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

Executives

Marty Beskow – Vice President-Finance and Head-Investor Relations

McAndrew A. Rudisill – President and Director

Paul Wiesner – Chief Financial Officer

Analysts

Ronald Mills – Johnson Rice & Company L.L.C.

Stephen Berman – Canaccord Genuity

Curtis Ryan Trimble – Global Hunter Securities, L.L.C

Paul Grigel – Macquarie Capital (usa) Inc.

Emerald Oil, Inc. (EOX) Q3 2012 Earnings Conference Call November 9, 2012 10:00 AM ET

Operator

Greetings, and welcome to the Emerald Oil Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode, a brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Marty Beskow of Emerald Oil. Thank you, Mr. Beskow. You may begin.

Marty Beskow

All right thank you, Kevin. Good morning, this is Marty Beskow, Vice President Finance and Capital Markets. Welcome to our Emerald Oil’s third quarter earnings conference call. Yesterday afternoon we issued a press release and Form 10-Q to report our financial and operational results for the third quarter ended September 30, 2012.

We also posted an updated investor presentation on the homepage of our website at emeraldoil.com. On the call today, we have McAndrew Rudisill, Director and President and Paul Wiesner, Chief Financial Officer. Please be advised that our remarks, including the answers to your questions, may include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call. Those risks include, among others, matters that have been disclosed in our earnings release, as well as in our filings with the Securities and Exchange Commission including the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we’ll also make references to adjusted EBITDA, adjusted income or loss, which are non-GAAP financial measures, reconciliations of these amounts to GAAP measures can be found in our earnings release.

I will now turn the call over to McAndrew.

McAndrew A. Rudisill

Thank you, Marty. Good morning to everyone. We’ll begin with some general comments from our management team and then we’ll open the call for a question-and-answer session. Third quarter was a transformational quarter for Emerald Oil. We closed the acquisition of Emerald Oil in late July and rapidly began the transition to operator, while restructuring the balance sheet of the company. The Emerald acquisition significantly strengthened our management team and added operational capabilities to develop our own operated Williston Basin drilling program.

We utilized the data from our non-operated database with over 200 well participation wells in the Williston Basin to identify top performing operators and geographic areas within the basin that we are targeting to grow our operated leasehold position.

With this data, we targeted our acquisition of 4,500 net acres in McKenzie County, North Dakota that was announced in early September and closed on October 5, following our $75 million equity offering in late September.

Our land team in Billings, Montana led by J.R.Reger has been busy consolidating our acreage to build operable drilling units. In July, we identified approximately 6,800 net acres that we targeted for conversion from non-operated acreage into operable DSUs.

I’m pleased to report the land team has already converted 4,600 net acres in Richland County, Montana that represents nine operable DSUs on 1,280-acre units. This conversion process is well ahead of our original projections. The conversion is being executed with cashless trades of acreage with other operators in the area.

These DSUs now represent a potential third focus area for us in the Williston Basin. With the conversion of these operable acres, Emerald Oil now has about 1,600 net operable acres in the Williston Basin and another sorry 16,000 net operable acres in the Williston Basin and another 33,000 net acres that we classify as non-operated.

While we transition our focus towards growing operated production, we continue to derive significant production from our non-operated wells. During the third quarter, we added 31 gross of 1.69 net wells to production, we produced an average of 972 BOE per day from our 181 gross or 8.25 net non-operated wells that are producing from the Bakken and the Three Forks formation in the Williston Basin. These wells produced $7.1 million of revenue and $4 million of EBITDA during the quarter, the third quarter.

Activity in the Williston Basin continues to remain strong. As of the third quarter end, we elected to participate in 21 gross or 1.08 net wells that we’re drilling waiting on completion or completed. We expect these wells will add to production in future quarters. We expect our production from non-operated wells will be flat to up slightly quarter-over-quarter until our operated wells come online.

We are currently modeling that we will add half the net non-operated wells to production each quarter over the next few quarters. We expect to exit Q4 2012 with production that is slightly over 1,000 BOE per day.

In regards to our operated program, we previously communicated that we plan to spud our first operated well by early 2013. We are well ahead of schedule on this plan. We currently have seven wells permitted of our nine operated DSUs in McKenzie County, North Dakota. We have two pads completed one of which is installed tank batteries.

Our contracted rig is now on location in McKenzie County, North Dakota and began drilling the Mongoose well on November 2. After successfully drilling the first well, we plan to drill our second well the Arsenal from the same pad. After these two wells are drilled, we will concurrently build to require tank batteries on the site and move the rigs to drill our third well to pirate from a single well pad that is three miles of the east of the Mongoose Arsenal pad.

We plan to batch complete these first three wells and initial results will be available after the wells are producing, which we estimate will be during the middle part of the second quarter of 2013.

Based on this timeline, production from these wells should start to come online in the second quarter of 2013. We anticipate our operated wells will significantly add to production in the third and fourth quarters of 2013. We expect to double production by the end of 2013 and exit the year with over 2,000 BOE per day.

Based on strong results from wells that are near our acreage using an experienced drilling crew and similar completion techniques of operators that have been successful in the immediate area, we are confident in our ability to execute and produce economic Bakken wells.

Specifically, (inaudible) well that is located on the DSU adjacent in north of our Mongoose well produced an average of 678 BOE per day in the first 30 days. So there are number of other wells that are northeast of our property, some of which are operated by Triangle Petroleum that also produce similar results.

We believe that we have done everything possible in our operational planning to address potential execution risks and to position Emerald to develop highly economic oil wells.

I will now turn the call over to Paul to review our financial plans.

Paul Wiesner

Thank you, McAndrew. We ended our third quarter 2012 with $33.3 million in cash and $15 million drawn on our Tranche A credit facility. On October 4, we closed down on our acquisition of 4,500 acres in the McKenzie County for $15.4 million in cash. We also received $2.5 million of net proceeds in late October as the underwriters from our September equity offering elected to exercise an overallotment option.

Therefore, subsequent to the events, our cash balance was approximately $20.4 million. We’re maintaining our previously stated 18-month capital budget. So for the remaining 15-month period ending December 31, 2013, we plan to spend approximately $72.5 million on well development in the Williston Basin. We plan to spend $55 million to drill 10 gross or five net wells during 2013 assuming a 50% working interest at an average cost of a $11 million per well. We also plan to spend approximately $17.5 million over the same 15-month period to participate in 1.9 net non-operated wells at an average cost of about $9.2 million per well.

We currently have $15 million drawn on our Tranche A credit facility, which was based on our December 31, 2011 proved reserves. Since then we’ve added to our acreage with operated DSUs in McKenzie and Dunn Counties of North Dakota and have added almost a 100 gross wells or 5.25 net wells to our proved developed production.

We anticipate our available credit will increase above our current levels and with the significant changes with the significant changes since year-end 2011. We believe our cash on hand, cash flow from operation, additional borrowing capacity and the potential to monetize non-operated well AFEs will adequately fund our dedicated one-rig drilling program in Williston Basin.

During the third quarter, our average sales price for crude was $83.56 per barrel, which was a differential discount of about $8.50 per barrel relative to WTI over the same period. About 65% of our current production is hedged with costless collars at a floor of $90 and a ceiling of $103.50 per barrel and swaps at $88 per barrel.

Including the realized effects of several commodity derivative hedges that negative impacted revenues by $121,000 or $1.46 per barrel during the third quarter, our net realized price for crude was $82 and $0.10 per barrel.

At this time, we’d like to open the call to questions, there is a question-and-answer portion of our call. I’ll now turn our call over to Kevin, our moderator.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions). Our first question is coming from Ron Mills from Johnson Rice. Please proceed with your question.

Ronald Mills

Good morning guys. Question on the operated programs, you obviously started drilling within the past couple of days. Can you just McAndrew walk through the timeframe to get the three wells drilled? And then talking about starting to bring production on and by the middle part of the second quarter a, how do you get there and b, from a frac standpoint, where are you in conversations with the frac crew and what style of frac do you think you’re going to employ?

McAndrew A. Rudisill

Sure. Ron we estimate that it will take approximately 30 days to drill each of these wells. So the three wells should be down by the end of January. The rig will continue to drill on the other well locations that we have permitted in McKenzie, post completion of these initial three. And we anticipate that the frac crew will be set up to start fracking operations in March of 2013. We’ve decided to do our initial fracs with Liberty Oilfield Services; this is because they’ve produced very good results in some of the wells directly to our north.

The type of frac that they use is a slick water frac, it uses high volume of fresh water and the reason why the frac will probably start in March rather than immediately after drilling the first three wells are drilled post the end of January is because we need to position the company to have enough fresh water available in those northern DSUs, so that the fracs can be batch completed in concurrent sets.

Ronald Mills

Okay, great, thanks. And then secondly just on the acreage conversion, adding the nine DSUs that’s two-thirds or so, would you expected is, where are you in the negotiation phase on the remaining acreage for conversion and is the remaining acreage also somewhat close to that, that Richland County area? And then the last one on that part is, who are some of the people you are able to affect these swaps with?

McAndrew A. Rudisill

Okay. I’ll start with the last part of that question. First the swaps in Richland were primarily done with the offset operator in area, which include Oasis, Whiting and Brigham. Most of those DSUs, I think are between 7 miles and 10 miles of the North Dakota border. And I’m really happy with the way that the land team performed on converting those DSUs in such a rapid manner over the course of the last couple of months.

And on the balance of acreage remaining of that 6,800, most of that is in Williams County and I feel pretty comfortable that we’re going to be able to convert that in the next couple of months. I think we should be able to do that by the end of the first quarter.

Ronald Mills

Now I’ll let some I’ll jump off, and someone else get back on, going back, five more. Thanks you guys.

McAndrew A. Rudisill

Thanks Ron.

Operator

Thank you. Our next question is coming from Steve Berman from Canaccord Genuity. Please proceed with your question.

Stephen Berman – Canaccord Genuity

Good, morning everyone. Sticking with the operated program, McAndrew, at this stage, now that it’s underway and congrats for being ahead of plan on that. When do you think you might start going after Dunn and even Richland on an operated basis? I know that the permits are all seem to be in McKenzie, but to have crystal balls to when you might start drilling in Dunn?

McAndrew A. Rudisill

Sure Steve, so as I look into my crystal ball, I think Dunn could probably be added to the drill program in the back half of 2013. We’ve got one well that we’ve designed in Dunn already that’s effectively ready to be AFE-ed and permitted. So it’s going to be an easy transition to start the drilling program there and we’ve got the balance of wells that we’d like to drill in Dunn, theoretically setup.

So I think it’d really be a matter of timing as to when we complete the [HBD] process in McKenzie and then we’ll need to look at our cash flow at that point in time and decide whether it make sense to add a second rig to start the drilling of Dunn.

In regards to Richland, we’re really encouraged by the results that we’ve seen in Richland and some of the wells that we’ve participated in with the operators that I mentioned before and that we traded this acreage with. But because the acreage doesn’t expire until the end of 2014, I think it’s in our best interest to actually let them continue to drill wells in the area around this, perfect the completion techniques, which we’ll get to watch from the non-operated basis and then make a decision on how we go about drilling Richland County.

Stephen Berman – Canaccord Genuity

Okay. And then on the well cost here, you’ve gotten $11 million number in there and pretty much every operator up there has done a really nice job over the last quarter to bringing well cost down, are you just are you being conservative within the $11 million number is there some signs in there given that these will be your first wells, can you elaborate a little on that the $11 million number?

McAndrew A. Rudisill

Yeah, I’d say we are being conservative, because this is our first couple of wells. I do anticipate that these wells will pump up towards that $11 million because of the amount of freshwater that we’re using and the type of frac that we are doing. So the cost of fracture simulation is generally going down in the area, but these fracs that both Savanna and Liberty Resources have used in the wells around us, because of that volume of freshwater that’s used in the ceramic process that we’re going to use, the cost is going to be higher, but we believe that result should be commensurably better.

Stephen Berman – Canaccord Genuity

Okay, all right, great, thanks a lot.

Operator

Thank you. Our next question is coming from Curtis Trimble from Global Hunter Securities. Please proceed with your question.

Curtis Trimble - Global Hunter Securities, Llc

Thank you. Good morning everyone. Well, somebody give a little bit more detail beyond just the slick water and kind of what you’re including in the AFEs for the initial crude wells on lateral length stages, proppant type et cetera.

McAndrew A. Rudisill

Sure. Okay, so the wells go down to 10,500 feet approximately. We then turn horizontally and drill for another 10,000 feet. It’s a 35 stage frac ceramic proppant is similar to the ceramic proppant used in the same cross-linked gel fracs and ceramic is mixed in with slick water and then pumped at a very high pressure into the well.

Curtis Trimble - Global Hunter Securities, Llc

Thanks a lot, I appreciate it. And then hoping to get a little more idea about money going out the door and then kind of weakened up to the timeframe that you mention can you kind of go over uses of capital by we sold and then also by drill and complete before first quarter, second quarter of next year. Thank you.

McAndrew A. Rudisill

Sure. We’ll form that up right now.

Paul Wiesner

Okay. So our guidance on operated production think about adding two gross wells in the second quarter of 2013 and when I say adding we’re talking about bringing into production. In the third quarter, three gross wells, and then in the fourth quarter of 2013 three gross wells as well and then use an average of 50% working interest. On each of these operated wells, I would use a $11 million as the AFE.

And then on the non-operated side for the first two quarters, I would model 0.5 net wells per quarter through Q2 of 2013 and then 0.2 net wells per quarter for the balance of the year and the average on those wells is $9.2 million per well. So that adds up to a total plant capital expenditure on the operated program of $55 million and on the non-operated program fell to $17.5 million, five net wells, 10 gross operated wells, 1.9 non-operated wells, net.

Curtis Trimble - Global Hunter Securities, Llc

$72.5 million capital program for the balance of this year, next year basically and then we sold on top of that?

McAndrew A. Rudisill

Yeah we have so much acreage right now that we’re very focused on [HPP-ing] our acreage and I think that anything you could see our leasehold slightly grow due to some land trades we are doing with operated AFEs that we have, sorry non-operated AFE’s that we have in hand in trading those into either operated leasehold positions or just swapping out to consolidate leasehold.

Curtis Trimble - Global Hunter Securities, Llc

Thank you. I think I have to get back to my desk and (inaudible) open I appreciate it.

McAndrew A. Rudisill

All right.

Operator

Thank you. Our next question is coming from Paul Grigel from Macquarie. Please proceed with your question.

Paul Grigel – Macquarie Capital (usa) Inc.

Hi, good morning. Just following up a little bit on the CapEx team there, obviously you guys pulled forward couple of the non-op well. If you could want just kind of discuss the thoughts about going ahead with those and then touching on the monetization of some non-op AFEs and how much you think that could be going forward in terms of a potential inflow of capital?

McAndrew A. Rudisill

Okay. So, one of the reasons, why we decided to pull forward some of the non-op AFEs this quarter is really twofold. Number one, in our analysis of the operators that were drilling the wells in this quarter, we wanted to participate with these operators in particular, we had some conversations with them in upcoming drill schedules, we like the geology of what they were doing and decided purposely decided to pull some of that CapEx forward participate in these wells.

And then secondarily in terms of AFEs that we have in hand that we can potentially trade for cash. We’re going to really work diligently to hold to our planned capital expenditure budget on the non-operated side. So the AFEs that we’ve received from operators going forward are really going to be force [ranked] very carefully and we’re going to decide, which one that we need to monetize.

So we can’t project how many AFEs we’re going to receive per quarter, right now in the non-operated side is just the way the business is, but what we can do is control how much we’re going to spend on a quarterly basis on these AFEs.

Paul Grigel – Macquarie Capital (usa) Inc.

Okay, make sense. And then just on the acreage front, the 2,200 acres you’re still working on. Is there a potential ones one-third of acres are completed to continue on with additional acreage conversions in 2013 or is there enough on the play that 16,000 acres plus that whole they’re focused on drilling?

McAndrew A. Rudisill

We have a lot on our play with the current operated acreage position that we have in the three counties to occupy a full drill program for 2013. And what I say is as our reserves and cash flows start to build over the course of the year then we’ll start to analyze how we add to our acreage in all of these operated areas that we’ve already started to build.

In regards to the conversion of the balance of that 2,200 acres, for the balance of the non-operated portfolio, I think about that more as we use some of that to continue doing this cashless trades to core up the areas in our operated areas or just continue to participate on non-operated basis, if the working interest are too small to trade.

Paul Grigel – Macquarie Capital (usa) Inc.

Okay, great, that’s all I have, thank you.

Operator

(Operator Instructions) Our next question is a follow-up from Ron Mills from Johnson Rice. Please proceed with your question.

Ronald Mills - Johnson Rice & Company L.L.C.

Two, can you expand a little bit on the commentary in your lease about the credit facility and multiple lenders discussions with multiple lenders, as it stands right now, I think you have $22 million or $23 million of borrowing base under your Tranche A and B based of on the year end reserves, but where are you in the process with negotiating a new facility and any other color around that?

McAndrew A. Rudisill

Ron, I feel comfortable saying that we are very far along in the process with Wells Fargo bank to put a new credit facility in place. And I expect it will be able to do that in the next two weeks. And I think the size of that will initially be $27.5 million interest rate will be around LIBOR plus 200. And then we’ll have the ability to redetermine the facility on a quarterly basis, as we bring operated wells into production. So it’s really a flexible facility, where we are happy with the work that Wells Fargo has done on the reserve engineering of it, and we think it’s really going to hold out to grow this company and it basically help us get more fully funded for 2013 with it in place.

Ronald Mills - Johnson Rice & Company L.L.C.

Perfect. And then lastly, just I think Paul had mentioned, potential monetization, I’m assuming that the things that are still out there would be Sandwash and/or Heath. I know Sandwash is one you talked about more than the Heath is a potential monetization. What are some of the bogeys you are looking for from industry and on the Sandwash over the coming months?

Paul Wiesner

Okay. So Sandwash is on our radar to monetize in the next couple of quarters and we are assessing all of the activity is going on around, it’s in the Sandwash right now. Shell is probably the most active operator along with Quicksilver. We continue to watch the results, but they, Shell in particular continues to keep their drilling results very close to divest as we would expect that they would and the acreage is really tightly held in that area.

On page 19 of the presentation that we put on our website, we put out a more detailed map that outlines some of the public and private companies that hold acreage in the area and some of their well results. So we are going to analyze what to do with this and timing of monetization over the next couple of quarters.

Ronald Mills - Johnson Rice & Company L.L.C.

All right, that’s all I have. Thank you so much.

Paul Wiesner

All right, thanks.

Operator

Thank you. We have reached the end of our question-and-answer session. I’ll now turn the floor back over to management.

McAndrew A. Rudisill

Thank you for joining us on the Emerald Oil conference call and we will talk to you later.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for participation today.

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: Emerald Oil's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts