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Executives

Stewart Yee - VP of IR

Nigel Lovett - President & CEO

John Gilboux – VP of Exploration

Charles Campise - SVP-Finance & Accounting

Steve Thornton - VP of Operations

Analysts

Robert Chapman - Chapman Capital

Philip Dodge - Stanford Group

David Lu - Hedgehog Capital

David Anderson - Palo Alto Investors

Josh Mankowitz - AGP

Robert Chapman - Chapman Capital

Toreador Resources Corp (TRGL) Q2 2008 Earnings Call Transcript August 8, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Stewart Yee, Vice President of Investor Relations. Please go ahead, sir.

Stewart Yee

Thank you, operator, and welcome everyone to the Toreador Resources second quarter 2008 earnings and operations update. My name is Stewart Yee, and the I'm Vice President of Investor Relations. Joining me on the call today are Nigel Lovett, President and Chief Executive Officer, and Vice President of Exploration, John Gilboux. Also present in the room are Charles Campise, Senior Vice President of Finance and Accounting and Chief Accounting Officer, and Vice President of Operations, Steve Thornton.

We have a few prepared remarks, and then we will open the phone lines for questions. Before we continue, I would like to remind everyone that this call is being recorded, and that today's call may include forward-looking statements that are subject to Safe Harbor provisions. I would also like to remind everyone that there are important risk factors which can be found in our filings with the Securities and Exchange Commission that may cause results to be materially different from any forward-looking statements in this call. I will now turn the call over the Nigel Lovett.

Nigel Lovett

Thank you, Stewart. Good morning, everybody. Although, the size of our quarterly loss is indeed disappointingly large, I can tell you that we at Toreador have been waiting for this day for exactly one year. It was a year ago that we were in Beijing trying to get PetroChina interested in to buying in to our Turkish Black Sea gas ply play.

Now, we've finally signed a letter of intent to sell a 26.75% interest out of our 36.75% interest in that play for $80 million in cash. This transaction, which should close early in October, is I believe, one of two truly transformational events for our Company in recent weeks.

The other was the reduction in the Dallas Technical team following the resignations of the senior members of that team. In no way does this mean that we are out of the exploration business, rather, it reflects a major shift in responsibility for exploration activity from Dallas to our European regional offices, which are after all where our oil and gas assets are.

The Dallas Technical effort, now led by John Gilboux, will be more appropriately focused on providing guidance and support to those European offices. We still believe there is an important role to be played by American technical experience and ingenuity. But these changes, including the sparing rather than full time use of consultants, will take up $2.5 million per year, or 33%, out of our Dallas G&A, or 20% out of our total G&A.

Nine months ago, we discontinued our investor marketing efforts and stopped participating in conferences. We lacked creditability and consistently failed to meet projections, let alone expectations.

It seemed to make more sense to save the money and focus on doing what we said we would do. At various points over the last 12 months, we have set out some key objectives. We said, we would stop sole risk exploration. We have done that, have completed or are close to completing multiple farm out agreements.

Secondly, we said, we would focus on higher potential exploration plays on shore. We have done that, and John Gilboux will talk more about that. Thirdly, we said, we would limit CapEx to annual net cash flow. We have done that. First half EBITDAX exceeded CapEx by almost $10 million, and we will exceed CapEx on a full year basis as well.

Fourthly, we said, we would cut G&A. We have done that, and simultaneously empowered our European offices. Fifthly, we said, we would lower the overall risk profile of our Company. If we can close this Black Sea sale, we will have unquestionably done that. Sixth, we said, we would delever our balance sheet. Again, if we can close the Black Sea sale, we will have the funds to do exactly that.

Finally, we said, that we would change management compensation to align it more closely with shareholders' interests. We have done that. We have shifted from cash perks and limited equity to less cash, no perks, and a lot more equity if we perform.

We hope that you will agree that we have now done or are doing much of what we said we would do. It is, I believe, fair to say that we are close to the culmination of the critical management and financial reengineering plans that we have been considering and discussing for the last year and the beginning of a sharper, prioritized focus on finding oil and gas.

Let me now talk a little bit about our second quarter results. The Turkish Black Sea was primarily responsible for our large loss, because of the high quarterly depletion charge and because of the very large impairment charge that we have taken, primarily on the carrying value of that asset.

The size of the charge was determined largely by the fact that we have agreed to sell the majority of our working interest at a price below book value, but at a level we consider to be fair value, and by a provision we have made to cover the cost of potentially buying back a related overriding royalty interest.

Our G&A was also inflated by one-time employee separation costs and related to legal fees, together aggregating $1.2 million, and by the fact that this year we capitalized no G&A costs, whereas in last year's quarter we capitalized $1.2 million.

The combination of significant future reductions in depletion, following the write down in the carrying value of the Black Sea asset and in G&A, make it possible that we will be able to show profits in the future quarters, which will make a pleasant change from the losses we have been showing.

Much more important was our cash operating performance in this last quarter. EBITDAX was almost $8 million in the second quarter, our sixth consecutive quarterly improvement in EBITDAX.

Our fist six months EBITDAX was approximately $14 million. The combination of our exploration farm out program and delay in the green with TPAO on a economically sensible phase 2 development program for our Black Sea gas play have meant that our cash capital expenditures in the first half of this year were only just over $4 million. So, we are living well within our means. Indeed, our unrestricted cash position at the end of June was $16 million, and is over $20 million today.

Let me now revisit for a moment the sale of our Black Sea gas play. First, I should caution you that this sale is not yet closed, and despite board approvals and a letter of intent signed by both parties, there is always a chance that for some reason it might not be completed.

The reason for our partial divestiture is that our experience to date indicates that for a Company of our size, this is our highest risk asset, subject to considerable uncertainties and volatility. Sadly, despite our best estimates and hopes a year ago when we thought we might be producing 50 million cubic feet a day, gross that is, we peaked to 30 million gross and are now cut back by the operator, TPAO, to approximately $18 million gross.

Additionally, we simply do not have the financial capacity to fund 36.75% of the capital expenditures programs likely beyond phase 2. These are not only likely to involve wells grown by semi-submersible rigs presently costing over $400,000 today per day, but we also know only too well how challenging the Black Sea environment can be.

We are much more comfortable participating in those costs and risks with a 10% working interest. The price being paid, equal to $3 million per 1 percentage point of working interest, may be considerably less than our book or carrying value before the impairment charge, but it is well over five times our projected 2008 gross profit from the Black Sea, a significantly higher multiple than our whole Company's multiple of estimated 2008 gross profit, and to that extent, an anti-dilutive transaction.

It also represents a price of $55 per barrel of oil equivalent, or BOE, of proved reserves attributed to the project by our outside engineers. Again, a price per BOE more than three times our whole Company's value per BOE of proved reserves.

Finally, the price represents an 85% premium over the pre-tax SEC-based PV-10 value of our Black Sea reserves, indicating that the buyer sees considerable upside potential in the play. We agree with that, but again, we would rather have a more manageable 10% interest in it than our original 36.75%.

A number of you have seen fit to criticize us for the fact that at last year end, our independent outside engineers gave us almost 4 times the volume of reserves for our Black Sea interest than our partner, Stratic Energy, was given by their engineers that is, our after adjusting for our different working interests.

For those of you who believed Stratic and not us, we are pleased to tell you that our sales price for the Black Sea asset, if you use Stratic's reserves adjusted for production through June equals over $200 per BOE.

I would also like to comment briefly on a note that went out this morning suggesting that while the implied value of our sale is higher than the PV-10 book to year end on proved assets, it's considerably less than the proved plus probable value. Again, we don't disclose probable reserves attributable to a specific asset. However, under U.K. and Canadian disclosure rules, Stratic, our partner, is able to disclose both.

The end of last year, their proved and probable reserves brushed up for the larger working interest that we are selling aggregated $22 million on a PV-10 basis. We are selling these reserves at $80 million, so I don't see where that's considerably less.

In addition to reducing our exposure to our highest risk asset, we intend the use the proceeds to address our highest risk liability, our leverage. The exact allocation of proceeds has not yet been determined, since it will depend on the price of our various traded securities, and on negotiations with our bank, the IFC.

The likelihood, however, is that the bulk of the proceeds will be used to reduce our debt, with a view to leaving our balance sheet by year end with a considerably lower level of net debt, but with available debt capacity as well as the cash and surplus cash flow to ensure that we can meet our future Cap Ex obligations and enjoy a much improved financial flexibility.

With that, I would like to ask John Gilboux to give you on update on our exploration activities.

John Gilboux

Good morning, ladies and gentlemen. I'll discuss our upcoming plays, and in no particular order. We will start with Hungary, in our Szolnok block, we're looking to drill one two wells, spudding in December of this year. And we are starting a new 145 square Km 3D in the Szolnok block starting late September.

In the Tompa block, we are expecting to spud or top a deep prospect, a high pressure, high temperature gas play in December of '09. Moving to Romania, we have entered a joint venture farm out agreement in the Moinesti block, consisting of one reentry well and two neutral wells or three new drill wells, starting in the fourth quarter of '08, and extending through the third quarter of '09.

And we are continuing to see farm in partners on our Viperesti blocks to the south. In Turkey, in the Sea of Marmara block for permit, we are beginning a 1500-Km 2D program later this month, and anticipating the first well in 2009. Thrace Black Sea, we are expecting to announce a farm out agreement within the next few weeks, with drilling to begin in the first quarter of '09.

In Bakuk, onshore Turkey, we are shooting a 150-kilometer 2D survey starting late this month, hoping to drill in '09. And in France, we are initiating and continuing farm out discussions, anticipating the drilling of three wells in 2009. We are also expecting to receive three new concessions totaling over 315,000 acres in the late third quarter, early fourth quarter of this year, and then we will begin farm out discussions in late '08.

So, assuming success with all our farm outs, we have the potential to drill ten wells between the fourth quarter of '08, and the third quarter of '09.

Stewart Yee

All right, operator, we will take questions now.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we will take our first question from Robert Chapman with Chapman Capital. Please go ahead.

Robert Chapman - Chapman Capital

First of all congratulations on this preliminary agreement. I know your counter party, I think has a little bit of a history of being somewhat slippery, so hopefully, we can get this thing closed. It seems to me that the obvious route from here and I think that your dialogue dictated that this would be the case that you are essentially going to take in this capital to reduce your leverage and then try to get a closure between net asset value and the public market value.

If I'm running my numbers correctly here, I'm looking at enterprise value here, that could get you, let's call it 400 million on a sale basis and you take out maybe 10 million in M&A fees and $100 million residual debt, and you have about 300 million of equity value, which is over $14 per share, and that's using a 67% to PV-10 for France and I think relatively conservative numbers across the board, and no value to Romania, and no value to Hungary at all, which obviously could have upside to a buyer.

Is there any reason why that wouldn't be the course of action here close Hungary and then try to close the private market value gap that I think can get the stock to 14 or 15 giving once again zero value to Romania or Hungary?

Nigel Lovett

Well, you said close Hungary. I think you meant close the deal on the Black Sea.

Robert Chapman - Chapman Capital

Excuse me. Yes, I meant close Turkey. I get these countries a little confused on Friday afternoon.

Nigel Lovett

That's all right. Yes, I mean, that's the strategy here. We are not obviously able to share with you what we think our real enterprise value should be, but clearly we think our shares are undervalued. And we believe that they are undervalued for a variety of reasons, our lack of credibility to date, which we hope we can change now, the challenges that we faced with this Black Sea play, which we hope we are addressing as we speak. And then the extent of the leverage on our Company, which represents clearly an overhang on our Company.

And so, we will be addressing that, and I think that's an important issue. So that the mix of our enterprise value should change and be minimally debt and maximum equity. The last thing is that our exploration program in the last 18 months has clearly been very disappointing, and we have to do a better job there, and I'm confident that we will. We have some interesting, if not very interesting, exploration prospects. And I believe, we have to do all of the above to get the stock up to the right level.

It's not just management and financial engineering, it's the drill bit as well. And I think we've done, if we can close the Black Sea sale, we've done the bulk in the management and financial re-engineering, we need to get the drill bit working in our favor.

Robert Chapman - Chapman Capital

Well, your exceptionally rare accountability is appreciated, but just once again, to focus on the end gain here, and I think that you have a very large shareholder who has been vocal through 13-D filings, and this is well. The math can really get you to a big number here on a sale once SASB is done, giving yourself a $30 million residual value for that that is left over after the implied sale. And then, once again, no value for Romania or Hungary, we can get ourselves to $15 with relatively conservative valuations placed on your French assets. So, you've developed a quick track record for being very shareholder friendly, and I hope you're going to close the private market value gap to this highly undervalued public market valuation.

Nigel Lovett

We hope so too.

Robert Chapman - Chapman Capital

Thank you.

Nigel Lovett

Thank you.

Operator

Thank you. And our next question comes from the line of Phillip Dodge with Stanford Group. Please go ahead.

Philip Dodge - Stanford Group

Good morning, everybody. Thanks for the comments. Let me ask you firsts what's called a housekeeping item, and then I have a couple of things. But what do you estimate that the unit DD&A rate will be if you close the Black Sea deal following that?

Nigel Lovett

I've got to ask Charles Campise to give you that number, and maybe he needs to run a calculation on it to give it to you. But do you have another question while the computer is in flames on the desk here?

Philip Dodge - Stanford Group

Yes. I have a couple of others. Nigel, other than your innate caution, what do you consider the obstacles to be, the remaining obstacles to close the Black Sea deal?

Nigel Lovett

I like your description of my innate caution, you're not the only person to accuse me of that. I think that we have been once bitten, perhaps now twice shy on the sale of this asset. We are moving forward to get government approvals. Obviously, our partners have preemption rights, and they have thirty days at which to exercise those.

Philip Dodge - Stanford Group

But will those be on the same terms if they exercise them?

Nigel Lovett

Exactly. So, if they exercise them, we would still receive the proceeds, but from a different purchaser, so that's not really a risk. I mean, I really can't come up with a specific reason why this shouldn't close. I think everything seems to be moving forward in the right direction. I just need to be cautious and warn you that there is always a risk.

Philip Dodge - Stanford Group

Okay. And then, what is the estimated capital expenditures for SASB phase 2 that you would notionally have 10% of?

Nigel Lovett

Well, it's been a bit frustrating for you as well as for us, to be honest with you, in terms of the phase 2. The original program was $120 million program, or about $46 million to our interest. I would tell you that the original budget and the original design plans are now really in the process of being reconsidered, and there is a operating committee meeting that the TPAO has organized in two weeks' time in Ankora to revisit where we are, or where they are and where we want to be.

So, my view would that be that the likelihood is that the budget will not be less than 120 million, but it could be higher. We think that there are ways of doing this development still at that $120 million number. But that's subject to additional discussion and negotiation between the working interest partners.

Philip Dodge - Stanford Group

Okay. For Black Sea, how much exploration acreage is involved in the sale?

Nigel Lovett

It's just under 1 million acres.

Philip Dodge - Stanford Group

Okay.

Nigel Lovett

It's the whole of what we call the…

Philip Dodge - Stanford Group

The SASB Western Black Sea?

Nigel Lovett

Yes, yes.

Philip Dodge - Stanford Group

Yes. But not Thrace or Sea of Marmara?

Nigel Lovett

No, absolutely not.

Philip Dodge - Stanford Group

Yes, okay. And then finally, waiting for the DD&A…

Charles Campise

We have that number for you,

Philip Dodge - Stanford Group

Okay.

…hold on one second, Phil.

Charles Campise

The number, depending on production levels, should be in the neighborhood of $15 to $18 per BBOE.

Philip Dodge - Stanford Group

Yes, okay, so down a little bit. And then finally, France, how do you see that strategically going forward? Would any of that conceivably be monetized, or are you happy with steady state there?

Nigel Lovett

I think that there are a number of responses we should give to that question. It's a very good question, and we've certainly considered it. First of all, we are very pleased to be getting these new concessions. We are waiting on, simply on paper work to be completed by the bureaucracy in Paris. But those are particularly interesting concessions to us. We can't talk more than just hint at it about what we see in those concessions. But they could represent a very significant play for us in 2009.

I think that the asset has been -- the French assets have been an immensely valuable, if you like, anchor to [Windwood], as we have struggled with our Black Sea play. However, we have a very low basis in those assets, and if we were to separately sell them or monetize them other than by leveraging them, we would trigger a substantial tax leak, which I don't think is in the shareholders' best interests. Having said that, we have looked at ways in which we can get a better debt facility together than the one that we presently have with the IFC. We've appreciated our relationship with the IFC and we've enjoyed having them as our lender. But our debt capacity with them is fully drawn at 30 million.

And however, you care to look at the values of our various assets, one would have to conclude that $30 million is a pretty low loan to value ratio by anybody's standards. So, I think that you should assume that we have begun the process of looking at alternatives, although, we have a pretty distressed credit market out there in Europe amongst the banks with a reluctance to lend to new credits at this point, even on a reserve-based basis. But we are in discussions with one or two parties, and we believe that it might be possible for us to put together a new facility, which we wouldn't draw down, we would need it, obviously, to pay off the IFC, if there was anything left on that credit facility. But it would give us incremental debt capacity in reserve, if you like, to fund our share of additional exploration or development activities going forward.

Philip Dodge - Stanford Group

Good. Thanks for all the information.

Nigel Lovett

Okay.

Operator

Thank you. And our next question comes from the line of David Lu with Hedgehog Capital. Please go ahead.

David Lu - Hedgehog Capital

Yes, hi, Nigel. I started a little bit late, so I'm not sure if you went over this. But the buyer for the Black Sea assets, have they completed the due diligence on that or are they still in the process?

Charles Campise

They have completed all of their due diligence. We are really in a process now where we have to go through a 30-day period, as I indicated, for preemption rights to TPAO and to Stratic, and then there has to be -- the buyer does not have petroleum right in Turkey, so they have to get that from the GDPA, which is the Turkish authority that grants petroleum rights to companies.

David Lu - Hedgehog Capital

Okay. Is that, sort of a formality type of thing, or is there a risk that they don't get those?

Nigel Lovett

I don't think there is any risk that they wouldn't get it. But the only issue really is how long it takes. We have assumed, to be honest with you, our schedule for closing has September 30th but you will note that we indicate in our press release that we are expecting to close early in the fourth quarter. We're just trying to be cautious on this. And we will get the purchase price escrowed to us to our benefit, with interest accruing to our benefit at the time that the assignment agreement is signed and that the preemptive rights period is expired.

David Lu - Hedgehog Capital

Okay. Just the other question was, have you considered AIM or a London listing at all, given that most of your assets are in Europe now and perhaps…?

Nigel Lovett

Yes. The answer is we have been considering that for sometime. My predecessor, I know considered it, and clearly, you're absolutely right. Our assets are in Europe, so we really should be more closely aligned with the European capital markets than we are at the moment. I would say that we are too small to get onto the London stock exchange, which is really -- where one would like to end up. But on the AIM market, that market is pretty distressed right now. And the receptivity for IPOs or listings of U.S. or related companies is not as favorable as it was, let's say, a year or two ago. I think that the question then comes as to whether one wants a dual listing or how one goes forward. But the answer is, it's not lost on us that we need to be more closely aligned with the European capital markets than we are today.

David Lu - Hedgehog Capital

Okay. And just one other question, in terms of going forward, do you see the value in the Company as in just having a people recognize what you -- the assets that you have value -- or really from the exploration, having some of those come in -- I guess with results better than they have been because, that seems like there is this quite, if some of those joint ventures start to work, then you could create a lot more value than just selling off the Company as is here.

Nigel Lovett

I would agree with you completely. That's John's Gilboux's mission, and he has got to deliver for us. For you as well as for us.

John Gilboux

And to that end let me just add, I misspoke earlier on the Hungary, the Tompa deep well, that's spudding in December of this year, not December of '09.

David Lu - Hedgehog Capital

Okay.

John Gilboux

That has a lot of potential.

David Lu - Hedgehog Capital

Okay. Great, thanks a lot.

John Gilboux

Thank you.

Operator

Thank you, and our next question comes from David Anderson from the line of Palo Alto Investors. Please go ahead.

David Anderson - Palo Alto Investors

Good day, gentlemen. Nigel, thanks so much for the update, and John as well. Congratulation on the Turkish deal. I think it's a great step. You guys have made tremendous steps in the last few months and the last year, and I appreciate all of your efforts of you and your team. So, we are pretty excited about what is going to happen next. Obviously, we think this allows you guys to start showing off what else you have in the portfolio.

John, I had a couple of questions on that. I agree with Mr. Chapman and other callers here that there is a tremendous amount of value just in France. And I'm curious on that. I just want to ask, you guys have a pretty large exploration license portfolio in France now. The concessions you are looking at now, are they somewhat contiguous? And I guess the second part is, while you may not yet be able to talk about your targets, whether they be oil or gas, I assume you would like either but there may be one that you have a preference for in that particular region. Just thought maybe you'd expand a little bit on France, and then I have a question on the Tompa block.

John Gilboux

Sure. The French concessions that we're waiting approval on are three separate blocks. They range in size. Let me get to my notes here. Well, they range in the size of about 196,000 square acres, and then the other one would be approximately 70,000 acres, and the other one is approximately 30,000 acres. The basin as a whole is primarily an oil basin. Very little gas is really truly produced out of the Paris basin that we are in. And we are expecting oil out of these three new concessions, but I will take some gas production with that, too, but we are primarily focused on oil.

David Anderson - Palo Alto Investors

Okay. Great, well, that helps. The other question on Tompa, which Nigel, I believe that to be a fantastic potential, and obviously so do folks like Exxon Mobile, who are also drilling out there, and I guess that's the question. Do you guys expect to get anything additional in terms of information before you spud that well that might cause you to either firm up some part of your plan or change any part of your plan, given what is going on with Exxon, Falcon and other people in the area?

John Gilboux

Well, Dave, we've got the Tompa block where the prospect is located, and we've applied for four surrounding blocks around the Tompa Block, and that's what we call the [Keskin Haulers] blocks. We have gone through two rounds of waiting for [MOLE], the national oil company, arguing with their various mining bureaus within their company that they should get these blocks and not us. And we've won on both occasions. And there is one final argument that MOLE can make with another entity, government entity, and so assuming that we win the third -- well, MOLE would lose, we would win the third round of argument, if you will, then we would win the approval of those four blocks, and those four blocks are just a continuation of what we are chasing in the Tompa block. Assuming success in the Tompa block, I would expect to have that same type of success in the four surrounding blocks since it's a pretty mirror image of the play we're making in Tompa.

Nigel Lovett

I would just like to add that the joint venture partner that we have in the Tompa play is a extremely sophisticated group. It's run by a former senior explorationist from Shell, and his partner is a former senior executive of Schlumberger. The team that they put together at Delta is largely stocked by ex-Aramco guys, Americans from Aramco. And frankly, they bring to this play an extraordinary amount of sophistication and familiarity with the kind of challenges we are going to face in the Tompa drilling. But we think we have a very good partner there and we're pleased to be working with them. And it's more than just the money, it's the technical additions that they bring to the equation.

David Anderson - Palo Alto Investors

Yes, thanks. I fully recognize that and appreciate that. That's one of the reasons we are pretty excited about that. Remind me, though, what would their participation potentially be in these additional blocks if you got those?

John Gilboux

They come up to 87.5% interest in the surrounding blocks.

David Anderson - Palo Alto Investors

Great. So, they are working with you on those as well? Great.

John Gilboux

Right. That's correct.

David Anderson - Palo Alto Investors

That's all I have for you. I believe we are going to see you at the Intercom conference, we will plug for Intercom. And I'll look forward to that, but just again, finally, thanks again, Nigel, for all the good updates and we are looking forward to a pretty exciting future. So thanks for your time.

Nigel Lovett

Thank you very much.

Operator

Thank you. (Operator Instructions) And our next question is from Josh [Mankowitz] with AGP. Please go ahead.

Josh Mankowitz - AGP

Good morning, sir. Most of what I was going to speak about actually was addressed by the first caller. But I do want to take this opportunity to thank you for a job very well done, Nigel. Just a quick question. I mean, clearly, just from an accounting standpoint or PV-10 standpoint and now from a transaction standpoint, there is a hard value. So, I guess you had mentioned, I know, you had mentioned that you're going to retire some of the debt. But can we talk about your cash flows, like what do you take in every quarter, like from France?

John Gilboux

Do you mean in gross revenue or the net number?

Josh Mankowitz - AGP

No, no, like actual net cash, I'm going somewhere with this. So that's, if you can just bear with me for a minute. Like what are your net cash flows per quarter?

John Gilboux

Net cash flow from France, at the current prices, are somewhere in the $8 million to $10 million a quarter range.

Josh Mankowitz - AGP

Per quarter, okay.

Nigel Lovett

Just to be sure we don't mislead you, it was my misguided, perhaps, decision to lock in a rate of $100 a barrel for half of our production in France until the end of September, so we are not enjoying the full…

Josh Mankowitz - AGP

Yes, I know. You had mentioned that. Look, I'm a trader, I make mistakes all day long, So…

Nigel Lovett

… across the board.

Josh Mankowitz - AGP

… if there is this value basically now with a transaction, which basically sets that price, would you guys consider, understanding that this $80 million would go to retire and to deleverage the balance sheet, which I completely agree. But with the cash flows, would you go out and like help shareholders and like buy back some of the stock and reduce the flow? Because you are basically buying something that as the -- you know, I'm not going to run through the numbers, my numbers are very similar to the first caller's, I mean, this thing, you're basically buying with a proven set price from the marketplace and not just numbers on a spread sheet. You're basically buying something 40% or 50% cheap. Would you guys consider doing that?

Nigel Lovett

We would consider doing that, but we are not in the position to make a commitment to doing that at this moment. And I think we have to be very careful in terms of how we allocate the use of proceeds between debt retirement, adding to cash, and the possibility of buying back some shares. I don't want to mislead you, we may or may not buy back some shares.

Josh Mankowitz - AGP

Okay, understood. I also remember, I don't know if we discussed this on the last call, but I'm pretty sure it was in a press release from you about you retained Merrill Lynch. Is there any progress on that other than the big lunches that they probably take you out for?

Nigel Lovett

Actually, we provided them sandwiches.

Josh Mankowitz - AGP

I'm sure you did with the way things are going over there. But in any event.

Nigel Lovett

No, no. They have been very good to us, very supportive. We've had a relationship with Merrill Lynch, they've actually been on retainer to us since they did the private equity placement for us in April of last year. The whole purpose here was to ask them as an outside agent to help us understand some of the strategic alternatives that we could consider, and they have been helpful in terms of guiding us as to whether this transaction in the Black Sea is a good one or a bad one. They are helpful in terms of guiding into how we might use the proceeds on the sale, and have given us a number of ideas and thoughts, and some good ideas. We have asked them to consider pretty much anything and everything, and that's an ongoing dialogue.

Josh Mankowitz - AGP

Right. All right. So nothing -- neither here nor there with that. And that's basically it. Once again, thank you so much. You know, I really do think, I know some of our calls have been a little taxing, but I really do, you did a good job, so thank you so much.

Nigel Lovett

Thank you.

Josh Mankowitz - AGP

Have a good day.

Nigel Lovett

Thanks, yes.

Operator

Thank you. And we have follow up question from Robert Chapman with Chapman Capital. Please go ahead.

Robert Chapman - Chapman Capital

If you could do us a favor and explain your perspective on finding the balance between getting paid for success in exploration versus finding a counterparty to, as I like to call it, pay for the dream? Meaning that, we transfer the risk and the reward of a prospective drilling activity to a third party in exchange for having that risk off the sheets and your owners being paid up front.

Obviously, if history were to dictate future actions, getting anybody to pay for past dreams that have failed would have been successful. But once again, don't want to necessarily assume that the future of Hungary and other drilling locations is going to be as poor as our problems have been in the Black Sea. Can you kind of give me a perspective on that at this point? Are you more of a bird in the hand theorist or are you more going to reach for the brass ring? Where are you on this?

Nigel Lovett

I've had some tough questions on this call and prior calls. This may be the toughest. I don't want to give you a bull shit answer. I mean, if somebody comes in and offers a very high price, we're not going to stand in the way of that. We're not entrenched as managers, we understand the way the world works. It's a free market. Anybody can buy our Company. But we are not going to allow it to get sold for any meaningful amount less than we think its worth.

We obviously are and should be extremely excited and optimistic, but not unrealistically so. We think, we've got some very interesting exploration plays that can be drilled. We've got a broad range of exploration plays, as John had indicated. We've got at least 10, maybe 12 or more wells to be drilled in all four of our countries of activity in the next 12 to 18 months. And we're not betting on any one, we're not betting on any two, three or four, but we've got a broad range.

I would say, as somebody else did, we've had a hell of a lot of luck in the last 18 months, and unfortunately all of it's been bad. It's time for us to get some good luck. And I think that, again, I repeat: We not entrenched here, but aren't willing to allow somebody to come in and steal what we think is a very good team, very good assets, and very good potential. And what I would say, though, is if we can't validate it in the next year or so, somebody else should have every right to come in and do it for us.

Robert Chapman - Chapman Capital

No, you have some smart investors that have been in this for a long time and I've heard some of the research coming of shops like Palo Alto Investors, and they have, I think, a pretty ambitious upside target that's based on some good research, so I'm trying to keep that in the back of my mind, but that bird in the hand looks pretty attractive sometimes, so just don't lose sight of that, okay?

Nigel Lovett

Absolutely. All right?

Operator

Thank you. (Operator Instructions) And at this time, there are no questions in the queue.

Nigel Lovett

Okay. Well, thank you, everybody, for participating on our call. We think it's hopefully going to be, prove to be an important day in our Company's history. And we are now coming out of the box, as you heard. We will be participating in a conference in Denver next week and we will participate in some additional conferences in the course of the rest of this year. We will keep you informed. We will do everything we can to make sure that the Black Sea sale happens, and we will continue to answer your calls if you call us. We welcome those calls, we welcome criticism, we welcome better ideas, we don't have a monopoly on those. So, thanks again, have a great day. Bye-bye.

Operator

Thank you ladies and gentlemen. This concludes the second quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000, followed by pass code 11117727, followed by the pound, available after 12:00 pm Central Time today until August 28th at midnight. ACT would like to thank you for your participation. You may not disconnect.

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Source: Toreador Resources Corp., Q2 2008 Earnings Call Transcript
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