have this type of porosity at 3500 meters and this was the deepest of three poro well sanddune regions that we are looking at and we were concerned as to whether it might be too tight. But this is just a great result for us and gives a lot more confidence on our big target just to the Northwest at Sroda city.

The well cost about $6 million, but if you look at the well board itself it’s at 20 bcf the value of that well would be about $50 million. So we had very attractive economic result. Roszkow that we’re currently drilling is some what shallower. It’s about 29-75 meters. We see a bigger throw, so we think we might get a greater column so we think it might slightly bigger structure, maybe something in the 30 to 60 bcf range.

Both of these are 49% owned, 51% owned by Polish national company and there they operate. This just gives you a little bigger blow-up of our 3D areas so that you can see the sanddune rigs that goes from Sroda-4, Sroda-5 and then on up tick from the [liche]. We have a prospect to the south of that, so that is on that same sanddune rigs and then there is another rig if you can see Winna Gora going to Sroda city and further up.

We should have rigs drilling on this 3D, hopefully in the fourth quarter and see the results the next year.

This shows you picture of our 1.5 million Northwest Concession with a stratigraphic column on the left. The Rotliegend sand is the bottom horizon. You see six Z -- [Zec] signs where this area was flooded six times. That is the polarized caps melted.

When this was a sea, [weeds] were laid down and established and salt was laid down creating a seal that captures the gas down of the Rotliegend. The BMB and Lubiatow complex, two very major fields that [PIGC] has discovered immediately to our south.

We believe that those types of fields have the potential of existing in this block. We have several leads we’re pursing. We're reprocessing all seismic. We will be shooting new seismic in anticipation of preparing to drill in this area in 2008. There's both Rotliegend a Reef play in this acreage.

Please interrupt me anytime if you have a question. We have few more moments. This slide presents our estimated reserves and our revenues. While it's little dizzy from a distance and looking at your book, I’d like to bring to your attention that in Zaniemysl where we have 24 bcf for the wellbore, we have probable and possible of 50 -- 41 to 57 bcf.

That compares to Sroda where we have 16 bcf for the well, and 22 to 27 bcf probable and possible. The big difference there arises from the 3D. Zaniemysl-3 is on 3D. The Sroda-4force on 2D. So when we get our 3D shot over Sroda-4, I would hope to see a good increase in the reserves.

Next to the last column in the right you see that the wellhead price. When we first went into Poland, we got quite a low price on our (inaudible) well. On Zaniemysl, we're getting 374. On Wilga, we are getting 647, something in the -- like $6 to $7 area is more typical of what one would expect for, I guess, price if you have a free market in that area.

We are the only company in Poland that produces gas outside the National Company. We sell through the National Company and one of their distribution companies. But we have the right to sell to anyone and we can export gas if we want. This summarizes some of the economics on this page.

Finally, on stock performance, we have had some significant runs in the stock as the market has been volatile as a result of the size of some of the structures that we can get into. If we can get into a big structure, it can have a really dramatic impact on the Company. And you knock in the middle and you do some more [count].

Our Wilga discovery is in -- it appears to be a very big structure. Is it the channel within that structure or is there something else there? And once we do some more homework, we’ll have a much better idea on that. But there is some good volume in the stock. There is some good liquidity in the stock. And we're looking forward to the opportunity of seeing it move ahead. Yes, sir.


Unidentified Audience Member

What's the royalty burden in Poland as opposed to typically what we see here in the US?

Tom Lovejoy

The royalty burden in Poland is roughly 2%.

Unidentified Audience Member


Tom Lovejoy

2%. And that’s comparative -- some 18 here.

Unidentified Audience Member

[Question Inaudible]

Tom Lovejoy

And then the income tax is 19%. So fiscal terms are very attractive. And the Pols who want us there, they are very like Americans. They've really appreciated all that the US has done for Poland. So it's a wonderful country to visit.

Unidentified Audience Member

Is the Pol’s National Company capital constrained [Question Inaudible]

Tom Lovejoy

Is the Polish National Company capital constrained? I would say it is not. They did their public offering in 2005, a year-and-a-half ago roughly. They went public on the Warsaw Stock Exchange. They raised about $700 million for 15% of the company. It is a big company.

I think that relationship with us has been to try to work with them and be a good guest in their country. And in contrast, we're a major oil company that might be keeping its current rigs close to their best. We try to share with them everything we know. We’ve introduced them to the best consultants that we can bring in this country and try to help them as best we can to discover oil and gas.

I think that when we first went in the Fences I and II, I think they thought it was some of their lesser attractive acreage in their Permian Basin. I think based on the success we’ve now had, they think it’s more attractive acreage in the basin.

And I think as we're looking at that our new Northwest Concession and other areas, we can actually value. And hopefully that’s going to be appreciated, and we’ll do more things with them in the future.

Are there any more questions? Well, thank you very much. I appreciate your time and attention.


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