Earnings Transcript for MMAT - Q2 Fiscal Year 2014

Executives: Derek Gradwell – MZ Group Tom Lapinski – Chief Executive Officer and Director John A. Brda – President, Secretary and Director Willard McAndrew III – Chief Operating Officer and Director Roger N. Wurtele – Chief Financial Officer

Analysts: Jim Collins – Portfolio Guru LLC Eric Carter – Kobi Partners Dmitriy Shapiro – Umbrella Research LLC

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Torchlight Energy Second Quarter 2014 an Operational Update Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Friday, August 15, 2014. I would now like to turn the conference over to Derek Gradwell, from MZ Group. Please go ahead, sir.

Derek Gradwell: Thank you, operator, and good morning everybody. Thank you for joining us today for Torchlight Energy’s second quarter 2014 and operational update conference call. On the call today are the company’s CEO, Tom Lapinski; the company’s President, John Brda, Will McAndrew, the company’s Chief Operating Officer, and Roger Wurtele, the CFO. Tom, John, Will and Roger will provide comments regarding operational and financial developments during the three months ended June 30, 2014. After the prepared remarks, they will be available to answer questions from investors. Those of you using webcast today, management has provided slides for you to reference through the presentation. A webcast link is available on the most recent press release announcing second quarter results. I’d like to remind our listeners that on this call, prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional statements in response to your questions. Therefore, the company claims the protection from the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of Torchlight Energy Resources Inc. and its subsidiaries can be identified by common used forward-looking terminology, and those statements involve unknown risks and uncertainties including all business-related risks that are more detailed in the company’s filings with the SEC. For those who are unable to listen to the entire call, we will have an audio replay that will be available, and again the call is being webcast with slide provided, so you can log on via the Internet, and access details were provided on the conference call and earning announcements that were distributed by the company this week. At this time, I would like to turn the call over to John Brda, the President of Torchlight, and he will provide opening remarks. John, the floor is yours.

John A. Brda: Thanks, Derek, and thank you all for your interest in Torchlight Energy. We are extremely pleased to have this opportunity to speak with all of you about our progress through the first six months of 2014. Tom will begin with the summary of our key operational milestones achieved so far this year. Followed by Roger, who will discuss our second quarter financial results. We will close with Will providing an update on our major projects, and our outlook for the rest of 2014; and then proceed to Q&A. Without further ado, I will introduce our CEO, Tom Lapinski.

Tom Lapinski: Thanks, gentlemen, and good morning to everyone out there. We’re extremely pleased with the improvements in the quantity and quality of our production and reserves, our increasing working interest, the operations team which we’ve built and the partnerships which we’ve developed over the past 12 months. As we continue to execute on the strategy we laid out for our investors since we went public more than three years ago, we are as excited as ever about building a sustainable high growth company. Since our inception, we focus on building a platform based on low risk, high repeatability projects. We believe that strategy has served us well as evidenced by our Oklahoma and Kansas project. At the end of 2013, we had three wells producing. Currently, that number is 27, and it grows monthly. Our net production is also increasing, rising to approximately 500 barrels of oil equivalent a day. What this has done, is enable us to look at new ventures to give the potential for some explosive growth. You’ll hear more about that in a few minutes when we discuss the Orogrande project in West Texas. The project, the geology we believe to be the same as the highly productive Midland and Delaware basins that to date has remained uncapped. It’s an exciting venture for Torchlight as we all like to say, it kind of gives us a little bit of sizzle. Our other projects continue as we planned, albeit we did have some operational slowdown due to various risk factors, such as rig availability, weather in particular range in Kansas this spring, and we need to conduct a 3D seismic survey in our Ring joint venture area in Western Kansas. All-in-all, we believe we have a strategic plan and we’ve had the discipline to follow it. It has provided us with, as we planned a stable base on which we can add additional projects to propel Torchlight to even new levels. Now, I’d like to turn this over to Roger with some financial results. Roger, please go ahead?

Roger N. Wurtele: Thank you, Tom. We posted solid financial results for the quarter ended on June 30, 2014; had marked a growth in revenues, productions, and margins all as a result of what Tom was describing. Our revenues for the second quarter of 2014 were $1.63 million, that’s up 155% from the $0.64 million in the first quarter of 2014. With reference to the prior year, revenues for the second quarter 2014, the same $1.63 million, were up 919% from only $0.16 million in the second quarter of 2013. Revenues for the six months ended June 30 were $2.3 million, that’s up over 400% from $0.39 million for the six months ended June 30, 2013. Gross profit for the second quarter of 2014 was $1.24 million, representing 76.3% of revenue, that’s compared to $0.08 million, only 48% of revenue in the second quarter of 2013. The significant year-over-year, and quarter over quarter increase in revenues is a function of higher production from the existing wells and new wells coming online. We had a reported net loss of approximately $2.9 million, about $0.17 a loss per share in the second quarter of 2014. $2.5 million of that $2.9 million was attributable to non-cash transactions. Our general and administrative expenses for the second quarter were $1.32 million of which $0.36 million was attributable to non-cash expenses, that’s down from $1.58 million for the same period in 2013. For the six months ended June 30, 2014, we reported net loss of approximately $10.5 million or $0.68 at a loss per share, of which $8.9 million was attributable to non-cash transactions. General and administrative expenses for those six months ended June 30, 2014 were $7.1 million, again $4.7 million of those were non-cash expenses. That compares to $2.1 million in total general and administrative expense for the same period a year ago. Cash outflows from operations declined to $0.75 million for the first six months of 2014 compared to outflows of $1.39 million for the six months in 2013. Cash flows from financing activities were $10.8 million for the six months ended June 30, 2014 and the cash used in investing activities for acquisition of oil and gas properties is the same amount at $10.8 million. Our total assets and shareholders’ equity at June 30, 2014 were $30.8 million and $17 million respectively. Now, let me turn it over to Will. Please go ahead, Will?

Willard McAndrew III: Thanks, Roger. Some of you may not have listened to our last operational update on July 17. So I will repeat some of what we discussed on that call. However, this won’t be anywhere nearer to the detail of that call, but I’ll spend more on our exciting new project, which is a game changer for Torchlight. Just a real quick, Marcelina Creek, as you know we are pre-producing wells on Marcelina Creek. These three wells are currently producing about 120 barrels of oil per day in aggregate, on average. We are surrounded Exxon, Mobil, Clayton Williams, EOG, Hunt Oil. We have approximately 16 to 20 wells that we can drill on those project, and we probably will get one, if not two wells drilled on this project at the end of the year. With Ring, we’re just beginning the enter the second phase of our program with Ring Energy. Within the week, we will begin drilling our fifth well out of a 10-well project with the balance of the wells to be drilled immediately thereafter. Sometime in September, our plan is to initialize our 12-mile 3D seismic shoot, which will help us better delineate all of our pay zones but more importantly help us to find the prolific model channel which we found 22 feet up in one of our wells with great formation characteristics. And Husky Ventures Cimarron can we say about Husky Ventures. As of June 30, 2014, we had five AMI's with Husky Ventures covering over 55 in gross acres and over 300,000 potential acres within those AMI’s. We have to continue our phase of drilling four to five wells per month and stimulating four and five wells new up and putting five new wells into production every month in this play, very active robust measure. We have begun the process of running the gas lines of the Viking play which we own 30%, which will enable us to hook up these two wells we drilled in May to the pipeline and bring them on to production, which at that point in time we will start an active drilling program in the Viking project. Smokey Hills, this is one of our operated properties, we have drilled four wells of a 10-well project and we are now in the completion and testing phases of those wells. The first well, the Evans, is currently being hooked up with a pump jack and the tanks all the plumbing. They should be producing revenue this weekend. We are continuing to move forward with this 10-well project as promised and we are really excited about it. On Slide 6, I think you will see on here that we have the Orogrande Basin, and I’d like to visit a little bit before I move into the Orogrande Basin to talk about the geologists have put the Orogrande Basin together. His name is Rich Masterson. He is a geologist out in Colville River, Texaco. He originated the work loan unconventional play in the Delaware basin totaling over 150,000 acres. He wants to – he showed it for 2.5 years, the acres are running about $12 an acre. He talked to company after company after company that looked at all the geological work that he has done and tried to tide into other plays in the area, and nobody would take it. Now as you can get acreage than the Delaware basin, its 22,000 and up for acre. There has been over 800 successful wells drilled of which Rich Masterson those wells and help them the geological aspects I think picking different zones and helping with the stimulation techniques. Shell, Chesapeake, Petrohawk, Anadarko (indiscernible) they are all been working with Rich Masterson in doing this. He originated the Orogrande project of which I’m going to go into a little bit more detail as we speak here. Let’s see on to Slide 6, the Orogrande project, that’s about 172,000 acres, its contiguous as you’ll see here shortly. We believe that we have penetration rate of about 60% as production and if it’s only 60% productive, because as we grow we’ll know more, we’ll learn more, the science will tie in for us in what we ought to try that science into the new well that we drill, but if only 60% of it is productive. We have over 2,500 wells that we could drill on this project. 2,500 wells we can drill on this project. The EURs run about to 100,000 to 140,000; some of these wells are in the Midland Basin have 170,000 recoverable EURs. If we have just 100,000 recoverable per well bore on our wells only 60% productive and only use a $4 million pre-detail, that’s about 225 million barrels of oil for Torchlight or about 9 billion bravo to the company. Just real quick, on the 170,000 acres in Hudspeth County, we have about 22 miles, 25 miles east El Paso. It’s almost all contagious as you can see here in a second. These are five year leases and we are only into year one of the five year primary term. We have five year extensions, we will spearhead this project and operate it. The first four wells will drill about 1.5 billion because we’re going to do barrel cores and sidewall cores and imaging wells and all the type of tests we can to give Rich all the data that he needs to be able to tie in the four wells (indiscernible) to the four new wells we’re going to drill. Once we get up and running, we’ll have less than $1 million per well to built and complete. They’re only about 6,000 feet deep at that point in time. But we have a look-alike, an absolute look-alike over to the Midland basin. They have about 1,400 feet of formation, we have 1,300 feet of formation. And if you were to compare the two wells side by side, you sit there and see that we’re just almost identical when it look like twins when it comes to the type of formation and the characteristics of each of those formation. Tom, you want to take eight?

Tom Lapinski: Let me take a little bit of color on basin comparison. For those of you who got the slides in front of you, you’ll notice I believe it’s on Slide #5. And so it shows a comparison of the Orogrande to the drilling work in the Midland. And basically what we’re seeing is, we look at the rock heights from major producing zone, which is basically in the Pennsylvania – shale, these are all the same. And if you look it’s a historical geology of tectonic that performed, that’s very similar to that of the Intermountain basins in the Rocky Mountain west. Approximately 30 million to 35 million years ago, this was one great big mega basin, and over time we got some uplifting to the east, these basins were compartmentalized very much to say, and what the (indiscernible) we did in the Rocky Mountain breaking that mega basin into basin such as the Wind River, the Bighorn, the Powder River and the Denver basin, we’re seeing exactly the same thing here.

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Willard McAndrew III: Yeah Tom, I do. I believe this is one of the things, what I said earlier, this is the game changer. If you look at the slide here, all the yellow is the University of Texas land, it’s contiguous, and you can see a little bit off to the left, we have about 42,000 acres there, one contiguous 130,000 acre block. And I think, what is interesting to note here, and which makes us very unique and probably one of the last opportunities like this alone, we own it all, we own all the acreage, it’s not somebody that’s going to be able to say, good gosh, look what just Torchlight just did, drilled this great big well over in the Orogrande Basin, let’s go back and lease them, let’s see who can get next to them, are there any holes in the leases? I think you can see on here, there are no holes in these leases. We have one big huge contiguous block, and I think if you look out there, we’d grow these wells, we’ll put them online, everything that we’ll have on here from an organizational standpoint and operational standpoint will be us, and only us. If you go to Slide 10, I think this is important to see, you can see the yellow outline of those leases again contiguous block for UT acreage as well as the other acreage totaling 172,000 acres, but while the outline of the yellow was faint, you can see the green here where it’s a structural low, this is the basin, so the lower part of it, this is what we’re looking for. And you can see the four stars on there that we have the cross section going to, that Tom talked about, these are the four wells we’re keying off of in this basin. These wells were growing in ’03, ‘04 before the shales and silts were really being active in the base Midland or Delaware, Permian Basin period. But they were drilled down deeper more conventional sand, well through the unconventional sand, so we mold the sand to there, we mold the silts and the shales are there that we can go by again and produce. And you can see on here, where our four well development is going to be an R&D type project on those first four wells. We have to start by the end of the fourth quarter, we hope to start by fourth quarter this year. But as we go in, and we offset these existing older wells (indiscernible) science together, and then we started very active drilling program. One well can drill three to four vertical 6000 foot wells a month, one rig drill maybe two horizontal wells for now. That’s the plan, go out here and pull the information, confirm what we have, and saw a very active robust drilling program. But as you can see on this map, no one is going to be able to come in and buy leases next to us. No one is going to be able to start getting the acreage from 200 to 400 to 22,000 like it is now over in the Delaware Basin. Nobody is going to be able to offset our great wells that we plan on drilling in this basin. So that’s why you can look back on our first part of the conversation. This is a game changer for Torchlight. This is a property that we will operate when we depicted the sphere. This is exciting and this is going to give us potentially 2,500 cross wells we can drill as a company. Tom, on to you?

Tom Lapinski: Thanks, Will. Again, if you’ve got the slides available, the last two was one solid mantras and another one which is cross action and basis of what this, what the mantras is to demonstrate that the Rock units in the Midland, the Delaware and the Orogrande are all present. They’re all present for that approximately the same depth, they have approximately the same thickness and it looks like at least on the scale that you’ve got there, I know it’s going to be very difficult to see detail on it. But the – I’ll confirm the belief that we have that at one-time this wasn’t one major basin that was broken apart whenever we watch 12 mountains or mountains in Appalachia were uplifted. The last slide which is basically a cross-section within the Orogrande itself just goes to support that the units – here again we’re just starting the peak which is the top of the Pennsylvanian expected section. There is no significant change and which is why we would expect. So the geology appears to be well behaved, well uniform throughout the basin and because of that, what we’ll do as Will said on our first four well basin and our test program is, we’ll locate the four wells reasonably close to the existing wells. Again, just to get as much information as we possibly can, we’ll test, as Will said, we’ll have the upside well course, four core barrels. We’ll drill the wells vertically at first to determine what the petro physicists are, so that we can better define what techniques are going to need if any to drill these wells horizontally as well. So that’s kind of where we stand with it and as Will said, we’re pretty excited about it. It is visible that we’ve got and we’re really looking forward to getting started here either in the fourth quarter this year or first quarter of next year. Now I’m going to turn the call over to John and so let him discuss the recent financing announcement and the update on our senior debt facility. John?

John A. Brda: Thanks, Tom. Good job, Will and Tom. That was tremendous information of our new project on the Orogrande. Let’s start off by talking about the financing and give everyone an update on where we stand. As you’ve seen this morning, we closed on a $3 million an equity with a private placement with an institutional shareholder Castleton Commodities. We’ve been working with them for the last month on this deal and we finally brought it home last night. Also in the second quarter and shortly thereafter the second quarter close, we closed on approximately $4 million of sub debt. Lastly, as we mentioned on our last call, we’ve signed definitive terms with a senior lender for a $14 million facility and the documents were pending the approval of a third party independent engineering evaluation of our reserves. That independent evaluation has finally been finished and the reserves are sufficient to look forward on the transaction. This means we are now on the homestretch and the document entitled verification phase of the transaction. This portion of the transaction is known to take a couple of weeks and we are very organized. We fully expect this transaction to close on the next couple of weeks or so. When closed, the facility will supply with sufficient and immediate availability to cover our CapEx needs and allow us to efficient to grow the line as their other projects are engineered and put into the reserve mix. Now, just to reiterate the CapEx and drilling schedule for this year, we have already spent $10.8 million in CapEx for the first two quarters of this year. After today, we are still on schedule to spend up $13 million this year. This CapEx will be handled with the recent sub debt, the equity raised, the senior facility when closed and most importantly free cash flow. As far as current activity, things continue to be keep a tall pace in the Hunton play and we are moving ahead with full scheme in both Kansas players. And in the next 60 days, we should be drilling at least one additional shop well in South Texas as well. And then the Orogrande will be tackling the logistics of joining the first four test wells in the play right away as we are anxious to get started out there. And lastly, since we’ve done so much work in the Hunton play for the first half of this year, we are updating our engineering for a mid-year reserve report. That updated reserve report should be available to it from the next week and we will make an announcement regarding those results as soon as they are available. This concludes our prepared remarks. We appreciate you joining us today. We will do our best to answer any questions you may have at this time. Operator, we are ready for questions.

Operator: Thank you. (Operator Instructions) We’ll take the first question from Jim Collins with Portfolio Guru LLC.

Jim Collins – Portfolio Guru LLC: Good morning guys. Two questions, the first one is for John. Can you just talk about how you got together with Castleton, obviously they’re kind of legendary in this business and what they were looking toward in terms of the investment? And then secondly, for either Will and/or Tom, just on Orogrande, it’s obviously such a huge prospect and you are paying $20 an acre whatever it is, why it is that everybody else looked at this in past, when you talked about Rich Masterson at Nate, what are you seeing that everybody else is missing in Orogrande?

John A. Brda: Okay. I’ll handle the first question on Castleton. Those of you who did not know about Castleton, Castleton actually they are very well known commodities fund, and actually we were introduced to them by a very respected shareholder for Torchlight. We’re introduced to them probably, I would say the first week of July and have been communicating with them for the last four, five, six weeks. And the whole time they have been following us and doing the due diligence with us, and we were very pleased to bring that one home and actually Benjamin Graham who is the person we are dealing local, there’s been such a terrific asset for us I believe in the future. He really loves what we are doing and has been kind of blast our business plan and what we are doing as a management team by his sole faith with that equity transaction. And on the Orogrande aspect, I‘ll let Will answer that. But just to clear things up, Jim, what we are talking about in that transaction with Rich Masterson going to Nate for two years, there is not this project. It was the Delaware basin project that he was working on but I’ll let Will clarify that.

Willard McAndrew III: Thanks, John. Yeah, Jim, that’s remarkable what it was. If you think about back in the 90s initial energy, Barnett Shale figure and how to work with the shale, somebody knew where the shale plays were and/or.

Jim Collins – Portfolio Guru LLC: Correct.

Willard McAndrew III: But they haven’t figure out how do the blocking yet. And so once we did figured out the 90s then it let’s do he is on Haynesville, Marcellus, Pennsylvania, and all the shale play that was the part of (indiscernible) but they didn’t lose North to heat up the shale themselves over in the Permian, Midland or Delaware into the last three or four years. So when Rich took his 150,000 acres and was showing everybody the shale plays in the South Delaware Basin people where passing on. Most of the companies that I mentioned with them have the opportunity to buy a 100% of the 150,000 acres that Rich was shown the geological work up on. So many have in past, now they are all backup, they are drilling and they got 10,000 or 20,000 or 40,000 acres. While those are significant positions of acreage, it’s not a 170, 2,000 and it’s not contiguous like we have in the Orogrande. So at this time back in 2003, Rich went out there and slightly did a geographical work on these 2003 – these four wells of 2003 and 2004, they were drilling deep for conventional type sands, the conventional sands were not what they were looking for, so they dropped the wells that Rich remembered all the shale in itself that they drilled through. So when the lease is expired, about eight, nine months ago, they hired a company, they went out, they started pulling this entire lease block together. We have five year leases or five year extensions and we are just on the first year of the primary lease. And so knowing that they not only wanted to get the benefit of a drilling project but they want to get into the solid management team, they want to get with the company that it will go and make an impact too. They want to begin with a company like Torchlight. We are around $4 a share. When is you’re going to take the Torchlight to go from $4 to $20, five times our price today. That’s the kind of impact that the Orogrande project would have versus the company that maybe $25 a share. What we’re going to take for them to go $125 a share. They could have a bigger, greater impact with this company like Torchlight from $4 to $20. And more importantly to Rich, he wanted to stay involved, he wanted to be all set of wells, he want to look at the desk, he want to look at the science and it’s perfect for Rich, the geologist, many of the geologist they can sit there and they can talk about all those blocks and bring out lengthy blocks are and talk about an hour. To putting that aside, he want to stay on board, he wants the company to participate with the company’s management into the secured process and the development process of the Orogrande. It can have an huge impact on the company and we believe as well.

Roger N. Wurtele: Could I add just another little thing to what Will said? If you look back at what – I had the opportunity to listen to talk with Tom gave earlier this spring. He talks about the shale gale and you look at the impact of what the shale have been over the last five to seven years. Now keep in mind, the wells at Orogrande were drilled more than 10 years ago or – 10 years or 11 years ago, that the companies have reached out and acquired massive acres in the Marcellus, the Eagle Ford, the Bakken and with the end of their primary term coming on these leases, we’ve spent all their time trying to monetize those by drilling them. And something like the Orogrande would have never hit their place. So I think we were fortunate in that. We got involved in sort of a window of opportunity, where other companies who have spent tremendous amount of money leasing in the Marcellus, the Utica, the Bakken, Eagle Ford; how to drill those new and they don’t want anything extra on their plate. So I think we captured that window while it was still open.

Jim Collins – Portfolio Guru LLC: That’s true. The background is really helpful. Thanks a lot guys.

Operator: We’ll take the next question from Eric Carter with Kobi Partners.

Eric Carter – Kobi Partners: Good morning, gentlemen. I just wanted to follow-up on the – and this is probably for John, the $40 million debt package, what are we looking as far as stages that you will be able to draw down from that. I mean, I doubt this can be $40 million upfront what does that look like over the next three of six months based on cash flow and a new reserve report?

John A. Brda: We’re going to – we will get into that over the next few weeks with the funder and it really is going to be based – the first drawdown is going to be significant enough for us to cover all of our CapEx needs that we have outlined in our plan, I will say that. However, it could – the first draw down could increase depending on how our reserves come back with the large company over the next week. So that’s part of the process, so we’re working through over the next two leases what’s that initial draw down going to be. I know what the number is, I’m just not at liberty to say what it is here on the phone today. But it is one, I will say that it’s sufficient to cover all of our CapEx needs combined with the 3 million equity we just closed on the subject.

Eric Carter – Kobi Partners: Okay. The updated reserve report through Ryder Scott, can you tell us which wells or when will that be occurring through?

John A. Brda: Yeah. It’s actually not Ryder Scott, it’s Whiting Company. Whiting Company is our engineer. But yeah, going to be through mid year through June 30, 2014 and it covers the Hunton Play only. We are not updating our Marcelina Creek project as it hasn’t been – we haven’t drilled any new wells out there? But it will cover – and not only – the wells have been doing with the GDP but it will also cover the additional 50,000 gross acres that one Bob look now, and Rich work last year and the additional 75 wells that are already slated to be drilled between now and August of next year. So it has the potential to move the needle quite a bit.

Eric Carter – Kobi Partners: Okay. And then two quick financial statement related questions, can you comment at all on what the cash flow run rate for the company was at the end of the second quarter, not what it was based on the average production for the quarter?

Tom Lapinski: Roger, that’s your question.

Roger N. Wurtele: Pardon me, I buzz on mute, could you repeat the question please?

Eric Carter – Kobi Partners: Sure. Can you comment on what the cash flow was for the quarter or annualized for the company based on Q2 exit production, not average production. I’m just trying to get a sense for what the cash flow run rate is moving into the third quarter?

Tom Lapinski: It actually takes the month of June and then extrapolate that going forward.

Eric Carter – Kobi Partners: Yeah.

Roger N. Wurtele: From a monthly standpoint, unfortunately I don’t have the monthly detail here to just quickly respond to you.

Eric Carter – Kobi Partners: Okay.

Roger N. Wurtele: Could I just send you an email? Will that be okay?

Eric Carter – Kobi Partners: Yeah. That’s fine. And then the last question I have is, on the cash flow statement, it did look like there was a sizeable bump if you will in the accounts payable and accrued liabilities, it’s a non-cash charge to it. If anything that kind of offset the cash drawdown, I was wondering if you had any commentary on that?

Roger N. Wurtele: The accounts payable are principally on development costs, the pace of the work, particularly in the Hunton is what’s driving those, and we’re making significant progress against those of course, but that’s where the ramp up in accounts payable is coming from is the pace at which the Hunton development is occurring.

Eric Carter – Kobi Partners: Okay, got it. Okay. Thank you. That’s all I have.

Operator: (Operator Instructions) We will go next to George Jasper and he is a private investor.

Unidentified Analyst: Yeah. Thank you. My question relates to the drilling activity within Oklahoma, with Husky Ventures and Ring Energy and Kansas. Could you identify the flow rates of any of the wells already completed and flowing in mid-Oklahoma project with Husky and similarly what’s your target for flow rate targets and Ring Energy project in Kansas.

Willard McAndrew III: Tom, since you handle all of our daily production numbers, you want to talk about that numbers?

Tom Lapinski: Yeah. Not the problem. Let’s start with the Hunton, the wealth in Oklahoma on average will have a peak rate of about 400 barrels a day of oil. And their gas rates will vary. They will be anywhere from 1 million cubic feet of gas a day 3.5 million cubic feet of gas a day, it all depends. Now, there are going to be wells that are less and there are going to be wells that are more. But I think on average, I look at this about a month or so ago, and I was happy, at of our pro forma numbers to use 400 barrels of oil a day as it can create, and then a decline of fairly significant though, first. And second, and I believe we’re going to use about 2 million cubic feet of gas as a peak rate. We declined about 65% to 75% for the first year, about 50% and then 35% for the third year. When we run out pro forma economic, I only really running out of that three year, just a crystal ball, it gets a little cloudy once you get past that. In Western Oklahoma, we’re looking at wells of approximately 75 barrels of oil per day, there’s no gas associated with that. And in the Smokey Hills area, the numbers we’re looking at are on order of 30 plus barrels of oil per day. That’s on average. You can find wells in both areas that are going to be slightly less and you’re going to find wells in those areas that are significantly greater. I can show you a number of wells in Smokey Hills that would come in over 3000 barrels of oil a day, but they totally distort the economics that we just – if we get one that’s fine and then but on average we’re looking at about 30 barrels of oil per day there. Now, with Ring in Western as I said about 75 barrels of oil per day, we expect the channels to be significantly greater than that. We might be looking at 200 barrels to 250 barrels of oil per day. That’s the reason why we’re shooting the 3D seismic surveys to desalinate weather channel goes. Channels, and finally you look at any kind of a river, they love to (indiscernible) and the worst thing you can do is try to exploit that channel with a drill bit. It will destroy your economics. We can show you a map channels out of existing – other operators are found and if you look at where the wells are located – they’ll be producing well and you go one location to the East, one location to the West and then have dry hole. So we need to be cautious and 3D seismic, so it’s a proper funding method. I hope that’s answered your question.

John A. Brda: Just as a clarification. You said West Oklahoma is actually Western Canada JV. And also – yes and secondly what Tom was speaking to was the IP rates obviously are going to decline overtime.

Unidentified Analyst: Great. Great. Can you – and both those areas which I asked about – can you highlight any kind of cost per barrel that you’re seeing and you’ve experienced already and what you anticipate?

Willard McAndrew III: Well, you’re to be looking at reserves in each one, let’s start with Western Canada. You’re going to be looking at reserves on average over that 125,000 to 150,000 barrels of oil, that’s assuming – we do not have – Mississippi level of oil in that channel. Those wells are going to run $550,000 to $600,000 apiece drilled and completed, so you can kind of do that quick calculation in your head.

Unidentified Analyst: Great.

John A. Brda: The wells in Smokey Hills which is east central Kansas are basically north from Wichita along Intercity 135. Those wells are going to run your about 300,000 drilled and completed, and again you’re going to be looking at just about 100,000 barrels of ultimate recovery, so again mathematics on here. The Hunton, they are all the over the map, I think I would rather wait and see what their reserve report, to give you really good solid numbers (indiscernible) comes up with. I know they’ve looked at certain areas that 252,000 barrels estimated recovery all the way up to the 450,000 barrels – and 750,000 barrels, has also been recovered. Those wells run around 5 million to 5.2 million depending upon the number of factors we go through.

Unidentified Analyst: Okay. All right. And then the lastly, previously you’ve targeted, I believe by the end of the third quarter, a production rate of 1000 barrels a day, how do you feel about that at this point in time.

John A. Brda: Looking at what our exit rate is at the end of the year, we’re going to be – we should be at 2000 or 2000 plus sales of oil equivalent. Again, in this business, we’d never again see –but we’re on track we – our expectation was to be at about 500 barrels of oil equivalent a day by the end of the second quarter, hopefully July 1. We were off a little bit, but at the end, that was due to operational considerations, we would delayed because of rains in Kansas, rig availability, believe it or not, the model channel delay this, we said, you know what, let’s not drill anymore, let’s wait, that’s due to seismic – so we know where these wells are going to be located. But I think other than that, when we look at the exit rate in the middle of July, we were just short of 500 barrels of oil equivalent at 479 barrels. So we are on track, I think everything has been moving in that direction. I’m confident we’re going to – we’ll hit that 2000 barrel exit rate by the end of the year.

Unidentified Analyst: My question related to the end of the third quarter, I think you had put out a target rate of 1000 barrels a day, where do you see yourselves at the same time?

John A. Brda: I think we’ll get there, I think the one thing that will hinge on that, is how quickly we can get to Viking area wells, those looks like they are going to be very, very good producers and as Will said earlier, we have a 30% working interest in those. So when those come online, they’re going to move the needle quite a bit. So, yeah I’m certainly confident we’re going to hit 1000 barrels.

Tom Lapinski: Okay, thank you.

Tom Lapinski: You’re quite welcome.

Operator: (Operator Instructions) We’ll go next to Dmitriy Shapiro with Umbrella Research.

Dmitriy Shapiro – Umbrella Research LLC: Hi, guys. I want to congratulate you on completing the financing on all of the operational developments. I just wanted to clarify, you mentioned drilling out of cash flow and they know production has ramped substantial at the end of Q2 are you now operating cash flow profitable?

Tom Lapinski: On a cash on cash basis, yes if you were to add in the non-cash items and expenses, obviously we’re not going to – that had immediately brings our cash flow and our income. But as we stand here right now, every dollar that comes in or if it’s in excess of G&A, it’s going back into the ground for drilling or back into acquiring additional leases particularly in our Hunton play. We continue to spend 150,000 to 250,000 a month in additional leases in those six AMIs, 5 or 6 AMIs that we’re in the Hunton formation currently.

Dmitriy Shapiro – Umbrella Research LLC: Okay, great.

Tom Lapinski: We do expect by end of fourth quarter as we’re drilling a substantial amount of our CapEx out of free cash flow.

Dmitriy Shapiro – Umbrella Research LLC: Got it. Thank you.

Operator: And it appears that we have no further questions at this time.

Tom Lapinski: Okay. Thank you all for listening. And thank you all for your input. We’ll talk soon.

Operator: That does conclude today’s presentation, thank you for your participation.

Tom Lapinski: Thank you.