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Cobalt International Energy, Inc. (NYSE:CIE)

Q2 2012 Earnings Call

July 31, 2012 11:00 AM ET

Executives

Joe Bryant – Chairman and CEO

John Wilkirson – EVP and CFO

Jim Farnsworth – Chief Exploration Officer

Analysts

Scott Willis – Credit Suisse

Evan Calio – Morgan Stanley

Matthew Portillo – Tudor, Pickering, Holt

Ryan Todd – Deutsche Bank

Brian Singer – Goldman Sachs

Al Stanton – RBC Capital Markets

Joe Allman – JP Morgan

Brendan Warn – Jefferies

Ed Westlake – Credit Suisse

Operator

Good day everyone, and welcome to Cobalt International Energy’s Second Quarter 2012 Conference Call. Just a reminder, today’s call is being recorded.

Before we get started, one housekeeping matter. This conference call includes forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and in Cobalt’s SEC filings, and we incorporate these by reference for this call.

At this time, for opening remarks and introduction, I would like to turn the call over to the Chairman and CEO of Cobalt, Mr. Joe Bryant. Please go ahead, sir.

Joe Bryant

Good morning, and thank you for joining us on Cobalt’s Second Quarter 2012 Earnings and Operational Update call. I’m joined on today’s call by John Wilkirson, our Chief Financial Officer; and I’ve asked Jim Farnsworth, our Chief Exploration Officer to join us to say a few words about the successful Cameia 2 results that we announced this morning. I’ll begin by reviewing our second quarter operational activity and results, and then I’ll turn the call over to John for a review of our financial results.

During the second quarter, we focused on five key objectives that we believe would deliver shareholder value. These include one, safely and successfully drilling our Cameia #2 Appraisal Well Offshore Angola to expand total debt and collecting critical well data. Two, continuing our technical evaluation and maturation of additional pre-salt prospects located within Blocks 9, 20 and 21 in Angola, as well as our Diaba block in Gabon. Three, initiating and progressing the development concept and approach for the Cameia field in anticipation of positive Cameia #2 well results.

Four, building our organizational capabilities particularly in our West Africa division, so that we can effectively and efficiently carryout the exciting drilling and development activities associated with our abundant West Africa portfolio, and by participating in the drilling wells with operated and non-operated from the deepwater Gulf of Mexico.

I’m happy to report that we’ve accomplished a great deal in these five key areas in the second quarter. I will now discuss these in more detail starting with our Cameia #2 results. Cameia 2 reached total debt of 5,475 meters on July 4th, without any safety and environmental incidents.

Of course, this is always the most important measure of success in all of our operations. Since reaching total debt, we have been conducting numerous wireline testing and evaluation operations in order to establish that we have achieved our key role objectives of one, establishing lateral continuity of the prolific reservoir that we discovered in Cameia #1. Two, determining if an oil-water contact existed on the Cameia structure, and three, drilling the entire pre-salt stratigraphic section of our basement to determine any evidence of deeper hydrocarbon charge in the system.

I’m going to let Jim, walk you through the results in a few minutes. But as we have announced this morning, we believe that we have successfully achieved the first two objectives and made significant progress on the third. Our 3D seismic data acquisition processing and evaluation efforts offshore West Africa continued to go very well.

Our seismic contractor completed the acquisition of approximately 4,200 square kilometers of 3D seismic data on Block 20 in May, and is now processing this data. We will remain confident that the progress made on the seismic data will allow us to drill the much anticipated long-term prospect in Block 20 in 2013.

In Block 21, where Cameia is located, we finalized our Block wide 3D seismic reprocessing efforts utilizing the 1990s existing seismic survey and our exploration staff has been diligently evaluating this data.

In addition, the Board has approved an extensive 3,000 square kilometer of 3D seismic acquisition program to assist that in our Cameia development planning, as well as prospect maturation in the Block. We will begin acquiring this survey this fall. Our prospect inventory remains robust and we are very excited about our next few prospects, Bicuar and Loengo in Block 21. To avoid any confusion, we previously have referred to Loengo as Cameia north, but the concessionaire has renamed this prospect Loengo.

In Block 9, we are continuing our prospect maturation efforts and preliminary well planning, which should allow us to be in a position to drill our first Block 9, pre-salt exploration well on the Loengo prospect in 2013.

With regard to the Diaba Block in Gabon, TOTAL, as operator, is nearing completion of its detailed seismic reprocessing of the recently acquired and process 3D seismic data over the most promising prospects in the block. They remain on targets for the first Diaba exploratory well on either Mango or Mango South with their contracted rig in early 2013.

Given the exceptional results of both Cameia 1 and Cameia 2 Cobalt in conjunction with our partners and the concessionaire has commenced development planning for Cameia. We anticipate employing a fairly development approach and are currently evaluating subsea design specifications and exploring FPSO opportunities for this development.

I believe that this early planning will help us to achieve production from Cameia in a timely manner. My best guess is that, we should – could be online as Cameia in early 2016, if we remain aligned with our partners and the concessionaire. I will have a lot more to say about this later in the call.

We also announced today that we’ve signed the rig contract with Petroserv SA for the new build deepwater semi-submersible drilling rig SSV Catarina. The rig is expected to be in the field early in the first quarter of 2013, and the term of the contract is three years with two one-year extensions.

In addition, we expect that the Ocean Confidence will return to Angola by year-end to recommence drilling operations for us in Block 21. We have two firm slots remains on the Ocean confidence following the completion of our Cameia 2 well. Our plan calls for continuous two rig program in Blocks 9, 20 and 21, for several years beginning in early 2013.

Of course, the SSV Catarina will be one of these rigs and we will provide more information on the second long-term rig when we can.

As you can see, our operations in West Africa has grown given our deep and growing inventory of exciting pre-salt prospects, as well as our continued drilling success with Cameia. In order to effectively and efficiently manage these operations, we have increased our West Africa division by over 20 employees and we’ll continue to hire additional employees and contractors that will be needed to carry out the activity set that I have just described.

This growth – they separated the move to a larger and more capable head counts for us, while our Angolan operations in a longer to accommodate this near-term growth. Now, I will move to the deepwater Gulf of Mexico.

As I announced in Cobalt’s first quarter call, Cobalt participated in a successful Anadarko-operated Heidelberg #3 appraisal well and a Heidelberg #3 sidetrack, both of which confirmed the commerciality of the Heidelberg Miocene field.

The Heidelberg partnership is continuing the pre-FEED work and is evaluating development solutions with the objective of advancing commercialization of Heidelberg as a standalone development.

Of course, we completed drilling operations for Ligurian 2 in the second quarter. Needless to say, we were extremely disappointed with the outcome of the well. We do not anticipate drilling any follow-up wells on the Ligurian structure. We spud the North Platte #1 exploratory well on Garden Banks Block 859 on July3rd with the Ensco 8503 drilling rig. The Cobalt-operated North Platte prospect is a four-way inboard Lower Tertiary structure that lies in the heart of the emerging inboard Lower Tertiary play.

Cobalt holds a dominant position in its exciting play with numerous follow-on inboard Lower Tertiary exploratory prospects. We anticipate that we will announce the results of this well in late 2012.

In addition to drilling our North Platte well, we are participating in the Anadarko-operated Shenandoah #2 appraisal well, which was spud on June 29. This well will appraise the Shenandoah inboard Lower Tertiary oil discovery announced in 2009, where more than 300 feet of net oil pay was discovered. We anticipate that the results of this well will also be announced in late 2012.

In preparation, for drilling the next well in Cobalt’s business plan, our team is seeking approval of the Aegean #1 well drilling permit, as well as the Ardennes exploration permit in order to ensure that we have all approvals necessary to move the Ensco 8503 rig from one well operation to the next with no costly rig standby time.

Well, this process continues to have its challenges and approvals continue to take much longer than in the past. We are encouraged by the fact that we are seeing improvements in both the predictability and what is required as well as the level of cooperation between ourselves in the regulatory agency.

The federal government held its first Central Gulf of Mexico lease sales, since the Macondo incident on June 20th. Cobalt participated in this sale, and there is a high better on 10 blocks, which represented a total net bid about of approximately $17 million. These blocks, if awarded, will expand our Gulf of Mexico asset inventory by adding two new prospects to our inventory, and by adding adjacent blocks the two of our existing prospects.

We are excited about the quality and quantity of our assets in both West Africa and the Gulf of Mexico where we will continue to drill our high potential exploratory prospects and appraisal discoveries in order to move these discovered fields to production.

I will now turn the call over to John for a few words on or financial results.

John Wilkirson

As reported in this morning’s release, for the second quarter of 2012, Cobalt’s net loss was a $141 million, or $0.35 per basic and diluted share of this $99 million relates to impairment and dry hole expense associated with Ligurian exploration prospect including $69 million that was spent in prior quarters. Excluding the Ligurian related charges our net loss per share for the second quarter would have been roughly equal to the past few quarters in the current fiscal consists of a loss of $0.10 per share.

Our cash expenditures for the quarter excluding working capital charges were approximately $124 million about a $100 million of this amount was associated with drilling activities in Angola and the Gulf of Mexico. For the full year, our cash expenditure forecast excluding working capital changes remains unchanged at $550 million to $650 million. For the third quarter cash expenditures we expect approximately the same level of expenditures at the second quarter with the primary expenditures being drilling activities, both offshore Angola and in the Gulf of Mexico.

Our balance sheet remains strong, with approximately $1.7 billion consisting of $1.2 billion of unrestricted cash investments, plus $550 million of cash in designated for future operations held in escrow and collateralized letters of credit. In addition, and not reported on our balance sheet, for the joint promote funds of $151 billion related to our Gulf of Mexico program with TOTAL, we continue to have no debt.

We expect that our remaining 2012 quarterly earnings will align with our cash expenditure as with the second quarter, the primary earnings uncertainty will be either the capitalization or expensing of cost following the results of individual exploration wells. In addition, we anticipate having approximately $4 million to $6 million of non-drilling, non-cash related items each quarter.

I’ll now turn the call back to Joe.

Joe Bryant

Thanks John for those comments. I’d now like Jim to say a few words about our Cameia #2 success. Jim?

Jim Farnsworth

As we have previously stated, we had three objectives for Cameia #2. One to better define and understand the lateral continuity between the Cameia #1 discovery and the Cameia #2 location, two to determine oil saturation extent deep to be on lowest known oil. We observe the Cameia #1, and three, to determine whether an additional deeper separate hydrocarbon bearing section and lowest in risk exists above basement. Based upon the information available today, we believe that we have been successful in the first two objectives that made significant progress in the third.

Furthermore, we now have evidenced of extensive hydrocarbon saturation in the Cameia field, which make our promise for addition reservoirs in greater Cameia and our acreage in the Kwanza basin.

Regarding our first objective, we had conclusive evidence of lateral continuity of a very high quality offers significant amount of reservoir system between Cameia #1 located in the center of the field and Cameia #2, which is drilled on the Southern side 3.5 kilometers away.

The pressure grade that we measured in the many (inaudible) that Cameia #2 is identical to that measured in Cameia #1. In addition, the fluid that we produced with MBT logging tools in this interval at Cameia #2 appears to be identical for that, which we produced in Cameia #1. We see the same highly fractured and leggy pay section Cameia #2 that we saw in Cameia #1.

We calculate that the net pay in Cameia #2 is about one-third of what was penetrated at the centrally positioned #1 well, which is not unexpected for flank well, and the carbonate reservoir. The pays that we have explained in number two appears to be ever best prolific as the best pay that we discovered and tested in Cameia #1.

Let me now turn to our second objective, which was determined as oil exist on a Cameia structure below the oil that we discovered at Cameia #1. We can now confirm that the oil has positively been identified in Cameia #2 at least a 135 meters or 440 feet deeper than the oil found in Cameia #1. This has been confirmed through (inaudible) direct oil sampling.

The preliminary analysis of pressures and oil samples indicates that the oil in the reservoir are both different and separate in a main pay in enrollment to Cameia #1 and Cameia #2.

Based upon our preliminary analysis we believe the both the gravity and gas oil ratio or geo water of the oil in this middle zone is lower than the very light oil or condensate tested in the upper zones of Cameia #1 and #2 this is indicative of a more conventional type of oil.

Our preliminary analysis also indicates that the middle reservoir – for the middle zone reservoirs is of lower quality for the upper zone, and may not be commercial with the Cameia #2 location. You will know that we will be wondering of what does this mean?

Well, while it’s still very early days in our analysis and results, we believe it means that we have down an inter formational field between the upper and middle zones. And these separate reservoirs are not constrained by the area or height of the base of salt closure. It also just a strong indication of the basins robust hydrocarbon generate potential. In fact, after having now drilled two deep pre-salt wells, we still have not identified an oil-water contact in Cameia field. All of this is very positive news for Cameia, as well as further exploration of the Kwanza Basin.

Our third objective was to drill all the way to basement and determine whether a deeper separate hydrocarbon-bearing section exists and lower syn-rift. This deep (inaudible) was not penetrated by the Cameia #1 well and represents a major exploration target both in Cameia and the rest of the Kwanza pre-salt basin.

We successfully drilled all the way through this deepest zone, and reached total depth in basement. We are now confident that we have seen the entire stratigraphic section over the center of the Cameia field. We’ve also seen the deepest lower syn-rift interval strong evidence of the field and immediately below it as down which we believe that’s been charged with and likely still contains oil.

Unfortunately, due to whole problems in this interval, our login data was not conclusive and we can now at this time determine at the indicative hydrocarbons or commercial. We will be conducting a production drill stem test and this is down in the near future to avoid further into this third new potential zone. The result of this test will be announced when it’s available.

Looking beyond Cameia on exploration prospective, these results have important applications for our entire pre-salt inventory. The deeper fields on reservoirs are confirmed through further testing, it opens of a deeper pre-salt play with potentially equal or greater importance to what was discovered in the upper zones of Cameia #1 and to affirm by Cameia #2.

The actual results and the data we have obtained from these two wells have exceeded our expectations. We have conclusively proven fuel capacity not only results, but numerous seal in the deeper sections, which provides traps for global potential reservoir for low zone.

We have produced oil not only from the main prolific Cameia favorable, but also much deeper in the syn-rift sections. Finally, we have found strong indications of hydrocarbons and lower syn-rift, which will require further testing to understand commerciality. We have a tremendous amount of work to do as we explore this new basin, but we are excited about our track record thus far.

I will now turn the call back over to Joe.

Joe Bryant

Thanks, Jim. So I’ll summarize our fair portions of today’s call. As you all have noted, Cobalt’s operations are gaining considerable momentum in West Africa and the Gulf of Mexico. We are very pleased and excited with results of the Cameia #2 well. We have confirmed what we believe as a large hydrocarbon accumulation in the Cameia field.

The data that we have obtained from this appraisal well is nothing short of a windfall. The results will go a long way for us and our partners to move towards the sanction of the phase development project at year end or in early 2013. The addition of the Petroserv SSV Catarina rig will also allow us to maintain a steady exploration and appraisal program for years to come.

We are on track with our exploration program in Gabon in early 2013. We continue to build our organizational capabilities to successfully execute both our West Africa and Gulf of Mexico programs in a safe and efficient manner. We continued to be excited about our Gulf of Mexico portfolio, and look forward to announcing the results from both the North Platte and Shenandoah wells by the end of the year.

I will now look forward to taking any questions that you have for myself, Jim or John. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session (Operator Instructions) Our first question comes from the line of Ed Westlake with Credit Suisse. Please proceed with your question.

Scott Willis – Credit Suisse

Hi, this is Scott Willis standing in for Ed. I was hoping you might be able to give us an estimate of the net pay in the three different zones?

Joe Bryant

Good morning, Scott. Yeah, this is Joe. I will ask Jim to walk you through that. Go ahead, Jim.

Jim Farnsworth

Certainly. Take very along to get to that question. Well, based upon our preliminary analysis of our login data, we have about 100 meters of net pay Cameia #2. This number really could increase or decrease by as much as 20% upon our final test results and analysis. The lot of data that we’ve acquired and we’re still working our way through it.

Scott Willis – Credit Suisse

Gotcha. Okay and then was I correct in taking your comments as the raw quality and the hydrocarbon type in the separate structure was different than the Cameia #1?

Joe Bryant

Let me just – let me go back to that first part of that question I want to emphasize that, that 100 meters was at the upper zone.

Scott Willis – Credit Suisse

Okay.

Joe Bryant

So the other zone – the middle and lower zone are completely separate and have separate seals and that looks certainly looks in the middle zone has a different oil quality as well.

Scott Willis – Credit Suisse

Okay and that doesn’t extend to the lower zone that you still have to do more testing?

Joe Bryant

Yes, we are still in the process as Joe mentioned preparing to test the lowest smoke zone.

Scott Willis – Credit Suisse

Okay, all right. And I was wondering if you are able to discuss any of the potential capital cost for the early production system or kind of what you think the potential size of the FPSO might be at this point?

Joe Bryant

We are working on all of those costs right now, and nominally the FPSOs or things like this or around 75 barrels to 110,000 barrels a day we had not landed on the piece of equipment that we will use in the field yet. So consequently we can’t really quote a development cost for this I expect to be able to that later in the fall.

Scott Willis – Credit Suisse

Okay, great. Thanks for your time.

Joe Bryant

Yeah, thank you Scott.

Operator

Our next question comes from the line of Evan Calio of Morgan Stanley. Please proceed with your question.

Evan Calio – Morgan Stanley

Good morning guys, congratulations on the results I know you have made summer vacations for some shareholders a bit better. On the net pay that you reported I guess can you give us any help on the volumetric implications I know you either giving us a new area under closure or provide any estimate of the slow per reservoir parameters to kind of allow us to estimate what that 100 feet might add?

Joe Bryant

Yes, it’s 100 meters.

Evan Calio – Morgan Stanley

100 meters sorry.

Joe Bryant

Not 100 feet. And again just in the upper zone. But let me just describe kind of how we look at what the implications are at this will result on kind of question of the areas and closure, I am not going to give you a precise answer, I kind of warn you at upfront. So what we have now confirmed is oil presence, well the basis of closure still point, and we still not seeing water in the structure. And so – in essence we still do not know what controls the down dip and aerial extent of the field.

We also don’t know what the lateral variations in the reservoir basis and qualities in the middle and the deeper zone, we confirm lateral continuity in the upper zone. I will remind you that – in these deeper zones represents entirely new oil containers or accumulations and you were not penetrating Cameia #1, so it’s very early days especially in the middle of horizon. What we do now is because of the shape of the Cameia structure the deeper the oil columns and the deeper the seals, the larger the potential area of closure. So what we now found our oil saturations, from the basis of all the way down the basement essentially the entire pre-salt section.

Something we – we always suspected maybe (inaudible) that these deeper zone could hold significant potential if the seals are present and we now clearly seeing these oil, sorry the seals, and saturations at depth. So I can give you kind of sense, our sense that the deeper we find oil the larger the structure. But we are prepared this time to say how big is that structure and part because we simply don’t know.

Evan Calio – Morgan Stanley

And the original D&M report didn’t include any volumetric assumptions for – for the syn-rift. And then I guess secondly, that’s – the syn-rift is in terms of the DST in August, are you testing the incremental footage in the top reservoirs or is there you are solely isolating the deeper zones for that august test?

John Wilkirson

Our first priority and our first intent is to test that deeper zone going at least about and it’s also the most significant. And that as I mentioned kind of the deeper the oil, the larger the structure amplifications.

Evan Calio – Morgan Stanley

Right. And just confirmation that in terms of – there was no, in your original D&M report there were no estimates that they did not include any kind of syn-rift portion of the reservoir, they were even in this middle kind of portion, is that correct?

John Wilkirson

The evaluation of that time was fairly simplistic about what we mentioned and what we are learning, because this is reservoirs.

Evan Calio – Morgan Stanley

And then just one last from me if you would does this, do the results of this well change and I know obviously you have to consult with Sonangol but does it change in next steps in terms of either your next exploration well and the structure or the development to timing and only with that, thanks.

Joe Bryant

I think it confirms are new on the development timing and certainly supports our plans to move forward to develop.

John Wilkirson

Well this is John, just to add, that you are going to see I think two different things happened now on Angola, one will be pretty intensive effort on development understanding of the greater Cameia field as well as the continued intense effort on exploration of prospects that are in Blocks 9, 20 and 21.

Evan Calio – Morgan Stanley

Understood. Appreciate it guys.

Joe Bryant

Yeah, thanks Evan.

Operator

Our next question comes from the line of Matt Portillo of Tudor, Pickering, Holt. Please proceed with your question.

Matthew Portillo – Tudor, Pickering, Holt

Good morning, guys, just a couple of quick questions from me. I was wondering if you could help to clarify the breakdown on the upper middle and lower sections of the reservoir and in the Cameia 1 well, if that was purely just the upper section of the reservoir that you were testing and essentially with the Cameia 2 well where you’ve lowered the known oil contact if you are actually moving into the middle section, just trying to get some understanding of what the second well actually showed you from a data perspective?

And then secondly, just on the aerial extent, I know that you mentioned not giving a specific number, but I was hoping to see if you could clarify a little bit if Cameia 2 has increased your confidence level above the 7,500 acres and if you could give us directionally any indication of how much figure the aerial extent for the upper reservoir has moved for you guys?

Joe Bryant

Okay. Obviously, I’ll address your first question. So the Cameia #1 well, we believe saw just the upper zone. It may have just the middle zone but the upper zone is what we tested, what we flow tested and that’s the result of seeing Cameia #2 and obviously one of the big objectives of Cameia #2 was to test those deeper zones that we have been successful in evaluating those and continue to evaluate those.

Now again in terms of (inaudible) all I could do is going to give you the guidance the deeper we find oil, the deeper we find fuels, the greater likelihood there is that the area and the closure get larger, in fact what we know is because of the basis how closure is limited, the fact we found deeper oil and that means that the area under closure expand beyond just the basis of closure.

Matthew Portillo – Tudor, Pickering, Holt

And just a quick follow up to that. So as we look at kind of the graphical diagram you guys have provided in your presentations, so essentially the way that we should think about that is that middle section on the Cameia if you will is the incremental net pay that you guys added, or I guess where the oil contact was lowered it was really in that middle section of the well, and so you basically went through the feel as you kind of reached the same depth of Cameia 1, is that the right way to think about it here?

Joe Bryant

I think a part, I think the picture that you are referencing we probably need to add another seal. So rather than just being the two zones that you – that we have described before, we now have at least three zones. And by having more seals in more zones that allows that dark area to potentially expand.

Again I will add that, I hope you all understand that certainly this is the deepest well that we know up in the basin, it’s the first time that any one has drilled, I think the entire section all the way from solid to basement and so a lot of what we as explorers do is compare the model that we now have versus the model that we prognosed before we drill the well. And so this is really hot up the press data’s going to take Jim and his team sometime to sort all these out and we don’t have all the answers today but as I said earlier it’s a true treasure provost data that we got to work our way through.

Matthew Portillo – Tudor, Pickering, Holt

Great. And then just last question from me on the (inaudible) planning will the equipment be in place because I know in the first test there was some restrictions to the flow rate are you guys planning on putting an equipment to potentially get a cleaner flow here or how we should think about kind of the expectation around that?

Joe Bryant

it will be the same flow test data it’s really constrained by how much equipment and how big the flair booms are on the rig itself – it’s just tough to get a big flow rate with a gassy fluid tested on the drilling rigs. So that will be about the same – that will be exactly the same equipment, I can’t forecast because slow test it.

Matthew Portillo – Tudor, Pickering, Holt

Thank you, very much appreciated.

Operator

Our next question comes from the line of Ryan Todd with Deutsche Bank. Please proceed with your question.

Ryan Todd – Deutsche Bank

Thanks. Good morning guys.

Joe Bryant

Ryan good morning.

Ryan Todd – Deutsche Bank

A couple more quick questions, the first as you are going to be doing, is that you would tell this primarily the test at lower zone, is that just the lower the lowest of the three zone, that you testing both lower and middle zone.

Joe Bryant

Yeah, let me answer that. They test that we’re going to conduct is dissolve that’s immediately above basement. And based on that test we’ll go from there, but that is, at this point, the only test that we anticipate doing on the well jumping to the top of the well with section that Jim’s talked about we see no point in testing that section because the rock is identical to what we saw in Cameia #1 so we wouldn’t achieved any new information on that I might have Jim speak to what we will be thinking about on that middle zone and where we’ll chase that around the field in the basin Jim do you want to handle that.

Jim Farnsworth

Sure. So the significance of that middle zone really is two folded one is since there is oil there it does expand the footprint the real footprint of the known oil closure and so that – that has big impact to both the Cameia we think and certainly it offers an additional target in our other structures in other prospects of the basin. Now as I mentioned the realizable quality is not as good as what we saw in the upper zone however we’re not upon thinking about that if we had seen this middle zone in the first well and only seen this middle zones in our first exploration well. I would have been extremely happy as it will confirm that the structure of the packed and there is a oil reservoir there that’s filled with oil.

It’s only a comparison of what we have seen in the upper zone and that colors our view. But, I guess finally trying to then take this penetration at this location in all these three zones and then extrapolate them into the rest of structure is what we will be doing next. And as part of that effort Phil mentioned our plan to soon – a new seismic survey over this area and that will help us tremendously to integrate these well to – well result now. And essentially appraise and evaluate through seismic data.

Ryan Todd – Deutsche Bank

Okay. And on the 135 meters down to lower zone, was that all the way down to basement or is that all the way down to the bottom of the third zone?

Jim Farnsworth

And we’re just down to the bottom of the second zone.

Ryan Todd – Deutsche Bank

Okay.

Joe Bryant

Actually not even to the bottom yet there maybe additional or below that but this is the lowest point where we had actually collected a sample of oil to this so far. So I would be in the zone two the middle zone.

Ryan Todd – Deutsche Bank

And in terms of so you don’t need to test the upper zone more you’re testing the lower zone I mean in terms of go forward plan in the middle zone what’s the – is that can be something that waits for the next appraisal well or is that’s the right way to think about?

Joe Bryant

More than likely we’ll wait for the next appraisal well or perhaps a future development well and as I mentioned I really want to get hold to that new seismic data and from a map that is laterally around on that structure. It certainly will also be a target of future wells and other structures.

John Wilkirson

I would just add to that the commercialization of the Cameia field or the phase development that we’re considering is not dependent upon that second zone. So we’ll continue our valuation and make a decision upon development to announce the second zone being the integral to that at this point.

Ryan Todd – Deutsche Bank

Great, and on the – the top zone which the quality look just Cameia #1, for the net of growth point of view was the growth thickness relative to now – whether it’s similar to what you saw in Cameia #1?

Joe Bryant

We haven’t actually, I don’t have that date in front of me and we haven’t release that data either. And so all these information you can get the draw line of how much (inaudible).

Ryan Todd – Deutsche Bank

Right. Great and I guess one last one on the aerial extent I know, you take a multiple shot today, I mean you referenced that based on what you are seeing now, that the potential for oil there and reservoir extends beyond the – could be extend beyond the south closure, does the 75 and 125,000 acre range that we saw before was that limited at the south closure or not?

Joe Bryant

On the small range, yes that was essentially the bound and the south closure.

Ryan Todd – Deutsche Bank

Was that – sorry was started with the lower end of that range or the?

Joe Bryant

The lower end, I’m sorry.

Ryan Todd – Deutsche Bank

Okay.

Joe Bryant

That’s what tags the lower end.

Ryan Todd – Deutsche Bank

Great, okay, I will leave it at there. Thanks guys.

Joe Bryant

Thanks.

Operator

(Operator Instructions). Our next question comes from the line of Brian Singer with Goldman Sachs. Please proceed with your question.

Brian Singer – Goldman Sachs

Thanks good morning.

Joe Bryant

Good morning, Brain.

Brian Singer – Goldman Sachs

I’m going back to the implications about the debt to pay in the upper zone and the existence of the middle zone on Cameia #1. Can you just kind of talk to whether you see if that the Cameia #1 upper zone could extend down another 135 meters and whether then be a middle zone, I think can you just talk a little bit more about the implication from Cameia #2 to Cameia #1 on the 135 meter additional depth that exist in the middle zone.

Joe Bryant

Yeah, I think you are probably spot on Brian, I think if we could have drilled deeper in Cameia #1 we could well have seen a deeper oil saturation in that upper zone and seen a second zone as well, actually could have seen a third zone also. So we think within the upper zone we could see a deeper oil zone and certainly we’d hope we’d see the zones and zones the middle zone and the deeper zone as well.

Brian Singer – Goldman Sachs

Did you mentioned in response to an earlier question and it might be one of the comment that you – you feel like you had – you had maybe seen the middle zone in Cameia #1?

Joe Bryant

Yeah, it’s subject to interpretation still, because we didn’t see the entire section as we might have just seen the upper part of it, or maybe the seal between the zone 1 and the zone 2.

Brian Singer – Goldman Sachs

But I guess the point would be that, you feel like you did not find the lower limits of the upper zone when you dropped he Cameia 1 in the pay that you’ve calculated?

Joe Bryant

That’s great.

Brian Singer – Goldman Sachs

Okay. And when we look at the middle zone at Cameia 2, what were the reservoir characteristics that made it potentially non-commercial there and when might that be different elsewhere in the Cameia field?

Joe Bryant

Because to the degree of fracturing and the amount of fine or great material in the reservoir. Again these are kind of my assumptions at this point, we are still evaluating that section. But it’s just as less poor space and less ability as our interpretation.

Brian Singer – Goldman Sachs

And you’ve heard that could be unique to Cameia 2, or you think that there is the potential that could be commercial or that could be commercial elsewhere in Cameia?

Joe Bryant

We certainly think there is potential for to be more commercial elsewhere.

Brian Singer – Goldman Sachs

Okay, thanks. And lastly, was the lack of conclusivity regarding the commerciality in the deeper zone on Cameia 2 a function of some limitation beginning the data you needed or whether just that the characteristics that you saw made in a close call with (inaudible).

Joe Bryant

It was more the former that simply we couldn’t get all the log and logging tools which we implied to had down in that deepest part of the section for because of some whole conditions. And that’s what we have to go in with the DST and gets kind of the ultimate data.

Brian Singer – Goldman Sachs

Got it. Great, thank you.

Joe Bryant

Thanks, Brian.

Operator

Our next question comes from the line of Al Stanton with RBC Capital Markets. Please proceed with your question.

Al Stanton – RBC Capital Markets

Yes, good morning. I’ve got two questions, one on the zoology and one on 2013 CapEx. Just on the zoology just trying to keep it simple. But in terms of, should we assume that there is a South shale play at the top and then there is two plays below that you have been mapping across the basin, I think it is fairly more complicated it is the good porosity that you are seeing in the upper wise play associated with some lows and highs is it may be it has porosity that you are only seeing on structural highs rather than the parts of the basin.

And then just to give John a question, if I look at the 2013 exploration campaign, there is some eight exploration wells there. If I deal back of them for a calculation as to what that’s going to cost, how close am I going to beat your CapEx forecast the next year?

Joe Bryant

I will take the first one. Obviously, we’ve only drilled on structural highs, so that I think is somewhat bias because of that. But I would say that I think it’s more – there is more to it which is structural highs and high porosity because we’ve also drilled in a structural high for the middle and lower zone as well. So what we know for Brazil is that we’ve seen repeated successes on these both base self closures and in some of the fields in Brazil deeper producing reservoirs as well.

Jim Farnsworth

I don’t get to your question.

Al Stanton – RBC Capital Markets

Yeah I – yes you did but in addition to that I mean you when you said that the structural closure you are drilling out with the self structure closure you are not indicating whether there any start traffic element to this it just auto sales work at different levels.

Jim Farnsworth

That’s correct and if there maybe actually be additional seal just below the base of (inaudible) could potentially expand it extend it beyond the base of self closure in the upper zone we don’t know that yet/

Al Stanton – RBC Capital Markets

Okay. Thank you.

John Wilkirson

Philip, it’s John. As far 2013, we haven’t updated recently our numbers for 2013, obviously, there was some projections to what the overall well cost will be in the activity as we most likely progress the (inaudible) development as well as Heidelberg and its go to the multiple reprogram the cost will be probably higher than what we’ve said, but we know everything at this point that we’ve actually released.

Al Stanton – RBC Capital Markets

Okay.

Operator

Our next question comes from the line of Joe Allman with JP Morgan. Please proceed with your question.

Joe Allman – JP Morgan

Yes thank you, hi everybody.

Joe Bryant

Good morning Joe.

Joe Allman – JP Morgan

Just to clarify so Cameia #1 the net you’d pay was about 900 and a Cameia #2 – and all that 900 was in the upper zone and Cameia #2 you’re seeing upper zone net pay is about 300. Just want to clarify that?

Joe Bryant

That’s correct.

Joe Allman – JP Morgan

Okay great. And so in the upper zone, is there some limit, is there some down-dip limit, if there is some pinch out or something when you talk about not seeing the oil-water contracts, is that specific to the upper zone or you actually talking more about the middle zone?

Joe Bryant

We haven’t seen any oil water contacts in any of the zone, that’s we are aware of. So you just remember that we drilled Cameia #1 pretty close to the center punching the structure and the Cobalt bound and then Cameia #2 is drilled to the Southeast kind of only closer to the edge of this bound and we did not see an oil-water contract in either one.

Joe Allman – JP Morgan

Gotcha, okay. So do you okay, so do you really don’t – at this point you don’t- you had no idea about the down-dip limit of this upper zone.

Joe Bryant

That’s right.

Joe Allman – JP Morgan

Okay. And then in terms of the size of the discovery here I mean you’re clearly, I mean you are indicating a commercial discovery here and you’re going to move forward development. Now, I think looking at some of the (inaudible) am I correct that the thickness, the net mean thickness that was in over to somewhere around 490 feet of net mean, Cameia #1 you got 900, in the upper Cameia #2 300. Like what does that tell us about for the net mean thickness overall in this field?

Joe Bryant

While, I think it could be like every field the net mean pay thickness varies across that field and that’s a problem with the reservoir calculation or reserves calculations, we have essentially one numbers input, it does vary from across the structure.

Joe Allman – JP Morgan

Gotcha. And based on the theory you have, what is the size about the size of this field at this point versus what was in the – for the regular previous (inaudible)?

Joe Bryant

Yeah, I don’t have the answer for you to see at. We are clearly very encouraged and enthused by what we found, but it’s going to take more data, especially in the middle of lower zone for us to get to excellent calculation of what it could be.

Joe Allman – JP Morgan

Gotcha okay, and if I have a table in front of me and one column is good and then the next column is disappointing. So based on the (inaudible) to like what’s good so far and then what would disappoint so far?

Joe Bryant

What’s good is, we have confirmed that that upper zone will continue to Cameia #2 and continues in a substantial way and there is no oil-water contract identified there. What’s also great is we’ve found that little zone with another seal with a different type oil and that is substantial for expanding the footprint of the fuel. And number three, was – it’s still out for evaluation but what we do know is we found another seal and we found another potential reservoir depth which also appears to be hydrocarbon saturated what we need to test is. John I’m struggling, a little bit with

Jim Farnsworth

I would also add on what’s good side is that. The quality of the good pay in the upper zone is every bit as good in Cameia #2 as it is in Cameia #1, they would also add based on our pressure analysis that it’s unprecedented I think in our careers may be not in others to see correlation between pressure gradient in Cameia #1 to Cameia #2 which suggest maybe as one big tank, the oil itself looks to be very correlative that I think lastly on the positives as Jim as said several times we have not seen an obvious indication of water in this structure which has a tremendous amount of about the hydrocarbon generating potentially of this basin and the fact that at least at this location if oil was generated in the basin it’s probably still in the basin, Jim would you...

Joe Bryant

Yeah, I mean what ultimately that layer of salt there really doesn’t work and then the other fields seem to be working equally as well.

Joe Allman – JP Morgan

Gotcha. Okay, how about the disappointing curve?

Jim Farnsworth

Joe any disappointments?

Joe Bryant

Well, I was disappointed that if we got into that lower zone and it was pretty clear based on our drilling performance and our logging while drilling, when we got into that lower zone it was a new world for us. And in the fact that we couldn’t get definitive logging data in that interval despite several attempts was disappointing and we’ll get data on in a drill stem test here but we’ve all been on the edge of our seats now for three weeks or so with that carrot dangling in front of us trying to understand what is the reservoir potential that lower zone I will add that whether that zone flows are not is almost not as important as the fact of the indications we have that it does continue in hydrocarbons and the suggestion that the hydrocarbons that contains royally so Jim do you have count?

Jim Farnsworth

Well I think it confirms that deeper section is going to be a serious target for future exploration wells on the basin. That looks be potentially be very significant.

Joe Allman – JP Morgan

That’s right. Any other disappointments in that column?

Jim Farnsworth

well, it gives at a best had we drilled this well first. This would have been one of the best wells any of those been drilled the fact that we drilled the second fails in comparison, in some ways to Cameia #1, but itself is a spectacular success.

Joe Allman – JP Morgan

Okay, great, it’s helpful. And then just in terms of the development, what’s the minimum size discovery, you need to pursue a development?

Joe Bryant

We’ve done quite a bit of work on that, I can say that it’s definitive, but I think something around the 150 million barrels recoverable as what we would say is going to be a commercial here and we certainly believe we’re north of that threshold.

Joe Allman – JP Morgan

Gotcha. And then Joe any – so can you give us some range or you think you can found here on a low-end you think you found this could be but don’t know.

Joe Bryant

George, I just don’t know, and well we haven’t said on the call that we literally submitted the case again this well yesterday. That’s how fresh all of this data is. Jim and his team, Van and his team have just been working 24 hours a day for the last month trying to integrate all of the data that we have seen and it’s a massive amount of data. So it’s just going to take us a while before we form a consensus about what we got here.

Joe Allman – JP Morgan

Okay, it’s helpful. And then lastly, what’s the cost of this flow test?

Joe Bryant

The cost of the well.

Joe Allman – JP Morgan

No sorry, the cost of the flow test and then actually the cost of the well will be great too. What’s the cost of the...

Joe Bryant

The cost of the well, it’s been on well about 150 or 160 days, so multiply at that times a million and that’s about the well cost so far. The cost of the flow test out here, they take say three to four weeks again about a $1 million a day, so here about $20 million to $25 million or so.

Joe Allman – JP Morgan

Okay, right, very helpful thanks guys.

Joe Bryant

Yeah, thanks.

Operator

Our next question comes from the line of Brendan Warn with Jefferies. Please proceed with your question.

Brendan Warn – Jefferies

Hi, thanks guys. As you can give me okay, just couple of this and just follow up on the middle zone and considering the surprise of that and can you just clarify in terms of tie back to seismic and I appreciate it might too preliminary, but I mean in terms of what’s providing the track for this middle zone is that visible in seismic, and just secondly with the third or the lower zone the syn-rift, again how do you believe this is coming on the seismic, in seismic interpretation on just second question will I expect to Cameia #1 and I appreciate now you got more time and more sort of led data. And can you give us sort of any updates on for the geological oil qualities now that you should have full led results back.

Jim Farnsworth

Okay, Bob, Joe just mentioned this is a right in the middle of trying to integrate all the data and we still don’t have all the data in. For instance, things like cores are still starting to or just started to come in now. However, it’s always interesting, and have few to drill exploration well and we go back look at the seismic data you started to see things, which you did realize where they are before, we are right in the middle of that process now what we’re trying to map and having some early indication of success of mapping these seals.

I think what we are going need that, is that new seismic data that I mentioned to be older map the reservoir changes and face these changes away from well bore and between the well bores and beyond that to rest of the structure and that’s going to take a little bit of time. The second question was around GOIs can you just ask that again please?

Brendan Warn – Jefferies

I’ll just – now you should have full lab results back on the original Cameia #1 oil in terms of quality GOI and any update from the capital ratios?

Joe Bryant

No, there is no update related. As Joe mentioned, the Cameia #2 upper zone the pressures there suggest identical real type and also looks like it’s also communication as well. So no changes there with regards to the upper zone.

Brendan Warn – Jefferies

Okay, thanks a lot. Just lastly, just in terms of defining oil water contact. What do you believe your next step will be?

Joe Bryant

Well, I think in Cameia the next step will be proceeding with the development and it’s possible that some of that developed wells will see an oil water contact but it’s also based upon the results of the two wells possible with those early developments wells, won’t seen a lot of contact. And at some point the future will have to go up and look for it, with the well that steps out further.

Brendan Warn – Jefferies

Okay, thank you.

Operator

Our next question is a follow-up question from Ed Westlake with Credit Suisse. Please proceed with your question.

Ed Westlake – Credit Suisse

Hey good morning, I hope you can hear me at this time. Just on the upper rock quality I think in the D&M report it was sort of a yield of about I think a 102 barrels per acre/foot obviously we got some extra data about the net mean. But the rock quality is good across the two wells that you’ve drilled so far. I mean, from your expectations, do you think you could beat that sort of a pre-expectation and if so, I mean has it a guess that range what that number could turn out to be.

Joe Bryant

Yeah, I am not going to have to guess to be honest with you right now. We still have a lot of data to go through and there is a lot of things that go into that recovery factor and includes actually with the refreshable quality fluid type pressures and I’m just not ready to give you the numbers, I’m sorry about that.

Ed Westlake – Credit Suisse

That’s fine. And then in terms of the hashed green area which you have on your slides, which represents the sort of broader flanks out in the lower zones, based on what you’ve seen so for, have you de-risked in your sense that those that whole zone contains oil obviously with different rock qualities?

Joe Bryant

Yeah, I don’t know the whole zone certainly it looks like the entire section is oil saturated and where there is porosity and permeability, it’s going to be cyclical. And of course that deepest zone we don’t have it, on that yet. So we are still waiting for that of the DSP. But again conceptually, if you think about the diagram that’s in our slide pack, it’s – it looks we’re along those lines. But again as I mentioned and emphasized, I can’t give you the aerial expense, because we are limited by not knowing where the oil word of contacts are.

Ed Westlake – Credit Suisse

Right. Okay, thank you very much.

Operator

Our last question for today is a follow-up question from the line of Matt Portillo, Tudor, Pickering, Holt. Please proceed with your question.

Matthew Portillo – Tudor, Pickering, Holt

One quick follow-up question. Just on the Cameia 2 well, could you give us an idea of the growth column, oil column here relative to Cameia 1, just trying to get a sense of what that gross number would be from the well?

Joe Bryant

Yeah, I can’t give you that. But yes, we’ve considered to be competitive in terms of information. But I would just emphasize it’s basically from a base of salt to the top of the basement.

Matthew Portillo – Tudor, Pickering, Holt

Thank you.

Joe Bryant

The center column.

Operator

I would now like to turn the floor back over to management for closing comments.

Joe Bryant

Thank you very much, and I do appreciate everyone’s patience today as we try to describe what results we’ve obtained from Cameia #2. It is seemly complicated situation. It’s actually going to play out I think in the next few months for us, in the next few wells and we’re trying give them understanding of how all of this looks and be able to describe it to all of our investors in a fairly simple way.

I have to say the encouraging thing here is that, after two wells we drilled the entire section, we can’t find any water out here, seen evidence up in a awful lot of oil. We’ve just now got team reservoir engineers up with the explorers and figure out where this basin exploration programs takes us. So all in all, we’re very encouraged. We didn’t get a lot of questions about our Gulf of Mexico business today.

But I will tell you that we’re equally excited about Gulf of Mexico. We drilling, I think some of the most exciting wells in the Gulf of Mexico now and we’re proud to be the operator of one of those. So anyway, let’s wrap it up there today. I do want to thank all of our shareholders for your continued confidence, and I would also mention again if you have any follow-up questions to just give us a call. Thank you all. Have a good day.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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