Toreador Resources Corporation, Q1 2008 Earnings Call Transcript

May.12.08 | About: ZaZa Energy (ZAZA)

Toreador Resources Corporation (TRGL) Q1 2008 Earnings Call May 12, 2008 11:00 AM ET

Executives

Stewart Yee – Vice President Investor Relations

Nigel J. B. Lovett, Chief Executive Officer, Executive Director

Michael J. FitzGerald, Executive Vice President of Exploration and Production

Analysts

Chris Cook – Zasoff

Myron Pawn – UBS

Josh Anzelowitz – First New York

Owen Chivers – Source Capital

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Toreador Resources Corporation first quarter earnings conference call. During today's presentation all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. (Operator instructions). This conference call is being recorded today, Monday, May 12, 2008

I would now like to turn the conference over to Stewart Yee, Vice President of Investor Relations. Please go ahead sir.

Stewart Yee

Thank you operator and welcome everyone to the Toreador Resources first quarter 2008 earnings and operations update. My name is Stewart Yee and I am the Vice President of Investor Relations.

Joining me today are Nigel Lovett, President and Chief Executive Officer and Mike FitzGerald, Executive Vice President of Exploration and Production. Also present is Charles Campise, Senior Vice President of Finance and Accounting and Chief Accounting Officer. We have a few prepared remarks and then we will open the phone lines for questions.

Before we continue, I would like to remind everyone that this call is being recorded and that today’s call may include forward-looking statements that are subject safe-harbor provisions. I would also like to remind everyone that there are important risk factors which can be found in our filings with the Securities and Exchange Commission that may cause results to be materially different from any forward-looking statements in this call.

I will now introduce Nigel Lovett, President and CEO. Nigel?

Nigel J. B. Lovett

Thank you. Good morning everybody or in Europe, good afternoon. The financial data that was released this morning on our first quarter results, while still disappointing, gives you the first signs of positive change in our cash flow generating capacity and earnings, certainly in relation to the results in each of last years four quarters.

This improvement was despite the fact that Turkish gas production was only renewed gradually through the second half of the quarter after last November’s accident. Incidentally, I hope that a number of you also recognized that that production was restored more quickly than our press releases had projected. That too I consider to be a positive change from an era when we fell short on many of our projections.

Let me comment briefly on certain aspects of our first quarter results. Our revenues benefited greatly from continued stable French oil production at ever rising prices. Our smaller Turkish oil production has also become more material as prices there have risen. Turkish gas production has finally become a more meaningful contributor although the rising U.S. dollar has deprived us of some of the recent increases in the Turkish lira denominated pricing of gas.

Our G&A expenses included well over $1.5 million of non recurring items, most of which relate to year end costs that are not accrued on a quarterly basis but charged off when paid. These include stock and cash bonuses, accounting, engineering and legal fees.

I would also point out that no G&A was capitalized this past quarter in relation to ongoing exploration and development programs. In last year’s first quarter some $200 million was capitalized.

We are very sensitive to G&A costs and I would simply remind you that when comparing one company’s G&A costs with another, it is important to look at gross costs, the four amounts capitalized or charged to others. We look at them on a gross basis because that is the cash cost regardless of how the accounting treatment might work.

In that same regard, I also want to explain the big increase in interest expense in the quarter. This year’s number includes $870,000 associated with an annual interest charge or fee payable to our lender, the IFC, over and above our regular interest rate. Last year’s interest expense number reflected no such charge and was further reduced by $800,000 of interest that was capitalized. This year no interest was capitalized.

Accounting treatment involving capitalization can distort the picture of underlying performance which is why cash flow is so critical as a real measurement measure of performance. Our cash flow from operations or EBITDAX was over $6 million this quarter and this was well in excess of our capital expenditures. This was our best quarterly cash flow level since before 2006. It was also the first quarter in some years where cash flow has covered capital expenditures. Our cash position today is several million dollars higher than the March 31st level.

Our strategy, as it relates to risk management and financial discipline, requires three key things, all of which you can now see we are doing or moving towards. First, we will live within our means from a cash standpoint, at least on an annual basis if not in each specific quarter.

Second, we hope to reduce our exposure to our offshore Turkish Black Sea Gas Play which has been more than challenging and will require higher cost deeper water exploration wells in the future. This Play has involved and will involve more risk than we believe we should be bearing.

We are, therefore, in the final stages of due diligence and negotiation with a large Turkish company for a partial divestiture of our working interest. I must add that there can, of course, be no assurance that any such transaction can be agreed, approved by the respective boards, or closed. Thirdly, we will farm out our exploration program for the foreseeable future.

And this is at a good point to pass over to Mike FitzGerald who can tell you more about that.

Michael J. FitzGerald

Thank you, Nigel. I would like to take this opportunity to review the activity in our various countries overseas. In France, as Nigel has mentioned, steady production continues in the Neocomiab and Charmottes Fields, yielding excellent cash flow due to the ongoing steady production and the high price of oil. Exploration prospects on three of our permits have been delineated and are in the process of being shown to other companies with the view to bringing them in to drill in near future.

Three additional applications that we have put in to the French government requesting have closed without any additional top filing and we are hopeful that in the coming months they will be granted and allow us to pursue a new Play that we have in mind.

In Hungary, as the press release mentions, the second well on our Szolnok Block is currently drilling toward a planned total depth of 1400 meters. Additionally, on the Tompa prospect, operations and preparation continue targeting the Deep Gas prospect that will be drilled in the latter part of this year.

Seismic work is ongoing on the Szolnok Block also.

In Romania, geological and geophysical work continues on refining our understanding and defining exploration prospects on our two exploration Blocks and on additional development potential in our Fauresti Field. Potential partners have contacted the company and our coming in to see the various data packages with a view toward bringing companies in to drill on all three of these Blocks.

In Turkey, we now have production off of all three of our tripods. We also have continuing oil production from the Cendere oil field and the development potential of Cendere, especially in light of the increasing oil prices, is again being studied with a view toward seeing if additional drilling can take place on Cendere to enhance the production even more.

Farm out efforts continue on our exploration acreage of which we have considerable in Turkey. Two farm outs have taken place and others are in the process of being worked on. At a time when although we only have one exploration well drilling, it sometimes is misleading to think that exploration is not going on. In actuality it is during these times when drilling is not primarily on our list that the most of the exploration work, the GNG work, can actually go forward full steam.

I would like to thank all of our technicians in the overseas offices for the hard work they have been putting in, finding prospects, finding partners to join with us, and thank all of our investors for their patience while we continue toward finding additional oil and gas reserves. Thank you very much.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentleman at this time we will begin the question and answer session. (Operator instructions) The first question comes from the line of Chris Cook [ph] with Zasoff [ph]. Please go ahead.

Chris Cook –

Yes. Just a couple quick questions. What are your expectations for capital spending for the year and how much of your production hedged as far as prices?

Nigel J. B. Lovett

The first question related to capital expenditures, our budget is $27.5 million for the year which is exclusively associated with Phase 2 development in the Black Sea. I did not get the second part of your question.

Chris Cook – Zasoff

Yes. How much of your annual production in ’08 and even beyond have you guys hedged as far as prices?

Nigel J. B. Lovett

Okay. We have hedged through September what is approximately 50% of our estimated French oil production. That is actually 16,000 barrels a month and the hedge price on that is around 100.

Chris Cook – Zasoff

And so why wouldn’t you do more than that at these prices. I realize prices have continued to go up.

Nigel J. B. Lovett

Yes. I think, well first of all you do not want to get into a situation where you cannot deliver the amount of oil that you have hedged. And we felt it was a reasonable balance to come up with a hedge on 50% of what we thought we would produce and float free in the market with the other 50%.

Chris Cook – Zasoff

All right, fair enough.

Operator

Thank you. Our next question comes from the line of Myron Pawn [ph] with UBS. Please go ahead.

Myron Pawn – UBS

Good morning Nigel.

Nigel J. B. Lovett

Good morning sir.

Myron Pawn – UBS

On the [inaudible] of the Turkey’s offshore SASB properties can you tell us what percentage of that is sold and what the structure of the deal is?

Nigel J. B. Lovett

Well, I think first the deal is not done and it may not be done. I want to be very cautious about that. We are in negotiations but nothing is signed, set, sealed, delivered, approved or anything else. So I think at this point it will be premature for me to give you any specifics. It is still in the process of discussion, negotiation and due diligences.

Myron Pawn - USB

Thank you.

Operator

Thank you. Our next question comes from the line of Josh Anzelowitz with First New York.

Josh Anzelowitz – First New York

Good morning sir. I remember on the last conference call we discussed the Turkish deal and the gentleman before me actually just sort of touched upon where I was going with this question. But I guess if this deal were to be consummated I am just wondering like again what is your strategy with the proceeds?

Nigel J. B. Lovett

Well our strategy with the proceeds, if this transaction were to be completed, is still to be determined and approved by our board but you can assume a significant portion of the proceeds would be used to restructure our capitalization.

Josh Anzelowitz – First New York

Okay. And could you just provide a little bit of detail. Would that relate to the covert, would that have to do with shares outstanding, a combination thereof?

Nigel J. B. Lovett

I think the best way to respond to that question without leading anybody on, hopefully not falsely, would be to say that we are looking at all of the above. The IFC, our bank lender, will require we will, probably will require that we will pay some small portion of that credit facility back. Because it is secured not just by the French oil reserves but also by our Turkish gas reserves.

So you cannot sell something and not expect them to require some modest pay down of that debt. Certainly we would consider and will discuss internally and with our board the merits of repurchasing some of the convertible notes and some shares. But in the case of shares it will require approval from the IFC and so a number of boxes need to be ticked before we can give you anything specific and definitive.

Josh Anzelowitz – First New York

Okay fair enough. I appreciate that. And I am just wondering with regards also to the strategy of like farming out some of the risk. Because I remember we discussed this before and you brought it up again on your remarks in the beginning of the call. I am just trying to understand I guess, from a business standpoint, why you would be doing that. And I guess you know what you should answer that. It is to defray the risk I assume, right?

Nigel J. B. Lovett

Yes. I think it is really two-fold. First of all, we typically own 100% working interest in our concessions. That is not true everywhere but typically that is the case. And therefore we have a substantial working interest in which to trade with somebody else to come in and bear some of our expenses, maybe shoot seismic and certainly drill a well or two. So we think that is a fair trade.

Josh Anzelowitz – First New York

You would be doing that because of the risk. This company, Toreador is not in a position to assume all of the risk because of the balance sheet, right?

Nigel J. B. Lovett

I think that is fair. It depends obviously on, you know there is a difference between a $1 million well and a $20 million well. I think it is fair to say we should not be drilling substantially expensive wells on 88% or 100% percentage basis. That is just management’s view.

Josh Anzelowitz – First New York

Right. And I couldn’t agree with that more. But I guess where I am going with this is that if that in fact is your view, and that is the strategy you are pursuing, there are very few companies that actually pursue that strategy, which means to me sort of means that perhaps some of the assets are better handled by someone else with stronger balance sheet.

And so I guess it is not a concern because I know the assets are there but a latent concern is like I would say if me and you were having this conversation two or three years down the line and basically what has happened is you know a bunch of people went out and drilled and this company is using the French assets to subsidize potential upside of other projects. And that really is the jewel of the company.

I went through some of the documentation last night and in ’06 your proved reserves were 14.5 and in ’07 it is 13.3. So basically what is happening is the crown jewel is being depleted to some degree and even with oil going up quite a bit. So there is an offset but there is no assurances that oil is going to go up you know forever.

I guess what I am trying to get at is, is this strategy, are the French assets being used to do this one thing? Because if that is in fact the case, wouldn’t it just be better just to monetize that asset and, and you see where I am going with this?

Nigel J. B. Lovett

I do not mean to be difficult but I do not really see where you are going. Let me just say that I would disagree with you in terms of the practice of farming out risk and effectively working interest in wells, exploratory wells, on a promoted basis so that we are carried for our residual interest. That is a pretty common industry practice and I would disagree with your contention that we are unique or different in that regard. So I think that we are setting a strategy which is not forever.

This is a strategy which we think is appropriate for our present time in terms of our capital constraints, our balance sheet constraints, and the potential of the acreage in which we hold interests. And I think we have simply established a strategy with regard to farming out as a function of some of the challenges that we went through in the last year or two. But that is not to say we will still be farming everything out in 2010 or 2011.

Josh Anzelowitz – First New York

I understand. I guess if I could rephrase what I was saying is that from a PB-10 standpoint at the end of 2007, which was several months ago, it is about $350 million. Now the market cap of this company is significantly less and who wouldn’t be interested at 300. Like in this environment who wouldn’t be interested. Because I remember on the last call that we had you had said you could not recognize the value and I just have a hard time understanding why what would be. I just do not get that. So, in any event.

Nigel J. B. Lovett

I can try and answer your concern if you would like me to.

Josh Anzelowitz – First New York

Yes, please do.

Nigel J. B. Lovett

Okay, obviously we are very much aware that the value of our company, which we look at on an enterprise value basis not just a stock market value basis, an enterprise value reflects the amount of our debt outstanding less cash as an addition to the stock market value of our equity. Because it is all of that capital effectively that has been utilized to finance or purchase the assets that we have. But we still are concerned that our stock is undervalued at current levels and maybe materially so.

Josh Anzelowitz – First New York

My matrix is about 50%.

Nigel J. B. Lovett

Well, I do not necessarily disagree with that. But I think the things we are trying to do are very much focused on trying to enhance shareholder value and share price over the next year or so. We would like to think if we can complete a transaction in Turkey around our interest in the Black Sea Gas Play that we have, it will reflect a valuation of that which is by most people’s calculation in excess of what the stock market and our enterprise value are giving us credit for, for that asset. I think our exploration program where we are being carried in everything by third parties by definition is giving us value that the stock market is not giving us value. We do not see any value for “the upside potential” of our exploration acreage in our stock price today.

Josh Anzelowitz – First New York

None. Absolutely none. But to some extent the market is responding to, I mean I could not agree with you more and I think the market is responding to the fact that this company’s drilling has not been as successful as perhaps as other companies, other corporations.

Nigel J. B. Lovett

Yes. There is no question around that point. You are right. We have had a disappointing results from our exploration activities. At least outside the Black Sea. And we have to do a better job. We understand that very clearly.

Josh Anzelowitz – First New York

Right. Okay. I thank you so much.

Operator

Thank you. Our next question comes from the line of Eric Waggoner from Source Capital.

Owen Chivers – Source Capital

This is Owen Chevers, I am on for Eric. Good morning. I had two questions. One, can you give us an update on the current level of production coming from the Black Sea. And what it might be if it does increase by year end. And second, on Phase 2, is it ahead or behind your initial time frame for development of Phase 2. Thank you.

Mike FitzGerald

Yes. The production is still being fine-tuned as what we said would be the case once we got the third tripod on. We are running various production tests, interference tests, adjusting choke sizes. But production varies between $26 million a day and $30 million a day on a weekly basis depending on what work is ongoing.

There is production I said coming from all three tripods at the present time. I do not envision a significant increase between now and year end from these wells. I think the $30 million mark is a good mark to keep in mind.

And in the case of Phase 2, we are again evaluating, and again we are not the operator at this point of course so TPAO has called for tenders, they are coming in. They are being evaluated. So although there is nothing tangible on the surface there is no steel being driven, there is no pipes being laid.

The project planning aspect of Phase 2 is continuing on. And we anticipate having a meeting over Ankora within the near future, the latter part of June, for a more intensive discussion and status update on how things are progressing.

Owen Chivers – Source Capital

Just a follow up on that. Your capital expenditured about $27.5 million this year. If I heard it right, a significant portion would be going to Phase 2. As far as future capital expenditures in the timing of Phase 2 how do you see that playing out now. We have gotten a little bit closer, an extra six months or so, since we last at least when I reviewed it last. So if you could bring me up to speed on that I would appreciate that.

Nigel J. B. Lovett

Well the total budget would have us spending 27.5 this year and 15 million approximately next year. There is obviously some potential for some slippage or more money being spent this year than next or more money being spent next year than this.

We are actually still assuming 27.5 although the calls for capital in the first quarter were a little less than we had anticipated. I think that we do not see, and there was interestingly a meeting in Houston between our operating guys and TPAO only as recently as Friday and they do not see any material delay to the original schedule or a material increase to the original budget.

Owen Chivers – Source Capital

Okay, thank you very much.

Operator

Thank you. (Operator Instructions) Mr. Lovett I show there are no further questions. I will turn it back to you for closing comments.

Nigel J. B. Lovett

Okay, thank you very much. I would just like to close by reminding people that we have our annual meeting on Thursday morning that will be webcast as well. Some of you, I hope, will be there at the meeting in Dallas and others hopefully will participate on or listen in on our webcast of that annual meeting.

We will give a little more of a sort of review of the past year and some color as to where we hope to go this year. But with that thank you very much and we look forward to answering any questions that you guys may fire in at us and we look forward to talking to you in the course of time. Thank you very much.

Operator

Thank you sir. Ladies and gentleman that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference please dial into 303-590-3000 or 1-800-405-2236 and enter the access code of 11113692 followed by the pound sign. We thank you for your participation and at this time you may disconnect.

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