Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Double Eagle Petroleum Co. (NASDAQ:DBLE)

Q2 2008 Earnings Call

August 6, 2008 1:00 pm ET

Executives

Richard Dole – President and Chief Executive Officer

Steve Degenfelder – Vice President of Land and Regulatory Affairs

Bob Reiner – Vice President of Operations

Aubrey Harper – Vice President of Midstream Assets

Kurtis Hooley – Chief Financial Officer

Analysts

[Unidentified Analyst] – Sidoti & Company, LLC

[Scott Richardson] – Private Investor

Justin Borus – Lazarus Investment Partners

[Mike Temple – Unidentified Firm]

[Bob James] – Private Investor

Bill Richey – Moloney Securities

[George Robinette] – GHR Capital Partners, LLC

Operator

Welcome to the second quarter earnings call by Double Eagle Petroleum. (Operator Instructions) I would now like to turn the conference call over to our host, Richard Dole.

Richard Dole

Welcome to Double Eagle’s call to discuss second quarter results. Joining me today is Steve Degenfelder, Vice President of Land and Regulatory Affairs; Bob Reiner, Vice President of Operations; Aubrey Harper – Vice President of Midstream Assets; and Kurtis Hooley, Chief Financial Officer.

This quarter’s been a dynamic quarter for Double Eagle, with record production resulting from the development of our core assets in the Atlantic Rim as the result of drilling 33 production wells in 2007. Gross daily production from those wells continues to exceed all expectations and was approximately 19.3 million cubic feet per day for the month of June, 2008. We had 23 of those wells on production at quarter end, with gross production of approximately 22 million cubic feet per day, and have since added the ten wells to production.

The current constraint is approximately 25 million cubic feet per day due to compression limitations. In addition, we’re seeing increased production from our Pinedale interest and the encouraging outlook for the Sun Dog and Doty Mountain units. Now Kurtis, will you discuss the financial results?

Kurtis Hooley

Sure. Thanks Dick. Before I discuss the company’s second quarter financial results, I’d like to remind everyone that all statements made during our conference call that are not statements of historical fact constitute forward-looking statements and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The actual results could vary materially from those contained in the forward-looking statements. The factors that could cause the actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K, 10-Q, other periodic filings with the SEC and our press release.

As you can imagine, we’re very pleased to report net income attributable to our common stock for the quarter ended June 30, 2008 was $2,342,000 or $0.26 per share, compared to a net loss of $507,000 dollars or $0.06 per share for the quarter ended June 30, 2007. The net income attributable to common stock for the quarter ended 2008 included $931,000 paid in dividends to the holders of our Series A preferred stock.

In our press release that went out last night, you may have noticed that we added an analysis of proforma cash earnings per share. I did this, and I will continue to present this information as I believe that it presents a consistent, meaningful analysis of our results on a comparable basis to prior periods. As we have increased our price risk management activities, the non-cash impact of our accounting for hedges under FASB 133 has, and will continue to have, a significant impact on our GAAP earnings per share and, in my opinion, does not provide readers of our financial statements with an easy way to obtain the true results of the company during the period.

For the three and six months ended June 30, 2008, we recognized gains on our derivative instruments for our mark-to-market hedges of $1,370,000 and $2,022,000 respectively. With the constant change in NYMEX and CIG pricing, portions of this gain will continue to change in the future periods without any corresponding actual cash or volume related activity.

On a proforma cash flow per diluted share, adding back to the GAAP net income number the effect of non-cash items of stock option expense, DDNA, deferred taxes and deducting the unrealized gain of price rich management, net cash flow attributable to common stock for the quarter ended June 30, 2008, was $6,009,000 or $0.66 per share, compared to net income of $468,000 or $0.05 per share for the quarter ended June 30, 2007.

And when we look at the same quarter results, the significant improvement over last year’s is primarily attributable to several factors. First, as Dick said, our net production for the quarter was 1.49 DCF versus 0.752 DCF for 2007. This represents an increase of 99% year-over-year. This increase is primarily attributable to the success of our Catalina drilling program. We recognized net production at Catalina for the second quarter 2008 of 2,002,000 cubic feet or 151% increase over 2007 production of 3,992,000 cubic feet. During the quarter we were able to get 23 of our newly drilled wells on production in the Catalina unit.

Secondly, as all of you know, during the second quarter the market had a real volatile period around the oil and gas prices in the Rockies. We were able to realize an average price per Mcfe of $7.71 versus $4.64 per Mcfe in 2007. We still have 7,000,000 cubic feet under fixed price contracts that were entered into in early 2007 at an average price of $5.84, but we still were able to realize the benefit of the rising stock market on much of our remaining volume.

The combination of increased volumes and realized prices resulted in net oil and gas sales increasing 265% to $12,456,000 for the quarter ended June 30, 2008 from $3,417,000 in the same prior year period. Overall, the production volume increase accounted for 63% of the increase in revenues and the price increase accounted for 37%.

The third significant component contributing to our increase in net income available to common shareholders was the reduction of production costs by $0.79 per Mcf to a $1.39 per Mcfe for the quarter ended June 30, 2008, versus $2.18 per Mcfe in the prior period last year. This reduction in cost is due to improved efficiency in our operations, as well as if you remember in 2007 we had some residual costs related to the work overs created by the harsh winter in the beginning of 2007.

This reduction cost is partially offset by the increase in DDNA expense for the second quarter of 2008 due to the obviously increased production volume, as well as the capital additions that we’ve made since June of 2007.

Turning to our balance sheet, there are a couple of accounts that I’d like to discuss. First, as shown in our 10-Q, the accounts receivable at June 30, 2008 had a balance of $20,724,000. This balance is made up primarily of $9.9 million of amounts due from our working interest owners for their allocated portion of the 2007 Catalina billing project costs. We expect this receivable to be settled in full prior to the end of the third quarter and the significant portion of the remaining balance of the accounts receivable is from third parties for normal production payments, and the reimbursement of joint interests billing costs.

Our line of credit increased to $19,184,000 due to the costs being related to the 2007 Catalina drilling project and the third party billings for wells drilled in the Pinedale Anticline, as well as the Sun Dog unit at the Atlantic Rim.

We forecast that cash flows from our operation as well as the amounts available under our current credit facility of $50 million which based on the 1231 reserves had a $35 million borrowing base, will be able to fund the cash requirements of our 2008 capital projects. Now as part of our ongoing assessment of price risk, we have entered into numerous hedging instruments, which we believe allows us to partially manage and anticipate our cash position in the future.

As of June 30, 2008, we had approximately 55% of our average daily production for the quarter hedged. This consisted of 7,000,000 cubic feet per day equivalent under fixed price contracts that we entered into 2007 at an average price of $5.84, and two million cubic feet per day under a CIG costless collar with a $6.50 floor and a $10 ceiling. In an effort to limit our exposure to price volatility, we’ve entered into additional hedges for future production as follows. And you can also refer to a detailed list in our June 30 10-Q table for more.

For the period from July 1 to October 31, 2008, we currently have 14,000 Mcf per day hedged. That’s made up of 7,000 per day of the original fixed price contracts at an average price of $5.84, at 2,000,000 at the $6.50 to $10 CIG collar price range, and we also have 5,000 Mcf per day at a NYMEX collar with a range of $10 to $17. For the winter ’09 which is November 1, 2008 to March, 2009 we still have the 7,000,000 per day at $5.84 is still on. We have 5,000,000 a day with a NYMEX collar $10.50 to $20. And with that we’ve coupled the CIG basis hedge at $2.27, which effectively puts us at a CIG basis collar of $8.23 to $17.73.

And we also have for the period of calendar ’09, 8,000,000 under a $7.34 price swap. The 7,000,000 a day under the fixed price contracts continue through July and they fall off from July forward. That’s presented in the table. And we also have 8,000,000 on in fiscal 2011, 8,000,000 per day at $7.07 at a CIG price swap.

With that I will now turn it back over to Dick.

Richard Dole

Thank you, Kurtis. As you just heard the second quarter and year-to-date results reflect the hard work and commitment of our staff for the successful development and growth of our company. Management is firmly focused on growing our asset base, which has the potential for several more years of development in the Catalina unit. Anadarko, the operator of Sun Dog and Doty Mountain Units, most recent plans are to drill approximately 70 wells in those two units in 2008. We have Atlantic Rim midstream assets and opportunities that could have significant potential for future commercialization.

Pinedale has additional locations to be drilled with substantial potential remaining. And there are several offset locations of the Waltman area to develop. While these projects will require multiple users of development and capital, we continue to review new ventures that are a complement to our company’s assets, portfolio and our core competencies.

With that, I’d like to do a very high level review of the current projects. With regard to Catalina, you’ve been given the historical results. We have for 2008, 24 new coal bed methane wells planned, with eight additional injection wells to be drilled. We’ve commenced the drilling activity with three rigs on July 30, and we expect completion of all wells sometime in November of 2008. We will do a little bit of limited infrastructure development on the next year’s drilling program.

For Sun Dog, 2007 drilling plan resulted in 74 new wells. As of June 30, 47 of those wells were producing, the others limited by water capacity constraints. The current gross production from those wells averages about 327 Mcf’s per day. The operator updated the 2008 drilling program to 46 wells versus the original plan of 78.

Doty Mountain in 2007 we had no new wells drilled. Our latest count shows 41 of 52 wells producing. Operator has confirmed that the initial results of the pilot frac stimulation program appears to be positive, and we can address that in the question and answers if you have any additional interest in that.

The 2008 drilling plan has been revised for 27 total wells versus 53 originally planned. They may drill more in Doty Mountain depending on the results in the pilot frac program.

With regard to Waltman, as many of you know we could not to total depth on the original well, and we completed the well up hole. We’ve completed and put production tree in place. We’ve tested between 250,000 cubic feet a day and 275,000 cubic feet a day. We’re waiting to put that on production until we have a second well drilled.

We currently have two to three more wells for 2008 and depending on the results, we could have up to six more locations. With regard to our expiration projects, Christmas Meadows we’re continuing to be actively involved with several parties. All of them are which are significant companies. In regards to Nevada a recent nearby well was drilled and became a dry hole. And while we are in discussions with a few potential partners, even in farm our or participation, the gene pool for people drilling in Nevada are pretty limited so we’ll see how that works out.

As I think we have previously announced, the Madden #1 was converted to an injection well. The south [Fillmore] GMT well, while coming on initially tested at 1.6 million a day is about

100,000 a day and at this point in time there’s no indication that there’s any commercial activity to be done to extend that.

The south Fillmore PH State 16 #1 well we are in the progress of plugging and abandoning. And the Caltrate #2 which was written off last year, are still assessing whether it can be converted into a injection well and if not, it will be plugged and abandoned.

I’d like to take this opportunity to address a couple of market related items. As many of you know, the stock market, the commodity market, and more specifically the oil and gas stocks are experiencing high volatility and a lot of downward pressure. If you compare the latest volatile period of July 1 through the end of yesterday, Double Eagle’s stock price has declined 20%. That compares to decreases of 35% for Barrett, 29% for Queststar, 32% for Ultra, 32% for Chesapeake, 26% for Devon and if you compare that to two commonly followed index funds, the index funds for the American Natural Gas index is down 25% and the Standard and Poor’s E&P Index is down 28%.

There are several aspects about Double Eagle’s market presence that need to be addressed to prepare the company for improved market performance. We’ve performed an analysis that shows few financial institutions that invest in energy stocks actually hold our stock. That’s an indication of a long history of not being focused on the financial markets.

Secondly, we have a relatively small float and low trading volumes which makes it very hard to acquire sell meaningful positions of our stock. This is a deterrent to many if not all the financial investors. While there needs to be multiple steps taken in the next year, the first step is a non-deal road show to visit with numerous funds and institutions not currently invested in Double Eagle. Our first series of meetings will begin in September and October and be hosted by [CEE Bank], Sidoti & Company, and Collins Stewart and will involve approximately eight different cities across the country.

We will have our updated reserve report for proved possible and probable reserves as of June 30, 2008, and an eight month track record of significant revenue, production and a cash flow growth to demonstrate the potential for continued economic growth, and therefore the attractiveness of owning Double Eagle stock.

Next, some of you noted a large increase in the short position the company’s stock in mid-July. This was expected as one of the results from being listed on the Russell’s 2000 and 3000 Index funds. We discussed this with NASDAQ and learned that nearly all the newly listed customers experienced this situation as a part of the firm’s balancing of their portfolios.

It was mentioned last quarter that the board should consider adopting a share buy-back program. The board based, in part upon recommendations of several research analysts and financial institutions, concluded not to pursue a program at this time. We would have to debt finance the share repurchase program, which would divert capital away from growing the company and its assets. And it would also exacerbate the float and liquidity challenges we face. The board will continue to monitor and evaluate this situation quarterly.

As you know, the company can only control certain aspects of the company valuation, which is increasing production, reserves, executing on plans and creating a positive interaction with the stream. Over time we believe that the market will respond favorably to these factors.

And finally, the board is actively pursuing the hiring of a CEO. In the meantime, the board is comfortable with the current delegation of authority to bide specifically for this transition period. And with that I will open up the call for questions.

Question-and-Answer Session

Operator

Okay. Thank you for holding. (Operator Instructions) Your first question comes from [Unidentified Analyst] – Sidoti & Company, LLC.

Unidentified Analyst – Sidoti & Company, LLC

I saw the operational updates from the other day and I was wondering if you had an exit rate for July production for the total company?

Richard Dole

Yes. That was the 22 million gross per day, right, Kurtis?

Kurtis Hooley

Yes.

Richard Dole

The exit rate was 22 million a day and then, yes, that was the end of June, right?

Kurtis Hooley

The end of July.

Richard Dole

Oh the end of July. Yes. Okay, 22 million today.

Unidentified Analyst – Sidoti & Company, LLC

And just, I guess, it seems like, between you guys more and you both kind of paring back on what the activity you’re planning for ’08. You know, given the stellar results you’ve seen so far I was kind of curious why you aren’t, you know, looking to press the pedal to the metal there?

Richard Dole

Well, I can’t, actually I can’t respond to Warren and Anadarko’s since they’re the operators for the two other units and why they pared back. Particularly, and I think, you know, we’ve had about four different estimates of what they’re going to do this year so far. So obviously a lot of strategic thinking going on in their camps.

With regard to Catalina, we’re doing absolutely the most prudent and optimal thing for us to do which is the next 24 wells. And it has to do with making sure that we have enough data to really understand how this field is developing. We – next week – will be commissioning a geologic and reservoir study by consultants who will be looking at both the geology, the geophysics, the hydrostatic nature of the reservoir to give us a better sense of where we should be drilling and not drilling.

And then, you know, quite frankly our wells are so abnormally above the norm that we want to make sure we know exactly why we’re getting that and we want to continue that.

Unidentified Analyst – Sidoti & Company, LLC

I guess looking at, you know, where you guys are and I guess you had kind of mentioned – hinted at the Doty Mountain fracture stimulations. I was wondering if you did have any more color in that regard?

Richard Dole

I’ll let Steve Degenfelder, who met with the operator recently, discuss that.

Steve Degenfelder

The six frac jobs that they informed us that they did occurred over a 15 day period from July 14 to the 28th, and so we really only got results from two of those wells. The other four are coming back on. But the two that we received were very encouraging. While they are not a sustained rate, if we can come back and say that this has occurred over a three to six month period, it does show some very positive reaction to those stimulation jobs.

For instance, the 7-22 well we were told previous production was 84 Mcf a day and 160 barrels of water a day. And after the frac that well is producing 400 Mcf a day and 1,800 barrels per day.

And the 1-22 well was before the frac producing 143 Mcf a day and 189 barrels of water per day. After the frac it is producing 300 Mcf a day and 1,685 barrels of water per day.

Unidentified Analyst – Sidoti & Company, LLC

Those seem like pretty encouraging results. Just to remind me, what’s the working interest now and, I guess if assuming total development there, what ultimately will be your working interest in the Doty Mountain unit?

Richard Dole

The first 23 wells we had 26.5% and as we’ve tried to explain on these conference calls, the workings of the Federal Exploratory Unit as the unit participation area where the wells are located expands, your interest is developed or calculated on the basis of the increase that you own in the hole. So a corresponding drop in your working interest in the hole group is usually offset by the fact that you’re gaining interest in wells that you would not have normally because you didn’t own an interest in the lease hole that was included in that.

So with that, our first interest in 23 wells was 26.5%. The next 27 wells – well the next PA revision was, and where we are at right now is about 20.5%. And in fully developed in the Doty Mountain area, which would be on the order of 250 wells thereabouts would be on the order of between 12 and 15% working interests.

Sundog about the same you know 250 wells. Right now we have 4.5% and that will gradually increase to about 9.25% over those wells as it’s fully developed.

Operator

Your next question comes from [Scott Richardson] – Private Investor.

Scott Richardson – Private Investor

My question’s about the share price. You mentioned that you talked to some experts or whatever and they said that a share buy back program at this time, you know, they didn’t think that that was the way to go. Since, you know, our share prices actually done nothing in the last six months and we’re at a six month low at $14.14 yesterday, and then you talk about the share price of a year ago and how much more we’re selling our gas for.

And a year ago on June 30, our share price was $17.67. And if you guys, you know – you’ve got to do something different. And I wonder if you think the share price is not where it should be that any of you are actively looking at buying shares of the company? Because you’re getting your salary all the time and you’re doing your job and you’re saying, you know, this is the kind of success that we’re having on our job right now.

And we’re shareholders and we’re left holding the bag because that’s all we’ve got. We don’t get a salary and we don’t get a dividend on this stock. So what can you tell us in response to this?

Richard Dole

A couple of things, one it may not fit your portfolio. We are what we are. Two, you must not have listened to the part on what we’re trying to do to expand ourselves in the market. You obviously didn’t listen to the part where our stock in the last month has gone down less than a lot of the companies similar to us in all the indicies.

We are doing things. We’re working very hard. Whether people buy stock in the company at this point in time, be they management or the board is an individual decision. They take a lot of their compensation in stock, which is the same as paying cash for it because you pay income taxes on it. So I mean I don’t know how to answer you question.

We’re doing everything we can do to grow the company. We’re doing everything we can do to increase the market presence. And you know quite frankly if it doesn’t fit you, you shouldn’t be in it.

Scott Richardson – Private Investor

Well, you know, I wish I could get my money back on the stock, that’s for sure. Because I’ve listened to a lot of promises and you guys seem to think that you’re doing everything correctly, but the market is not acknowledging it and the market is always right.

Richard Dole

What promise have we not made recently?

Scott Richardson – Private Investor

What promise have you not? Well, that’s what I’m saying. You guys are fulfilling what you promises are, but the market is not realizing it. There’s a disconnect there. And I’m saying that you guys need to address the disconnect. I heard everything that you said. I’ve been on the whole time. And, you know, you did programs before to introduce your stock to people. And, you know, I just wonder when that you, you know, if these guys are giving you this advice, wouldn’t you realize that maybe they’re not giving you the best advice?

And you should listen to some of the shareholders that are saying “Buy back. Offer a dividend. Do something different, because what you’re doing as far as the share price is not successful.”

You’re apparently doing everything right as far as the running the company, but as far as the share price it’s not. And if you want to look at Anadarko and everything else, I mean, you know, it’s trading at 40 and went up to 80. So, you know, I mean if you want to look at big picture items instead of select little, you know, instances of a month here or there, then you’re not getting the big picture.

Richard Dole

Well, Scott, I think, you know, the board has addressed all the issues. You may not like the opinions or the conclusions the board has come to, and that’s fine. But I think this has been asked and answered and I’d like to move on to the next question, please.

Operator

Your next question comes from Justin Borus – Lazarus Investment Partners.

Justin Borus – Lazarus Investment Partners

Just a kind of a follow up to the last question, one thing I just can’t reconcile because your operating results have been so good and your financial results have been so good over the last quarter and, you know, I assume they’re just going to get better. It seems like every director or officer, the second they have a stock option, you know, $0.50 or $1 in the money, they can’t wait to exercise and sell. And what I can’t reconcile is if this stock is as cheap as it appears to be, why are so many insiders, you know, selling the first shot they get when they can exer –

Richard Dole

We’ve been in a, you know, we’ve been in a – what do they call it? Quiet – you can’t trade? Black out period. Our black out period lifts on Monday so, you know, ask us this question next quarter.

Justin Borus – Lazarus Investment Partners

Okay. I mean I hope you can understand why I can’t reconcile it. Because I look at this stock and I think it’s one of the cheapest stocks out there but maybe you guys know something that I don’t. I don’t know.

Richard Dole

I think it’s a cheap stock too.

Operator

Your next question comes from [Mike Temple].

[Mike Temple]

Onto some other matters, regarding the receivables Kurtis had mentioned that receivables right now of approximately $20 million, offsetting that almost $19 million of bank borrowing. Did I hear correctly the receivables that you currently hold are – represent the 2007 drilling programs? Is that correct?

Richard Dole

Yes. Our problem was that the information required to bill our partners was caught in the bowels of our contractor. And that’s the reason it’s taken so long to get these billed and they have certain criteria that are required before they’re reimburse us. And – very hard, we’ve had to recreate some of the transactions which is another reason why you should always control your own destiny. And I think we’ve got that solved. Kurtis, do you want to add anything to that?

Kurtis Hooley

Mike no, I mean, you know, $9.9 million relates to the 2007 and the balance of it is really receivables related to our current production. You know we accrue and record in the period earned and we don’t get paid for 30 to 60 days after. So the $9.9, $10 million is related to that.

[Mike Temple]

And then for the current 2008 program of 24 wells, do you expect to be able to bill that receivable in a quicker time frame, given that you control your destiny this year as opposed to last year.

Kurtis Hooley

Actually yes, we do, because with us controlling it and our operations group managing the process, we will be billing out through the normal JIBs process all expenditures that we incur on a timely basis. You know, for the other one we didn’t get the invoices for it – significant period of time and so, as we pay them we’re billing them the same month.

[Mike Temple]

And again just going along on the same theme, I’m just trying to get the apples and oranges aligned. Roughly $19 million of bank borrowings, roughly $19 million of current receivables, after you complete these 24 wells your economic interest goes to approximately 68% I believe, so theoretically you’d be billing 32% of the 2008 drilling costs to your partners. I’m going to just take a wild stab and say that the number’s something on the order of $30 million. So a receivable for something on the order of $8 to $10 million is likely to be generated, sometime in Q4 of this year?

Kurtis Hooley

Over the course of the program, yes, it should be probably smaller than that at 12/31. As I said hopefully we’ll be done in completion in November and so within 30 days – so there’ll be a small true up in the interest based on the apex, but yes, but by year end it should be –

[Mike Temple]

And of the bank borrowings you currently have $19 million, do you anticipate for the rest of this drilling season that you have to continue to reach into that revolver? Or have you prepaid most of your 2008 drilling expenses and really don’t need to tap into that liquidity revolver at this time for the rest of the year?

Kurtis Hooley

In my forecast we’ll continue to tap into that a little bit. The variable that, you know, I’m being conservative when I front end that, is the billings from my third party operators are primarily, you know, Anadarko and up in Pinedale when they bill me for their drilling. So, you know, I will continue to take that down. We haven’t front ended a ton of our costs. Since most of our costs are drilling we have purchased the inventory related to the drilling.

But we’ll pull down some of that, we hopefully to keep it kind of constant level with depending again – it’s all dependent on prices. We believe our production will continue in the trend that we’ve seen. So, you know, it’s kind of going to be, we believe in the cycle for at least one more year where we’re going to draw down our debt, dig it up, then our production will help pay it back down until we get to the critical mass, you know, over 50 wells producing at, like I said, the next 68. And then in the next year or two we should be self funding.

[Mike Temple]

And again just following up on this theme, again not asking you to make a forecast because it’s all dependent on this, that, and the other, but assuming that, you know, the quarterly numbers are repeated here these next two quarters you’re going to be generating by my estimates $20 million of cash flow if you duplicate what you did this past quarter. Most of those monies I assume will be deployed in paying for the various CapEx and/or pay down of bank borrowings here for the most part, given the continued borrowing that you need to fund here in the meantime?

Richard Dole

That’s a fair assumption.

[Mike Temple]

Back to this – some of the revenue things, again, there’s so many different numbers that get thrown around, I just want to make sure I understand. The – there were ten wells from 2007 that have not yet been hooked up. And have those ten wells – any specific update on whether those ten wells have been hooked up or look to be imminently hooked up?

Richard Dole

Yes. Just to give you – we did update, you know, as of June 30, they were not completely – but you know our July update, all the wells were on production status. Now that’s not to say that

July 1 we flipped the switch and went from 23 to 33. We brought those on, managing the water, the gas, the compression and so at the end of July as we stated we had all the wells that were drilled on and available to produce.

We’ll give you an update at the end of August, but we have every reason to believe we’re going to continue to grow production and only be constrained by the current compression.

[Mike Temple]

Did the – have you – the last time we talked on the call, the temporary compressor unit – has that been completely resolved? And everything is working the way you had originally anticipated with the compressors? Are you still using –

Richard Dole

We’re using a combination of both electric and gas. The electric compressors that were originally designed, were designed way back in, I guess, early ’07. And nobody ever expected this field to do what it’s doing. So they were, I guess, undersized is a good way of putting it. We did have all the mechanical issues I think we’ve talked about before relative to the manufacturing process. I will tell you that the supplier has stood up and took it like a man, so to speak, and we have one of the two fully up. The other one will be up next week.

We have two gas compressors and we’re keeping those because they can supplement the compression that the two electrics will do. So August is going to give us a better sense on what the 33 wells really will be producing.

[Mike Temple]

Just a couple more questions again. I don’t want to go back to the buy back issue, but regarding the financing, again on the previous call you had mentioned as things were developing you were hoping to be in talks, if you weren’t already in talks, about a new credit facility. Any progress or comments you can make on that score, given the success you’re clearly experiencing and what you anticipate that?

Richard Dole

Yes, we’re in conversations with our current lenders and also some new potential lenders. You know, I think if – we’ve had a wonderful relationship with our current group and we’d surely like to keep them as a part of anything we do. And the question is, you know, how much will they be able to provide us, given some opportunities that might come up that we might need some bridge financing to accomplish. So do you want to answer that any differently, Kurtis?

Kurtis Hooley

No. I think just to add to that, Mike, is that, you know, we’re also kind of, since we’re not in urgent need right now we’re also wanting to wait until we get this new reserve report done on June 30. That will also allow us to see what the true producing reserves are since we have such an increase in production. Then that gives us, I guess, an entry step into the discussion with our banks and give them a better profile of where we’re at. And get a true borrowing base off of what our current production and what our new updated reserves will be.

So we’re kind of – you know, on a hole motel – when we get done with that, which will be short coming.

[Mike Temple]

And then one just operational question, again now that you control your own destiny and given that this is a more manageable 24 wells, I mean, I know you’re saying November but with three rigs out there and no bad weather conditions, hopefully here, in these summer months, is there every reason to be optimistic that these 24 can and should be on line, you know, in stages? Or is this compressor unit infrastructure kind of play itself out a long time?

Richard Dole

No I think we’re okay. I mean, you know, we have compressors on order. We’re looking at alternatives that might be more efficient. But I’m not worried about the long term compressor issues. You know, we do more than just drill 24 wells. We manage 47 other wells with four other compressors and a bunch of injectors. So the operations, while the drilling program is very important, it’s just a small part of what we’re doing to create value.

And we’ve made a lot of changes in how we drill and complete wells and how we manage the water. And so there’s a lot of things with our existing wells we’re doing to improve performance, too.

Operator

Your next question comes from [Bob James] – Private Investor.

Bob James – Private Investor

Double Eagle is not the first company whose stock does not reflect its presumed value, but there are other kinds of markets out there. You can sell the reserves. That is, in this case, is sell the company. Or you could – it’s expensive to run the company, a small company like this, public. You could go private. Have you looked at these alternatives?

Richard Dole

Yes. Last fall the board looked at all those alternatives and concluded that we needed to see really what kind of asset base we had before we could determine whether – what the various options might be. And as you see we’re continuing to grow the asset base and “sell the company” at this time when the market, the commodities market, the ENP markets are all on downward pressure and our production is on upward pressure probably is not the right time.

But, you know, the board always has to evaluate what’s the right maximum – what’s the maximum – the way of getting the maximum value for the shareholders, and none of those things other than maybe going private, I mean the management wouldn’t take it private. If someone wanted to acquire it for cash, that would be a different thing. But, you know, we’re open to any of those things at the board level if they present themselves.

Bob James – Private Investor

If you looked at this a number of months ago, what have you concluded? It’s not the right time. Is that right?

Richard Dole

That’s what we said in December, that’s what we said in March and that’s what we’re saying now.

Bob James – Private Investor

But you see people want to buy reserves, probably go through all – they’ve been through all this. They look at the reserves. They don’t look at whether today’s prices are and that sort of thing. They want reserves. They look at a ten year reserve.

Richard Dole

Okay. Well, let them come look.

Bob James – Private Investor

So you are welcoming anybody that wants to come and look. There is another alternative. I’m not saying you should do this. There is another alternative. You could go hunt them.

Richard Dole

If the board thought that was an appropriate way to do it, and it was the appropriate time, I’m sure that they would agree to do that. They -

Bob James – Private Investor

One last comment then, I guess you don’t think that is appropriate at this time.

Richard Dole

No. I mean, I think I’ve said pretty clearly, the board continually assesses this and we believe that the growth of our assets are creating a substantial more value for the company, whether it’s reflected in the share price today or not than if we tried to do some kind of monetization event today. It’s premature.

Operator

Your next question comes from Bill Richey – Moloney Securities.

Bill Richey – Moloney Securities

My question, I guess, revolves around what we think we’re going to be able to accomplish in ’09 and 2010 in Catalina. And I was wondering if you could kind of bring us up to date in that regard, if you would.

Richard Dole

I think I’ve mentioned this several times that the development of Catalina is going to be highly dependent on the results we get from our geologic and reservoir study. We need to understand, you know, what’s happening under the ground a hell of a lot better than we do right now. So it’s a little premature, but maybe by the end of the year we’ll have a better feeling on where we go in Catalina.

But as you know, it has 200 and some well potential locations in addition to the 500 well locations on Doty Mountain and Sundog. So the answer is we’re continuing to look forward, but we want to look forward and make decisions based on facts not intuition. And we think we’ll get some good information off of this study.

Bill Richey – Moloney Securities

In regard to the latest ten wells that were hooked up recently, are we seeing the same results thus far generally that we’ve seen from the prior 23 wells that were hooked up earlier?

Bob Reiner

This is Bob Reiner. Bill, yes we are. These – all of the wells in [beta odd] that were drilled last year have come on very nicely. We’ve had more wells come on flowing initially than we anticipated, which is good. And our production from the individual wells is on average better than we anticipated, which is generally why we are struggling a little bit getting compression capacity to handle the gas.

Bill Richey – Moloney Securities

A good problem to have.

Bob Reiner

Yes, yes it is.

Bill Richey – Moloney Securities

I guess my question was specifically though the last ten are looking similar to the prior 23 though?

Bob Reiner

Yes, yes very much so. And most of the last ten have been brought on as flowing wells and have not needed pumping initially.

Bill Richey – Moloney Securities

I guess it makes an awful lot of sense to do the geologic and overall study that you’re doing. And I guess, in the back of my mind, is there – the question is asked are we seeing something anomalous that is potentially bad? Everything we’ve seen so far has been to the good thus far, so is there something lurking back there that we’re - want to be aware of?

Bob Reiner

No, I don’t think that’s – that hasn’t been in our mind at all to start on this study. We are looking into this to explain some of the very positive things that are not analogous to other fields of this type, other fields of other types that decline more rapidly in production.

Richard Dole

If you look at Sundog and Doty Mountain in general you have to say they haven’t – that isn’t attractive, at least to this point in time as Catalina has been. And we need to kind of understand what those differences are. There’s a lot of other sub-surface things that we have to understand better that we don’t which is, you know, how does the quality of the water change across the fields? How does the CO2 content which has to do – does – could restrict us in certain pipelines, how does that change as the field evolves?

And of course a myriad of other issues that we have to deal with. So there’s a lot of information that we’re collecting that will be analyzed so will help us make better decisions about how to manage this field.

Bill Richey – Moloney Securities

One last question in regard to pipeline operations, are we making progress with getting third party gas? And with that I’ll sign off here.

Richard Dole

Yes Bill we are in certain discussions around that issue. It’s very early stages. I think that we’ll have a better sense of what we can and might want to do probably by the end of the year.

Operator

Your next question comes from [George Robinette] – GHR Capital Partners, LLC.

George Robinette – GHR Capital Partners, LLC

Could you tell me the pay back time on these current CBM wells at $6 gas in the 2008 program and also in the 2007 program?

Richard Dole

A little bit of a difficult question there. The common method of looking at payback for the wells involves how much time it takes to pay off just the well cost. Here we, in CBM and Catalina especially we have a rather large investment in capital facilities, in compression, in water disposal facility and gathering lines that factor into that. But at these gas prices, you know, our pay out is 18 to 24 months on the aggregate investment.

George Robinette – GHR Capital Partners, LLC

The price management is obviously a big plus and I certainly congratulate you on that. Is this something that we’re doing in house now or are we having to pay for this capability for this risk management program?

Richard Dole

No we’re doing it in house but we do get a lot of advice from a variety of sources that are in the market every day. Kurtis is the point on it and I don’t know if you want to add anymore to that, Kurtis.

Kurtis Hooley

No. You know, we make sure we assess our counter parties, taking all the impacts on not only the pipeline structure, where the futures are at, where our production is. But we also have unfortunately is and most producing companies have limitations related to our debt. But we’re getting over those. Yes, we are managing in house. Dick and I look at that pretty much every other day. I think we’ve been successful so far.

Richard Dole

The challenge has been when you’re ramping up gas so rapidly and you don’t really know how much to have and it doesn’t get reflected in your reserves, relative certain covenants that – banks have relative to, you know, how far out and how much you can hedge. It’s created a certain amount of inability to move as quickly as we’d like to. But having said that, we are moving as quickly and as boldly as we can relative to the changes in the market that occur.

George Robinette – GHR Capital Partners, LLC

Could you address Christmas Meadows a little more and maybe tell us what the deadline is for making a decision and whether or not it would be in the 2008 program? And maybe update us as to what the budget might be if and when it launches? And what our share conceivably could be based on our current financial circumstances?

Steve Degenfelder

The update that I can give you is that we continue to have discussions and show Christmas Meadows to potential partners who we have tried to identify. Companies that have an appetite for this size of a target and also the financial worthiness to take on a project like this. And with the idea that we would farm out our interests and not have a corresponding cost to deepen this well. A secondary well we would and our interests we estimate would be in the order of 12.5% of that existing well and any subsequent wells.

As far as the timeline, everyone’s aware of the high altitude that that well is at and the fact that winter comes very early. As we go forward here, no doubt we probably think that this would occur in 2009 as opposed to 2008.

Operator

Your next question comes from Mike Temple.

Mike Temple

I remember last year at this time I think Steve Degenfelder was able to share with us the site work that BLM had given Double Eagle for the one year forward. Has BLM worked with you and given you site approval for your potential 2009 drilling prospects, again understanding that you may not do them depending on your reserve analysis.

Steve Degenfelder

You mean in Catalina?

[Mike Temple]

In Catalina yes.

Steve Degenfelder

Yes I guess in answer to your question and I’m wondering if this kind of dovetails into something that Bill asked about 2009 and 2010 drilling permits. We don’t see any problem with getting – in fact we’re getting another slew of permits approved by BLM. They said before their fiscal year, which will be September 30 that we’ll have those in hand. So having the permits in hand we will have those. And then as Dick had mentioned as this engineering report unfolds, that will be a driver to us of how many of those approved drilling permits we want to drill.

[Mike Temple]

And to the extent that Dick had said on the call earlier that you’re doing some preliminary work for next year’s sites, that would probably be along the order of roadbeds and things of that nature?

Steve Degenfelder

Correct. That’s location building, road building and utilities, you know, electric, gas and water pipelines into those locations to expedite the drilling next year. Once wildlife stipulations come off it gives us probably a three to four week head start.

[Mike Temple]

Last year I recall that there’s a November 15 deadline but you can make application to stay in the field and do certain work longer if in fact the wildlife are not there. Is that kind of how that works? I do recall that you were able to stay in the field a bit beyond last year’s November 15 official cutoff.

Steve Degenfelder

That’s true. The crucial winter range for antelope and deer begins November 30 and we have been successful in the past of getting some waivers to that. That’s a subjective call by BLM and we will pursue that if it aids in our operations. Another thing that is beyond BLM’s control is once winter gets there, the days get shorter and our progress on work gets less and less during the winter months.

And so even though if wildlife waiver stips – even though we can get those stipulations waived, sometimes it doesn’t make economic sense for us to have men out there working those short hours and getting very little done.

[Mike Temple]

In terms of pipeline revenue, Dick or Kurtis or Steve, what’s a good holding figure to use as a working assumption on the volumes? Or does it vary with the volumes going forward? But what would be a good tolling fee number for investors to keep in mind?

Kurtis Hooley

I think right now $0.50 is what I would use for anybody looking at the projection estimates with that caveat. You know right now all of our volumes from the Catalina field are tied into our line. Go through our line. Third party purchasers pay that fee. We also charge a gathering and compression fee. So even if somebody takes their gas in kind right now it is captive gas. It does have to go up our pipeline, difficult to loop a line, so $0.50 is what I would use.

[Mike Temple]

And regarding the pipeline is the capacity pretty much what it is? Or as you discuss possible third party arrangements and shooting more gas are their easy upgrades to increase carrying capacity on that pipeline? Or are you pretty much, you know, [inaudible] that’s what it’s going to carry?

Richard Dole

Pipeline is capable depending on compression of doing anywhere from 100 to maybe as high as 120 million a day, which is substantially more than we’re putting in it.

[Mike Temple]

Right.

Richard Dole

Does the ability to loop the pipeline which could even increase the capacity more, does the ability to extend the pipeline to alternative markets? And those are all the kind of things that Aubrey and the management team are evaluating over the next couple of months.

[Mike Temple]

Okay. Quite clearly as you bring on more of the Catalina gas this is going to become more and more meaningful cash flow, you just do the numbers. You guys are going to be by 2010 coming pretty close to filling that thing with 100 million a day.

Richard Dole

I hope so.

Operator

Okay. And there are no more questions in the queue.

Richard Dole

Thank you all for coming and appreciate your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Double Eagle Petroleum Co. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts