Genie Energy Ltd (GNE) 2014 Q2 法說會逐字稿

Good morning, and welcome to the Genie Energy second-quarter 2014 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation by Genie Energy's management, there will be an opportunity to ask questions. (Operator Instructions).

In its presentation, Genie Energy's management team will discuss financial and operational results for the three months ended June 30, 2014. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the Company anticipates. These risks and uncertainties include but are not limited to specific risks and uncertainties discussed in the reports that Genie Energy files periodically with the SEC. Genie Energy assumes no obligation either to update any forward-looking statements that they have made or may make, or to update the factors that may cause actual results to differ materially from those that it may forecast.

Please note the Genie Energy earnings release is available on the investor relations page of the Genie Corporation website, www.genie.com. The earnings release has been filed on a Form 8-K with the SEC. Please note this event is being recorded.

I would now like to turn the conference over to Geoff Rochwarger, Genie Energy's Vice Chairman and CEO of IDT Energy. Please go ahead.

Thank you, operator. On behalf of our management team including our Chairman and CEO, Howard Jonas, welcome to Genie Energy's second-quarter 2014 earnings call. We appreciate you taking the time to participate this morning.

My remarks will focus on operational development and plans. On the E&P side of our business, I'll cover recent progress in our oil and gas exploration program in northern Israel and provide an update on our other projects. On the retail energy side of our business, I will focus on our rebound from a very challenging first quarter, which resulted from last winter's polar vortex, and I will provide an overview of several of our most important growth initiatives.

Afek Oil and Gas is our subsidiary holding an exploratory license covering 396.5 square kilometers in northern Israel. As you know, if you have been following our story, we believe that there may be significant amounts of oil and gas in our license area based on our above-ground geophysical work and analysis of existing data.

Earlier this year, we applied to the northern district planning and building committee for a permit to conduct a 10-well oil and gas exploration drilling program. The permitting process included extensive submissions and planning as well as a public notice and comment period culminating with a public hearing. As part of this process, an extensive outreach program was conducted. It included consultation with geologic and national resource experts and conducting numerous town hall style meetings to meet with local residents, answer questions and allay concerns about the impact on water quality and other local resources.

After this lengthy process and a thorough review of the evidence presented, the committee met recently and made their decision. I am pleased to report that they voted to approve our application for a 10-well exploratory program, and we expect that they will issue these permits shortly.

Prior to the vote, the opposition sought to prevent the issuance of the permits by appeal to the Supreme Court of Israel. The court denied their initial motion but issued a temporary injunction barring us from beginning the drilling program in order to grant petitioners time to modify their pleading. However, the petitioners declined to modify their petition and the injunction has just been lifted. We await issuance of the actual permit, which is in the hands of the local authorities. We expect the permit itself to be issued in a timely fashion barring further legal action. This will give us a clear legal and regulatory path to spud our first well later this year.

Turning briefly to Genie's oil shale projects. At IEI, we continue to work through the permitting process to build and operate an oil shale pilot test. The Jerusalem planning and building committee held a public hearing on the first two parts of the five-part application this past Monday, which served the committee by explaining the goals of the pilot project. The process is moving forward, and we expect it will continue for some months and, depending on legal challenges and delays, possibly into next year.

AMSO LLC continues its review of alternative heating systems solutions and specifically the development of the systems and equipment that will test and monitor the operations of alternative downhole heating approaches. This work will likely continue into 2015.

Genie Mongolia continues to carry out its resource evaluation activities in central Mongolia. On the regulatory front, we continue to await legislation and comprehensive regulations to govern oil shale production that could provide us with the clarity we need to proceed to commercial development. There does seem to be some progress in that direction.

Now I will turn to our domestic retail energy supply business, IDT Energy. Overall, I am pleased with the quarter's results and by the continued resiliency of our business model. As many of you know, our region faced unprecedented cold temperatures and a perfect storm of operational issues in the wholesale energy markets that impacted our industry, our Company and consumers last quarter.

The wholesale electric market failed retail energy providers like IDT Energy and it failed consumers. Here is what happened. Demand for natural gas soared well above the expectations during the polar vortex. Supply was not sufficiently elastic to meet the demand at reasonable prices. Costs rose quickly for the electricity generators whose gas-fired plants meet peak load requirements. Consequently, wholesale market prices for electricity spiked to unprecedented levels during periods of peak electric demand, leaving retail and electric providers including IDT Energy with no option but to pass these costs on to consumers. Throughout this period, we acted in complete accord with our customer agreements. We adjusted the rates we charged consumers to recoup only a portion of our real-time wholesale cost increases, and we further mitigated the impact of these rate increases by offering the rebates to hard-hit customers and ultimately paid out $4.7 million.

As I mentioned last quarter, the polar vortex-related increases in our rates also greatly accelerated churn, most notably in certain territories in Pennsylvania. At the same time, we temporarily suspended customer acquisition efforts in these territories. As a result, our base to meters served declined by 27,000 during this quarter to 364,000 meters. The decline in RCEs was more pronounced, as the highest rates of churn were in the Pennsylvania territories with higher-than-average per meter consumption. Total RCEs decreased by 28,000 during the quarter to 260,000.

The average monthly churn in the second quarter was 8.1% compared to 7.2% in the first quarter. However, it's clear that we are rebounding nicely. Our monthly meter churn rate peaked in March at over 10% and declined on a sequential basis in each month of the second quarter to drop below 7% in June. Moreover, as Avi will detail for you, our margins on electricity sales in the second quarter were robust and suggest that we are close to returning to normalized operations.

With that in mind, let me talk about several important initiatives that will, I believe, get us back to meaningful net meter growth before the end of the year. As many of you know, last year we acquired Diversegy, an energy brokerage and advisory business, and its retail energy network marketing channel, EPIQ Energy. Since the acquisition, we have rebuilt EPIQ's sales platform, overhauled its commission structure, filled out its management team and launched a campaign to build its core base of independent third-party sales representatives. This quarter, the revamped EPIQ began acquiring meters in some regions outside of IDT Energy territories where we had already had networks of representatives in place. Beginning in the third quarter, EPIQ will open shop in Illinois and will be operating in additional IDT Energy territories later this year.

By the end of the year, I expect that EPIQ will be contributing material levels of new meter acquisitions in IDT Energy territories, and in 2015 will be a key driver of growth in our customer base. We expect that the meters EPIQ acquires will bring us an added benefit. Although the initial per-meter acquisition costs will be higher than those meters acquired through our traditional marketing channels, we believe that the relationships with customers added through this channel will be stickier and have significantly lower rates of churn and, hence, higher lifetime values.

In addition to adding this important network sales channel, we are broadening our customer base and driving new meter growth by diversifying our service offering. As many of you know, we historically marketed only variable rate plans with a price adjusted to reflect the underlying cost of supply at the time of consumption.

Although we continue to see strong interest in our variable-rate products, after this winter's chaos in the wholesale electric market, a segment of the customer base requested a product that will protect them from excessive price volatility. We listened and responded. In the second quarter we introduced a new 12-month guaranteed rate offering in certain Pennsylvania electric utility territories as well as in the ComEd service area in Illinois.

As I mentioned last quarter, even when carefully hedged, fixed-rate offerings entail additional commodity pricing risk. Minimizing commodity risk has been a key to the longevity of success of IDT Energy over the years. But the markets have changed, and our product offerings have to reflect this evolving demands of our customers. We are very focused on meeting demands of the market while tightly managing this risk in a carefully controlled, monitored and appropriate way.

To promote, market and sell our guaranteed rate offerings, we are in the process of introducing a new brand, Residents Energy, which has already been approved and begun to offer supply service in New York. We expect to gradually move towards a model throughout our territories where IDT Energy's main focus is on variable rate offerings while resident (sic - Residents) Energy's main focus will be on guaranteed rate offerings. I expect that the expansion of EPIQ Energy, the development of guaranteed rate offerings, and our new Residents Energy brand will be synergistic and, in aggregate, will help us to achieve net new meter growth before the end of the year. Complementing these efforts, we will continue rolling out gas service in the territories in Pennsylvania, Maryland and the District of Columbia where we were granted licenses in the first quarter.

In summary, our resilient business model has weathered the polar vortex. Margin strength is sequential year over year, and churn rates are returning to pre-vortex levels. Looking ahead, several important initiatives to accelerate gross meter acquisitions and return us to net meter growth are underway and should be impactful by the year-end.

Now I will turn the call over to Genie Energy's Chief Financial Officer, Avi Goldin, to discuss Genie's financial results.

Thank you, Geoff, and thanks to everyone for joining us this morning. My remarks will cover financial results for the second quarter of 2014, the three months ended June 30. Except where indicated otherwise, all comparisons in my remarks are to the results for the comparable year-ago period, the second quarter of 2013.

As in prior quarters, IDT Energy accounted for all of Genie's revenue, cost of goods sold and gross profit. As Geoff pointed out in his remarks, this quarter represented a return to normal from the impact of the polar vortex in the third quarter of this year. While there was a residual effect from increased churn and rebates in the earlier part of the quarter, we are pleased with the overall performance of the business.

On a consolidated basis, IDT Energy's revenue decreased to $48.8 million from $55.1 million. Sales of electricity totaled $40 million, 11.3% less than the year-ago quarter, and gas sales totaled $8.8 million, a decrease of 12.1%.

Looking at sales of electricity, kilowatt hours sold decreased 29.6% from the year-ago quarter. This was caused by a decline in average meters served during the quarter, which decreased 22.3%, and consumption per meter, which decreased 9.4% compared to the year-ago quarter. The decrease in consumption was partially offset by 25.9% increase in revenue per kilowatt hour sold, reflecting higher electricity costs and increased market rates in many of our territories. Therms sold decreased 11.8%, entirely as a result of an 18.9% decrease in average gas meters served during the quarter.

In contrast to electric meters, average consumption per gas meter increased 8.8% compared to the year-ago quarter. In general, we have experienced more churn in the greater New York metropolitan area, where per-meter consumption is lower than in suburban or rural areas.

Average revenue per therm of gas was stable, declining by just 3/10 of a percent. Gross profit increased to $11.5 million from $10 million. Electricity gross profit was $10.2 million, increasing sharply from $6.7 million. Substantial improvement in gross profit was due to the increase in electric gross margin, which rose 10.7% to 25.6%.

As you may recall, our electricity margins in the year-ago quarter were constrained by the impact of an internal pricing system issue which we resolved last year. That issue impaired our ability to make timely adjustments to electric rates in some of our newer territories. The margin achieved in this quarter is closer to the level we would strive to achieve over the long run on electric sales.

Gross profit on gas sales was $1.2 million, a decline from $3.2 million. The decrease reflects a substantial decrease in gross margin to 13.9%, as well as a decrease in consumption. Although the per-therm cost of gas increased sharply compared to the year ago because of marketing conditions in competitive considerations, we decreased our gas revenues per therm a slight 3/10 of a percent. Gas gross profit should return to levels closer to our historical experience in the coming quarters, with the notable caveat that the smaller current gas customer base will impair our ability to recover costs related to pipeline capacity and transportation.

On a consolidated basis, SG&A expense increased to $13.4 million from $12.1 million. IDT Energy's SG&A expense increased to $10.5 million from $9.4 million, primarily reflecting the cost incurred by the integration and ramp-up of Diversegy and EPIQ Energy. SG&A expense at GOGAS decreased to $400,000 from $489,000. Corporate SG&A increased to $2.5 million from $2.2 million, primarily reflecting increased non-cash compensation which totaled $1.4 million compared to $649,000. R&D expenses incurred wholly at GOGAS and decreased to $2.4 million compared to $2.6 million. The decrease reflects a lower level of activity, IEI, as we continue to work towards permits for the pilot, which was partially offset by an increase in activity at Afeq.

Also at GOGAS, equity in the net loss of AMSO was zero compared to $806,000. Under the terms of the joint venture with Total, we have the right to not fund our share of AMSO's projected cost, which is currently 31.4% of total expense incurred by the Company. We have elected not to fund the capital calls for the first three quarters of 2014. Total provided the funding, thereby diluting our equity stake in the project from 50% to approximately 45%, which also reduces our share of future funding proportionately.

Adjusted EBITDA on a consolidated basis was a loss of $2.6 million compared to an adjusted EBITDA loss of $4.4 million in the year-ago quarter. Consistent with the change we announced last quarter, our measure of adjusted EBITDA now excludes stock-based compensation. Adjusted EBITDA at IDT Energy was $1.1 million compared to $751,000, driven by the improvement of electricity margins. The adjusted EBITDA loss at GOGAS was $2.6 million compared to $3.6 million, primarily reflecting the decision not to fund AMSO's capital calls. Corporate contributed an adjusted EBITDA loss of $1.1 million compared to $1.5 million. Genie did not incur significant depreciation or amortization expenses during the quarter.

On a consolidated basis, the loss from operations was $4.3 million compared to a loss from operations of $5.6 million. Income from operations at IDT Energy was $940,000 compared to $520,000. The loss from operations at GOGAS is $2.8 million compared to $3.9 million, and corporate overhead contributed an additional $2.5 million in losses compared to a loss of $2.2 million.

The net of interest expense, financing fees and other income was an expense of $529,000 compared to $680,000. The provision for income taxes was just $202,000 in the second quarter compared to a benefit from income taxes of $81,000. Adjusting for non-controlling interest, the net loss attributable to Genie after preferred stock dividends was $5.2 million, or $0.24 per fully diluted share, compared to a loss of $6.2 million, or $0.32 per share in the year-ago quarter.

Net cash generated by operating activities in the second quarter was $22.1 million versus net cash used of $29.7 million in the first quarter. This improvement primarily reflects the normalization of working capital at IDT Energy following the polar vortex.

Total working capital at June 30 was $96 million compared to $100.2 million at March 31 and $103.5 million at June 30, 2013.

Following the close of the quarter, our Chairman and CEO, Howard Jonas, purchased 3.6 million shares of our class B common stock in the Company for $24.5 million in cash pursuant to an amended employment agreement. With that infusion of liquidity, Genie is an even stronger position to make the needed investments on the E&P side of the business, including the near-term cost of drilling and programming in northern Israel, and continue to make opportunistic investments to grow IDT Energy.

As always, Geoff and I are happy to take any questions about the business that you may have. We are joined by Terry Stronz, CFO of IDT Energy. I will now turn the call back to the operator for Q&A.

(Operator Instructions). Marco Rodriguez, Stonegate Securities.

I was wondering if you could talk a little bit more about Afek. How should we be thinking about this in terms of the rollout of spudding these wells in terms of kind of like timing, and then the CapEx expense associated with that?

Hi, Marco, it's Jeff. So I'll answer -- let me try to answer your questions in order, and obviously feel free to add in anything else.

First of all, in terms of the rollout with Afek, we certainly have passed a major milestone in terms of getting the northern council approval. We still need to get the paper document for the permit. While that sounds like a fairly simple feat, we know that we are getting it, it's just a matter of time; it probably will take upwards of about four weeks. There's some other administrative things that need to be taken care of.

I would, for now, barring any other legal issues and any other bureaucratic issues, our hope and expectation is that we can spud the first well I would say probably in -- I would say within the September-October timeframe. And the plan will be, that based on quarrying and sampling, we'll probably be stationed at that first well for approximately 4 months. We want to make sure that -- you know, initially spudding in a new basalt resource will take some time. As I said, we want to take samples and core.

So I think that, for the time being, that's what how we are looking at it. If we see any delays, we will obviously communicate that. But we feel pretty good about that timeframe.

Regarding the CapEx required, based on what our now updated schedule is for spudding and for drilling wells for the remainder of this year, we are looking at approximately $3.5 million.

This is Avi. We are looking at each well to be approximately $3.5 million of incremental CapEx or incremental expense. Obviously each well is unique, and some of the earlier wells might be a little more expensive. But on average, that's what we expect the wells to cost.

Okay. And how do you foresee the other wells coming up after the first one spud here in September, October?

What we were granted right now with the license and the permit that's forthcoming is it is a 10-well, three-year exploration project. So our intention is that, as soon as we have completed all of the initial work, all the drilling at that first well, it is our intention to move to what would be a second location, which will be determined specifically which location by the results that we see from that first well. But it is our intention to try to at least complete the first three wells in succession as quickly as possible.

Okay. And can you give us sort of a sense as far as how long it takes to bring up a well?

Yes. I think that the way we are looking at it right now, and we certainly will have a lot more information obviously once we spud and we successfully drill that first well, because this is a specific resource that has not been drilled, with the exception of some water exploration wells, it's a little hard to tell right now. But we do believe that the four months represents the time of spudding to well completion.

Got it. And switching gears here, on Diversegy, can you talk a little bit about the initiatives there? How do you see that -- or do you see that part of your growth driver here in the near term bringing net meter growth in Q4 this year? And then what sort of growth rates on the net meter side do you think Diversegy can add in 2015?

Okay. To answer your question -- well, what we have done since our acquisition in December with Diversegy is actually EPIQ, which was a wholly-owned subsidiary of Diversegy, is now we restructured it. We reorganized it so that they are actually now sister companies, EPIQ and Diversegy. Diversegy is much more focused on the high-end corporate industrial energy advisory and brokerage services. Which I will leave aside for a moment and talk a little bit more about EPIQ, since that's actually much more relevant for what we're doing right now.

So as I mentioned on my remarks, once we acquired EPIQ, EPIQ was -- at the time of acquisition, was probably around for about a year prior to the acquisition, based on a couple of leaders in the industry coming together. And we spent a lot of time with them to rebuild, restructure, get them primed to start acquiring.

They have two goals. And that is to acquire meters throughout the country, throughout the 35 some-odd deregulated states. And number two is to try to bring a focus and help acquire meters via this new channel for IDT Energy. Based on where their base of reps had already been established over the last four months, there are some markets, like Texas as an example, that they had some early success with reps that have come on board and brought meters.

We do see that ComEd in Illinois will be their first market where they will incrementally add meters for IDT Energy. We believe that that is a process that has only very recently started. And very much, according to the network marketing model, this is a process that starts off slowly and then as more reps -- as the base of reps builds and develops, that then starts to grow exponentially.

So that's where, for certainly the next quarter, we believe that the ground base will start to grow. We do believe that towards the end of the fourth quarter that they will start adding a real material number of meters there. And I can tell you that, at least for now, based on where they are developing their base, Pennsylvania will probably most likely be the second IDT Energy market that we expect to see incremental meter growth coming vis-a-vis that channel.

Okay. Understand that. And then in terms of the extra marketing costs, the acquisition costs, that you mentioned in prepared remarks, can you quantify what that is? You also mentioned clients being a bit stickier. Can you talk about why that is? Why you're expecting that?

Sure. For us, when we look at -- and then subsequently acquired EPIQ and Diversegy, EPIQ has a very specific purpose for us. Which is as we have -- our niche is very, very specific and focused on the residential and small business sector. This is a mass-market customer base. We have developed and proven an expertise regarding the marketing channels that we've utilized over the last 11 years.

What we like about network marketing is that it reaches ultimately the same customer base. But because the introduction into the homes of these prospective customers is completely relationship-driven as opposed to an instinctive sale, while on the upfront side the commission that's paid out to the reps, to the network marketing reps, is higher than what we have historically paid for the enrollment of the customers that come in vis-a-vis the door-to-door channel or outbound telemarketing channel, that's true. However, because it is relationship-driven, with income generation opportunities for the reps, we believe, and we've studied this in the markets, that the expectation is that the lifetime value of those meters is significantly longer than the lifetime value of meters that just sign-up vis-a-vis the more traditional or the acquisition channels that we have historically used.

Got it. And is there any expectation that as you roll EPIQ and Diversegy out into the IDT Energy current territories that there is any sort of cannibalization, if you will?

I think that there is -- while there is always the possibility of that to happen, we have worked closely with the management at EPIQ and Diversegy to try to avoid that. I would say that the chances for that are probably pretty low because the one area -- an additional incremental area for us with the EPIQ channel is the reality is they will have success in acquiring probably much higher consumption meters then that we have historically been able to acquire with door-to-door and outbound telemarketing.

I will just say a little bit different. In a sense that one of the reasons we are so excited about this marketing channel is that, in our analysis of the various ways of marketing to our target customers, we identified that this is a channel that is fairly distinct in the types of meters that it's going to target than what we have been traditionally able to reach with door-to-door and outbound telemarketing. So there's a certain cross-section of our customer base that we haven't been able to get to through our traditional means. And our analysis of these marketing channels identified that this is a way of specifically targeting those types of customers. So that's why we feel strongly that from a cannibalization perspective the risk is low.

Right. And I guess to put it into very plain terms, and the way that we refer to this is that the reality is that approximately 80% of residential customers are on a do-not-call list. Approximately 80% of residential customers are either not home to open their door or won't open their door. And for us, the challenge has always been, well, if we can sign up somebody on a block in Brooklyn, how do we get into the door for their neighbors that we know exactly what their usage patterns are, what their income levels are; we basically understand the nature of the rest of those customers. And we see in this channel a very -- potentially a very effective way of getting to those customers. And that's -- that's what excites us the most about this.

Got it. One last quick question. Just wondering here from your prepared remarks, you're talking about two different brands now on the IDT Energy side. I guess IDT Energy going on marketing variable rate plans -- and forgetting what the new brand is called for the fixed once. Can you talk about how that's going to work? Are there going to be two separate sales forces or what?

So first of all, what I will say is that I do expect by -- that on the next quarterly call that based on some of the initial rollouts that I have announced today, that I will probably have much more information to talk about these two brands, the focus and some of the other initiatives and how they fit in.

But for now, there will be different sales forces for the different brands. It helps us in terms of acquisition vendor management. We've seen and as we have grown with a lot of these vendors, that they have specific specialties. And yes, it will be geared towards that.

I think that one of the other things that we -- one of the other products that I did not discuss in depth during this call which will also play a central role in the future is also how we are going to be positioning our very successful green product. And what we are trying to do ultimately is to create specific brands with their core competency backed by vendors who have the experience in those specific channels.

So for now, Residents, which is the other brand, is in the process of getting licensed. It has licensing right now in two primary utilities in New York. It is our goal to get them licensed in every single utility that we're -- that IDT Energy is licensed in, as will be the case with our Evergreen brand that has been used and will be used as the primary brand for the green variable products that we are selling as well.

Got it. Thanks a lot, guys.

Ian [McGellen], Edison.

I'm going to go back to northern Israel if I may. I've got a couple of questions. The first one is in terms of your readiness to start the work program once you have the exploration license, you're talking about spudding your first well in September or October. Does that mean that you actually have everything on the ground vis-a-vis your rig identified long lead items or actually in place and the crew ready to be mobilized?

And also specifically on the rig, if you do have something ready to go practically immediately, does that actually mean that you are already effectively on the meter for the rate that you have identified?

And then my follow-up question is in addition to drilling in that sort of first three- to six-month period, do you plan to do any other activities on the ground? I guess specifically I'm thinking of additional seismic acquisitions or any (inaudible) or anything of that nature?

Okay. I'll try to cover all the questions, and if I don't please feel free to interject. So I'm actually very happy that you asked the question. Because as the permit process, the regulatory process, has been underway with Afek, based on how we've conducted ourselves and have worked well with all of the various parties on the ground in Israel, we have -- our operations crew has been working day and night to make sure that we can start drilling, we can spud that first well as quickly as possible after the actual permit is issued.

So number one is yes. We do have at present -- I am happy to say that not only do have the rig on Israeli soil -- it's not in the north yet, but it is being warehoused right now in Israel. As well as, I would say, the vast majority of the ancillary equipment that we have sourced from at least four or five key vendors from the oil and gas industry to help ensure that we would be prepared to start as quickly as possible.

For the next part of your question, while I can't disclose very specific terms of our agreement with our rig vendor, what I would like to say is that we have developed a very strong relationship with Viking. And they have thus far -- obviously, it will come down to when we actually drill. But up until now, they have proven to be not just a vendor, but a partner that has now developed into a very strong relationship between the two companies.

We moved the rig from Turkey to Israel at a time of significant political instability in the region, both in Israel as well as in Turkey. And they have never stepped back. They have responded and have worked very aggressively with us in a very proactive basis. And they have additionally worked with us to ensure that understand the priority is to get the rig on the ground on the soil in Israel and make sure that financially that it would make sense for all -- for us as well as for them. So I'll just say that we are working very closely together in a mutually beneficial relationship, and I'm very happy with what economic terms are for that relationship.

Okay. Thanks. And just specifically, then, on the rig contract, do you have the availability, if (inaudible) the results are good, to easily access a second rig to increase your efforts?

Within the Viking relationship, yes. The answer to that is yes. We have, however, very strict terms that will govern the permit that we receive. Whereas the actual drilling rig can only work on one specific well at a time. And what will probably happen is that, working very closely with the energy and ministry and the northern council who will govern this license and the permit, not the license, our work will be limited to drilling one well. And then once we move the drilling rig out, all the completion work and, prior to completion work, some additional quarrying analysis, pressure testing and some additional testing that we'll do can happen in that initial rig. But that is a limitation of the permit pronounced for exploration. But certainly working with the relationship, we have identified what would be the follow-up drilling rig that would allow for, hopefully in the event of our anticipated expectation of a discovery during the exploration process and then some resulting in a production, that that is something we've already discussed with them at great length.

Thanks. And then I'll ask a follow-up question about additional activities over and above drilling.

So at the present time, our focus will be using all of the testing that we have done up until now as well as the seismic work as well as the available data from all the faults and what exists from these subsurface. And what I would say is probably, for now, we are looking for the results from at least the first well and, depending on what we've seen in the first well, probably the results of the first two or three wells to then enable us to go back and map a much more accurate substructure plot to then match up against what initial theories that we have developed. And based on that, we then may decide to do additional work. But we feel that, based on what we've been allowed to do, that we have enough of -- we have enough information right now to dictate the priority of at least the first three or four wells.

Okay, that makes sense. Thank you.

(Operator Instructions). Erin Shafter, Great Mountain Capital Management.

First, congratulations on the progress you've made towards drilling in the north of Israel. My question is regarding the project from the Shfela basin and the recent late filing by the environmental protection ministry and their jury statements that they made. And anything else you could tell us about the project there.

Absolutely. I will -- I want to present the update where we are today based on some of the late filings and some of the information we have put that's in the release. I will call tempered excitement.

I think that, for more than four years, we received a license from the government of Israel to perform a pilot test in the Shfela basin for oil shale. And I think that, as we have discussed many times, we have been frustrated by the lack of any real progress since that license has been awarded to us. And there's a lot of reasons for that -- I think good, bad and whatever. Lots of commentary for another time.

But what has recently happened is while it's a baby step forward, it is a step forward, and I hope that this is -- and I am cautiously optimistic that we have actually taken very recently the first baby step forward in what I believe and what I hope will be some real -- some real decisions within the next year that will hopefully enable us to finally move forward with getting the permit for the pilot.

The document that was issued by the environmental ministry was a document that was issued 35 days late. And not coincidentally, I think two or three days before what is, I think, a critical milestone in our process and our progress in that we have finally for the first time attended and been invited this past Monday to an official meeting of the Jerusalem council -- that is the council that governs the awarding of the ultimate permits -- which means that they have recognized for the first time our application for the permit, that the process under which the regulations in Israel govern such projects is now in play. And as I said, we had our first lengthy discussion to describe a pilot and what we intend to do.

I am not surprised at all by what the environmental ministry produced. I will say that at -- even though it was submitted two or three days prior to the meeting, our experts reviewed it and at the meeting, at this meeting on Monday, after the environment minister presented some of their findings, both the water authorities from the government of Israel as well as the chief scientist for the government of Israel both ripped apart the report that the environment ministry put out as being baseless and lacking any professional backing.

The energy minister -- I'm sorry, the environment ministry in Israel has not been shy about the fact that they, in general, oppose exploration for any fossil fuels on the ground in Israel. That was the case leading up to our progress within the Golan for Afek. And I'm happy to say that all of the other leaders, both the ministries and the northern councils, saw through that and understand the importance of energy independence for Israel, understand the importance of exploration, understand the importance of really understanding what Israel has. And I am confident -- I am confident and optimistic that as additional people see and understand, the experts weigh in on the subjective nature of the report that was filed, that we can hopefully look at this and have it behind us and allow us to continue to progress.

Okay. Thank you.

(Operator Instructions). I'm showing no further questions at this time. This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.