Gasco Energy Management Discusses Q2 2012 Results - Earnings Call Transcript

Gasco Energy (GSX)

Q2 2012 Earnings Call

August 01, 2012 11:00 am ET

Executives

Peggy A. Herald - Principal Financial Officer, Chief Accounting Officer, Vice President of Accounting & Administration and Treasurer

W. King Grant - Chief Executive Officer, President, Director and Member of Executive Committee

Michael K. Decker - Chief Operating Officer and Executive Vice President

Analysts

John Polcari

Presentation

Operator

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gasco Energy Second Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to hand the program over to Ms. Peggy Herald, Vice President of Accounting and Treasurer. Please go ahead.

Peggy A. Herald

Thanks, and good morning, everyone. Please be advised that our remarks and the information that follows, including answers to your questions, include statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. However, they are subject to significant risks and uncertainties that could cause actual results to materially different from those currently anticipated. While the company believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us, such as commodity prices, competition, technology, environmental and regulatory compliance, drilling schedules, capital plans and other factors, will be as we anticipate.

Important risks that could cause actual results to differ materially from the results implied by these or any other forward-looking statements include, among others, matters that we have described in our earnings release issued yesterday and in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Existing and prospective investors are cautioned not to place undue reliance on forward-looking statements, which only speak as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

Now, I'll turn the call over to King Grant, our CEO and President, for some introductory remarks.

W. King Grant

Thank you, Peggy. Good morning, everyone, and thanks for participating in today's conference call. Peggy and I are joined by Mike Decker, our Chief Operating Officer, who will cover operations.

With the closing of our Uinta Basin transaction and unlining of our derivative contract and maturity and retirement in our revolving line of credit, our financial business unit is out with Gasco. Our cash position was $5.1 million at June 30, 2012. Our working capital was $6.8 million. Since June 30, our cash has increased $1 million to $6.1 million today.

Our long-term debt consists solely of the $45 million 5 1/2% convertible notes due 2015. We plan to replace our recently matured revolving line of credit, which is a reserve back line with the new facility, which we're currently working to identify.

We are gearing up our drilling program, which as we previously described is weighted towards the second half of the year. We opted to delay drilling, especially for natural gas until gas prices shows some indication of recovery.

Our Green River oil program is in permitting, and we are optimistic that we'll be able to spud the first 6 wells early in the fourth quarter.

With respect to the natural gas markets, we are seeing signs of price recovery. The second quarters are some of the lowest prices we received in the past 12 months for sales of our natural gas.

Gas markets are changing rapidly. In mid-April, the NYMEX prompt month natural gas contract traded at $1.90 per MMBtu. That marked the lowest price in more than a decade.

Since that 10-year low, prices have recovered more than 60% to around $3.20. Our wellhead prices received and followed a similar path.

To remind the listener, we have an internal projection of $3.50 wellhead price for our Uinta gas drilling project, which would generate a 10% rate of recurrent for drilling. This $3.50 price is prior to the beneficial effects of the drilling carry we received from our Uinta Basin JV partner, which would reduce the needed wellhead price well below recent levels.

Of course, we do not intend to drill 10% rate of return projects, but the encouraging indications of a gas price revival are positive for Gasco and its shareholders.

The recent low prices may be traced to 3 causes. First, the engineering success of hydraulic fracturing in reducing the cost and increasing the productivity of liquids-rich plays like the Eagle Ford Shale in Texas and Marcellus Shale in Pennsylvania. Second, the destruction of industrial demand that followed the recession of 2009. Third, the unseasonably mild winter this year that reduced demand for space heating in both home and commercial industrial markets.

The seeds of a long-term recovery in natural gas prices are being sung this year. These effect -- these seeds affect both the supply and demand side of the equation. On the supply side, the number of rigs looking for natural gas has been on a steady decline over the last year.

As of July 27, the North American natural gas rig count was 505 rigs, down from 877 a year ago. This is a 42% decrease in 1 year. Many industry analysts believe that the current rig count is below the number of which the fleet is able to maintain supplies at current levels. Consequently, we may begin to see a tightening in supply in the coming months.

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