Endeavour International Management Discusses Q2 2012 Results - Earnings Call Transcript

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Endeavour International (NYSE:END)

Q2 2012 Earnings Call

August 02, 2012 10:00 am ET


K. Darcey Matthews - Director of Investor Relations and Corporate Communications

William L. Transier - Executive Chairman, Chief Executive Officer and President

Carl D. Grenz - Executive Vice President of International

J. Michael Kirksey - Chief Financial Officer and Executive Vice President


Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Steven Karpel - Crédit Suisse AG, Research Division

Irene O. Haas - Wunderlich Securities Inc., Research Division


Good day, and welcome to the Endeavour International Corporation Second Quarter 2012 Earnings Conference Call and Webcast. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Ms. Darcey Matthews, Director of Investor Relations. Please go ahead.

K. Darcey Matthews

Thank you, Cindy. Good morning -- good afternoon, everyone and thank you for joining us today for Endeavour's 2012 Second Quarter Earnings Conference Call. On the phone today, we have Bill Transier, our Chief Executive Officer; Mike Kirksey, our Chief Financial Officer; and Carl Grenz, Executive Vice President for International Operations. Jim Emme, Executive Vice President for North America -- excuse me, North American Operations, is not available for this call.

Before we begin, let me remind everyone that our comments today reflect our current information and understanding. However, there a number of factors that could cause actual results to differ materially from what we present here today. For the risk factors associated with our business, please read our full disclosures and our latest 10-K and 10-Q. The second quarter 10-Q is expected to be filed early next week.

Now for some opening comments, I'll turn the call over to Bill.

William L. Transier

Thank you, Darcey. Good morning to all of you, and happy to have you on with us for this quarter. As you can tell from our release this morning, it was a busy and very productive quarter for the company. Just in terms of things that we accomplished during the quarter, we completed the Alba portion of the acquisition from ConocoPhillips. We completed an equity offering to provide some cushion against any further delays in the completion of our capital plans for 2012 that seem to be on track for us.

We've completed 2 letter of credit facilities for decommissioning security in the U.K. North Sea in a revolving credit agreement. We also added a new member of our senior leadership, Ralph Midkiff our Senior VP and General Counsel. And then just in the days following the end of the quarter, we also -- as you saw in the announcement this morning, announced the second well in our Bacchus development program that we're extremely excited about. And then, we also took the rig to start our drilling at Rochelle.

Let me just comment on a few things here to begin with, and then we'll go to Mike and Carl to give you some more updates. First about the Alba transaction. No question that the completion of this purchase of this additional interest from ConocoPhillips was a major accomplishment for the company. At our call last quarter, you might remember I was fairly reserved about our ability to come to an agreement with the existing partners regarding how to handle the decommissioning security. It's important to note that we do not expect to incur any decommissioning costs for many years at Alba, based upon what we see in the reservoir and the activities that are planned going forward.

However, the best practice in the U.K. North Sea is for the partners in any asset to enter into a decommissioning security agreement. These agreements, if you're not familiar with them, require the partners to provide decommissioning security. The amount, the type of security determined is through a complex formula, unique to every field and correlated to each company's credit quality.

In our case and in Alba, we issued a cash collateralized letter of credit from a major international bank, and we pay a fee to investors who cash collateralized that LC. This transaction is simple in concept, but it was very difficult in execution, as you know. It took us right to the last minute that get that deal done. But we were able, as a team to get the deal done. That was through a fair amount of perseverance, appropriate financial structuring for the company and the transaction that we were looking at, and, I think, most importantly, a strong belief that the Alba transaction was worth the effort that we had to go through to get it done.

We also believe that the nominal value of that letter of credit that we put in place will be significantly reduced next year as the U.K. Treasury implements the already announced certainty around decommissioning tax deductibility.

As to MacCulloch and Nicol, as you we might remember, the ConocoPhillips asset acquisition was in 2 phases. The first phase was to get the Alba transaction done, which we accomplished and I just talked about. The second phase was MacCulloch and Nicol. Once we got the Alba transaction done right at the end of May, we focused all of our attention on the second phase of the asset purchase from ConocoPhillips. The process involves for us to transfer operatorship from Conoco to Endeavour. It also requires us to come to an understanding with the other partners on decommissioning security, should it be required, but not, in our opinion, a field-wide DSA as we executed on the Alba transaction.

We are making real progress, and we are focused on completing this deal just as soon as we can. I am not going to predict when the deal will actually close, but we are confident we should be ready to close by the end of this quarter or early next. The reason I'm not going to predict is every time I predict, I'm behind schedule.

As to Bacchus, there's no question from this team, and I think if we had a simultaneous earnings release going on by Apache, that we are all excited about this great news on the second well at Bacchus. This what we've all been waiting for. The second well on Bacchus development began production at a very good rate over the weekend. I'm going to let Carl talk in more detail about it, but suffice it to say that the well confirms our view on the Bacchus reservoir and its long term potential to the company. Our plans for continued development are being updated because of the positive news from this Bacchus well, and we'll let you know more about that as we move forward.

I mentioned it already, but during the quarter, actually on May 23, we had Ralph Midkiff joining us as our Senior VP and General Counsel. Ralph has very strong experience in the energy sector and has a very distinguished career with major law firms here in Houston. He joins us as a senior member of our management team, and at a very important time in the company's development. I would say that he joined us literally 1 week before we wrapped up the Alba transaction, and he was a very instrumental part in getting that deal closed for us at the final hours that we were working so hard on it.

Our financial results today will improve dramatically in the coming quarters. We now have a significant improved production, highly exposed to crude oil, in a good commodity price environment. Mike will give you some more color on our numbers, but our financial results are reflective, in my opinion, of a company in the final stages of heavy spending on development projects that are now starting to provide good returns towards investors.

As to the liquidity in our fore plan, our plan now is to work through the remainder of this year to continue to execute on our development activities in the U.K., continue our proof of concept in the Heath Oil Shale play in Montana. Now we believe we have enough capital to get all of this done in 2012 and going forward into 2013, which we'll talk more later in the year, we plan to hedge our production, lock in cash flow, be conservative on CapEx going forward and pay down debt and reduce cost of capital in 2013.

I'm excited about the operating news this quarter. I'm going to let Carl talk to you in more detail about the U.K. business right now. Carl?

Carl D. Grenz

Well thank you, Bill, and good day, everybody. Well, as Bill has said, this has been a very busy, but fantastic quarter for us in the U.K. business. We've made excellent progress on all fronts there. We've made significant moves forward on our development projects and advanced the acquisition of the ConocoPhillips acquisition as Bill has described.

I'm going to start today with Bacchus, bringing you up-to-date with progress there. So production from the South well that began in May of this year has continued to follow the high-end of our expected production profile. Production efficiency, that's the amount of uptime you get from these wells has been exemplary, too. This well has been online over 98% of the time since it started production, which is a great result.

Now, the drilling of the second well, which is called the West Well, the progress on that well was just very good, too. Because of drilling there, we met or exceeded our progress curves on the drilling of that well. The well came on stream on July 29, and so it's obviously still in the very early stages of being ramped up to optimal levels. But what I can say today is that this well is performing, again, at the higher-end of our expectations. It's really a great well. We've seen production rates already in excess of 10,000 barrels a day on a very restricted choke setting.

Now this high level of natural productivity, together with the other reservoir properties we've seen in Bacchus to date, assures us a great result on this reservoir. We've seen pressure connectivity along the reservoir. And that's important for when we turn this first well into a water injector later on next year. And we've also seen great success in drilling into the third panel, the west panel of this reservoir, too. So great results. Now, we'll go on and optimize production from these 2 wells and monitor the performance of the reservoir as we go forward.

You will recall, I'm sure, that there are 3 development wells planned for Bacchus, and one of these wells -- the first well we drilled will be converted to a water injector after this first period of production. Now with the success of these 2 wells, the Bacchus partnership has taken a very prudent step of monitoring production from them for a period of time so that we can calibrate our reservoir models and decide where best to place the next development well and so, ensuring maximum reservoir drainage. So we expect to reach a decision on that, where we'll place the well and the timing of drilling sometime before the end of this year. So a great result from these first 2 wells on Bacchus.

I'll move now onto Rochelle. We progressed all our manufacturing and installation of the pipeline and the equipment for both the Scott Platform and the seabed infrastructure right on schedule again -- once again this quarter. And as reported last earnings call, we've been steadily progressing the required modifications to the Scott Platform, and this is included installation of the major items of equipment.

The annual shutdown is ongoing on Scott -- Scott Platform right now. It commenced a little while ago, and this is the time when the final stages of the modification work will be substantially completed for the Rochelle development.

The subsea installation work is ongoing, and once again, we've got vessels in the field right now making preparations for pipeline crossings, for example. The manufacturing of the pipelines and the control umbilicals for both the East and West wells is complete, and installation work will commence later this quarter.

The drilling rake, the Ocean Nomad, has arrived recently in the field. We'll be spudding the well likely tomorrow to commence the drilling of the first of these 2 production wells for Rochelle. Now there was a delay to the start of the drilling program, and this was caused by the extended use of this rig on its previous contact.

But our expert project team have accommodated the change into our program without adversely affecting the start of our production, which is still on track and expected to be in the fourth quarter of this year. So Rochelle is moving along very, very well.

Moving now onto Alba. As you know, we've increased our working interest there significantly. As we reported at the last earnings release, the steady production on Alba is being enhanced by the ongoing in-fill drilling development program. This year, we've got 3 wells being drilled and a number of well workovers. The first of the 3 wells is online, the second well is being drilled right now as we speak.

So, essentially this drilling program will keep the production profile steady for this year, and as we go into next year, we will be drilling more wells that will see an uptick in production profile on Alba.

Now, the third quarter is traditionally the time of year in the North Sea where we see a lot of facilities undertaking maintenance programs, and this, obviously, can affect the production volumes. It's normal to see then some volatility and production around this time of the year. And on Alba, there are some maintenance work going on right now to clean out some of the process vessels. And this work has caused a temporary reduction in production, but will likely to be completed in the next 2 to 3 weeks and then full production will be restored.

And also, as you will know, we have a relatively small interest in the development called Enoch. And this single well development, which gives us somewhere between 120, 180 barrels a day, normal production. This well was taken offline earlier to complete some required maintenance work on the wellhead system, and it's likely this well will be out for the rest of this year. But let me be clear that the production from Alba and the Enoch is just deferred production, and when these maintenance works will be completed, then we'll return to full production on both of these developments.

So, turning now to the ConocoPhillips acquisition. Well, we've been working very hard on moving to operatorship of MacCulloch. And this is not an insignificant piece of work. You'll appreciate what's involved here is transferring contracts, transferring data and making required changes to the organization, and also to address all the health and safety requirements involved in the operatorship of a FPSO. So all of the planning of that work has been completed and is being actioned right now. We're making good progress there.

So -- and we also have to work on getting approval from the partnership and the government for us to take on the operatorship there. That work is ongoing, too. Now we expect to take over as operator, which will be synchronized with the closing of this transaction, as Bill said, late this quarter or early the next quarter.

So in conclusion then, from the U.K., a very successful, a very busy quarter. We did state clearly at the beginning of the year what our focused objectives were. And at this stage in the cycle, we can say we're well on track to achieve our annual objectives in the North Sea.

So now, I'll turn back to Bill for U.S. operations.

William L. Transier

Okay, as Darcey said upfront, Jim's not here today, so I'm pinch hitting in for him. He's actually involved in a family commitment that's been planned for a long time, and he's not even in cell phone range. So I'm pinch hitting for him.

But let me just make a few comments about the U.S. We continue to maintain production base despite no drilling or completion activities, while we prepare for our pursuit of the Heath oil play.

As you see in the quarterly release, we had average production of about 15 million a day for the first half, and that production is kind of ahead of our expectations and what we had hoped to have this year, knowing that we weren't going to spend any capital.

We right now have no rigs active in either the Haynesville or the Marcellus plays, and we will continue to defer all discretionary drilling until we see stronger signs of economic returns that are appropriate for us to put capital to work.

We have, as all of you know, seen some improvement in gas prices, but that hadn't triggered an incentive on our part to go and spend any more capital there right now. Besides the fact that we have focused all of our capital on these development activities in the U.K. North Sea.

All of you seem to be interested, and continue to be, in the Heath Shale tight oil play in Montana. We are in the process of securing a rig to drill our first horizontal reentry, in our Zeus vertical pilot well located in Rosebud County.

I say that, that's just east of some recently announced successful Heath horizontal completed wells by other industry operators, and the name of those wells are Fidelity Smith [ph] and the Cirque Rock Happy well. If you watch some of the information that is now becoming public about those, they have been pretty good producing wells, and we're fairly confident that we have the same Heath B zone carbonate source shale couplet that have been targeted by these horizontal producers.

Following the Zeus operation, we will continue to drill other horizontal reentries in one or more of our remaining 3 vertical pilot tests to continue to test this play for ourselves in the coming months.

Finally, we do continue to get asked questions, but we continue to build our portfolio in Colorado where we're acquiring leasehold and permitting our first well because of the competitive nature of that and the low-cost entry that we've been able to create for ourselves. We are being fairly careful about what we say about this stacked cretaceous play potential there as we move forward.

As we learn more and as we get closer to actually having some drilling operations, we will obviously bring you up-to-date on another potentially exciting play for the company.

With that said, let me turn it over to Mike to talk about the quarterly results.

J. Michael Kirksey

Thanks, Bill. Overall production volumes for the second quarter were 6,400 barrels a day, as you saw mentioned in the press release, up significantly from the first quarter levels of about 4,000 barrels a day.

As I'm sure most of you are aware, the first Bacchus well came on stream the end of April, 1st of May, and we closed out for Alba on May 31. So Alba is included for 1 month only and the Bacchus first well for 2 months in these production figures.

Just to give you a sense, production in June, with the first Bacchus well for a full month and a full month of Alba, was approximately 10,700 barrels of oil equivalent per day for Endeavour.

It is worth remembering that we record revenues from most of our oil production in the U.K. when the barrels are lifted by tanker. The first lifting on Alba of our volumes was in early July. We expected Alba lifting from our production approximately every 6 weeks of approximately 200,000 to 250,000 barrels.

On the pricing front, the second quarter had an average brick price of about $108, compared to $118 in the first quarter. If you looked this morning, you'll see that Brent is about $107 to date.

Average U.K. gas prices were $9.12, compared to Q1 levels of about $9.30. As we enter the summer months, current U.K. gas prices are a little lower, but the forward curve for next winter continues to be very robust, significantly above about $9.

U.S. gas prices continued their decline during the second quarter and averaged $2.29 compared to $2.44 in the first quarter. But is the quarter up at $2.74. We've actually seeing a little rally as of late, as I'm sure you know, with Henry Hub pricing at $3.20 this morning. U.S. gas sales in Q2 represents only about 12% of revenues and will continue to fall as we have increased sales from Alba and Bacchus.

Our operating expenditures were about as expected at $13 per barrel as were the G&A expenses. Last year, there were well work-over costs in the U.S. that made the last your operating expenses higher than this year.

Interest expense does deserve some comments this quarter. The nonrecurring, non-cash write-off of $15 million of deferred financing cost, related to early retirement of our previous certain senior term loans is included in this quarter, as well as about $6 million of double-interest expense that we incurred for 2 months during the quarter as the bonds funds we held in escrow and the senior term loan, both were accruing interest waiting for the closing of Alba when the senior term loan was retired, as I said it's added about $6 million to interest for the quarter.

So this total interest expense of $46 million, we expect about $20 million to be the recurring cash interest costs per quarter. We should see this decrease as we pay off debt and refinance some components of our capital structure going into 2013.

The interest income and other line in our P&L, as we've said before, includes foreign currency gains and losses and other transaction banks and LCCs. In Q2, this includes banking fees and transaction costs of $4.7 million, offset by foreign currency gain.

We, like other companies you are seeing reporting earnings, are required to record impairments under U.S. GAAP if gas prices fall. In the second quarter, falling U.S. gas prices resulted in such an impairment of about $20 million to our U.S. full cost of pool. The 12-month average gas price continued to fall, resulting in this non-cash charge.

We now have approximately $23 million of value in the proved, reserved category in our U.S. full cost pool, and as I mentioned, we've seen a little rebound as of late in gas prices.

Capital expenditure spent on our projects in the second quarter was approximately $68 million of Rochelle pipeline and production equipment manufacturing, Scott Platform modifications and other preparatory work for Rochelle production as you heard Carl speak about, as well as the cost of the Bacchus drilling operations were the biggest parts of capital in the second quarter.

On the financing front, the financing team was very busy during the second quarter. We entered into a new senior loan of $100 million, which matures the end of 2013. Approximately $460 million of bond funds were released from escrow, and the previous senior term loan was repaid and the Alba purchase price was paid. We also executed 2 agreements supporting LC facilities that were used to replace previous LCs outstanding and to finalize the Alba purchase. These 2 facilities expire $30 million in May of 2013 and $120 million in December of 2013.

So even though these do not have to be replaced for some time, we have already begun the process of syndicating a bank revolver, which will encompass both the senior loan and the LCs in the future. We also executed in June an equity offering of about 8.6 million shares raising approximately $60 million for the company, as Bill mentioned.

Now other changes in the balance sheet compared to year-end 2011 relate either to the closing of Alba or the bond offering in February. An example is the purchase price for Alba reported in the property accounts goodwill and decommissioning accounts, other assets and accrued expenses increased because of financing and other fees, associated with the transaction and the interest accrued on the bonds during the first half.

So with that said, while our CapEx budget next year will not be at the same levels in the past, we do plan to accumulate cash to pay off debt, and as a result, we continue our hedging strategy as in the past. With Bacchus' second well now online and with the closing of MacCulloch, we expect to continue to add hedge structures for 2013.

As we've said before, 2012 was a transformational -- is a transformational year for Endeavour. I'm very proud of our entire team as they continue to execute on our priority projects and goals.

And I think with that, Cindy, we'll turn it over to Q&A.

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Neal Dingmann with SunTrust.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Say, Bill, a question. Just one, and obviously, when you look at MacCulloch and Nicol, you mentioned kind of when you expect that to come on. There's no certainty out there, but what kind of color could you give us as far as maybe more assurance about the timing?

William L. Transier

Well, Neal, this is really a regulatory situation now. I mean, we have proceeded, as Carl was saying, with meetings with all the partners regarding our qualifications to take over the operatorship from ConocoPhillips. It also means, as Carl said, no waiting on the contracts are our way [ph] and getting the DECC to kind of approve that. We feel -- and I think Carl would reinforce this, that we've had great meetings with the partners. They like what our plans are because they really -- this has been an under-appreciated asset from a major -- not a criticism of Conoco, it just was under their radar screen. So they like what our plans are going forward in terms of just doing some basic reservoir maintenance, mechanical work that can improve production for ourselves going forward and in the longer-term view of what the reservoir can be for us. So the reason I made the comment, as you know, in that part of the world, August is always a heavy holiday season to begin with, and right now, it's a heavy Olympic season. And for me to just try to predict how quickly we can run this through everybody involved, which is not that many players, Neal. I mean, we've got 3 partners, ENI, Noble, Talisman and the DECC to get through. But Carl is moving that process along very quickly. And I just -- I think we'll be in a position where we're ready to close, probably before the end of this month, but I think then you just got to go through the process of the regulatory and other partners sign offs to get there. So I'm predicting the end of the quarter, but as soon as I say that, that usually jinxes it, it means it will take longer than that. But we're anxious to get it on. We're anxious to get our hands on the reservoir and move forward. It's probably -- MacCulloch and Nicol combined is probably 2,500 to 3,000 BOEs a day. So we're anxious to kind of get hold of that and move it forward.

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

And Bill just one ops question follow-up, then I'll just do one final. Just on Rochelle, just -- either from you or Carl, just so I understand, now the -- exactly where -- I want to know where the rig is. And just to begin, obviously, if it's on -- once it's on location, there's no fear even if weather sets in, is there still the fear that you could have slow down, as far as when that first well is drilled? Just wondering if you could comment on that.

Carl D. Grenz

Yes, Neal, it's Carl here. The well -- sorry, the rig is on location in the field. It's been set -- rigging itself up over the last few days, and we will spud the well tomorrow. So the activity will commence tomorrow on drilling that first well. And it's about an 83-day well to go and drill this -- get ready for production.

William L. Transier

Neal, to your question about timing. Generally, what happens in terms of timing, and you heard this from us in regards to the Bacchus situation, is that if you have mechanical issues on the rig itself, our guys -- Carl reported to me this morning, our guys were out on the rig yesterday, pleased with the crew, and it's been doing a good job for BG in advance to coming to work for us. So it's a good rig, a good crew that's experienced. But then if you have mechanical problems, you have to get supplies or other things out and the weather gets in the way, that can slow you down. But we're not in a bad time to be drilling the well. And I would just remind everybody on the call that based upon the modeling and the flow testing from the appraisal wells when we discovered Rochelle, we believe that each of the individual wells themselves, the 2 development wells, can produce enough gas to meet our capacity limits over the Scott Platform. So we're anxious to get this one done and get started on the second one and get the pipe laid and move on down the road. So we -- as Carl said, and I'm going to reiterate it, we still feel like we're on schedule to get all this delivered and production ramped up and started by the end of the year.

Carl D. Grenz

Sorry, Neal, just to build a little bit on what Bill has said. This rig has been performing extremely well on previous contracts. We've no concerns about its mechanical integrity. And we're drilling this well in a pretty good time of the year. Traditionally, it's backing into the -- towards the end of the year, but this is a good period to be drilling in the North Sea from a weather perspective. So we expect to get good progress made on this well.


We'll take our next question from Mike Kelly with Global Hunter Securities.

Michael Kelly - Global Hunter Securities, LLC, Research Division

I'm hoping you could give us an update on what the second half CapEx looks like. We've got some moving parts here, and third well, Bacchus, being pushed back a bit. I'm just hoping you could give us a refreshed number.

William L. Transier

Mike, I'll make a comment, then Mike can weigh in. Let me first talk about the Bacchus situation. I want to reiterate the fact that this is very good news on this second well. And drilling into that west panel that Carl talked about added a bunch of reservoir that was not really modeled in the original view of the Bacchus reservoir. As you all know, there's 3 panels. We believe -- Carl said this -- that we believe that they're all pressure connected, which is a good thing for us, and it means that the water injection well should work well for us as we move to that. It was always planned, as you know, to drill the wells, draw off some of the pressure and turn one of the wells into water injection to maintain the pressure for the reservoir going forward. I think this West Panel situation sets up what you've heard me say in a positive sense about Apache's view on the reservoir from the very beginning. Their P50 numbers were always much higher than ours, but it begins to already prove kind of what their numbers look like going forward. So first of all Mike, to me, it makes incredible sense to watch the reservoir performance for 1 month or 2 and then get back to drilling the third well because it will likely be, instead of placing that third well where it was intended before, that we will target more of this west panel as we go down the road. And I'm getting out ahead of myself, but I'm excited about that. And on top of that, just one other comment, the production that we're now seeing from the 2 wells is right in the middle of the range that we talked about for the last 1.5 years for all 3 development wells. So this is a good sign of what this reservoir can do for us, and the fact that we will likely push this development drilling off into next year is good. Now, to your real question about CapEx, that means that what we really have in terms of CapEx for the remainder of the year is the ongoing activities that Carl has on the Rochelle development. We really don't have much in material fashion other than that going forward, and you probably -- we probably got $80 million or $90 million of capital, that -- and I'm guessing that we have to spend to get Rochelle fully completed net to our interest. And whether that all comes in this year or some of it spills over into next year, we're planning on all of it being here this year so we can get the development turned on. So, Mike talked about the capital to this part of the year but we have spent a fair amount on Rochelle already. But we're really focused on the remainder of Rochelle this year and then, the closing on the MacCulloch transaction, which will be in the kind of round numbers, $20 million range, plus or minus.

Michael Kelly - Global Hunter Securities, LLC, Research Division

Okay. Great. And correct me if I'm wrong here. But I think the second well at Rochelle, is that being drilled by a Transocean rig? Is that [indiscernible] for that?

Carl D. Grenz

Yes, Mike. It's going to be drilled by the Transocean Prospect.

Michael Kelly - Global Hunter Securities, LLC, Research Division

Got it. Okay. And what's the status of that rig right now?

Carl D. Grenz

It's going to be arriving with us around about the end of the October timeframe to drill the second well.

Michael Kelly - Global Hunter Securities, LLC, Research Division

Okay. Is that scheduled to also take that kind of 80 to 90 days?

Carl D. Grenz

No. That's going to be around 70 days, that well. Just to build on that, just Bill mentioned it, but if this well is drilling over the period of time when we start up the first well, that's not a problem to us because we can deliver the full expected daily production nominations from just one well.


And we'll take our next question from Steven Karpel with Crédit Suisse.

Steven Karpel - Crédit Suisse AG, Research Division

First off, if you could talk about Alba on the in-fill well, maybe just some of the results you'll expect from that well, and the cost, timing in terms of how long it takes to drill, and then what this will mean ultimately. I think you were talking about just replacing the decline. What this will ultimately mean going forward for the field?

William L. Transier

What -- Steve, I'll start. I'll let Carl add in. But I was at a conference not too long ago with Darcey, and we had just gotten -- we just closed on the Alba transaction, and we completed shortly thereafter one of the infill wells. And in my enthusiasm, I talked about the fact that this well came on at about 9,000 BOEs a day. So net to our interest was something North of 2,000 BOEs a day. And that was much better than we had even forecast with the ongoing activities. That's the nature of Alba itself. There's ongoing infill drilling that happens. That doesn't mean every well that you drill has this kind of performance. It kind of depends on where you're going. We -- we drill some of the slots of the 35-slot production facility that's out there and move forward. I think for us, and what happened on Alba was they were slower to get to the in-fill drilling this year than was originally forecast. But then the timing of which they're drilling these wells, which is now they're drilling the second of 3 planned in-fill wells for 2012. As Carl said, they have some planned maintenance going on right now that has slowed down production; it hasn't stopped production. But we would expect this to come back and be very good for us going forward on Alba. So short answer is, is that we are pleased with Alba so far. It has exceeded our expectations in terms of production. And each of these wells still stay in the sort of same range, Steve, because you're drilling off of this production platform in kind of the $25 million range plus or minus, depending on how quickly they get drilled.

Carl D. Grenz

They're relatively cheap wells because they're drilled off a platform. Most of the Alba wells tend to come on onstream in the sort of 9,000 to 10,000 barrels a day range. They decline somewhat in the early stages and start to produce water. And that's very typical of what happens on Alba. And as you'll have heard us say before, there's generally speaking, the 3 to 4-well program each year, we expect to see that going on again next year. It'll be shorter drilling program next year because there's some more maintenance work to do next year. But that'll be the program typical going forward for a number of years to come on Alba. And in terms of production profile, the work this year will certainly keep the profile flat to going up slightly, and next year, we see, with these other wells coming on the profile, to increase going forward.

Steven Karpel - Crédit Suisse AG, Research Division

What is today, so this is post-second Bacchus well company production?

William L. Transier

Well, Steve, it's probably exactly in the range that I've pointed out several times in our presentations that says 14,000 to 17,000 BOEs a day, and that included MacCulloch, which obviously we haven't closed on yet. So we're already kind of in that range as we speak with the positive success of both Alba and Bacchus. So I'd rather not let you forecast that throughout the next quarter because of some of these maintenance issues and stuff. But right now, we should have good performance in the third quarter and expand those production numbers that Mike talked about for the second quarter that's only included 1 month of Alba.

Steven Karpel - Crédit Suisse AG, Research Division

Just to clarify, then one for Mike. So 14 to 17, plus whatever you get from MacCulloch, that 2,500 to 3,000 is the way we should think about it then would be go forward?

William L. Transier


Steven Karpel - Crédit Suisse AG, Research Division

And I understand there's downtime. I just want to -- and then of course there's decline as well.

William L. Transier

Yes, I would tell you that what we have been showing, we're more confident in now than we were before because of the positive news at Alba and Bacchus. So when we get MacCulloch onstream, we'll be in that 14 to 17, 18 range, and when we've turned Rochelle on, you'll add another kind of 7,000 BOEs a day to the production profile. So what we have said over and over for the year is if we get all this stuff done, we should have in that 20,000 to 25,000 BOEs a day production, 60% of that Brent crude oil and the remainder primarily European gas. And the results, so far, have helped us kind of be at the upper end of those ranges, but I wouldn't -- I'd let us get these developments turned on, and we'll have a much better chance towards the end of this year when we get Rochelle on to forecast production for you in a more formal way in 2013.

Steven Karpel - Crédit Suisse AG, Research Division

Great. And then just lastly for Mike. It looks than the CapEx number, at least in to my model, was a little bit high, and you still have a decent cash balance. Can you talk about -- big picture what your thoughts are on liquidity. And then secondly, I know you mentioned here in the release, and you've talked about is -- to bring in the banks syndicate, it seems that it's a bit of a slow process. Can you talk about how long that takes, maybe if you're in a rush to do it, or any thoughts on when that'll be done?

J. Michael Kirksey

Well your first point was along the lines of just -- of cash and liquidity. You can see we ended the quarter with strong cash positions. We have significant cash flow coming into the second half of the year. So that does not appear to be an issue for us at all. We always have opportunities to do some things if we wanted to, to put some more capability in, but we don't expect that to be needed at all right now. With regard to timing on bank facilities, we're in that process now. If you're in the U.K. or Europe at all, you know there's a lot of consternation around European banking -- European banks these days. So it'll probably take a little longer than we thought. But we're not in any rush to have to do that. Everything is fine as it is. That will help us lower the costs so we'll want to do that as soon as we can, but we are in that process right now. I don't want to predict the date exactly to that but we are heavily in the syndication process. We've met with banks already. So we expect to have that wrapped up in due course.


[Operator Instructions] We'll take our next question from Irene Haas with Wunderlich Securities.

Irene O. Haas - Wunderlich Securities Inc., Research Division

And I have 2 questions. Firstly, really, when Rochelle comes in at year end, what is your hedging program sort of to protect your cash flows? Secondarily, in the Heath play, what is the chance of actually drilling a second horizontal well this year? And if, indeed, the play ticks off, how do you envision crude sales? And what kind of differential you should be expecting from this part of Montana?

William L. Transier

Well, Irene, this is Bill. I like your enthusiasm about differentials and production and stuff like that at Heath. We are excited about it. As you know, and you're one of the experts on Heath, there's a lot of activity going on the second half of the year. We -- I think it's highly likely that we'll drill more than one horizontal well this year. We are watching what the other industry players are doing pretty carefully. As to differentials and production and stuff, I honestly don't have a great answer for you right now. We're focused on getting these wells drilled and making sure that we have a proof of concept, and that will determine how much activity we have in 2013 going forward. As you also know, the industry's working together to bring resources and services to bear like any of these shale plays, managing the cost going forward is going to be highly important to everybody going down the road. So I don't have a good answer for you on the differentials there going down the road. I will tell you, and Mike can speak to the hedging and stuff, our practice has always been to hedge somewhere in the 50% to kind of 70% range, maybe a little higher, depending on what day of the month it is. We will -- once we see stabilized production out of Bacchus, we will add more hedging in, probably in the form of a collar, with the purchaser of the crude oil because we have an embedded collar in that situation. And you'll see us hedge the Rochelle production once we get that turned on and see that stabilized also. We -- the reason for the 50% to 70% is to protect against just normal maintenance and downtime that can occur, so that we don't get out of ahead of our skis in terms of the hedging. But from our perspective, lock-in, in cash flow so that we have a good view of 2013 and the capital discipline that we want to have going into that. This is no different, Irene, than you remember back when we bought the assets from Talisman back in 2006. We hedged a good piece of it, and then we managed our capital going forward. So we will continue to do that. We like what oil prices have done in the last few weeks from where they dipped down, so this is a good time for us to layer in hedges. And natural gas prices in Europe still remain in that kind of 8 50 to 9 range. You'll see us layer in quite a bit of hedging in that same percentage range as we go forward.

Irene O. Haas - Wunderlich Securities Inc., Research Division

So if everything kind of goes according to plan, you should have a really great 2013, like Mike alluded to earlier. There's some discussion on just paying down debt. Do you have any appetite for acquisitions? And if yes, where could it be that you would be looking?

William L. Transier

You know, Irene, I think next year is a manage-the-balance-sheet-year for us. It doesn't mean that if something this tremendous comes along -- we always have to keep our eye on the ball. But I think that we're getting to these projects and getting them turned on and it now seems to be happening and you've been one of the folks who've been patient with us along the way. That now, it's important for us to make sure that we manage these assets properly, dial in the production profiles for ourselves and then manage some of the debt off the balance sheet before we get too aggressive. I think that you're right, and Carl alluded to it, we'll talk more about it as the year goes on. But getting this production turned on this year is a huge accomplishment for the company, but there's upside associated with MacCulloch. There's going to be upside associated with where Bacchus is today and going into next year. And there's still upside, as Carl made a comment on it a minute ago with Alba. So we like all that, not to discount at all what we may have coming out of the U.S. if we spend capital there going next year. So we have a lot in terms of potential growth for the company in 2013 without doing any acquisitions. And I think that we need to do what we promised the market is to be pretty disciplined on our capital and pay back some of the debt, so that it flows through to the investors the way it should.


And it appears we have no other questioners at this time.

William L. Transier

Let me just make a final comment, if I can. It really is a follow-up to Irene's last question. One, you may have seen a lot of activity going on in the North Sea in just the last few months with the acquisition -- the announced acquisition of Nexen by CNOOC, Talisman reduced their exposure in the North Sea, by a transaction with Sinopec, before that, we saw Mitsui buy BP's interest in Alba. So there is a lot of interest in that going -- in that part of the world, because of the great petroleum system and because people still see a lot of opportunity over there to move forward.

We have created kind of a position for ourselves with, obviously, some intellectual capital on that part of the world. We're excited about what we have going on. My concern is not so much about acquisitions, but it's -- if we do what we say we're going to do, we think the stock where it's at today doesn't really reflect the real value of who we are.

We are going to stay focused for the second half of the year on the targets we laid out for you at the beginning of 2012, and that's to finalize the acquisition from ConocoPhillips, which is MacCulloch and Nicol. We are excited about Alba's performance at this point, but we always knew that Alba was a good reservoir and that in-fill drilling would help maintain or even potentially increase production going forward. And we've seen some evidence of that just post us increasing our ownership interest there.

The Bacchus project has been long overdue and coming on -- onto production. But the first 2 wells have exceeded our expectations in modeling. And I think there's reason to be enthusiastic about what we have there going forward. I mentioned it earlier that the 2 development wells that we have onstream now are right in the midrange of the expected production that we talked about from all 3 development wells. Apache has done a good job of getting this turned on. We're excited about this west panel and what may be an indication of more reserves for us going down the road.

And then Rochelle. Carl, this has been the reason we brought Carl on board. He has a great team, and we're now executing the final pieces of Rochelle to get that turned on. And we're -- it'll be a test to the organization to get that turned on by the end of the year. There -- as I said before, I think you've seen with those pie charts that we've put in our presentations about where production could be if we had these development assets turned on and the acquisitions done. I think you can accept those ranges as good ranges, and possibly for us, at the higher-end of the range going forward. So I'm excited about what we can deliver, and I'm excited about managing the balance sheet in a strong position for all the investors that have been patient with us as we go into next year.

So I'm sure Darcey wants to tell you about -- we have EnerCom coming up in August. I don't know, Darcey, you're smiling at me to tell me to be quiet. So is there anything you want to add? And I'll let you close this up.

K. Darcey Matthews

I think you've already said it. But we want to thank everybody for their time today. And we appreciate, certainly, your interest in Endeavour's development and our ongoing story. And as Bill mentioned, we will be presenting at EnerCom in Denver on August 14, and we look forward to seeing everybody there. Thank you very much.


That does conclude today's conference. Again, Thank you for your participation.

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