GeoResources Inc. (GEOI)
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an average of 416 net equivalent barrels of oil per day from 134 productive wells located
within 42 fields in North Dakota and Montana
GeoResources, Inc. is a natural resources company engaged in three principal business segments oil and gas exploration, development and production; oil and gas drilling; and leonardite mining and the manufacture of leonardite based products. GeoResources, Inc. is traded on the NASDAQ SmallCap Market under the symbol GEOI.
GeoResources has a substantial oil and gas exploration and production operation in the Williston Basin. This business segment has historically constituted in excess of 70% of our revenue and earnings, although this can vary significantly with commodity prices. In 2003, the Company produced an average of 376 net equivalent barrels of oil per day from 141 productive wells located within 42 fields in North Dakota and Montana.
Due to the shortage of working drilling rigs in some portions of the Williston Basin, in late 2001 GeoResources elected to form a subsidiary company, Western Star Drilling Company, and acquire a drilling rig for its own use and for contract drilling operations. In September 2001 GeoResources purchased a drilling rig capable of drilling to 8,000 feet. After retrofitting was completed, the rig was deployed in the north central region of North Dakota.
In addition to its oil and gas activities, the Company operates a Leonardite mine and processing plant at Williston, North Dakota. At the Williston facility a distinctive type of oxidized lignite coal called Leonardite is mined from leased reserves and processed into several different specialty products. Those products include drilling mud additives for use in the oil and natural gas drilling industry and applications in metal working factories and in agriculture.
CEOCFOinterviews: Mr. Vickers, will you tell us about your background with GeoResources and companys focus?
Mr. Vickers: I have been with GeoResources for over twenty years and our business focus has not changed. I have tried to grow in each segment as well as increase our asset size and profitability. We have three primary business segments. The principal one is oil and gas exploration, productions and on occasion, acquisitions. The second segment is oil and gas drilling, which is a new business segment for us, and the third is leonardite based products. Leonardite is an industrial mineral that looks halfway between coal and peat. We are a bit diversified but the main product that we make in the leonardite operation is a drilling additive for oil and gas wells. All three of our principle segments are oil and gas related.
CEOCFOinterviews: How do the segments of the business break up as sources of revenue?
Mr. Vickers: It depends of the demands of the market. Two or three years ago, with oil prices relatively low and lack luster, all of the segments were not at their maximum revenue. Historically, over the last ten years, our oil and gas exploration and production is by far the largest amount of our revenues. The other two segments kind of switch places but leonardite generally is our second highest generator of business and drilling being a new business is third at this point.
CEOCFOinterviews: How much oil are you producing and what are you doing with it?
Mr. Vickers: We produce about thirty thousand barrels of oil a quarter. All of our oil is sold to local crude oil buyers that are located in the Williston Basin, foothills and plains. Because of the demand for oil, it is not hard to find a purchaser. We are not involved in upstream operations or refining. We find and produce the oil and once we have it in tanks, then crude oil buyers pick that up and purchase it from us. In the drilling segment, we contract to other operators or others contract to us for the wells we drill and then drill wells for operators under contract. That is a thirty day invoicing type of procedure much like any other contract business.
CEOCFOinterviews: How do you keep production costs down and are their any new technologies you can utilize for this purpose?
Mr. Vickers: The production prices now might be difficult to keep down as the price goes up, although many of our barrels are economic at higher production costs. Our production costs have historically been anywhere from ten to fifteen dollars, with the most typical being in the middle at about twelve dollars and fifty cents to fourteen dollars a barrel. I think the bigger push in the industry is to get the refining costs down. Production costs are thought to be just the costs of producing once you make a well; the costs of providing electricity and supervision. The higher cost is finding new production and using modern technology to find barrels at a lower cost. All of the new technology is being used but the one that is the most frequently employed now in the Williston Basin and other domestic producing areas is horizontal drilling.
CEOCFOinterviews: How much exploration are you actually doing?
Mr. Vickers: Because of our size, we are in the two to four wells a year range as far as drilling. In a typical year, a good mix would be to drill four wells. We would like to see three development wells for a higher chance of success and one an exploratory well. That is not just size either. Much larger operators focus more on redevelopment with technology being horizontal in horizontal drilling than they are in exploration, just because the risks are much lower in most areas of the domestic United States. That does not mean it is not going to be done or new discoveries are not going to be found. Exploratory drilling takes a longer time for the barrels to get on the line. To capitalize on the higher prices today, more of the shorter term work is putting more of the additional horizontal legs into existing wells or just putting one horizontal leg into an existing well that can bring on new production in sixty days. You have to go out on a prospect and buy or shoot 2D seismic and analyze that for six months. You then shoot 3D seismic and analyze that for three months. After that, you do the leasing that is required and find the rig to drill from a barebones prospect to find a brand new field. You might be looking a total of two years before you bring that production on.
CEOCFOinterviews: How are you positioned financially for all of your activities?
Mr. Vickers: We are very small with twelve million in assets, but cash flow is quite good right now. We have had in place, and continue to keep in place, a revolving line of credit. We do not do much exploratory drilling with borrowed money but we do use it for equipment costs and the lower risk part. We have funding for the budget that we have had this year. In the past, we have never done a secondary offering or raised additional capital in any form other than cash flow.
CEOCFOinterviews: Are you strictly oil or are you also involved in gas?
Mr. Vickers: We are primarily oil because the Williston Basin is primarily oil. That could change but the Williston Basin is an oil prone basin. Very little of the pure gas gets in from Kansas, Oklahoma and Texas. By the same token, the Williston Basin has never had a good pipeline infrastructure to get gas out of the Williston Basin, and the population that lives in the area is not a large market for a large find with natural gas. That pipeline infrastructure has gotten much better over recent years. There may be more focus on gas as a possibility of coal that methane gas, but even at that, the Williston Basin will continue to be oil prone. To answer your original question, we are probably 95% oil.
CEOCFOinterviews: How do you grow the various segments of your business?
Mr. Vickers: When prices go up, like now, all three segments improve and when prices go down, our oil and gas production suffers. Leonardite because it is sold into oil and gas drilling markets, suffers. Drilling itself suffers as well. When prices are on an upswing, all three areas tend to rise together. In the three months ending June 30th, oil sales went from eight hundred thousand dollars to a little over a million and in the six months they went from 1.75 million, to 1.9 million. All three segments came up in the second quarter, so total revenue in 2003 for the three months was a million dollars and 2004 was a million six. For the six months, 2003 was about 2.2 million and 2004 was almost 2.8. Revenues have come up dramatically with the rise in oil prices that have occurred in 2004.
CEOCFOinterviews: What do you do in the good times to prepare for the times that it may not be as good?
Mr. Vickers: We develop our properties and use the extra cash flow to increase our production. In the last two years, we actually have not increased our production, but we believe that even this year production increases are possible. These are excellent times. We can be very profitable in good times and somewhat profitable in poor times, but in disaster times, and there have been some, those are the can you survive times? Those are the ones that kept knocking the industrys infrastructure back because fifteen dollar NYMEX just shuts U.S domestic oil and gas down. There have been times when we have thirty dollar oil and right behind it we would go to fifteen dollars again. I think there is a little more confidence in the industry and in the financial community as well, that we may not see fifteen dollar NYMEX again. I will not bet the company on that but the world has changed. The petroleum demands of Asia and there is not the overhang of productions in the Middle East percentage wise that there were even five years ago and certainly ten years ago. Maybe there would be more stability, and that is good for us as an oil and gas producer. It is actually good for many other things, which are alternative energies, because they also cannot stand when oil goes to fifteen dollars. Many alternatives like ethanol, wind power and geothermal need some kind of a stable cost of energy to go forward. We are not involved in alternative, but we all need the same thing.
CEOCFOinterviews: Why should investors be interested in GeoResources Inc. and what should they know about the company they may not realize when they first look at the company?
Mr. Vickers: GeoResources is a long established company with a private company in the fifties involved in Uranium. It has been traded on the Nasdaq since the early to mid seventies. It is small but by being small, a major discovery can change the type of stock dramatically in a short period of time. Because of our smallness, it is probably high risk but we try to manage it conservatively to minimize that risk as much as possible. Because of our size, it falls off the radar screen of essentially all oil and gas analysts. We are far below microcap; a microcap company these days is a hundred million in assets. There are other ways that we can get bigger, both through our own growth and exploration and production. There is the possibility of merging with other companies here that will put something bigger together that would be typical of the size of a Nasdaq listed oil company. Our history is that we have been through fifteen to twenty years of time where most of our peers have disappeared. We had it a little bit different because you do not see companies our size if they are not Nasdaq last that long. The reason is that we are one of the few that did not have to merge because of a financial crisis or disappear by some other means. We are located close to our properties and we are headquartered in the Williston Basin where all of our properties add to our operations. Our location in North Dakota is an advantage; it is a good life and we have a lower cost of living. I think we can attract good employees at costs that are less than if we were located in Denver, Casper or one of the other typical oil areas.
We produce about thirty thousand barrels of oil a quarter. All of our oil is sold to local crude oil buyers that are located in the Williston Basin, foothills and plains. Because of the demand for oil, it is not hard to find a purchaser. We are not involved in upstream operations or refining. We find and produce the oil and once we have it in tanks, then crude oil buyers pick that up and purchase it from us. In the drilling segment, we contract to other operators or others contract to us for the wells we drill and then drill wells for operators under contract. That is a thirty day invoicing type of procedure much like any other contract business. - Jeffrey Vickers
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