Evolution Petroleum Corp (EPM) 2013 Q4 法說會逐字稿

Good morning and welcome to the Evolution Petroleum Corporation fiscal 2013 earnings release conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Sterling McDonald, CFO. Please go ahead, sir.

Thank you, Operator, and good morning to everyone. Thank you for listening to Evolution Petroleum's conference call to discuss results for fiscal 2013 and the recent quarter ended June 30.

My name is Sterling McDonald and I am Chief Financial Officer of Evolution and with me today are Bob Herlin, our CEO, and Daryl Mazzanti, our VP of Operations. Before we begin, let us cover the basics. If you would like to be on the Company's email distribution list to receive future news releases, please see the contact information on our news release.

If you wish to listen to a replay of today's call, it will be available shortly by going to the Company's website at www.evolutionpetroleum.com or via recorded telephone replay. The necessary information can be found in the earnings release. Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date.

Our discussion today may contain forward-looking statements that are based on management's beliefs and assumptions that are based on currently available information. We can give no assurance that such forward-looking statements will prove to be correct as they are subject to risks and uncertainties that are listed and described in our filings with the SEC. Actual results may differ materially from those expected. Our discussion also may include discussions of probable, possible, or potential reserves or recovery. Such unproven estimates are more speculative than proven reserves.

I will begin with comments about our results for the year and quarter and then go to questions. Bob?

Thanks, Sterling, and good morning to everyone. Since the detailed numbers are readily available to everyone in the news release that was sent out last night, I am going to focus my remarks on key overall results and operations. Sterling is going to provide some commentary on financial results and then we'll take your questions.

For the year, we had record earnings -- recurring earnings, revenues, and production. Earnings to common reached $6 million or $0.19 per diluted share, which is a 36% increase in earnings per share over last year. Revenues increased 19% to $21.3 million and net production increased 9% to 621 barrels of oil equivalent per day net.

All of these improvements are due to our core asset in the Delhi Field and these record recurring levels of earnings revenues production are even more remarkable in that we had divested all of our non-GARP proved reserves and producing wells during the year, totaling some 2.3 million barrels of oil equivalent in reserves.

Now our full-year results were dragged down by the fourth quarter that declined in performance compared to the previous third quarter and this is for a number of reasons. Production declined 7% to 583 barrels a day during the quarter, primarily due to scheduled plant maintenance, infill drilling and the effects of remediating the release of fluids in June in Delhi. Revenues declined overall by 10% to $5.4 million due to lower production, but also due to a 6% lower Delhi oil price. These are partially offset by a 40% decrease in LOE. Our G&A offset some considerable nonrecurring charges that Sterling will discuss in more detail. And these are all temporary effects, however. The oil prices now are higher.

Let's talk about operations. In Delhi, the remediation of the June fluids release by the operator is continuing. CO2 injection in the area immediately around the leak site was temporarily suspended, while production was continued to reduce reservoir pressure on the leaking well or wells. Oil production at the area -- affected area declined correspondingly and we expect that fuel production it will be impacted through the first fiscal quarter and perhaps into the second quarter that ends December 31.

Production averaged 7,180 barrels a day gross during the fourth quarter. So it has dropped below 6,000 barrels a day this summer before recovering somewhat.

I would like to emphasize that the CO2 injection in oil production has continued in the rest of the field that has been developed to date. The operator stated that CO2 injection will resume in the area affected by this build some time by our second fiscal quarter that begins October 1. And oil production should respond accordingly. We also should begin benefiting from field response to the CapEx that was done in 2012.

Our Delhi revenues have been impacted directly but temporarily by this environmental event. And we have no reason to believe that our reserves and future production will be materially impacted. In other words, this is really not a material event for our overall value of Delhi.

The impact of this event on the timing of reversion of work interest is uncertain as the reduced oil production and remediation costs are being offset to some degree by lower cost of purchased CO2; higher oil prices that we are getting this summer; and insurance reimbursement; plus the extent that this event may be covered by the operator's 2006 assumption of environmental liability and their indemnity of us. Due to this range of likely outcomes, our reserves report assumes a reversion date of January 1, 2014.

In other areas, we continue to make steady progress in commercializing our GARP technology with two recent installations that have been very successful. We acquired the Philip DL, a well previously banned as uneconomic by another operator, and installed GARP and got gross production up to about a 35 barrel of oil equivalent per day rate. Most recently we installed GARP in a joint venture well, the Appelt G1 that is in the Giddings Field and production has increased to an average of about 12 barrels a day so far this month. We hope to begin more extensive deployment during the second fiscal quarter.

In Oklahoma, as we previously announced, we are testing over our Mississippi Lime well's high-end zone after plugging back the lateral section. Prior to that we had sold down our participation in JV down to about a 34% level and that saved us about $1.2 million. Further development has yet to be determined.

We continue to work on monetizing our Lopez Field in order to redeployed the capital and staff to more productive areas while we really believe in cutting our losses and projects that don't meet our economic criteria.

Looking forward to 2014, our capital expenditure plan totals $18 million, $17 million of which is targeted on our 24% reversionary working interest at Delhi. That represents an -- actually an estimate of the full calendar year of 2014 expenditures. The balance of $1 million, plus up to $2 million of potential incremental expenditures is targeted on GARP installations.

Sterling will now provide some more background on the numbers.

Thanks, Bob. For the year, since production from Delhi was a much greater part of our total production, our blended production price increased 9% to $94 per BOE, even though we realized lower oil price in Delhi.

LOE decreased 8%, primarily due to the Giddings sale. DD&A increased due to higher volumes and the addition of future capital expenditures at Delhi, associated with the new expected recovery of NGLs there. Offset by the elimination of future capital expenditures associated with the gassy proved reserves that we sold at Giddings.

This yielded a $40 million expected net increase for all future development costs as compared to last year. But note that the increase in Delhi CapEx delivers a large increase in NGL reserves.

For the quarter, earnings were adversely impacted by the bunching up of several nonrecurring expense items in fiscal Q4. These included legal and registration costs to amend our expiring shelf registration, litigation defense, expensing of transaction fees associated with the Giddings property divestments, the cost of the Delhi NGL engineering study that increased our reserves there, and the application of a much higher tax rate for the full year that could not be determined until the Giddings divestments closed during the fourth quarter.

Consequently, our earnings for the quarter were just under $1 million and it was also due to lower oil prices sequentially that we received at Delhi.

Of the -- as to liquidity and 2014, our working capital is up to $25 million and we have maintained our current minimum unsecured bank revolver capacity. Our capital expenditures in Delhi are on the assumption of a 1/1/14 reversion date, obligating us to fund approximately $17 million in growth capital at Delhi in calendar 2014.

We further expect to spend between $1 million and $3 million during the balance of fiscal 2014 on GARP installations based on current negotiations and the potential for expanding that agreement. These expenditure levels are well within our current working capital resources even before cash flow from operations generated during -- expected to be generated during fiscal 2014, including any additions based on our MS Lime play, pending new test results.

Since our shelf registration was due to expire this fall, we elected to renew and also to expand the capacity of the shelf to $500 million. While we have no current plans to utilize this capacity, it does provide us with considerable flexibility and multiple options going forward.

In summary, we hit a speed bump caused by nonrecurring items during the quarter, as well as a temporary reduction of production at Delhi. And the current quarter nonrecurring expenses were -- excuse me, were in a large part due to the tax provision that we recorded in the fourth quarter.

As an example, we had been recording -- had we recorded the fourth quarter at the same rate that we had recorded the prior three quarters, our tax expense would have been approximately $440,000 less which would have improved our net income from what has been reported by 50%. We can discuss more about those details and how that occurred, but regardless, these items don't change our course, direction or underlying value per share.

As to earnings, an upward step change will occur in our revenue and earnings when our working interest at Delhi occurs in the near term. In the intermediate term, our peak in Delhi production is not expected until 2016 or so. And as to underlying value per share, our reserve metrics continue to improve without the -- without the issuance of additional shares or debt.

Our challenge going forward will be to redeploy and/or return to shareholders the massive free cash flows that lie ahead of us. Bob?

Thanks, Sterling. Looking forward, I think it is clear that we are increasing our focus on and our ability to begin delivering to shareholders the value that we have created to date. Simply increasing production revenues without increasing share value is just not a core strategy of this management. We prefer to limit our financial exposure to new projects until success is likely in them. And we don't have any problem with cutting those losses or cutting our losses early if a project doesn't meet our parameters of success.

We are pleased that the Company continues to be among industry leaders in key value metrics such as return on equity, return on assets and growth. The continued strong performance of Delhi during the year underscores the value of that asset and the increase in the near-term step change of cash flow expected, both with reversion of our working interest, but the resumption of oil production following the remediation work going on. With no debt, growing cash flow, cash on hand, and focus on our growth projects, we believe that we continue to be well-positioned to perform on our overall strategy of delivering value to our shareholders.

Now, with that, we are ready to take questions and, Operator, you can open up the lines for those questions.

(Operator Instructions). Joel Musante, Euro Pacific Capital.

Hello, guys. I just had a couple of questions. On the -- you said that the release didn't really impact your assets at Delhi. Can you -- is it possible that you can quantify the impact to reserves and maybe PV-10 value?

Sure. One of the things that we did this summer was to go back to our reserves engineer and say, hey, this is what is going on. How does this change our reserves?

And this is -- we are not really sure when reversion is going to occur because of all these other issues are out there. So we just picked a date that was comfortably within the range of possibilities and had him go back and say, okay, is this going to change reserves? Is this going to change the value of PV-10? And so forth.

And his resulting analysis was that no, it didn't really have any material impact on PV-10.

It did affect reserves slightly, but not materially, simply because -- obviously with -- if reversion is pushed back a month or two or so, then obviously it is a month or two of production that we are not getting our work interest in. On the other hand, production for about a six-month period of time at a gross level has been reduced.

But those barrels aren't going anywhere. They are just going to be recovered a little later along in line. So we will still get our share of those.

So, materially there has been no impact. Obviously there is some near-term impact in that revenues and production are down a little bit right now. We prefer not that to be the case, but it is not like those barrels will disappear. They are just being pushed back.

Now, Joel, as to -- if you looked at -- if we would have reverted in September versus January, I think our net loss would have been about 140,000 barrels on a total quantity of 23 million so barrels of 3P reserve.

Okay, all right.

Keep in mind that that is, also, that value has been offset by the fact that during this remediation period, they are buying a whole lot less CO2. So that has a big impact as well on the economics. Because that CO2 purchase cost goes against our payout calculations. So that there is some offsetting grace there.

All right. Well, that helps.

My next question is on the CapEx spending, how is that going to be triggered? I mean, how are you going to --? Is that all going to be in the fourth quarter or because you are not going to know when it reverts until probably after it reverts? How does that get accounted for?

Well, obviously, we don't have any capital expenditure obligation until we have reverted. That is number one. Second thing is that to the extent that we do have a capital expenditure obligation, it is being offset by the fact that, with reversion, we are now collecting a much higher level of revenues. Instead of a 7.4% of their gross revenues, we are going to be getting 26.5% of the gross revenues.

So it is a self-funding process. The assumption right now is that it is a 1/1/14 reversion date. So we are exposed to all of calendar 2014 CapEx. Now that isn't a number that comes on January 1 and Denbury says, okay, you've reverted and here is an invoice for a full year. It is something that is paid out over the course of the year.

So it is spread out during the course of the year so it is not all at once.

I think they have the opportunity to cash call us a month in advance for the subsequent month. So if your question is, can they call us for all of it, the answer is no. It's as spent. And the part about where we are relative to payout, you are correct that we will have to come to a month where payout occurs and the next month we are working interest on it. And it would be that month in which we can incur our first capital expenditure or cash call, if you will for that month.

Okay. All right.

And maybe a following month at the same time. So there could be a little bunching, but not to any extreme.

All right. And then, as I try to model out the cash flows going forward, your LOE, when it does revert, is going to change because you are going to include the lease operating cost from Delhi on those barrels for the reversion interest. So -- and it is going to be front end-loaded with CO2.

So I just want to get a sense for maybe on a unit basis, what kind of LOE I should be using for that period, because you are going to have some barrels that are not impacted. They are going to be the royalty barrels and then you are also going to have the other barrels. So --.

Well, it's -- the cap, the operating expense on a monthly basis fluctuates widely with the amount of CO2 being purchased, because that is by far the largest single component. I would say just in general, gross operating expense has been running around $9 million to $10 million a month. For our share that would be a quarter, a little less than 24% of that on a monthly basis. Now remember, that is being -- we are paying -- we are collecting far more than that in our revenue stream with reversion.

I think the clearest sign that the field generates a tremendous positive cash flow is the fact that the field has paid off the payout balance in a fairly rapid fashion. So obviously, it has to be able to generate some substantial cash flow from operations for that to happen.

Joel, I think what you might do is, is Denbury shows their operating costs over all of their projects. They come up to about $25 a barrel. And in that, they have, I believe, about several dollars, you'll have to look, of CO2 costs. And our cost, I think they charge about -- I don't know, $0.40 an MCF to themselves. Which, in comparison to us, if oil is $100, it is 1% of $100 is plus $0.20, is going to be $1.20 an MCF.

So you can differentiate that and probably get into the ballpark if that is what you're trying to do.

Okay. All right, I think that helped.

And you can use what Bob said, too, on the $9 million to $10 million a month. I mean, you might be able to come at it from that direction. Sort of kind of cross-check it.

All right and --.

Maybe it's -- it is not $9 million. It is maybe like around $10 million. You would -- that would be a better number on a gross OpEx on a monthly basis. For our share, that would be 2 point -- $2.5 million, let's say, a month. On the other hand, we are also collecting 26.5% of the gross revenue. And we were at 7,500 barrels a day before the environmental event.

So that would be the near-term rate and then obviously, peak cash flow is going to be when the field hits its peak level of production of around 12,000 barrels a day.

Right, so LOE -- and most of that is fixed, right? So going forward you can -- or, I guess, there's probably some variable component with the CO2, but --.

Well again, the LOE is tied heavily to CO2 purchase levels. I am not sure that we are going to see CO2 purchases go a whole lot higher. It is front end-loaded as you mentioned.

So, I don't know. We will see. OpEx, I don't see it going a whole lot higher than it is now.

Okay. All right. And just one more. On the G&A, is it pretty safe to say that we can use, just going forward, we can use the number that we had last quarter? I think it was $1.4 million.

Well, there is a -- you can, but here's another bunching. Just be aware that we have always accrued bonuses at the rate at which we paid in the prior year. So what always happens in the fourth quarter is there is a true up. We don't know until the end of the fourth quarter what that number is going to be. Or until, actually, after the quarter is closed. And so you have got -- you have a little bit of a spike on that number there. I don't have it right at my fingertips, but I think it is fair to say that the G&A in the fourth quarter was plenty full because it had these NGL studies charge to it. It had transaction fees for divestments that Giddings added to it that, interestingly enough, we have to expense those divestment fees. We can't put it in the net proceeds from the sale and we don't recognize gain or loss on the sale because the proceeds go into the full cost [bowl].

It is another one of those anomalies that the AICPA and the SEC kind of don't look at things like full cost accounting when they make some of these rules. So, it gets plenty full. And you need to adjust your tax rate, too. Do not use -- basically, the fourth quarter is a full year. I don't want to call it a true up, but it basically is due to changing circumstances and I can discuss the cause of that if you want to know the details of it. But, it was one of those things -- (multiple speakers).

The yearly rate was 38%. Should we use that for the rate going forward?

You can use it for the rate going forward, but actually the fact of the matter, Joel, it should be, all other things held constant, that we should go back toward the rates that we were using in the first three quarters of this year.

What's happened is, as we have burned through our cost depletion and the NOLs that that may have associated and you have to use it first before you get to percentage depletion which is really our largest -- one of our largest tax shields in our Company and at Delhi. And all of our models were showing that we had burned through all of our tax basis. And so we were going to percentage depletion and that is how we were computing our effective tax rate.

Bear in mind that percentage depletion is a permanent tax rate difference because it is never recouped. We are actually taking, in essence, a phantom tax deduction of 15% of revenue and it is never recouped anywhere. So it permanently changes your rate.

But what happened in the fourth quarter was, is that when we sold the Giddings properties, that threw us back into reducing basis and we didn't get to the depletion calculation for this year. Next year we should, unless we had some sale event or something else that would intervene, but I don't see it. We should be going back to the first three quarters' rate, roughly.

That is not a small difference. It is sort of a 5% difference in tax rate.

It is. That is correct.

So from 38% down to 33%. And the problem is, (multiple speakers) quarter, we had to make up three quarters of that tax rate difference. And so the fourth quarter was hit pretty hard.

All right, and I know, what did you call it, the deferred amount is tough to estimate, but it has been running around 60%. Is that -- should that be the same going forward?

(inaudible) on that. It was deferred at 60%. I think that is going to (multiple speakers).

Our expert.

It can change over time as our income goes up, I think because that deferred is brought about by timing differences with IDCs that are already set in place.

Yes, and what is going to happen, I think, is that we are going to lose the timing difference on depletion when we are in excess of basis. So I think our -- my sense is our current portion will be higher. Tax rate will be lower, but our current portion will be higher.

Well, that is the best we can give you at the moment.

What was the answer?

The current -- I'm sorry, the current portion would likely rise even though our overall rates [would fall].

60% is not the right number or it is higher or, I mean, lower?

He said 60% is deferred, so 40% is current and the current should go up and the current -- and the deferred should go down, we think, in the future. Why don't you just --? I don't know, for lack of anything better, if I were doing it, based on what you just heard, I would just cut it to 50-50 and call it good.

I mean, basically, we are talking about the cash flow difference. A temporary change difference in cash flow that is going to be -- it is going to happen one way or the other, right? In a matter of time. Okay?

All right.

Unless we can -- now, let me modify that. If we start development drilling at Mississippi Lime or elsewhere, that will change that whole complexion. And our deferreds will stay high.

I mean, obviously, our CapEx at Delhi will have some component of IDCs to it and so that will have some impact.

That is true, too.

I mean, this last year we had very little CapEx. We only spent about $4 million total capital. This coming year, in 2014, we are looking at $18 plus million expenditure level. So we will have considerable IDCs in that.

Well, let me -- that would conflict with my comment about going to a lower rate. IDCs are a timing difference and they don't affect the rate, but let me just say that the $17 million in capital at Delhi next year, the best we know, and we have modeled it out, it has got a lot of leasing wellhead equipment in it which is depreciable property and not depletable property.

So bear in mind, we have two basic tax shields. One is the depreciation of our tangible equipment and the other -- and through IDC or through depreciation. The other is not through IDC, but through depreciation of tangible equipment. And then we have our depletion allowance, which is affected by how much IDC we take. So --.

It is a complicated issue.

It is.

Okay. Well, that -- (multiple speakers).

Sorry, go ahead, Joel.

Yes, that was all I had. I appreciate it. Thanks.

Mike Kelly, Global Hunter Securities.

Good morning. I was just hoping we could go over that tax stuff again. That was fun.

I'm glad you think so.

I will ask you some easier ones than that -- well, maybe easier. On the expected -- when do you guys expect a resolution on whether this -- the environmental liability will be picked up by insurance? And is that something you think that could be, really, solved by the January 1 revision date?

The insurance issue is not ours. It is Denbury's. They have publicly stated that insurance is expected to pick up between one third and two thirds of the total cost.

For our purposes of modeling, we assume a 50% reimbursement. Just kind of picked a number in the middle of that. So the bigger issue, really, is when that reimbursement occurs. Is it sooner or is it later? And how that impacts the payout calculation.

And then the corollary to that is whether or not that has even any application, because if our indemnity applies and if Denbury's assumption -- environmental liability applies, then it is a moot issue anyway. so, there's a lot of these issues that are out there that we are in discussion with them on and when that gets resolved, I couldn't tell you.

Okay, all right, fair enough. And you guys are now reflecting a decent amount of NGLs in the reserves. It is good to see. I am just hoping to get some good color on when you would expect to see the processing really up and running in the field here. What's that build-out look like?

That is, again, at the moment, that is up to the operator because we are not a working interest owner. Once we are a working interest owner, then we'll have some input on that. In our reserve report, we've assumed that that is not installed until 2016. So that would be the earliest you would see any benefit from that facility. It actually -- it basically added a third year of significant CapEx to the whole project.

And how that processing gets done is still really open to question. We've assumed a fairly simplistic model where we're recovering the, initially, just the really heavy NGLs, which we call natural gasolines or the C5+'s. There is some thought in terms of recovering the methanes as well, and that could be used as fuel for the plant and that would cut down quite a bit of LOE.

There is also the issue of when or if we recover the C2s through C4s because of the impact on the admissibility and the ability to compress the recycled gas. So these are all issues that we have already had some discussions with the operator about. And, at the moment, they are the ones that call the shots because we don't have work interest ownership and until we do, we don't have a whole lot of voice. Once we have a work interest position, then we have a whole lot more voice in the matter. But right now, it is a couple of years off.

Okay, understood. What's that CapEx look like, maybe on a gross number ballpark in year three?

It's about 100 --

It is 60 -- $59 million, I think.

Is it 59?

Yes, million.

That's for the NGLs. Not for the probable case. It is for the proved case.

Okay, for the proved case. The total 3P case is $100 million gross number in 2016. So our share of that would be roughly $24 million. That is the 3P case, which is the heavy -- the natural gasoline, it is the methanes and the regular Y grade NGLs.

Got it, okay.

And I will follow-up on what Bob said too, where he was talking about using the natural gas for LOE. It wasn't modeled that way and the natural gas price is $3.25.

That's how it was valued.

I understand. I am just saying is that it is a $3.25 price tag.

All right. Final one for me. Sterling mentioned this, said the biggest challenge for you guys really determining how to redeploy cash flow going forward or give it back to shareholders. Just, well, basically I have asked you this the last couple of conference calls, too, but any update here on which way you would be leaning and just some color on potential options there would be helpful here. Thanks.

Well, this is kind of a sensitive topic, Mike. Something that the Board is reviewing and discussing with management in terms of what we're going to do, when we are going to do it and so forth.

I think we have stated in the past that there's a wide range of options on the table that we are always looking at and have been looking at. And I think I have been really consistent over the last couple of years that we are open to any and all ideas to how to best get the value we've created into the hands of the shareholder.

So that range of possibilities goes anywhere from paying a dividend to buying back stock to sale of the Company. So we look at everything of this type on a regular basis. And I would say everything is always on the table until we pick a route. And even then, just because we go one route doesn't necessarily rule out another route.

That might be a combination. And some of it depends on our ability to deploy capital in a meaningful way conservatively in the ground, too.

So, but let me make one comment here. As far as -- we have really -- the derisking in this project has taken, while we farmed out in 2006, and here we are seven years later and a lot of derisking has gone on, but there's still some pieces left.

One of the big pieces for being able to levered the cash flows at Delhi is getting to our working interest. Because if you look at our royalty interest today, let's say that number is $20 million on an annual basis. When you look at some of the opportunities, as Bob said, well, maybe sale of the Company. In that case, you have to look to the buyer and what their financial structure might look like and what do they need in order to support a price that we would be interested in.

So, let me give you an example. Let's say MLP ABC says, looks at our $20 million of royalty cash flow and says, well, in order for that not to be diluted to my unitholders, I can capitalize it 10%. So 10% times $20 million is $200 million. That is what will pay. Well, thank you very much, we are not selling it for $200 million.

That doesn't mean that the value is not greater than $200 million, it means that the cash flow of that value is still in its infant stage and it is about to take a step change. And when it does, our revenue is going to almost quadruple. And of course, yes, we are going to pick up some operating expense and some growth capital with that.

But it's -- again, we have derisked a whole lot, but we haven't quite derisked that cash flow piece yet. Not because it is questionable, necessarily. People don't question whether we are going to get it. It is just -- if you look at it -- somebody had to go to the bank and borrow. You have to look at, well, what is the borrowing base. And if you are allowed 3.5, four times EBITDA, it you have got to look at that. And then to that, let's say they add equity for a like amount and you come up with a number that is short.

We have to get value for our working interest in order for somebody to be able to lever these cash flows. But that will come in due time and not too long out in the future.

All right. Thanks a lot, guys.

Brett Hendrickson, Nokomis Capital.

Hello. Sterling, I'm glad you have explained that piece because I think it is a piece that has been lost on some people about the importance of the revisionary interest kicking in. But I had a little different question. But I wanted to make sure, Bob, did I hear --? Did you say what the gross production is in Delhi currently? I would be surprised if you did, but I almost thought I heard you say it in your prepared remarks.

If I did, it was purely an accident.

It has improved.

Production has improved from the low point. Keep in mind, that there was a lot of capital spent last year, that in the way that the field operates, you spend a lot of money and it takes a while for it to respond, especially because you spend a lot of money in an area and you don't bring that area on until it is all done. And then you want to inject CO2 for a while before you start even producing.

So all the CapEx last year has yet to really be -- start being reflected. Well, now that it is September, we are starting to see, I think, some contribution from that work last year that is helping to offset the effects of the remediation work in that one small area of the field.

So, we are encouraged. It is doing better than it was earlier this summer and, now, how soon the spill area starts contributing back again in a significant way, that is going to be later this fall when -- it is not until injection begins again in that immediate area. And that is not going to happen for another month or so. They have to finish their work plugging out the second well, I believe it is, that may be a part of the leak.

So, everything is moving forward, but if I gave you an actual number it was my mistake, because --.

No, okay, I just wanted to make sure I didn't miss something. My phone cut out.

But on that last part, you said, Bob, when they do start reinjecting in the area where the remediation is going on, it is it going to -- it is not going to be like when you started from scratch two or three years ago. But is there going to be some kind of fill-up issue with the reservoir where you are not going to get as an immediate response to the rejection? You might have to wait a period of days or weeks or how is that going to work out? I know we had to wait a while when the very first phase of the field, because you were kind of starting from scratch before you got a response. What is the delay time, would you guess?

I am not one to predict what Mother Nature is going to do out there 3,000 foot deep. I would expect that you would have a lot faster response than when you started from scratch. Because when you start from scratch, you have to think you have got to do. One is you have got to re-pressure -- add pressure to the reservoir and second, you have got to actually get the CO2 absorbed into the fluids in the reservoir itself.

At this point, I would say that -- and this is pure conjecture, but it would be my estimation that all you have to do now is put some energy back into that reservoir area because the oil has already been saturated with the CO2. So I would think that the response would not be as long as from the starting point. That's a purely qualitative answer. I couldn't begin to tell you, other than to say I think it is going to be faster than if you were starting from scratch.

Okay, understood. And, so here is my real question, Bob, and it is a little bit hypothetical. But you mentioned the idea that you have been indemnified against environmental issues from when you did the farm out in 2006. So, hypothetically, let's say that after the fact, sometime after new year, this might not be an easy agreement to come to, but the operator says you are right, you're indemnified. You are shielded from -- I don't know, I am taking a guess and making up a number, $40 million or $50 million of this $70 million cleanup.

Then is it their potential then at that point then the parties would have to agree that, okay, well, then we have to go back and retroactively give you guys credit for some of these barrels that are produced.

Because if it was originally supposed to kick in here this month in September, but not this $70 million kind of push to the right, then if after the fact you guys settled and realized that you weren't on the hook for all of those dollars, then it might be like say on December 31, you guys might be talking and you might say oh, really? We need to go back to October 15. And then when you retroactively get credit for that those barrels of production and that cash flow? Do you see what I am saying?

That would certainly be our position. And, obviously, I am sure Denbury has a different perspective on this. And that is why companies sit down and talk about these things and figure out what the best resolution is.

But I can't argue with what you are saying. That certainly is the position that we would take.

And I don't want to get too under the covers here, but can I just ask if those discussions have even started yet or is it too early to even have started those?

I think we are starting to vary, or move off into a direction that we really shouldn't be talking about.

That's fine. Understood. All right, Bob and Sterling, thanks and good work. Thank you.

Thanks, Brett.

(Operator Instructions). And seeing no additional questions, I would like to turn the conference back over to management for any closing remarks.

Certainly, thanks to everyone for participating. Feel free to call us if you want any more clarifications. We are certainly pleased with our overall progress for the year. Obviously we are not pleased with the fourth quarter, but we think that is a temporary phenomenon that, certainly, by the end of this calendar year we will be back strong again.

So, with that, thank you, and we will talk to you at the next conference call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.