Earnings Transcript for PED - Q3 Fiscal Year 2014

Executives: Clark Moore - EVP and General Counsel Frank Ingriselli - Chairman and CEO Mike Peterson - President and CFO

Analysts:

Operator: Greetings. And welcome to Pacific Energy Development Investor Conference Call on Q3 Results and Operations. At this time all participants are in a listen-only mode. [Operator Instructions] I would now turn the conference over to your host, Clark Moore. Please go ahead, sir.

Clark Moore: Good afternoon and welcome to Pacific Energy Development's third quarter earnings results and operational update conference call. My name is Clark Moore, Executive Vice President and General Counsel of Pacific Energy Development. Joining me from the company today are Mr. Frank Ingriselli, Pacific Energy Development's Chairman and Chief Executive Officer and Michael Peterson, the company's President and Chief Financial Officer. Following today's discussion, an archive of the call will be available on the company’s website. Before we begin, I’d like to remind listeners that on this conference call, managements prepared remarks contain forward-looking statements and estimates of future performance which are subject to risks and uncertainties. There are numerous risks associated with forward-looking statements and forward estimates, there can be no assurance that these statements or estimates will be realized, and actual results may differ from those discussed today due to various risks. Although seen many of the risk factors you need to consider as part of the material discussed on this call has been outlined in the company's filings with United States Securities and Exchange Commission and we incorporate these materials by reference for all discussion in this call. In addition, any projections as of company’s future performance represent management's estimates as of today, November 17, 2014. Pacific Energy Development assumes no obligation to update these projections in the future as market conditions change. Accordingly, although the company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and the company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995. In addition, all statements in this conference call related to oil and gas resources, aspects, potential and volumes are not references to proved reserves as defined in our SEC Regulations and are now presented in Pacific Energy Development's filings with the SEC. With that, it is my pleasure to turn the call over to our Chairman and CEO, Mr. Frank Ingriselli, who will proceed with the discussion of the company's third quarter earnings results and operational update.

Frank Ingriselli: Thank you, Clark for that introduction and good afternoon shareholders and potential shareholders. I’m Frank Ingriselli, Chairman and CEO of Pacific Energy Development Corporation PEDEVCO. It is our honor and privilege to be able to highlight today some of the recent achievements of our company and what plans we have for the future. After I am finished with my opening remarks, Michael Peterson, our President and CFO will provide a more detailed update. 2014 has so far been a momentous year of achievements for Pacific Energy Development. We have increased our acreage position in one of the hardest oil shale basins in the USA, the Wattenberg and the Wattenberg Extension, that are part of the overall Niobrara Play in the D-J Basin of Colorado, and we did this twice. In March of this year, we dramatically increased our position in the Niobrara Play by acquiring much more attractive acreage in the Wattenberg and the Wattenberg Extension. This increased our company's net acreage position there by more than 500%. Then just a month ago, we announced the acquisition of an additional 850 plus net acres, while not as much as in the March acquisition, these new acres are in the heart of the prolific Wattenberg core area. As I have previously noted in these conference calls, what is true in the real estate industry is likewise true in the energy industry. It is all about location, location, location. And what we have learned is, the Fifth Avenue - what we have acquired is the Fifth Avenue in the Niobrara, the location that everyone would like to be in. And as I’ll mention later on, in recent reports done by independent financial institutions, it is one of the most prolific economic areas for investment today notwithstanding the low oil prices. Getting to that subject of oil prices declining in the last few months, I have been in this industry for more than 35 years and have seen oil prices move up and down, yet the assets as I mentioned located in the best and the lowest cost areas are the ones that drive. The play we are developing in the Wattenberg area, again as according to independent studies has been shown to have notwithstanding these low oil prices, one of the most economically robust returns than any other shale play in the USA. I want to mention one other thing, when they do those studies, they are using current costs to drill wells, to frac wells, complete wells, and bring them on to production. As I have seen over my 35 year career, when oil prices decline, the competition for rigs increases and prices to secure those rigs goes down. Likewise, other costs like fracking and things like that, when there is an oversupply of frackers and there is oversupply of drilling rigs, and there is oversupply of other services, costs come down. So, actually your breakeven analysis will bring those breakeven numbers down even lower. Two weeks ago we issued an operational and business update where we estimated that we would exit 2014 with approximately 500 net barrels of oil equivalent a day, about double where we are today. We also noted that notwithstanding the recent price decline of oil, our breakeven price is approximately $40 to $60 a barrel. And what is meant by breakeven is not a zero rate of return, it's defined as a 16% rate of return, a pretty good return with those type of low oil price. We also noted that completion operations on our three Loomis wells would take place in the next few weeks, we announced that a few - about a month ago. Mike Peterson will give you an update on where we are on that, but I can tell you its just about ready to commence. Mike will also comment on our third quarter results. As noted in our press release last Friday, revenues have increased over 500% and our reserves compared to the last reserve numbers we issued have achieved an over 10x increase. What I don’t believe investors have realized is that our current acreage position in this prolific basin gives us the opportunity to drill over 1,000 gross wells. That’s a lot of wells. Enough wells to potentially achieve our strategic vision to grow our company into a billion dollar enterprise. With the assets we have assembled in our company today, we believe this strategic vision can be achieved. So what distinguishes us from the other company's? What gives us our company a competitive advantage? We believe it is the management, and technical and operating team we have put together and our ability to move nimbly and efficiently and quickly. It is our company that previously set a record for speed in drilling in the Niobrara Play. And what is that? That's all about cost. That is what drive the bottom line and how you achieve shareholder value. We also announced this morning an update on our interest in Kazakhstan. Several important achievements were publicly disclosed. The asset has been given a renewed gas flaring permit which now allows the producing wells that were previously shut-in to again commence commercial production. While there already exists a 20-year production license for the oil field already discovered, the government has also renewed the exploration permit. This will allow continued exploration and possible development of other new oil fields and net asset. It was also publicly disclosed that I have been proposed as an Independent Director of the Caspian Energy Company. I look forward to this role in assisting that company commercialize and develop their asset which is located in the most prolific basin in Kazakhstan and one of the largest oil basins in the world. Also, as we have noted before, because of the restructuring we recently did, we will not be obligated to put any more funds into this operation or will be the beneficiary of the capital raising program they have embarked on and what we hope to be the development of our commercially successful asset, that will benefit all the shareholders and of course our company. This restructuring gives us the ability to stay laser focused on the USA, where we will put all of our capital expenditures on developing exclusively our Wattenberg asset in the D-J Basin. In closing sure, we’re frustrated with our current stock price and the failure of the investment community to accurately value our assets. What we will continue to do is deliver on our operating development plans and deliver the results that we believe the investment community will recognize this and appropriately award us. So now let me turn this call over to Michael Peterson, our President and CFO. Here, Mike.

Mike Peterson: Thank you very much, Frank. Good afternoon. And thank you all for participating in PEDEVCO's earning call for the third quarter, ending September 30, 2014. I tend to walk through some of the financial results and provide a further more detailed operational update where we are today. Quarterly sales volume for the three months ended September 30, 2014, grew to 16,984 barrels of oil equivalent or 185 BOE per day, which represents over 200% year-over-year growth. Year-to-date sales volume grew to 58,240 barrels of oil equivalent or 213 BOE per day, which represents over 300% year-over-year growth. PEDEVCO generated revenues of $1.1 million over this past quarter, which represents a 450% year-over-year growth. We’re very excited about that growth. I look forward to adding to that in the quarter's ahead. I would note that our revenues compared to second quarter declined are primarily because we did not add any additional new wells during the third quarter, so we didn’t have the benefit of additional production. And with the typical decline curves of these unconventional shale wells, you have a sort of decline in oil production. Also I think the impact of foreign commodity prices had some effect. And lastly there was a bottleneck of access to sufficient produced water disposal resources that affected most of the majority of operators in the D-J Basin during the quarter.

: As Frank, mentioned the D-J Basin is one of the lower cost shale plays in the U.S. So despite declining oil prices, we believe that PEDEVCO’s assets with D-J Basin continue to be economic, meaning a 15% rate-of-return at the $40 to $60 WTI per barrel price.

: As Frank, mentioned the D-J Basin is one of the lower cost shale plays in the U.S. So despite declining oil prices, we believe that PEDEVCO’s assets with D-J Basin continue to be economic, meaning a 15% rate-of-return at the $40 to $60 WTI per barrel price.

: During the quarter, we divested our asset in North Sugar Valley Texas, which was a non-core asset, which was acquired originally when we acquired our public company. That also was beneficial to our LOE improvement. On our second quarter call, I discussed a bottleneck that was beginning to occur in the D-J Basin at that time, in our inability to access Salt Water Disposal Wells. Because of that there were few wells that were beginning to shut-in at that time and it became worse after our call. In fact during this time many operators in the D-J Basin including ourselves had a shut-in wells for extended periods of time waiting for sufficient access to these water disposal wells. In that call, I had mentioned that we were in the midst of negotiations and had looked at that problem in advance and thought we had it solved. And we were striving to gain access to – preferred access to a new Salt Water Disposal well that was being drilled and was coming online. On November 3rd, we announced that we had successfully entered into that agreement. This contract should allow us going forward to produce at full capacity and has already had a very positive impact on our fourth quarter in comparison to our third quarter production. To give you an example of that impact, during a 27-day period in August and September, when most of the wells were shut-in due to this bottleneck in the Basin, the company received net production of 975 barrels oil equivalent to our Red Hawk subsidiary. Other wells were brought back up in the full production of September 20, have been on full production since then [indiscernible] production to compare the last 27-day period that ended November 5th, the company received production of nearly 3,400 barrels oil equivalent towards Red Hawk subsidiary, that’s a 350% increase over that period of time when we were shut-in. Our team's early anticipation of disposal needs which led the negotiation of this Salt Water Disposal agreement, has had a significant positive impact, I mean it will allow us to operate at full capacity and at a lower cost. We will continue to use our team's experience to seek to improve the production while lowering and normalizing the operating costs of our newly acquired D-J Basin asset. We look forward to increasing our production with the completion of our three Loomis wells, which have a completion rig and crew onsite this Wednesday, November 19th, and starting the completion fracs in process on Thursday. We had a rig originally scheduled for last week, which we mentioned to you, but we were tracking the path of the Arctic freezing air that was scheduled to hit Colorado last week, and we thought it would be unwise to try to frac our three Loomis wells in such cold temperatures, as fracking is truly just moving a lot of water into the wells. We decided to wait until this week for safety and operational reasons. After hearing the tragic news this past week of a death of a worker on another operators frac crew, due to that cold weather, we were very grateful that we took that cautious approach. We’re excited to have the frac crew on-site this week and on completing these three wells. We expect the total time for fracking to be about a week. We will then drill out the plugs and connect the wells to our storage facilities and expect to begin flow back the first week of December. We also recently negotiated a more favorable crude purchaser agreement for a crude off-take through January. With a spur pipeline coming into the basin in the near future and with the additional providers in the basin, we're seeing and expect to see a lowering about off-take differential costs. As Frank has mentioned when commodity prices decrease, we expect to see a lowering in operating and off-take expenses to help compensate for those oil prices. We plan to make capital expenditures of approximately $30 million over the next 12 months to drill our leases in the D-J Basin, where some of our most perspective acreage is located. We recently put out a press release announcing the purchase of additional acreage that Frank also mentioned, we’re very excited about that acreage, as it is we believe one of the most perspective acreage we've purchased and certainly what didn’t seem to be noticed by the marketplace, but our next wells we expect to be in that location. And we believe they’ll be some of the best wells we’ll be able to drill. It's also important to note that our capital budget maybe adjusted and our location of this business conditions warrant. We are now timing an allocation of capital expenditures that are largely discretionary and within our control. M&A and leasing activity of basin remains very strong and with the reach of $125 million acquisition, that I am sure most of you saw the Wattenberg field assets, the valuation of our assets are more easily understood. The adjusted transaction value per net acre of that transaction was between $4,500 and $8,800 an acre, depending on how you value the PDP. As a reminder, we acquired our Wattenberg position for only $1,000 per net acre back in March. And immediately thereafter there was another transaction, the valued acreage of over $5,000 net acre. So, recent transactions have shown the value and the demand for acreage in the D-J Basin. It has also shown the very attractive price we paid for our acreage, value which is not currently being shown and reflected in suppress. From a liquidity standpoint, as of September 30, 2014, we had $8.9 million of cash on books. We had $29.4 million in debt on the balance sheet of which $8.1 million is current. We have an additional $13.5 million gross, about $1 million net, available to draw on our current debt facility for drilling activities. We continue to be very excited about the prospects for PEDEVCO. Near term growth drivers for the company include the potential for down spacing, from 80 to 40 acre spacing which is being done all around us, implying increasing from 8 to 16 wells per section. Development of additional stack pay zones in the area including Codell and AB&C zones as well as the Greenhorn to [Samaria] [ph] and improved drilling and completion techniques although increased well performances and reduce costs. With the completion of the three well Loomis pad this week, we expect to more than double the daily production by year end, applying the recent values that are being paid for production of the basin, our stock is undervalued just based on those amount in our opinion.

: In speaking with some of our measures, I also know that there has been year-end tax loss showing delayed cash for redemptions of their funds. However by definition, that selling has or should be ending soon, which will allow the same funds to purchase shares again after 31 days. We can’t control the price of oil or the price of our stock, but with the completion of our three Loomis wells, we are in an exciting inflection point in our oil production and revenue growth. We believe our current and new investors will be well rewarded as the fundamentals of our company are properly valued in the marketplace. Thank you again, all for your continued support. We look forward to our next earnings call this spring to discuss our annual performance. In the meantime, stay tuned for results from our three Loomis wells and announcement of future drilling. Frank, turn it back over to you.

Frank Ingriselli: Thank you, Mike. And thank you for listening to today’s call. Let me end on a personal note. I’ve been blessed to have so far an incredible 35 year career in this industry. But I can tell you that I’ve never had more fun and excitement in over the last three plus years as we have participated and contributed to the shale revolution, and the USA moving down the path of energy self sufficiency. That is something 35 years ago, I could have never envisioned. What I can assure you is that our whole team is diligently, and ethically, and efficiently, and safely, working to deliver shareholder value. I am proud to be the CEO of this company. We all take your investment in our company very seriously and always keep in mind the goal to deliver shareholder value. Now let me turn it back over here to, Clark Moore.

Clark Moore: Thank you, Frank and Mike. On behalf of the entire Pacific Energy Development management team, we would like to thank all of you for your interest and participation on this call. An archive of today’s call will be archived on the company's website shortly afterward. Thanks.

Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

End of Q&A: