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FX Energy Inc.(NASDAQ:FXEN)

Q1 2008 Earnings Call

May 12, 2008 4:30 pm ET

Executives

Clay Newton - VP of Finance and Chief Accounting Officer

David Pierce - President and CEO

Analysts

Philip Dodge - Stanford Group

Roger Liddell - Ingalls & Snyder

Sven Del Pozzo - C.K. Cooper

Robert Detweiler – Detweiler, Mitchell, Fenton’s and Graves

John Collier - Private Investor

Operator

Welcome to the FX Energy first quarter conference call. I would now like to turn the meeting over to Mr. Clay Newton. Please go ahead Mr. Newton.

Clay Newton

Thank you Julienne. Thank you all for joining us today. My name is Clay Newton, I am the company's VP of Finance. Welcome to our quarterly earnings call. Our will go as follows. I will start by reviewing our quarterly financial results after which David Pierce, our CEO, will join us for some operational updates. After that we will take questions.

Please be advised that the remarks to follow including answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those risks include among others, matters that we have described in an earnings release issued earlier today, and in our filings with the Securities and Exchange Commission including our most recent Form-10K. We disclaim any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable, they are subject to factors such as drilling schedules and results, capital plans, commodity prices and other factors that may cause our results to differ materially.

Okay, let us talk about our earnings report. Overall, I characterize the first quarter results as positive. It was a quarter with no surprises. On the positive side, revenues were up and liquidity and available capital remain high. The latter point is pretty important for a small company like ours that is conducting a large scale exploration program.

On the less favorable side we had as previously projected, a temporary decline in gas production and revenues during the first quarter. Also our net loss widened but for the right reasons, more exploratory, I will come back to that.

Total revenues for the first quarter of 2008 rose to $4.2 million from $4.1 million from last year's first quarter. We enjoyed higher oil prices and stable production at our US oil properties and we had higher oil field services revenues. Total revenues in the US rose to $2.2 million for the current quarter, up from $1.5 million for the last year's first quarter. This revenue increases offset the expected revenue decline in Poland.

As predicted, the production decline in the Wilga well Poland down 67% from first quarter 2007 levels means a decline in Polish revenue. However, two of our three wells in Poland continue to produce at sustained rates. The two steady wells are in Rotliegend area of western Poland our core area.

The result is that overall gas production in Poland was down 29% for the first quarter of this year. We recorded net gas production of 319 million cubic feet for the current quarter, compared to 449 million cubic feet in 2007. Our exit rate for gas production in Poland at March 31st, 2008 was 3.6 million cubic feet per day. Company-wide including our Polish and US oil production, our exit rate at March 31st was 4.6 million cubic feet equivalent per day.

We do not expect to see positive quarterly comparisons for gas production for the rest of this year as the Wilga wells will produce less during 2008, as it did 2007. However, let me put this in to context. As most of you know, only this one well in Poland, which is outside of our core area, has shown a sharp decline. Our other two wells, both in the Rotliegend, continue to produce at sustained rates. There are still three of our recent discoveries in Poland that have yet to be brought online. These wells should be added to the production mix in 2009, and as a result we expect to see a resumption of production gains in Poland during 2009.

Moving from production to pricing, our average gas price in Poland during the first quarter of 2008 was $5.76 per Mcf, compared to $4.87 per Mcf during the same period of 2007. To further update that number, our current average price in Poland is even better at $7.25 per Mcf.

Oil prices in Poland doubled from 2007 to 2008, increasing from $48.60 per barrel in 2007 to $97.38 in 2008. In the U.S., our oil prices increased from $49.44 per barrel in the first quarter of '07 to $84.93 per barrel in the first quarter of this year. Together these factors produced the modest net decline in total oil and gas revenues for the quarter, from $3.5 million in 2007 to about $3.3 million in 2008.

We expect this trend in oil and gas revenues to continue until early next year when, as I mentioned, we will begin producing gas from our Roszkow well, the first of our three shut-in wells to begin producing in 2009. We expect that our 2009 production will be substantially above that of either 2007 or 2008.

Now turning to the expense side of the ledger, total operating costs and expenses rose from $6.8 million for the 2007 first quarter, to $8.5 million for the 2008 quarter. The biggest contributor to the increase was exploration expense. When I said earlier, our loss widened but for the right reason, this is what I was talking about.

Our expected production gains for 2009 will be driven by exploration activities that were conducted in 2006 and 2007. In the same vein production gains for later years will likely be the result of our 2008 and 2009 exploration efforts. To that end, we have expanded our 2008 capital budget and we should expect to see higher exploration expenses for the year.

These exploration expense are $4.1 million during the first quarter of 2008, included almost $3 million of seismic-related expenses on our 100% owned acreage in Poland and also included about $700,000 completing our 3D survey at Winna Gora, where we share costs with POGC and where we expect to have data to look at in a few months.

Though not part of our operating expense. We also incurred approximately $2.2 million in capital costs during the quarter, including $1.6 million in Poland for drilling and concession costs, with the balance spent in the U.S. for additions to our domestic properties and our oilfield service equipment.

As you can see, we are well on our way to executing our nearly $30 million 2008 capital budget, with $6.3 million spent in the first quarter and with two of our four wells drilling right now. We reduced our total lease operating expenses in Poland for the quarter, although they were up on a per unit basis.

Lease operating expenses in Poland during the first quarter of 2008 were $0.78 per Mcfe, compared to $0.56 per Mcfe during the same period last year. The increase was principally the result of fixed cost at our Wilga property now being spread over smaller production volumes. We expect this trend to continue for the balance of 2008. Once we begin producing from our Roszkow and other wells, those least operating expense rates should drop to last years level and might be much lower.

Depletion for our producing properties was a $1.41 per Mcfe versus $0.73 per Mcfe in Q1, of ‘07. Again the increase is due to our Wilga facilities costs now been allocated over small reserves than last year and again we expect our 2009 DDNA figures to revert back to their 2007 levels once we begin our new productions next year.

Combining all results for the period, FX reported a net loss attributable to common shareholders of $4.3 million or $0.12 per share, compared to a net loss for the same period in 2007 of $2.6 million or $0.07 per share. Of that $4.3 million loss, 94% of it is attributable to our exploration costs. We generated positive EBITDAX, which is earnings before interest, taxes, depletion and exploration expenses of about $1.2 million during the quarter compared to $1.7 million during the same period last year.

Looking at the balance sheet there are no substantial changes, maybe the most significant was that working capital grew by about $2 million. As you will see in our 10-K, we received proceeds of just over $7 million from the exercise of some $2 million warrants during the quarter. We thought those warrant exercises went very smoothly with little market impact. Otherwise the major line items did not change a great deal.

March 31st, cash and investments totaled about $21 million, which is more than sufficient to fund any expected needs. I want to note that about $12.5 million of this is a straight cash or cash equivalents and about $8.5 million is in auction rate securities.

Although, there has been considerable stress in this market, we do not expect any significant impact on us. We do not plan to use any of the $8.5 million until next year. Meanwhile, more than $2 million has been announced for redemption in the next four to six weeks and we anticipate that the remainder will be redeemed in the next few months.

Finally, we still have $25 million of unused availability under our credit facility with the Royal Bank of Scotland and capacity for a substantial increase in the size of that facility. So, even though our capital budget for the year will be at a record levels nearly $30 million at this point, our balance sheet and liquidity as they sit today, can handle that budget quite readily.

This concludes the financial review section for this call. I will now turn the call over to David Pierce, our CEO, who will discuss a few operational updates and take your questions.

David Pierce

Thanks Clay. As Clay noted and as you have seen in the all the prior releases, we have expanded the budget for 2008 to around $30 million from last year's $17 million. That level of expansion is quite a challenge but we are making good progress.

Clay said through the first quarter we’ve spent $6.3 million and the biggest portion of the budget for the year is drilling four new wells and two of those of new wells have already been spud, we are off to a good start.

So let us talk about operations. First, we are drilling a well on 2D seismic, the Grundy well, to test the new play concept in our Fences concession. We believe there may be an oil and gas play on the eastern portion of the Fences concession. This is the play that is totally separate from the Rotliegend play in the western half of the concession, where we have had so much success.

The Grundy well is designed to see whether there is a reef build-up in the Main Dolomite. If there is, we may open up a whole new play in our Fences concession, possibly including both oil and gas. The Grundy well is also an important test of the deeper Rotliegend in this area. In light of the Trzek well and the Plawce well over into the western side of the Fences concession, we feel it may be potential for good reservoir in the Rotliegend at the depths that we are going to see with the Grundy well.

The seismic data in this area, though it somewhat sparce and only 2D, do suggest the possibility of Rotliegend structures in the Grundy area. So we have just set casing at the Grundy well to a depth of 3650 meters at the top of the Zechstein formation. Over the next few weeks we plan to be drilling and testing the Main Dolomite. We plan to take core samples and log this section of the well and we hope to run drill stem tests.

We will report the results of those operations as soon as we have data available. We expect that will be within the coming months. After we finish looking at the Main Dolomite, we will run another string of casing and return to drilling. Just as you might see in the Gulf Coast of U.S., at Grundy we have multiple potential pay zones. Below the Main Dolomite, we plan to test the Rotliegend. Total depth for the well is estimated to be approximately 4400 meters.

Once we have completed our work in the Rotliegend, we could potentially return to the Main Dolomite for production testing if warranted, and of course we hope it is warranted. As an aside, before we started this well we thought there might be delay in getting the specialty tubing that would be necessary if we were going to do a production test. We now think that that specialty tubing should be available just in time.

Now the Grundy well is an important well. It is the first in this area to target the Main Dolomite. We are hoping to open up a whole new play area, so we are prepared to spend whatever time and effort our technical people need to evaluate this zone. At the same time, we are sensitive to your desire for real-time information. We will do our best to keep you up-to-date and pass on material information as it becomes available.

Our second new well for the year is also already underway. The Kromolice North well is currently drilling below 1900 meters, drilling toward an expected total depth of about 3670. The drilling prognosis shows that if this well drills like an average well for this area, it should be testing in the little more than two months. This well Kromolice North is one of three wells that we have got scheduled for drilling this year on our new 3D seismic in the Sroda area.

The next well in this area will be the Sroda City well. We anticipate it will begin drilling in a little more than two months. The third well in this area will be Kromolice South and we expect it to begin drilling when the rig on Kromolice North is released.

In our technical presentation in Boston last month, we noted that these three wells are targeted at three different Rotliegend structures in the Sroda area. The three structures have aggregate potential of up to 60 Bcf to 90 Bcf recoverable net to FX.

Please remember that these particular structures have never been drilled, so its still exploration. Nonetheless, based on our most recent independent reservoir engineers reports on our nearby wells and adjusting for today's pricing, a successful well could show net PV 10 value of $3.00 or more per Mcf, that is $3 million or more per Bcf. As you imagine, we are pretty excited to see the results of these wells.

No let me talk just a second about seismic. We are continuing to push ahead with our seismic programs which take up about a third of our capital budget this year. In the first quarter, we spent about $4.1 million in seismic cost. A seismic is not as exciting as drilling nor does it short-term impact, but it is critically important to build up our inventory of drill sites for the future and to build drilling momentum.

Notably, much of the seismic activities are being conducted on concessions, where we do not have a partner and thus we can determine our own timing. We should be begun to see initial interpretations of these data later this year. This will help us set the 2009 drilling budget.

Lastly I would like to share just a few words about our 100% acreage. We are actively seeking participation by others in each of these three blocks that is Kutno, North West and Warsaw South. This is a time-consuming process but we are encouraged by the interest we have received to-date, and even while we are talking with potential partners, we are advancing the exploration effort.

We acquired seismic last quarter over a large potential target in the North West and later this month will be begin acquiring seismic over a potential reef target in Warsaw South. We cannot predict when we might make an agreement with the partner but we can tell you we are moving forward on the exploration front in the mean time.

Now let me move to production, Clay already mentioned that companywide production is down for the period, but let me point out that the decline is almost entirely attributable to the Wilga well in Eastern Poland in the carboniferous. By comparison the Zaniemysl and Kleka clinker wells in Western Poland in the Rotliegend have continued to produce at sustained rates. They appear to be the norm, not the Wilga well. This bodes well for the future for our production trends, as we bring our other discoveries like Roszkow in to production. So to that end, I am happy to report progress on getting our new wells into production.

Though it is not finalized, we are currently are making progress with design and permitting for new production facilities. Like seismic, this activity does not have the excitement of exploration but it also is critical to building cash flow and production. We plan to start construction of the production facilities for Roszkow in the second half of this year. That would put us in the position to have this major well online in early 2009. Cash flow from this well and its facilities are expected to be significant.

One last item, we do not often talk about our US operations but I would like to point out that our Cut Bank field in Montana and our US drilling services unit both showed substantially improved results during the first quarter. With current oil prices that might continue, these operations are providing a meaningful base for cash flow to assist in developing our high potential projects in Poland.

Let me summarize, real quickly. Over the last three years, from 2005 to 2007, we have experienced some impressive real growth. We have tripled our Polish Reserves over the last three years, and increased reserved values by more than a 150% in each of the last four years. We have approximately doubled our production and revenues in each of the last two years. We hope to increase this momentum and continue growing in to 2009 and thankfully we have a bigger exploration budget to help make that happen.

In the next few months, we anticipate some important drilling results and we expect to start some important new wells. We are really looking forward to the rest of this year and to the next few months in particular. I want to thank you for your continuing support. We believe it will be rewarded.

Julianne, can we open the call to questions from listeners.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Philip Dodge from Stanford Group. Please go ahead.

Philip Dodge - Stanford Group

Thanks. Good afternoon everybody. A couple of questions on gas prices in Poland. First, I think I heard you say that the exit price for the quarter was $7.25, which is up considerably from the average. Just wondering if that includes the gas equivalent of the oil or whether that's just the natural gas?

David Pierce

The $7.25, is by the way high. The $7.25 is our current average price. We didn't give an exit price, we gave the average price for the quarter at $5.76.

Philip Dodge - Stanford Group

Okay.

David Pierce

And that is gas only, that doesn't include oil.

Philip Dodge - Stanford Group

So it doesn't include. What's responsible for that fairly big increase?

David Pierce

Partly it's an increase in the price in Poland and partly its currency. Those are the two main components.

Philip Dodge - Stanford Group

So did some mechanism kick in since the quarter?

David Pierce

Yeah. For background, all of the wells that we are producing in Poland have long-term contracts, but each of them has an escalator built in. So as gas prices in Poland move up, so do our gas prices.

Philip Dodge - Stanford Group

And then finally on that, what price would you expect from the production at Roszkow when that starts?

David Pierce

We are having that discussion right now. I would expect that to be a good price, but I wouldn't care to speculate right this minute what that will be.

Philip Dodge - Stanford Group

Okay. And who are the customers, is it industrial or--?

David Pierce

We are in discussions right now. So let me leave that until we have a contract signed.

Philip Dodge - Stanford Group

Okay. Fair enough. Thanks.

David Pierce

You bet.

Operator

Thank you. The next question comes from Roger Liddell from Ingalls and Snyder. Please go ahead.

Roger Liddell - Ingalls and Snyder

Yes, good afternoon, gentlemen.

David Pierce

Good afternoon. Roger Liddell, how are you?

Roger Liddell - Ingalls and Snyder

I am fine, thanks, and you?

David Pierce

Good.

Roger Liddell - Ingalls and Snyder

David, could you give us texture on the drilling program in the Sroda area. You did speak of the three wells, but after Kromolice South, then you did not have a whole lot to say about it and the substance of my question involves the lining up of one prospect after another and getting away from the administrative delays that had been true when you were doing wells one off?

David Pierce

Yeah, one of the benefits of 3-D seismic is that it queues up quite a few targets all at the same time. So, if you remember a 3-D depth map that we looked at in a previous conference call, we saw half dozen targets on top of the Plawce area, I mean in addition to Plawce area. We have scheduled drilling three of these structures now and we have not scheduled the other three.

Obviously, it is in our interest to see what the results are on the wells that we drilled, but as we begin to see those results two things will happen. Number one, assuming we are successful and I do assume that, then we would want to go drill those, the other remaining undrilled structures. But we would also want to think about development of the wells for the structures that we do drill successfully. I would not be surprised to see development wells in next year’s budget, in addition to the first wells on some of the other structure that are there.

So we do not have a plan yet in specific, but in a general way both we and POGC anticipate that we will be doing follow-up drilling and I anticipate that will be for 2009. So we will be making those plans, we will start making them in the third quarter.

On top of that if you remember we have expanded this 3-D seismic to the southeast, down around Winna Gora. Again there is a place where we might see a developmental well and we hope that we will be seeing additional undrilled structures there that we can put in to our 2009 budget. Now all of that is in addition to the work that we are preparing now to carry out in 2009 up in that tight gas area that we call Plawce; you remember that we have wells and then across to border to the North of this there are five wells including one quite recent well that all focus on a area where the porosity remains good, the permeability is dropped to that point where we’re likely we would want to see fracs or horizontal wells.

And that is kind of a horse of a different color. We are working with the service providers who have been doing precisely this work in the Southern North Sea and in Germany. We will, in the second half of this year, we’ll come up with plans for the Plawce area. Right now the plans consist of enhancing the 3D in that precise area and we would anticipate seeing some kind of a test bed well, a well that will collect all the information that we need and that we would also hope would be a commercial well, probably in the early part of 2009.

So I hope that, that is a pretty broad answer, but that is where we are headed in the Sroda area. We think it is a great area, we expect to see results from these first three wells that will really kick off a much bigger program. And Roger, I do not anticipate a delay in getting that underway. I do not expect to see more wells in that area in 2008, but I would expect to see even more activity in 2009 in that area than we have seen this year.

Roger Liddell - Ingalls and Snyder

Okay great thank you. I will drop back in the queue.

David Pierce

Thank you.

Operator

Thank you if there are no further questions registered at this time I would turn the meeting back over to Mr. Pierce. Please go ahead.

David Pierce

I wonder if we can give just another minute.

Operator

Absolutely sir (Operator Instructions).

David Pierce

Do we have a question from C.K. Cooper's analyst, Sven Del Pozzo?

Operator

The next question comes from Sven Del Pozzo from C.K. Cooper. Please go ahead.

Sven Del Pozzo - C.K. Cooper

Yeah. Good afternoon. I was just wondering, with regard to the total CapEx for the year of about $30 million, and if you can give me a little more understanding of the sub components of that CapEx in terms of development versus exploration, and if the first quarter results have changed that composition at all? And secondly, if you could also give me the composition of the $4 million in exploration expense; how much of that might be seismic and how of it might just be dry hole expense? The different categories, I'd just like a better breakdown of those components please.

David Pierce

Yeah, Sven when I said almost $30 million, we can see that's where it's headed. But we had talked originally in our first release about the CapEx budget of $29 million and in that we've got $15 million for drilling; those are all exploratory wells, three of them in the Sroda area and then the Grundy well over on the Eastern side of the Fences concession. We've got $10 million per seismic. Now some of that is in the Fences concession, that would be by in large 3D seismic. Some of that seismic will be for our 100% owned concessions. And then finally, there was $4 million in that budget for facilities, that is to bring our three most recent discoveries into production.

So those are the components of the capital budget and that's on track. I don't see anything in the first quarter nor do I see anything that could come at us that would make us want to change the components of that budget other than potentially add to it and we are not there right this minute. And you asked the second question, that is it's just under $4.1 million I believe, that was in exploration costs in the first quarter. That's all seismic.

Sven Del Pozzo - C.K. Cooper

Okay.

David Pierce

Just about $3 million of that is in our 100% acreage. We shut out a large target in the northwestern session and we are preparing right now to acquire 2D on a reef prospect in the Warsaw South. About $1 million of that was in our Fences concession where we are 49% with POGC. Of course, they would have matched that, but that doesn't go on our financials. There is no dry hole expense in the first quarter.

Sven Del Pozzo - C.K. Cooper

Okay. And the $1 million in the Fences area, what's that targeting?

David Pierce

Primarily, that's the 3D at Winna Gora.

Sven Del Pozzo - C.K. Cooper

Okay. And then also the very first question about the escalator clauses for your gas price. I mean how do those actually work? So basically everybody in Poland now that is buying gas from Polish oil and gas is paying more for their gas from some kind of a regulatory event, or could you give us an update on the regulatory framework in Poland in terms of how that's progressing, in terms of getting closer and closer to becoming more market based kind of pricing?

David Pierce

Sure, I would be happy to do that. Ever since Poland joined the European Union in 2004, we have seen and I think people generally expect to see internal pricing get a lot closer to actually get to market pricing. Our escalators are based on the tariffs that POGC is allowed to charge to their retail and wholesale customers. So when they get higher prices, we get higher prices. And it’s regulator is much like I have here at home; gas distribution typically is a monopoly business and so you typically have a regulator who kind of watches out for the public make sure that they do not get gouged by their monopoly but our latest increase for example was a 14% increase that we got on April 25. Those, take effect May 1st. So it has just barely taken effect.

They are not scheduled there, again like regulators here in the US; the utility will go to them periodically and ask for a rate increase and show them his costs are up. Gas prices in Europe generally are somewhat linked to oil, that this is typical. I cannot say it is true everywhere, but in general that is the case. And of course Gazprom is the great big driver in all of this and to the best of my understanding, Gazprom's contracts both with Poland and Germany and elsewhere in Europe are linked to oil prices and of course there is a lot of upward pressure there and they typically also have a long tail on them. That is that rather than being volatile prices, they tend to lag behind but they do carry on for quite sometime. So higher oil prices that we have seen over the last year are just beginning to make their way into gas prices that Gazprom is charging and of course that’s the big component of POGC's costs.

So it is a little bit different than here in the US but the same general economic forces are at work in both places.

Sven Del Pozzo - C.K. Cooper

Are those escalators tied to oil prices as well or are you able to say; I am just wondering mechanically how your gas realization is going to increase?

David Pierce

No, I've given you about as much detail as I can, just to say that we are linked to a publicly available tariff but I have not said precisely what that linkage is.

Sven Del Pozzo - C.K. Cooper

Okay, but I would think it reasonable to assume that the Gazproms, their cost to Poland is going to increase, it's going to role over on an annual basis, they are going to renegotiate every single year and if those costs are linked to oil, the cost of buying gas from Gazprom is going to increase because oil prices have been going up and that would naturally flow through to you guys?

David Pierce

That's exactly what we anticipate and that is exactly what all of the leaders in Europe anticipate and that's what is causing some big concern over there about gas. Gas supply is a much bigger issue in Europe than it is here. We have got Canada to rely on and those guys over there, those poor guys have Russia to rely on, and they are tough traders. So yes I would expect to see gas prices stay high and potentially move higher and yeah, Gazprom they do have escalators just like we do.

Sven Del Pozzo - C.K. Cooper

Okay. All right, thank you.

David Pierce

You bet.

Operator

Thank you. The next question comes from Robert Detweiler from Detweiler Mitchell Fenton’s and Graves. Please go ahead.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

David.

David Pierce

Bob how are you.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

All right, thank you. I love these operational updates, the more the better. Obviously, I have been around long time and the stock has not been a prime performer in my portfolio and it gets more and more difficult to defend holding the stock all the time because there are a lot of other exploration companies that are doing significantly better in the marketplace. That said, the stock performance from here on will be dependent on several things. As you know, we're talking about Grundy and if that's a success, that will provide the shareholders for some sort of a boom, because that would then indicate that you've got four or five other possibilities. The other three things are the partnership opportunities. These, I would look upon, as being paramount in what happens to the stock over the next period of time. Could you just give us some more insight into the Pomeranian, Warsaw South, the Kutno partnership opportunities, some sort of a feeling because that's going to impact the stock significantly?

David Pierce

Yeah, I recognize it. First of all Bob, let me take exception to your statement that other exploration companies have done significantly better. I think in terms of the standard measures that you apply to E&P companies, which in my book are reserved volumes, reserved values, production, and revenue. We're at the top of the pack in many of those. We're certainly in the upper quarter of most of those. Now the share price, that's another story.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Well, share price is when you die, the bottom line is what you are worth?

David Pierce

Yeah.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Okay.

David Pierce

Well.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

And the reflection of success or failure is what happens to the price of the stock.

David Pierce

It is, but I'll tell you that in my belief, our performance on those majors will drive our share price. And at this point, we are trading at about what I considered to be our net asset value or possibly a little under and I believe that our success this year is going to push that number up. And if the market won't pay us for it, I bet we can get the industry to pay for it. But now let me turn now to your question about our 100% on concessions.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Got you.

David Pierce

Yes, we want a partner there. And as I said in the earlier remarks, we are very encouraged by the interest, that's been shown. I have got people today sitting down with a company and we have got a number of active discussions going with a good cross section of potential partners. You simply can't predict how that's going to go. We have people who have taken months and months to look at this because these are big projects. The North West is a big project. Kutno is a big project.

The notion of stepping into Poland is a big step for even a large company because you got to put people there, you want to know that you've got enough to keep you busy and keep them happy for the near term. I feel very confident that we will see partners in each of those concessions. But in the remarks about that, I said that we are moving forward with exploration. If we had a partner, I am not sure that in either the North West block or the Warsaw South block, we would be doing anything much different than we are today.

Exploration, then this was true in the Fences, Bob. We started off, we are reviewing data that was already there and you go on with 2D and you're a bit cautious at first. You want to see if you can isolate a really nice looking target and find something to drill. What you are looking for is a place where you can drill a lot of wells; invest lots of capital and gets the high returns that you have when you feel that you can drill successful wells without a lot of risks. That is what you look for. We are already shooting seismic in the Northwest and then in a couple of weeks we will be shooting seismic in the Warsaw south concessions. So we are moving forward of those. I wish I could tell you a date when we will have a partner for one or more or all of them. I cannot do that, its just that things are going in a positive direction.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

We were talking about this stock price and you said that the investor market does not respond to what we look upon as value. Well, the industry people might pay for it. Could you expand upon that a little more, please?

David Pierce

Bob, let's see we are a year two down the road and the market price has not done very well and we are trading below net asset value. Well net asset value in my book is the value of your reserves in the ground, your present value.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Right.

David Pierce

Plus your cash.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Right.

David Pierce

If that’s a bigger number than our stock price, I would think you could monetize some portion of those reserves and either shrink the shareholder base or expand the company, either one.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Okay, one other comment. This is a company that I have been investing in called Canadian Superior; they are drilling off Trinidad and Tobago into some interesting areas. They put a schematic on their website to show where they are drilling, to what depths and they get to a point where they no longer can do that because it becomes getting into a very sensitive area. But might I suggest that it would be a good idea,so people would not be calling all the time, where are we in such and such a well. But if you had this schematic up there on the two wells that you are drilling that gives more information. And the more information that the shareholder gets and the more enlightened he is, the more confident he or she is. So, that's just a suggestion.

David Pierce

I appreciate the suggestion and if there was a product placement fee with that I would like to have half of it. That’s a joke.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

So, I mean you can go by the Canadian Superior and give things exactly where they are, what their TD is and what the zones they shooting for, its very helpful?

David Pierce

I will say that is a good suggestion. We will look into that Bob.

Robert Detweiler - Detweiler Mitchell Fenton’s and Graves

Okay. Thank you David.

Operator

Thank you the next question comes from John Collier a Private Investor. Please go ahead.

John Collier - Private Investor

Yes sir and if you look out into ’09 and knowing that you will, this is an estimate and maybe an guesstimate, but on a range of wells that you would drill, what’s the low number and high number that ’09 could possibly hold for us? And then I have a follow up question.

David Pierce

Okay. I wish that I could give you numbers, I can’t. But I cannot imagine circumstances where the number of wells we drill in ’09 would be less than ’08. Of how much larger I can't predict it, so much depends on what we find in Sroda, at Grundy and what our seismic gives us in our 100% concessions. So I really can't predict, but I would expect to see at least the number of wells we have this year and almost certainly more.

John Collier - Private Investor

Now the follow up question is, if do you see evidence from seismic and your early indications from these wells, that you might double that number because of the indications that you get from your exploration results. Do you have the funds and the okay from POGC to actually double the number of wells you have drilled?

David Pierce

Well, the two parts to that answer are; we expect to walk into 2009 looking at substantially increased revenues, cash left over from this year. So on top that, as I mentioned earlier in this thing, better facilities haven't ever drawn on it, it sits at $25 million and we think it is expandable to somewhere in the neighborhood $75 million. So I think about POGC, until we're asked the question or we sit down with them to ask the question and they give us a firm answer approved by their board. Of course, I can't speak for them.

But having said that, every indication I have from them and also looking at their past performance with other major discovery areas, I would guess that they would be every bit as eager as we will be to expand the number of rigs and the number of wells. As you may know, they are importing about two thirds of their natural gas; increasing gas production in Poland is a great way to deal with the hindrance on Gazprom. So it makes sense economically, it makes sense politically, it's consistent with what they've done in the past, and it's what I would expect to see.

John Collier - Private Investor

Is there some reason from their own national perspective, that they would require you to do more wildcatting before they permit development wells for then to gain access to the geological information they are looking for long-term. Is that a part of the dynamic that you play with, with their national concerns?

David Pierce

It has not been and I can't think why all of a sudden it would change course. We took this concession on with them. We worked together. We devleoped really good information on that area that looks to be as prolific an area as any they've discovered ever. I think we're going to see real enthusiasm for development. In fact, I think if anything it appears to be seen, there is probably more pension to drill development wells than there is to drill exploratory wells, and that's why we have these concessions that are 100% ours. Now we are looking for partners there, but I think in those areas we're happy to go with an outside partner because I think they’re every bit as enthusiastic to drill a exploratory wells. So I don't see a problem in that area

John Collier - Private Investor

All right. Thank you very much.

Operator

We have one last question from Roger Little from Ingalls and Snyder. Please go ahead.

Roger Liddell - Ingalls and Snyder

Yeah David, a follow-up. In terms of the timing on the Sroda City, if I recall you need to reach the Zechstein on Kromolice North and make sure that the seismic data would match essentially with what the drillbit is seeing. But you spoke of Sroda City would spud in something like two or two plus months. So is the Zechstein down so close to the Rotliegend, that there is effectively, we're almost all the way down?

David Pierce

We have one additional string of casing to set after we get into the Zechstein before you get into the Rotliegend but you are a good bit down. I was going to try to say how many days you are away from completion, but yes you have drilled a substantial amount on that well. But we are not going to wait until we get there to tender the well or to select a drilling contractor. We are waiting to get to that point before we actually move the rig on and start drilling. So that's why I think it will about two to maybe as much as three months before we see Sroda City start. But we are already gearing up, I mean just so you know.

Roger Little - Ingalls and Snyder

All right, the Grundy well I believe is something like a 20% probability, but maybe that's just for the Dolomite we have for just other Rotliegend down below that. So are the odds any better than 20 or so percent probability?

David Pierce

Well I would hesitate to put numbers to any of these things. I would say that it’s a much higher risk well, whether its above or below 20%, I wouldn’t care to guess. But we do have two shots as you mentioned. We have the main Dolomite, which is really the reason we are drilling that well in that location. But having got the well done pretty far, its been just a few 100 meters to get down to the Rotliegend. Now if we didn’t have the information that we have in the Plawce area and the Trzek Well about the reservoir characteristics of the Rotliegend in that area, I might be a little more queasy about the Rotliegend at Grundy, but we are seeing some real gas content and real potential to produce that gas, even though the permeability is not what it is in the shallower stuff. So I think the Rotliegend is a real play.

Roger Little - Ingalls and Snyder

Okay, thank you. And you are speaking now of PV-10 value of $3.00 an Mcf, I think the last figures you used in published material was $2.50?

David Pierce

We have in times in the past used $2.50 as an undeveloped PV-10. That is where you still have to put in some production facilities and pipelines, and in the last couple of years $3.00 for a fully developed Mcf of gas. The $3.00 I'm talking about now would be an undeveloped number. So yeah, what you are seeing is the impact of higher gas prices. And that $3 number, if you look at our most recent reserve report, you will see that we are over that number blended.

We have half of our wells in Poland fully developed the other half or not. And $3 right now is what I would anticipate at today's prices for an undeveloped Mcf gas in the ground and that takes into account the fact that in the Rotliegend it is only 80% methane. Still, we are talking about an Mcf of that kind of gas worth about $3.00 present value, undeveloped.

Roger Little - Ingalls and Snyder

And so the $7.25 an Mcf figure, you have spoken of, translates when you do the 0.8 adjustment is down on the 5.75 range nothing content?

David Pierce

No. The $7.25 is our actual average price today for all of our gas in Poland on an Mcf basis. Now that does include gas at Wilga which is a 100%, but most of our gas in Poland today is Rotliegend gas and so it all comes out in the conversion to Mcf; you did not need to make a further conversion.

Roger Little - Ingalls and Snyder

Okay. That's great. Thank you, David.

David Pierce

Yeah, it is. I am delighted with it. We are out of time and Julienne, I would appreciate it, if you could close it off for us. I'd like first to thank the callers, shareholders, analysts, investors. Thank you very much for your participation. As Bob mentioned, it's nice to have these calls and we expect to see these conference calls continue on a quarterly basis. Thanks for your attention.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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Source: FX Energy Inc. Q1 2008 Earnings Call Transcript
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