Double Eagle Petroleum's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Double Eagle (DBLE)

Double Eagle Petroleum Co. (NASDAQ:DBLE)

Q3 2012 Earnings Call

November 8, 2012 11:00 am ET


Richard Dole – Chairman, CEO and President

Kurtis S. Hooley – Senior Vice President and Chief Operating Officer

Ashley Jenkins – Vice President and Chief Financial Officer


Kim Pacanovsky – Mcnicoll, Lewis, & Vlak


Welcome to the Double Eagle Petroleum’s Third Quarter 2012 Financial and Operations Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to your host for today Richard Dole, Chairman, President, and CEO. Richard, please go ahead.

Richard Dole

Thank you very much. Good morning everyone. I would like to welcome you to our call to discuss the financial results for the third quarter, and give you a brief update of the current activity at Double Eagle. Joining me today is Kurtis Hooley, Chief Operating Officer, and Ashley Jenkins, Chief Financial Officer.

The financial results that we continue to experience, which Ashley will discuss in more detail, reflects the same challenges our peers are experiencing continuing low natural gas prices. We continue to protect our revenues with the successful hedging program, but there is currently limited upside in the market.

We do have positive news though as we continue to increase our production up 5% for the quarter versus last year is do primarily to a 16% increase in our operated Catalina unit production as a result of the 2011 drilling program. We successfully up spaced the wells from 80 acre spacing to 160 acre spacing and are seeing the highest per well average production of any of the prior drilling blocks.

The company currently is completing and testing the Niobrara appraisal well in the Catalina unit. Two deep gas formations and three of the lower Niobrara benches have been fracture stimulated. The Niobrara completions are currently on flow back and are being evaluated. The company currently plans to start the completion of three additional Upper Niobrara stages during the fourth quarter of 2012.

We continue to see increased success from Niobrara activities to the South and West of the company's 70,000 gross acres in the Greater Green River Basin by companies such as Shell, Quicksilver, Samson and Entek. There is increased activity near the various areas where we hold an additional 28,000 gross acres by companies such as Noble, Sirk and Encana. We expect to de-risk some of our current land holdings through third-party activity.

Also, the major oil and gas company with which we have a non-binding form out is completing the development plan and continues with their preparation for seismic to be shot next year for the 2cf target at the Main Fork Unit.

And to provide some more details on the financials, I'll turn it over to Ashley.

Ashley Jenkins

Thank you, Rich. Before we continue, I would like to remind everyone that all statements made during our conference call that are not statements of historical facts, constitute forward-looking statements and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Our 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 and 10-Q, other periodic filings with the SEC and our press release.

In looking at the year-to-date third quarter results, for the nine months ended September 30, 2012 we reported a net loss attributable to common stock of $10.1 million or $0.89 per share compared to net income of $3.1 million or $0.28 per share. The 2012 results include non-cash loss related to the change in fair value of our economic hedges of $8.1 million versus non-cash gain of $5 million in the same prior year period. We did realize a cash gain from our hedges in 2012 of $10.2 million.

Our revenue from oil and gas sales at spot prices plus all realized gains and losses on our hedges for the nine months ended September 30, 2012 is $27.9 million compared to $34 million in the prior year period. This $6.1 million change is a result in the decline in our realized natural gas price, which includes the cash settlements from hedges and decreased from $4.75 for the nine months ended September 30, 2011 to $3.49 in the current period. This decline in our realized price is attributed to 40% decrease in the Colorado Interstate Gas market price offset by the hedges in place in each respective year. This was also partially offset by an increase in production of 8% year-over-year.

As in the prior quarter, our press release issued this morning included our clean earnings which is an analysis of pro forma cash flow earnings. As shown in the table, adding back to GAAP net income, the effective non-cash items of stock option expense, DD&A and deducting the unrealized gain and loss from our hedging instruments to before tax clean earnings attributable to common stock for the nine months ended September 30, 2012 was $10.4 million or $0.92 per share compared to $16.6 million or $1.49 per share for the nine months ended September 30, 2011.

Our general and administrative expenses increased over prior year due to the non-cash stock option expense related to the 2011 Long Term Incentive Plan grant. Despite the lower gas prices, we were able to realize cash flows from operations of $13.6 million for the nine months ended September 30, 2012 which shows the strength of our low-cost properties as well as our hedging program.

We also recently went through our semi-annual borrowing base redetermination with our banking group, and we're very pleased to say our borrowing base was reaffirmed and remains at $60 million under the current existing credit facility. We currently have $46.2 million outstanding, and we have an interest rate hedge in place for $30 million through September 30, 2016 walking in an effective rate of approximately 3.6%.

And one last item, the net income attributable to common stock in the first nine months of 2012 and 2011 included $2.7 million paid in dividends to the holders of our Series A preferred stock.

Kurtis S. Hooley

Let me jump in here for a second. Good morning everyone. This is Kurtis Hooley. I want to talk about recently we set our proxy to our preferred shareholders asking them to amend the existing plan in place. The closed amendment would allow for the company to enter into a merger transaction or any other transaction where a change of control would take place that's defined in the document. And if Double Eagle remained as the publicly trade entity, then we would not be obligated to call the preferred. Under the existing plan, we would have to retire all the preferred upon that transaction.

As you can imagine, when looking at merger candidates are doing deals with our stock both private and public, the requirement to retire is essence $40 million of debt does create an additional hurdle in those situations. We have just started this proxy process and we should know in a few weeks the results of that.

Also in October, we close on our acquisition of the working interest purchase from Anadarko in the Atlantic Rim. This asset purchase adds about approximately 18 bcf to our net reserves at the time and now we have interest in Spy Glass Hill and Catalina.

And looking forward to 2013 from an operation standpoint, we're looking at doing some limited drilling in the Catalina unit, continued participation of Pinedale Anticline and then on the results of our appraisal Niobrara well that we’re looking right now, we may expand project also.

Based upon one resources comments in press release of yesterday, we don't expect in the drill and supply gas sale at any time soon. We will continue to focus our efforts on improving our operating efficiencies, looking for partners or form in form outs with our undeveloped acreage and M&A transactions that increase shareholder value.

Richard Dole

Thanks, Kurtis. As Kurtis mentioned, we are budgeting for drilling operations in Pinedale and Catalina. Our current estimated capital expenditure budget for 2013 is approximately $15 million. That would exclude anything that we might do in the Niobrara. We are optimistic about the Niobrara well, but additional time and testing is required before we can provide any additional details.

With that I'll open up the call for questions.

Question-and-Answer Session

(Operator Instructions) And our first question comes from Kim Pacanovsky with MLV & Company.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Good morning everyone.

Richard Dole

Good morning.

Kurtis S. Hooley

Hi, Kim.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

I guess since you discussed the preferred amendment that kind of there is the question what types of, I mean I know you guys are always out there in the marketplace looking for potential combinations, but what is the ideal combination for Double Eagle?

Richard Dole

Well, the thing we have some several criteria. First of all we try and stay in a combination stay in the private markets. We are heavily that work with the private equity groups. We have a pipeline of opportunities that we're looking at generally two or three at a time, almost all the time over the last 12 months. But we look for diversity of assets both as geography and as to hydrocarbon side oil versus gas liquids, rich versus dry.

And also we’re looking for technical expertise and lots of the companies that we’re looking to evaluate for possible combination have teams that have been together one or two times, and have help grow companies in dramatic ways and I have a track record of doing that. So that's generally what we're looking for in combinations.

And one of the reasons that we have signed Kurtis to the operating role here in the company is, there are lot of really interesting projects that are now evolving. And we are not necessarily following the shale [plus]. There is a lot of really attractive projects that are available in conventional areas and we are looking, we're just starting to build a pipeline of those activities and we’re looking at several of them as we speak.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And is one of the potential avenues are right selling the company?

Richard Dole

That has not been discussed at the Board level, so I guess the answer is probably no.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And then can you just give us an update on any well results that you’ve gotten window around your Niobrara acreage and also when we might expect a press release with some read information on your well?

Richard Dole

As far as comparable well results, there isn’t any thing in exact proximity. Most of the activity in the Niobrara, in the Wyoming site, the site where we are in the Greater Green River Basin in Colorado, but it is moving up into Wyoming, it’s Shell and Quicksilver fall into joint-venture they have five wells, they will be drilling in addition to the wells they’ve already drilled, that's a sizeable joint-venture. I think it was around 300,000 net acres.

I hear from people in the area, group in that area and I hear from people that Shell has just got people everywhere. So they are taking this as a very serious play and they’ve got the expertise and the capital to continue to pursue it. There are some smaller companies that are doing appraisal of testing as we speak just to the south of us a company called Entek. They have been testing individual benches within the Niobrara, I don't know the results of those yet, but they’re taking an extended period of time to de-risk some of their acreage. So you know anything more?

Kurtis S. Hooley

No. Entek is the one that’s really – that’s going public. They’ve seen some limited success, but as Dick said they like to have some individual benches in the well. So I think they ran out money, so they're looking for people to partner with them. The rest of them – they keep it a tight hold just like we are. So there is no data being out there and we don’t – really sensitive discount. We have people look around and they will kick you off to well site immediately. So which we knew more but nobody is opening up at all.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay. And as far as one you believe you would have some information for us on this first well?

Richard Dole

Probably the answer is tomorrow. We are still testing, we want to get the flow back results. We’re going to go up whole and do some additional stimulation. So we don't want to be come out too soon and come out results that aren’t (inaudible) probably into Q1 because we have to flow back and get the reservoir pressure property done, but…

Kurtis S. Hooley

Yeah, I mean depending on the results remain on that.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

What are the gas stones that you are testing?

Kurtis S. Hooley

They are Dakota and Frontier.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak


Richard Dole

There is a lower zone in the Niobrara called the Sage Break.

Kurtis S. Hooley

Those things are prolific through the area. We have some wells that produce around that, not at all from for this location.

Kim Pacanovsky – Mcnicoll, Lewis, & Vlak

Okay, great. All right. Thanks guys. That's all I have for now.

Kurtis S. Hooley

Okay, Kim.


(Operator Instructions)

Richard Dole

Okay. Well, thank you for attending, and we'll talk to you next quarter.


Thank you for joining us today. And that concludes today's conference call.

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 All other use is prohibited.


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