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Brigham Exploration Company (BEXP)

October 17, 2011 8:00 am ET

Executives

Torgrim Reitan - Chief Financial Officer, Executive Vice President and Member of Corporate Executive Committee

Hans Henrik Klouman -

John Knight - Executive Vice President and Member of Corporate Executive Committee

Hilde Merete Nafstad - Senior Vice President of Investor Relations

Analysts

Jon Rigby - UBS Investment Bank, Research Division

Lucy Haskins - Barclays Capital, Research Division

Dean Machado

Brendan Warn - Jefferies & Company, Inc., Research Division

Neill Morton - Berenberg Bank, Research Division

Drew Figdor

Barry MacCarthy - RBS Research

Unknown Analyst -

Hootan Yazhari - BofA Merrill Lynch, Research Division

Jason Gammel - Macquarie Research

Hilde Merete Nafstad

Good afternoon, ladies and gentlemen, and welcome to this conference call arranged by Statoil. My name is Hilde Nafstad, I am Head of Investor Relations in Statoil. I have with me here today Statoil's CFO, Mr. Torgrim Reitan; Statoil's Executive Vice President with Strategy and Business Development, Mr. John Knight; the Senior Vice President for Performance Management and Analysis, Mr. Svein Skeie; the Senior Vice President for Finance, Rob Adams; Senior Vice President for Communications, Reidar Gjærum; and we will also wait around today to join by the General Counsel, Hans Henrik Klouman.

This morning, we announced that Statoil enters the Bakken and the Three Forks oil plays through a cash acquisition of the Brigham Exploration Company. The announcement can be downloaded from our website. Do we still have connection? Hello?

Operator

Yes, your line is open.

Hilde Merete Nafstad

Okay, sorry, I had -- thank you very much. Statoil.com, along with the presentation regarding the acquisition. In a minute, Mr. Torgrim Reitan will give a brief introductory comment, followed by a short comment by Mr. John Knight. After that, there will be an opportunity for questions. The operator of this conference call will explain the procedure for asking questions immediately before the Q&A session. The conference call will last approximately 45 minutes.

I now leave the floor to Mr. Torgrim Reitan. Please go ahead, Torgrim.

Torgrim Reitan

All right. Thank you, Hilde, and welcome, everyone. And good morning to you in the States and good afternoon to Europe. So I'm very pleased to invite you to this conference call. And today, Statoil ASA, we had entered into a Merger Agreement with Brigham Exploration, where Statoil will require all outstanding shares for $36.50 per share, and this is an only-cash tender offer. For this translates into an equity value of $4.4 billion, and taking into account the net debt at the end of second quarter, it corresponds to $4.7 billion in enterprise value.

So Brigham is an Austin-based company, with 100 employees in Austin and North Dakota. They have a strong proficience in their attractive Bakken and Three Forks basins. These are tight oil plays within the Williston Basin in North Dakota and Montana.

So this transaction will give Statoil slightly more than 375,000 net acres in the Williston Basin, and around 40,000 acres in other areas. The resource estimate is between 300 million and 500 million barrels of equity barrels.

So this is a very important milestone for Statoil. It builds on the stepwise experience from Marcellus and Eagle Ford, and it establishes Statoil as an operator within the U.S. unconventional. And unconventional is a substantial resource base and we consider it to be increasingly important part of the future energy supplies. So this will add a significant resources with long-term scalable oil production to Statoil.

At our Capital Market Day in June, we presented or updated upstream strategies where unconventional, but a very important building block. So this deal is very much aligned with the strategy that we have communicated. This deal will also add immediate production and cash flow, and it gives us an early mover. We are an early mover amongst the IOCs into the Bakken area.

When it comes to the financial situation for Statoil. We had, by the end of the second quarter, a net debt of 14%. That had decreased from 25% by year start, down to 14%, and we have around $15 billion in cash and cash equivalent by end of second quarter. So we have the financial capabilities to lift a transaction like this. I would also like to remind you that portfolio management is an integral part of what we're doing in Statoil. Just to remind you, we IPO-ed first fuel and retail business one year ago. Proceeds, $0.9 billion. We divested 40% of the proprietary Perigrino assets in Brazil, $3.1 billion and 40% of our KKD business or the oil sand business in Canada, $2.3 billion.

And lastly, we announced divestiture of our transportation ownership in transportation systems at the Norwegian Continental Shelf, and that is expected to be closed during this year, and that will provide us with more than $3 billion in proceeds. So this is the last part of the way we are operating.

When it comes to the offer and the structure of the offer. It will now be 5 to 10 days until the offer is given to the investors. And then there will be a 20-day time for them to accept it. And then there are final closing things that needs to be done before this is finally closed.

So that was my introduction, Hilde.

Hilde Merete Nafstad

Thank you very much, Torgrim. We will then welcome to Mr. John Knight to make a few introductory comments as well. Please, John?

John Knight

Good morning, and good afternoon, everybody. Before we go into the Q&A, I though I would just spend a bit of time to take us back to what Statoil's thinking has been around developments of this sort of activity. In 2006, we started to notice the increasing importance of unconventional resource, particularly onshore in the U.S. in the global energy mix. Between 2006 and 2008, we undertook extensive study of this phenomenon, including looking at a wide range of opportunities. It was not until mid-2008 that we felt that we had identified the perfect opportunity with the transaction that we did with Chesapeake, which was something that we analyzed from beginning of that year through to the closure in the fourth quarter.

You will recall that part of that transaction involves the covenants of personnel into the operating systems of Chesapeake. The second thing that we did, which happened around this time last year was the movement into the gas liquids and wet gas phase of the Eagle Ford. And we, before that transaction, we had examined many different possibilities before moving into liquids phase, including black oil phase. But we felt that the one way we could get the [indiscernible] was the introductory transaction, and also we felt that the joint operatorship arrangement with Talisman was the most appropriate way of increasing our own exposure and understanding to operations.

This transaction now takes place as a building block towards deepening our operating capability. And again, we have examined many possibilities in different parts of North America for entry into tight oil, and this transaction at this time, seems to us to be the most value-creating.

So what I'm trying to do is give you a sense of the phase involvement and increasing operating capability based on a wide range of possible transactions that we've undertaken in the space of the last half decade.

With those remarks, I will finish and [indiscernible] we will now open it for Q&A.

Hilde Merete Nafstad

Thank you very much, John. I will then now ask the operator to mention the procedure for posting questions, and then the floor will be open. . Operator, please explain the procedures for calling in.

Question-and-Answer Session

Operator

[Operator Instructions]

Operator

We'll now take our first question from Brendan Warn from Jefferies International.

Brendan Warn - Jefferies & Company, Inc., Research Division

It's Brandan Warn from Jefferies. Just one question in terms of projection of frac crews and rigs. Obviously, we're can see what the company was proposing going into this. Are you still maintaining that sort of level of activity in 2012, and if we can look out to 2013, and just the expectation of CapEx into 2012? And then just secondly, just in terms of the risk resource number, are you able to provide a split between middle Bakken and Three Forks, please?

Torgrim Reitan

When it comes to CapEx or investments, Statoil is [indiscernible] investing for $16 billion in 2011. And we have also stated that we intend to do that in 2012 as well. This transaction will take from additional investments, and we expect that to be around $750 million a year going forward. When looking at these set of assets, we also expect them to help financed from 2013, 2014 and onwards. When it comes to the splitting of the resources into the subsets in the basins, we are not ready to give that. Frac crews and rigs, Brigham has 12 rigs operating currently and ambitious plans going forward. So we will work closely with them to find the optimal setup.

Operator

We'll now take our next question from John Rigby from UBS.

Jon Rigby - UBS Investment Bank, Research Division

Two questions. The first is, you talk about a breakeven price of $55 per BOE. Can you just confirm, is that an all-in cost or a going-forward cost? And is it an economic breakeven or a cash earnings breakeven? And then second, just on your self-financing remark, can we just, I tried to point you probably won't give us a production forecast, but can we get assume something around a ratable increase between the number you're producing now and the potential of the end of the 5-year period is a number we can work with to get that self-financing level?

Torgrim Reitan

So on the breakeven that we have stated in the presentation material, mid-50s, that is now going forward breakeven price and it is not -- the cash breakeven, it's sort of the economic breakeven price. When it comes to the production build up, currently, Brigham is producing 25 -- no, excuse me, 21,000 barrels per day in equity terms. That is including the royalties paid, and that is just very recent numbers. Going forward, we estimate the production to step up to between 60,000 and 100,000 barrels per day within 5 years' time. So I think that's the timing around the productional growth efforts. So that translates into self-financing in the period 2013, 2014.

Jon Rigby - UBS Investment Bank, Research Division

Which is sort of half way through that period, roughly?

Torgrim Reitan

Yes, exactly.

Operator

We'll now take our next question from Jason Gammel from Macquarie.

Jason Gammel - Macquarie Research

I actually have 2 questions. The first is that Brigham was pursuing a strategy of drilling and completion that included very long laterals and a very high level of intensity on completions with something generally over 30 stages. Would you intend to continue drilling and completing in the way that Brigham has laid out? Second question is related to transportation realizations in the region. Right now, I believe that transportation is actually reasonably tight. Will you be relying on incremental rail transport, or do you believe you'll be able to get pipeline transportation out of the region? And where would you expect your realizations would be relative to WTI?

Torgrim Reitan

Okay. John, would you like to comment on the drilling completion? So please.

John Knight

Yes. One of the reasons that we have given you a range of resource rather than something narrower is because we intend to design a drilling program, which is obviously to increase production but involves a degree of piloting. We have a debate with Brigham about the number of wells double-section that is appropriate and now we think that a lot of optionality and upside in this asset, but we want to undertake a number of pilots about the level of experience and appropriate spacing for the wells before we become more definitive about it.

Torgrim Reitan

All right. Okay. Thank you. And your second question on transportation and realization. In the initial phase, we will be dependent on some range, but we expect to be sufficiently covered with the pipes from maybe 2014. So that translates into realization. So in the first 2 years, we have assumed a discount to WTI of around $7 to $10 per barrel, and that is sort of gradually decreasing as we move forward.

Operator

We'll now take our next question from Hootan Yazhari from Bank of America Merrill Lynch.

Hootan Yazhari - BofA Merrill Lynch, Research Division

Just a very quick question regarding the resource potential. You are talking about 300 million to 500 million, I'm just interested in getting what you see as the upside that's really on the cards here, just simply because the price that you've paid looks to be relatively full for a resource number. So quite clearly, you do see some upside in resources. Can you potentially quantify the un-risked level that you're looking for just to give us some sort of idea of the size of the prize here?

Torgrim Reitan

Yes. In general terms, this is early phase technology development as we see it, and that is certainly part of why we want to enter into it and we see we have the skills that we can contribute with in that respect. 300 million to 500 million barrels is based on what we see today and the technology that we have today. And then there is lot of things to be evaluated when it comes to the intensity, the well spacing and all of those issues. If you confer with Brigham’s Internet pages, you'll see 1,300 wells and you also see an EUR number. And if you use those numbers, you come to a higher number than what we have stated here. As such, this is based on what we see today and yes, we see upsides.

Operator

We'll now take our next question from Ian Pile [ph] from Sanford Bernstein.

Unknown Analyst -

Firstly, I just wondered if you could give a cash margin per well figure or perhaps a cash breakeven price for the assets. And secondly, clearly, the Brigham assets have a very high flow rate per well, but also have a number of fracs per well that's doubled many of the peers. I wonder if that's something that concerns you and something that you would expect to continue going forwards?

Torgrim Reitan

I suggest, John, you answer the flow rate and the frac issues, and then we will prepare on the cash per well. So, John, please?

John Knight

Well, I think this issue is very much related to the earlier question as to why we have given such a wide range of resource and the well spacing that we intend to undertake. But we had the opportunity of talking to the Brigham executives for quite an extended period and also sharing with them areas of additional pre-drill and science that we might be able to bring to this area. And they're quite excited about that. As Torgrim said, if you want to look at what might be an optimal case, the best thing to do is to look at what Brigham has set out already. And we've taken a deliberately more cautious approach to it and then based our evaluations on that. When we have -- if the tender offer is accepted and we have consolidated the business within existing [indiscernible] activities, then we will, and when some of the pilots are undertaken, we will become more specific at that point.

Torgrim Reitan

Okay, thank you. And on the breakeven, we stated mid-50s at the breakeven going forward, and that is sort of the best number I can give on activity as such. So $55 per barrel is what we recovered and all the cost involved.

Operator

We'll now take our next question from Theodore Nielsen [ph] from First Securities.

Unknown Analyst -

I have 2 questions. First one is, do you have an estimate of how much this equities will contribute with your 2020 production ambition of 2.5 million barrels per day? The second is the [indiscernible] indication of the OpEx per BOE?

Torgrim Reitan

On the two top incentives. That was the roadmap on production growth towards 2020, 2.5 million barrels per day and we announced that in June at our Capital Markets Day. So that way is based on the project pipeline that we have at hand and provides us with growth in that period. This transaction will add production also in the 2020 perspective, so it will make us even more comfortable in reaching that ambition. We don't have the intention to really do that in any way, but it certainly makes us even more comfortable as such. Yes, on the OpEx per barrel, I feel the best way for us is to refer you to Brigham and their Investor Relation unit or refer to their Internet pages and quarterly reports.

Operator

We'll now take our next question from Judy Delgado from Alpine Associates.

Unknown Analyst -

I'm wondering if the companies could detail exactly what regulatory approvals are required for the tender closing?

Torgrim Reitan

All right. Okay. I'll leave that to Hans Henrik Klouman, the General Counsel of Statoil. So Hans Henrik, please.

Hans Henrik Klouman

There are actually none. There's a waiting period in the U.S. antitrust law, so you have to give a notification to the statutory commission. And the waiting period is at the shortest 15 days from the notification, so that's all the formal process going on.

Unknown Analyst -

So the company's details on why the close timing is so long in the press release that notes are closing by the end of first quarter 2012?

Hans Henrik Klouman

I think that’s actually the longest possible closing period. The main benefit for a cash tender is [indiscernible] reduction. That theoretically can take shorter time, much shorter time, actually. It can take theoretically less than 30 days to get control of the target company. And after that, less than 20 days to formally close the whole transaction. So if you compare to, for example, BHP acquisition of Petrohawk, that transaction took 42 days to close entirely, actually. So that's a possibility here as well.

Unknown Analyst -

I see. Okay. And could the companies just confirm whether the CPS filing is also required?

Hans Henrik Klouman

Sorry?

Hilde Merete Nafstad

Could you repeat the question?

Unknown Analyst -

Yes. There's another regulatory filing that was not mentioned, I believe only the U.S. antitrust filing was mentioned. So I'm curious if there's also a filing here in the U.S. due to the companies' foreign entity status with CPS?

Hans Henrik Klouman

We still have, as far as we can see, we don't need that filing, actually.

Operator

We'll now take our next question from Drew Figdor from Tiedemann Investment Group.

Drew Figdor

I think it was answered just then, but if I can just follow up. So the time frame is just a longer-dated time frame, was that assuming the front end of the tender offer being closed and then closing the back end would take that long? Is it your assumption that the tender offer will close after the standard 20-business day launch?

Torgrim Reitan

So it depends upon how much of the shares have [indiscernible], of course. But if people have more than 90% of the shares, then they will have posted the transaction after the 20 business days as we said.

Operator

We'll now take our next question from Barry MacCarthy from Royal Bank of Scotland.

Barry MacCarthy - RBS Research

I want to come back to the $55 per barrel breakeven, please. My question is, what proportion of the purchase price is folded into that calculation? You've include something, saying an implied $8,000 per acre paid. Is that nothing else included, or have you included the bulk of the remaining funds that will be invested in the Brigham acquisition?

Torgrim Reitan

Okay. Yes, all right. So the $55 per barrel in breakeven price, that is not including the acquisition price. So this is a going-forward breakeven price in these assets. The dollar per acre, that is acquisition price as such. And that is adjusted for the dollar per acre. It is sort of adjusted for midstream and other assets, and also acreage outside the Williston Basin. Excuse me, and production, and production, and that is using the direct methodology as such that you will find.

Barry MacCarthy - RBS Research

I understand. So what's the implied value per acre for the non-Bakken assets?

Torgrim Reitan

Yes. That is not something that we have disclosed. So I can only say that the majority of the value is, of course, related to the Williston, and the Bakken and Three Forks play.

Operator

We'll now take our next question from Lucy Haskins from Barclays Capital.

Lucy Haskins - Barclays Capital, Research Division

Could you tell me what measures you're taking to retain stock because I know that this is actually near corporate transaction rather than asset deal and I assume here that's part of the incentive to retain that management edge. Is there a sort of time sort of issue there in terms of how long senior management will remain in place or...

Torgrim Reitan

John, if you can address that, that would be appreciated.

John Knight

Yes. It's our intention to retain as many of the staff as possible, same for the CEO, his brother and the CFO. We have transition arrangements with them. So just the key staff in the operating and subsurface have got their market-based retentions, as have a couple of next level of staff below them. And the whole company staff who got appropriate arrangements. These are very much at market and based upon benchmarks that we have seen in Atlas and Petrohawk. We also have bonus arrangements with key staff, which are tied to performance of the assets over the next 2 years. So these are the retention arrangements, Lucy, are essentially based on a 2-year program.

Operator

We'll now take our next question from Rasta Barrank [ph] from Jefferies International.

Unknown Analyst -

Just one question. Could you comment on your plans for Brigham's bonds? Are they going to remain outstanding?

Torgrim Reitan

Excuse me. If you could repeat the question, that would be appreciated. So please?

Unknown Analyst -

Brigham has 2 issues outstanding, no? What are your plans for those 2 issues of bonds? Are they going to remain outstanding? Are you going to do a t-part 50 [ph], what are your plans?

Torgrim Reitan

They have 2 bonds outstanding and we will not comment on our plans to what to do with them currently. I mean, in due time as such, we will revert to that issue.

Operator

We'll now take our next question from Ethan Agarwal from LionEye Capital.

Dean Machado

This is Dean Machado from LionEye. I got on the call late, so I apologize if you've already talked about this. But can you talk a little bit about the background of the transaction, how the 2 companies came together? How long you were in discussions? If negotiations were exclusive, or if there were other parties involved?

Torgrim Reitan

John, you are the right one to address that one. So please, John?

John Knight

I will sketch the answer to that but I will not go into the depths of detail. This is a discussion that we've started in the half of this year. We have spent most of the summer engaged in due diligence, both on the company and the assets. And we have had extensive discussions and fruitful discussions with management around future industrial program and integration. And a number of management have met with senior managements at Statoil, both in America and also here in Norway. The Board has been advised throughout by Jefferies and received appropriate advice on the situation. And I'd rather not comment on the competitiveness of the situation. I think that's a matter to address with them, with Brigham itself.

Operator

We'll now will take our next question from Neill Morton from Berenberg.

Neill Morton - Berenberg Bank, Research Division

Just a couple of questions left, please. Firstly, could you comment on Brigham's hedging policy and whether you’re likely to continue that? And secondly, perhaps comment on your sort of future strategy in this lower 48 unconventionals, have you now reached critical mass and likely to leave it there?

Torgrim Reitan

So I'll take the first one and then, John, you can prepare for the second one. On the hedging policy, we are not in a situation where we need to hedge on an asset-by-asset level. We have enough predictability in that we have cash available at all time and all of that. So it is not necessity for us to hedge our production as we go. So we have the sufficient capital and cash available, so we will think long term to develop these assets and these sets of assets. You are right, there is a hedging policy in place. Roughly what we do with the existing program and so on, we will have to revert at a later point in time. So on the future strategy, John, please?

John Knight

We see volumes available from these kinds of resource, not only in North America but also worldwide, increasing as technology and costs associated with extraction improve. We've seen both improvements in the Marcellus, and we've seen cost-effectiveness improve as the technology has been applied to liquids more generally. What you're seeing here is a deepening of our presence throughout the value chain, and one of the attractive things about this particular transaction is that it brings with us a more extensive land organization. We intend to continue to make inter-acquisitions in all the North American offshore well at present. And you'll recall from the record that both in the Marcellus and indeed in the Eagle Ford, we have made additional acquisitions and disposals with our partners as we have high-graded the acreage. You can expect us to continue to do that after this transaction, both in the Bakken, the Marcellus and the Eagle Ford.

Neill Morton - Berenberg Bank, Research Division

Do you see a sizable discreet deals?

John Knight

Well, we remain very focused on the opportunities here and will continue to evaluate these options as they come. I don't want to say more than I have about that. This is not the end of our North American unconventional strategy, let's put it that way.

Hilde Merete Nafstad

All right. Thank you very much. This then closes our Q&A session and our conference call here today. Any further questions can be directed to Statoil's Investor Relations department. Thank you all very much for your participation, and have a good day.

Operator

Thank you for your participation, ladies and gentlemen. You may now disconnect.

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Source: Brigham Exploration Co., Statoil ASA - M&A Call
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