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VAALCO Energy, Inc. (NYSE:EGY)

Q3 2012 Earnings Call

November 9, 2012 11:00 am ET

Executives

Robert L. Gerry III – Chairman and Chief Executive Officer

W. Russell Scheirman – President and Chief Operating Officer

Analysts

Leo Mariani – RBC Capital Markets

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Neil Nelson – DERS Group

Operator

Ladies and gentlemen, thank you standing by, and welcome to the VAALCO Energy, Inc. Third Quarter 2012 Earnings Report. Before the conference all participants are in a listen-only mode. There is will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) As a reminder today’s call is being recorded.

With that being said, I’ll turn the conference now over to the Chairman and CEO Mr. Robert Gerry. Please go ahead sir.

Robert L. Gerry III

Thank you, John, and good morning ladies and gentlemen and welcome to VAALCO Energy’s third quarter conference call. Please bear with me for a moment while I read our Safe Harbor statements.

This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21A of the Securities Act Exchange Act of 1934 as amended.

Forward-looking statements are those concerning VAALCO’s plans, expectations, and objectives for future drilling, completion, and other operations and activities. All statements included in this conference call that address activities, events or developments that VAALCO expects, believes, or anticipates will or may occur in the future are forward-looking statements.

These statements include expected capital expenditures, prospect evaluations, negotiation to government and third parties and reserve growth. Investors are caution that forward-looking statements are not guaranteed of future performance and that actual results are developments may differ materially from those projected in the forward-looking statements.

These risks are further described in VAALCO’s Annual Report on Form 10-K for the year ended December 31, 2011 and other reports filed with the SEC that can be reviewed at www.sec.gov.

Now joining me today will be Russell Scheirman, President and COO and Greg Hullinger, our CFO, but before I turn the meeting over to Greg to taking through our financials, I would like to mention a few things that have happened in the year past few days that Russell will elaborate on. You will note that from our earlier press release yesterday that we have found hydrocarbons onshore Gabon with our partner the French Total, because we have an agreement with Total to grow well as the tight hold we are not ready at this time to discuss the detail. So surprise to say that so far we are extremely pleased with the results, and I believe our shareholders will be equally pleased, where we’re able to discuss it in some detail.

Our third quarter earnings were actually pretty good, we start for the write off we had to take on our Granite Wash Greek, in fact if you take out the impairment we would have earned approximately $0.13 in other words more than triple our third quarter 2011. And after Russell takes you through our operations, I’ll have a few more remarks with conclusion of the prepared remarks.

So with that Greg, I’ll turn it over to you.

Gregory R. Hullinger

Great. Thank you, Bobby and good morning everybody. Thank you for joining us. As Bobby mentioned our earnings were rather flat that’s not for the non-cash impairment that we took on our Granite Wash property. Let me run through some numbers for you, our third quarter revenues were almost identical to the same period a year ago at $37.6 million compared to $37.4 million and net income to VAALCO was $2.4 million or $0.04 a diluted share for the comparable period in 2011.

As Bobby mentioned, we have the non-cash impairments of our Granite Wash property and if you are probably seeing there are a lot of companies have taken impairments this quarter. I will show some numbers here for you in a moment, but sufficed to say that our reduction in the natural gas price took quite a toll on the investment there. By taking the impairment now, however with less investment to write off in the future, which may improve our results in the time periods to come.

Let me take you through some of numbers now. In Gabon, our revenues for the quarter were $37 million; that compares to the $36.4 million in same period for last year. On a nine month basis, we had a $140 million worth of revenue compared to $147 million, so very comparable.

The volumes associated with those revenues in the current quarter, 342,000 barrels that compared to 322,000 barrels in the same period a year ago and for the year so far where 1.25 million barrels compared to 1.26 million barrels. The price per barrel were still low about $100. For the quarter, we sold our crude at almost $108, that’s $5 less than the same period a year ago and looking at the year in aggregate, we had an average sales price of almost $112 a barrel and that’s certainly less about $1 less than it was for the same period in 2011.

I will put some new information into the queue this time to talk about the inventory, VAALCO share of inventory that’s a board, the FPSO at the end of the quarter, we had 99,000 barrels of oil in the FPSO at the end of the quarter that compared to 119,000 barrels in the FPSO at the end of the third quarter in 2011 that 99,000 barrels is worth about $11 billion worth of revenue that we’ll see in the fourth quarter.

We take you on the Granite Wash where we also have revenue stream from the two wells that we have producing there. Our condensate revenue for the quarter was $178,000 that compares to $146,000 for the three month period a year ago. On a year-to-date basis we’re in about $0.6 million worth of revenue and for the same period 2011 it was the same amount as the third quarter as we only brought the first Granite Wash well up in the third quarter of last year.

Condensate volumes for the quarter were identical at 2000 barrels for the current quarter same as the third quarter 2011. On a yearly basis [for through] nine months, we have sold 7000 barrels of condensate and that close to 2000 last year. The price we received for the condensate current quarter is $77.48 that’s about $3 higher than what we received the year ago.

On year-to-date basis we’re down a bit in the third quarter because of the year average was almost $83 the barrel and compared to year ago it would have been close to $74 or about a $8 increase in the year-to-date condensate price.

If you look at natural gas in NGL our revenue for the quarter was $0.5 million that compared to $800,000 in the same quarter year ago. On a year-to-date basis $1.5 million in the current year versus 0.8 million in the same period in 2011.

On volumes and these are wet volumes but it include the natural gas liquids inside of it we produced – what we sold 147 MMCs in the third quarter this year that compared to a 137 MMCs for the same quarter year ago, year-to-date basis 421 MMcf versus 155.

In terms of pricing and this is where we got stuck with the impairment in the current quarter, the wet price, but this includes the dry gas value and the equivalent of the pricing for the NGLs were $3.32 in the current quarter, a year ago, we were at $5.52. So 41% decrease in that price. And there is a similar correlation in the year-to-date numbers.

So it was on that basis that we ended up having to impair the Granite Wash investment. We impaired it by $7.6 million, our remaining investment there is about $7.5 million that should be well structured as the gas prices rebound, that we won’t have that much more to amortize in the future period.

That’s the details on the revenues. Let me take you through just a couple of numbers on our financial statements, again we’ve got a stellar balance sheet, we had a very aggressive quarter in terms of spending. And we still ended up the quarter only and including our restricted cash at right up $150 million, a significant number that we stick with quarter-to-quarter.

We did a quite bit of investment, we did in the third quarter and we still ended up in acquisition. If you look down that all in our balance sheet, you will see the crude oil inventory at $2.4 million that’s again held at lower cost from market that is worth $11 million to us when we sell it which we would already had a lifting in the quarter and we’ve got a lifting underway right now as we speak.

To our attention one of the number here work in progress is a lot higher than what you see for prior year at $44 million and that includes a fairly cycle investment in four wells that are all in progress in Montana and Russell in just a minute here will take you through each of these wells and their current status.

On the liability side, we have got $38 million worth of liabilities of course no debt including the $38 million is $10 million worth of asset retirement obligations, which would be accounting concept of putting on to your book the discount value of what the ultimate obligation will be to retire our assets in the majority within offshore development.

With that total assets of nearly $300 million and equity at about $250 million, $260 million. Revenues are taking you through for the most part but if you look at our condensed statement of consolidated operations, I just mentioned here as we look at production expenses are a bit higher than the third quarter and a bit higher on a year-to-date basis.

The primary difference for the increase in there is really the effects of some retroactive charging that we’ve done with our incurred, when we renegotiate our contact on the FPSO. We’ve got a very competitive rate on the FPSO and by extending the contract for several years, we agree to go back and restate some of the processing rates and so that includes the impact there.

You also see the impairment listed separately there $7.6 million on the Granite Wash. Income taxes are good number because we’ve been doing initial investments in Gabon on a number of projects also getting ready to start our drilling campaign in December. That means our cost account has had more money in it, which then means that we have less of our volume of barrels listed going into the profit calculation.

So our income tax expense for the quarter was $14.2 million versus $17 million on a year-to-date basis were $60.7 million versus $65 million that we spent a year ago. Lastly on a just couple of items with regard to our cash flows, if you look at our cash flow statement, you’ll see we start with our nine months quarter income at $24.3 million. And if you take the effects of non-cash items and working capital changes that generated net cash provided by operating activities of $44.8 million and the majority of that was actually consumed in our investing at $43.4 there you see essentially a very flat position change in our cash position from the prior period. So that’s our financials, a very sound balance sheet, fantastic shape, like Bobby said, we would have had a good income month, had an up end for the write-off that we were required to take on the Granite Wash property, we look forward to the next quarter.

W. Russell Scheirman

Thanks, Greg. I’m Russell, Chairman, President, COO of VAALCO, and I’d like to spend the next few minutes taking you through our Gabon activities both onshore and offshore. We have some updates on Angola, we recently announced the acquisition of block in Equatorial Guinea. And then we’ll finish up with the discussion of the activity in on our domestic properties in Montana.

I’ll start with our biggest news onshore Gabon on the Mutamba block. We mobilize the rig on to the N'Gongui island on September 1, this was the same island on which we have drilled an unsuccessful test in 2010 that was a vertical well we drilled, we were suspicious that we were near oil based on the geochemical results from that well, we proceeded to executed farm out and brought to (inaudible) is a carrying partner for 50% with them carrying us on the next well that was followed by joint seismic reprocessing effort to try and figure out which direction we might want to go to confirm whether that was all near by and it was decided between Marcellus and Total to drill a directional well from the same surface location, we actually drilled at about a kilometer east of the island and the result was a discovery of an oil column on that first directional test. We’ve since drilled three sidetracks to delineate that column. The discovery is in the Gamba sandstone at a depth of just under 4,000 feet, that is the same prolific sandstone that we produced from our offshore field at Etame.

We expect to get fluid samples over the weekend. The third sidetrack we drilled was much more near vertical so that we can get wire lines tools down and get fluid examples, so that we can analyze those or flow assurance and oil property determination. And we will then work on a development plan to tie the discovery back to Total operated field called Atora, it’s about six miles to the north of this island.

We actually maybe able to develop this field from land because on the other side of the field, there is Peninsula that comes from the Mainland that we maybe able to set up there. So we’re not sure yet, whether we would develop it from the island or from the Peninsula, but that will be one of the things that we will workout with Total over the months to come.

This is a very exciting discovery for VAALCO and we look forward to being able the share the details of it with you shortly. But we are excited that we will have positive impact on our future reserve bookings and that will increase the cash flow for the company from this discovery.

With that, I’ll move offshore at Etame. We are currently producing at about 19,500 barrels per day. We had a six day shutdown in October to do work on the FPSO that kind of reduced the October volumes. I think we averaged right at 15,000 barrels for the month of October with that six day shutdown built-in. But we’re now back on it about the same rate we were before the shutdown.

Tomorrow, we are going to install the produced water separation facility on the Avouma South Tchibala platform and that will reduce the amount of water we are currently spending from Avouma to the FPSO, and will make room for additional oil production when the drilling program commences at the end of this year. The final schedule for that program is now at five well development and work over program. The 350 foot rig KCA Deutag Ben Rinnes is due to arrive in the field on December 3 and we will start at the South Tchibala Avouma field where we are planning two work over and a development well in the Avouma pulp block to improve recovery from that field.

That development well as I previously discussed will test the potential expansion of the Avouma structure based on our new mapping. We’ll investigate this area with a pilot hole and then that will determine where we will set our horizontal rig. There is a possibility that if this expansion is large enough that may make room for a second development well at Avouma.

After the Avouma program, we will move to Ebouri. We have a 7 million barrel prospect there, we call it the Ebouri platform prospect. It’s right underneath the platform. We will be drilling a pilot hole into that. If successful, we will complete that well. As I mentioned, a 7 million barrel should be about 1.7 million barrels net to VAALCO if it works. There is also a (inaudible) objective, it’s a little deeper, that’s about a million barrel in potential which should be about a 0.25 million barrel to us if it proves to be successful.

That we also now have a work over to do at Ebouri, the one well that we are producing there, the Ebouri-2h, one of the pumps has failed. We run two pumps in all our wells, so that we can keep the well going in the event of the first pump failing. But once we have a failure of procedures then to go in and replace both pumps. We've been able to do that such that all our wells are on ESP in the four years that we've been on ESP, we've only had one situation where both pumps failed and that was over (inaudible) who will be fixing that well with the drilling program.

We have one remaining swap for the Ben Rinnes, we have the six well program, four [permanent] and two optional. So I’ve mentioned that three work over and the two development wells so that leaves us one slot. We have two exploration prospects that we’re high grading right now, one is the (inaudible) which I’ve discussed before its about a 50 million barrel prospect. We’re still processing seismic to conclude whether we can upgrade it from a lead to a prospect.

The other is a prospect that’s just north of Etame into the 17 million to 20 million barrel range, and the consortion will be evaluating those while the drilling program is ongoing and we’ll decide at the end of that program, which one of those two wells we want to drill. Possibility we might drill in both if the rig is available, but right now we just have the one slot.

So the future we have now completed the studies for two new production platforms in the Etame area, we’ll be setting one on the Etame field, which will allow us to drill an additional three to five wells into that field.

Second platform will develop the Southeast Etame discovery that we made about a year and half ago and also it we’ll be our first attempt to develop Dentale reservoir at the North Tchibala field. The North Tchibala field contains two zones in the Dentale it was tested it in our productive and we will be drilling at least two wells one in the each zone to see how they do on longer production tests. North Tchibala also has a gas zone, actually two gas zones in it and being able to source that gas will save us a lot of costs of diesel, et cetera in the later life of the field. So that will be a good development for the company.

Platforms are set to be installed in 2014, in the first quarter of 2014. Each of those platforms is about a $32 million net investment to VAALCO, plus each well is about a $7.5 million net cost for VAALCO. So this will be a fairly major capital program during 2013 and 2014. The flip side of that is, it will keep our cost account full so we’ll be paying less taxes to current subsidized the development of this.

It is interesting that over the next 18 months or so as we spend all this money, there are only two months when we will actually not have positive cash flow. So the beauty of this cost account is, you spend the money and the next month you get it back in cost for oil. So there is no hockey stick here of us having to go spend a bunch of our cash and then wait for it to come back as we come production. We will recover these investments as we go out of existing production.

The goal of these two projects is to keep our production at 20,000 barrels a day or higher well into 2016, at which point hopefully we will have some results from some of our exploration wells to follow on behind.

With that I’ll move to Angola. We mentioned last time that we had received a decree for a three year extension until November 30 of 2014. We have finally been advised by our block chairman that the partner that we nominated has been given the green light, enter into negotiations with Sonangol for their final approval to enter into the Block. As soon as that is completed, we plan to begin to pursue our first subsalt prospect in about 400 feet of water, using a semisubmersible drilling rig.

We also plan and our partners agreed to this, the nominated partners has agreed to this once they are into acquire some additional seismic in the deepwater whereon 2-D we see a structure that looks very similar to the one that Cobalt drilled in the Kwanza Basin that led to their big discovery. So we want to firm up and see whether we have a comparable prospect on our Block.

I mentioned Equatorial Guinea, we acquired Petronas Carigali’s interest in that Block last week. It has a discovery on it called Venus that’s anywhere from 15 million to 30 million barrels coming on to the U.S.; it’s a 500 foot oil column in that discovery, it’s a channel that’s in case in shale, they had drilled three wells into it, one into – they’ve got a small gas cap, one into the main oil lag and then one to identify the oil water contract.

There is also two large prospects in the Block. So the plan is to go ahead and drill those before we decide on what to do about developing Venus, because if either one of those is successful, it will require much larger FPSO and what it would take to develop Venus. So we are hoping in 2013, if we can find a rig to get those two prospects drilled, the operating committee, I guess about a month ago approved the budget for those two wells. We will be working closely with GEPetrol to help them operate those wells, because they really don’t have the organization to do it themselves. We are not the operator named, but we are hoping that we will be essentially the technical operator, and there will be the financial operator.

With that, I’ll move to domestic. At Poplar Dome, we had drilled a vertical well to test the Nisku, Red River and Winnipeg formations, and those were unproductive. So, we suspended the well in a fashion that we can come back, either sidetrack it for additional deepwater, the potential and/or sidetracked into the Bakken/Three Forks.

We drilled the Bakken/Three Forks test and we frac that well. The well is currently shutting waiting on artificial lift to equipment. So that we can produce active frac water and unload the well. We hope to accomplish that in the next few months. We will drill a third well on the Poplar Dome, it’s the Nisku test, and that will complete the three well that we needed to drill to earn our 65% interest in the 22,000 acres. We should spud that well in December.

Moving to Salt Lake, our first well is just been hooked up and it is being produced by Avouma, electrical submersible pump to unload the frac water. we have a one-month test set for that well, and at the end, that will be able to announce the results of that first frac. The second well that we drilled was also Bakken/Three Forks test or actually Bakken horizontal and we are currently fracing that well as we speak.

Also in the fourth quarter, we had one more well scheduled up in the Rockies. we have acquired 10,000 acres on the Bakken South Dakota and we’ll be drilling a vertical Red River test and that well should also spud sometime in December.

So with that, Bobby I’ll turn it to you.

Robert L. Gerry III

Thank you, Russell and Greg. In summary, let me just say that starting December this year, we probably will have drilling rigs working for VAALCO and our partners throughout most of 2013. We will be drilling large prospects in Angola and Equatorial Guinea while developing and maintaining our core area offshore Gabon. We of course will announce at a later our future players for onshore Gabon.

Domestically, we are evaluating the ongoing opportunities for Poplar Dome on Roosevelt County, Montana as Russell has mentioned and Salt Lake in Sheridan County, Montana where we are working with our Poplar Dome partner to ask stating the best drilling procedures and locations for perhaps future drilling. There is a lot going on now in VAALCO. I know our stockholders have always been keen on getting our prospects drill to offshore Africa and I think 2013 will show the results of that.

But I’m sure you all have some questions, so with that, John, I’ll turn it back to you to open the floor for any questions that maybe out there.

Question-and-Answer Session

Operator

(Operator Instructions) And first we go to line of Leo Mariani with RBC. Please go ahead.

Leo Mariani – RBC Capital Markets

Hey, guys. Just real quick on Equatorial Guinea, you talked about it is been discovery at Venus there. Can you kind of give us a little bit more color on that in terms of what you think the size of that discovery maybe and additionally what type of capital we’re talking about developed that and then maybe how much would it cost to drill some of expiration wells there?

Robert L. Gerry III

Yeah, Leo. The discovery would probably require three wells to develop it, one of which would be an injector well into the gas cap. Gas cap is small, but you don't want it to shrink or you smear oil up in there and you lose recovery. I think each of those wells completed would be comparable to what we've spent on our subsea well in Gabon, which is something north of $50 million per well. And then the FPSO undoubtedly would be rented. There would be a small cost of getting it installed, but I think the entire project would be in the $150 million to $200 million range, and we have a 31% share of that, so $50 million, $56 million net to VAALCO.

As I mentioned the reserves the $30 million number was Gabon’s number. Gabon originally owned this in barrel, sorry 30 million barrels – it was actually dollars. The 30 million barrels was Gabon’s number. When Gabon sold out the Zafiro field, this was kind of a satellite that came with it, and the 15 million barrels, low end number is consulting firm that GEpetrol hired. I think there is some politics going on these numbers because the government wants the big prospects to be drilled. They don’t want the thing to be developed just for Venus. They want to see these other two prospects drilled. These other two prospects are kind of lookalikes to the Sabra Field, it’s operated by (inaudible) in that area. So I mean they are big, but there is a chance for to be gas there, as well as oil, so they need to be drilled to see what’s there.

Robert L. Gerry III

Russell to be monitors these prospects or couple of $100 million together conceivably net to VAALCO.

W. Russell Scheirman

So we’re equally in drilling…

Robert L. Gerry III

As the government of Equatorial Guinea is?

Leo Mariani – RBC Capital Markets

Yeah I’m sure. Okay that’s a very helpful color there, and then I guess are you guys tendering for a rig kind of as we speak, right now this block has been approved?

W. Russell Scheirman

Yeah, we actually have a meeting with GEPetrol next week. It was interesting, we had a meeting with the Minister of Mines, to get approval of this deal, last month. And at that meeting, he requested a joint letter from VAALCO and GEPetrol as to how this block will be operated. So we got to sit down, we didn’t have any standing really we have been attending some of these meetings as an observer, we’ve told GEPetrol that we were making the acquisition, but until it was approved by the government, we couldn’t really do anything other than just kind of standby and listen. But now that we are officially in it’s time to sit out with GEPetrol and figure out how we are going to take this thing forward and we’ll get started on that next week.

Leo Mariani – RBC Capital Markets

All right. That’s helpful color for sure. Just kind of jumping over Angola, you all talked about sounds like the government is they are on negotiations with your partner here, I guess I’m assuming that would come along with another extension on this lock to drill there also.

W. Russell Scheirman

But we’ve got it till the end of 2014, so. For sure, we’re going to get one Subsalt prospect that we delineated done. Just as soon as we can organize a rig and the partner is on board with that, that was the reason they wanted to get in the block. The government has made it clear that as long as we are actively studying, pursuing, processing they will give us whatever time we need to determine when and where we drilled the second well.

So I suspect if we can’t get it all done by the end of 2014, and we’ve shown good faith and we bought the seismic and we spent the money to reprocess that we could get an extension. But we will talk about that year from now kind of things.

Robert L. Gerry III

Yeah, the goal is where – this week in our office there were six from Angola we went through all this with them and I think Russell is absolutely right, they are enthusiastic now about getting pre-salt wells drilled in Block 5, we showed them this additional prospect, which we need to do some further work on. But at the moment it’s humongous and we’re hoping that the 3D that we intend to acquire, we don’t have to shoot it, this is already been shot. But we just have to buy it and we’ve held our (inaudible) until we have a partner hopefully that the 3D will confirm, what we’re seeing on 2D. And we’ve also finally gotten 2D over the entire block from Conoco so things are working up finally.

Leo Mariani – RBC Capital Markets

Okay, that’s helpful color for sure. And you guys can also maybe just drive the H-2S that you’re seeing offshore Gabon I think in your release, you’ve talked about potentially having to out there and kind of remediate some of these wells and install some new equipment and kind of upgrade the metallurgy our there, any idea of how much that would sort of cost and what the appetite is amongst the partners to be something like that?

Robert L. Gerry III

Well, I think Leo, that we’re still investigating the best procedures to handle that and it’s still really in the investigatory stage, so we don’t have a definitive plan yet to be able to tell you about, I think the important thing to remember that reverse are still there, they haven’t gone anywhere. So the procedures probably will come around to figuring out away and installing some additional equipment on the platform and whatever in Ebouri, so we’ll see what, we’ll keep your informed on that but it’s a little early.

Leo Mariani – RBC Capital Markets

Alright, thanks guys.

Robert L. Gerry III

I just got a note handed to me here that our partner has now been approved in the (inaudible). Can we tell them, who it is? Okay, we’re going to hold off telling you who that is until we get more of a just note handed to me here. So but they’ve approved so now that opens up all kinds of opportunities for us in Luengo.

Leo Mariani – RBC Capital Markets

That’s great news for sure.

Robert L. Gerry III

Yeah, terrific. We are on a roll.

Leo Mariani – RBC Capital Markets

Yeah, for sure, all right. Well, thank you for the color.

Robert L. Gerry III

Okay. I can help it, as the CFO mentioned that, with that approval, that company has prepared to make the payment that is owed to us for that 40% hangover since the other party laps, so that’s all write to income that number is $5.5 million.

Operator

(Operator Instructions) And we’ll go to line of Kim Pacanovsky with MLV & Company. Please go ahead. And Kim your line is open, possibly take yourself off mute.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Sorry about that, good morning everybody.

Robert L. Gerry III

Good morning.

W. Russell Scheirman

Good morning, Kim.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Good morning. It sounds like there is good news all around. Can we just talk about the discovery and I know that you really can’t give us any specifics, but maybe you can talk about what your thinking was before the well was drilled, maybe what the predrill was? And if you can’t go into that, maybe you can tell us what the initial well predrill was? And what kind of structure you are looking at compared with the structure at Atora which I assume is also in the Gabon?

Robert L. Gerry III

Well, I know in past presentations certainly that I have done when we talk about our concession on shore Gabon when ask what do you think your reserves are I will use the figure of about 20 million barrels and I think I am just going leave it right there.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And that was the target size for the entire concession.

Robert L. Gerry III

No that’s just for this prospect.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay that’s right I saw it. Okay, all right.

Robert L. Gerry III

Right, this Discovery now sets up four or five additional leads…

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Right.

Robert L. Gerry III

That we have, that will now take a hard look about turning into prospects.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay.

Robert L. Gerry III

In fact we have some $20 million in sunk cost that we are associated with two wells that we previously drilled, that we are not successful.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay.

Robert L. Gerry III

And we’ll be able to recover those sunk cost out of production from this field, if we get it all…

W. Russell Scheirman

So we got a carry forward of $20 million in the cost to cap.

Robert L. Gerry III

Right.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And what is the timeline that it would take to build the infrastructure to carry crude oil up to Atora?

Robert L. Gerry III

We’ll probably, we will be able to talk about all that Kim probably in the next 30 days to 45 days…

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay.

Robert L. Gerry III

My guess on that, I really want to sort of leave that get out of it for a moment.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay, right. That’s fine. I’ll move on to another subject, I understand. As far as H2S has concerned, did the samples get actually finally get out of the country, or they in a lab right now or they being analyzed, do you know anything about concentrations any more details?

Robert L. Gerry III

Well, we had the samples tested a lab in Congo to confirm that both wells have H2S and there were some people thought isn’t it wearied both wells would show with H2S at the same time. One of them is a much lower concentration than the other and it maybe that we’ve been producing some H2S we just really didn't know it until the second well came in, and it came fairly strong.

What we haven't gotten back yet is the announces that is ongoing is to whether this is bacterial or volcanic H2S. And that will maybe help us understand where this stuff is coming from if we get those results.

But we have ascertained that another operator in Gabon, had H2S in their wells and they bolted on one of their platforms a facility that treats it and cleans it up. And as we speak today, they are doing that to about six to 7,000 barrels a day of solid oil that they produce and they clean it up and send it on, onshore to the shale (inaudible) terminal.

So we won't be breaking any new ground here we decided to do something similar to that I think our existing platform probably couldn't handle all of the weight of that equipment so we'll probably looking at some sort of a satellite facility that we have set right next door to our Ebouri platform that would have basically what you do as you heat the step up and you treat it with sweet gas which sucks all the power stuff out. And then you burn the power gas.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

And if you had to put may be a best on a worse case scenario on how long it would take to have all this done best case scenario, of being able to treat it with this bolt-on, worse case scenario having to put in a whole separate platform. Again what kind of a timeline, we would be looking at?

Robert L. Gerry III

Probably 2015.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And then

Robert L. Gerry III

I understand that we aren’t still producing the 2H well which was our best well by far in the field. In fact it single-handedly produces almost twice what two wells if we check them.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Right, yes. No, I realize that.

Robert L. Gerry III

And we will capture a fair amount of the reserves that would have been captured by those two wells we’ve shut in, if we chose not to clean those wells up.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay.

Robert L. Gerry III

In other words, the 2H well is the highest well on structure and everything moves towards it. It is just that were suspicious by 2015 or 2016 maybe these two move far enough to get in that well, and then you have a situation where you just have to clean it up. So we're just going to have to clean it up.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And then the rig that's coming in is, I assume that’s in transit if you're saying it's coming in December, it's not still working on somebody else’s well, is that correct?

Robert L. Gerry III

It's been in a yard being going through its five-year upgrade, et cetera and the key was they have to hire a big barge to shift the well from South Africa were its been in the yard up to us, and they have firmed up today when that barge will arrive and we now it's about a two week journey. So the barge is supposed to be there on 18 November something. So once you know that date then you know when the rig is going to get there.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay, terrific. And then just one quick last question, coming into the Nisku, the first well was not successful in the Nisku and you’re drilling it Nisku test with the third well. Can you just give us an idea of geologically what change between the location of the first well and the third well that you think that you can be successful there.

W. Russell Scheirman

Well, we were able to learn a little bit about our seismic with the first well, and we can see we can get high to that well on a Nisku structure, and so that’s also a very cheap well to drill to go ahead and earn the 22,000 acres because it’s like about a two week well then we can just punch down, again it could be converted to a Bakken well, if the Nisku doesn’t work, but we want to get, we have to get that third well drilled by year end in order to earn, so that just seem like we can get high to, the Nisku was oily looking when we drilled it, it just didn’t produce…

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Right.

W. Russell Scheirman

So we know there’s oil in the system and if we can get high to that we think that took a good shop.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay, that’s great thanks. Thank you gentlemen.

W. Russell Scheirman

Thank you.

Operator

And we’ll go to Neil Nelson with DERS Group. Please go ahead.

Neil Nelson – DERS Group

Good morning, are there any comps in South Dakota on the Red River formation that you can use as a guide line for that property?

W. Russell Scheirman

Yes, but I couldn’t tell you the name of them, it’s also top of my head, but I’d be happy to send you an e-mail or something. It’s a trend that runs for about a 100 miles in where it’s the Red River, they call it goes into what they call kind of trash down where it porosity pinches out and you’re playing a that that the porosity pinch out and we got a well that made about 2,000 barrels on the edge of this thing that was, we think in the trash zone and we think if we go east, which is the way from that trash zone, we can get into the good permeability and hopefully make some wells. The nearest field, I want to say is eight miles or 10 miles away and was 50 million barrels, so I mean the fields can be good if you find something, and we don't think ours is that big, but we think it’s got to 20 chance of being 20 million barrels if it works.

Neil Nelson – DERS Group

And could you address the human resources given all of the moving parts, which you now have in terms of your ability to develop all of these opportunities?

Robert L. Gerry III

Yeah, we’ve got probably the scientists that had been working in Angola and Equatorial Guinea that’s all being done in house we put together a group for our domestic program in the Bakken and they are the ones that are driving the South Dakota prospect, so at the moment we are okay, but we probably add a couple of people in our G&T Department over the next four months or five months to make sure that we can process all this new information that we’re getting, but we’re aware that of that and looking for a little bit of additional help.

Neil Nelson – DERS Group

I’m really encouraged by your patience and waiting out all of these events, but been so long to come to fruition and looks like they are all coming together?

Robert L. Gerry III

It's been a long wait, and I'm sure the stockholders have been, well, I appreciate the patience of stockholders put it that way.

Neil Nelson – DERS Group

Thank you very much.

Operator

I am assuming there are no further questions in queue.

Robert L. Gerry III

Okay, well thank you all very much, and look forward to seeing you in about three more months. Okay, good bye.

Operator

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect

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