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Double Eagle Considering Joint Ventures, Low-Risk Projects

Denver-based natural gas producer Double Eagle Petroleum has no intentions to drill new wells this year in the Catalina Unit of Wyoming, long one of the company's prized leaseholds. Instead, the junior independent will focus on lower risk nonoperated projects and review some offers to set up joint ventures, the CEO said Thursday.

In a conference call with investors and financial analysts to discuss 2008 earnings and this year's projections, the management team laid out Double Eagle's plans for the year. Between $10 million and $30 million is set aside for exploration in 2009, well below the $65 million that was spent in 2008. Most of the capital expenditures (capex) will be directed toward the company's leasehold in Wyoming's Pinedale Anticline, along with the well production enhancements planned in that portion of the Atlantic Rim leasehold that it operates. In its operated portion of the Atlantic Rim, Double Eagle will spend money this year to complete and connect 18 wells drilled in 2008.

CEO Richard Dole and his executive team explained to analysts that the company assessed projects currently under way and projects on the drawing board to determine the risk and estimated rate of return in light of the current economy. The overview included nonoperated leaseholds in the Pinedale Anticline of Wyoming and in the Doty Mountain and Sun Dog units of the Atlantic Rim.

"Our 2009 capital budget is based on drilling programs which are low to medium risk development projects that provide a foundation for steady growth," said Dole. "Due to the tightening of the credit markets and the low forecasted natural gas price, we expect that a significant portion of available capital will be committed to nonoperated projects that management believes are in the company's best interests to continue to participate in."

The projected budget for 2009 does not include "the impact of any potential future exploration projects or possible acquisitions. Although our emphasis is on developing low risk projects and increasing our acreage position of potential drilling prospects, we are continually evaluating exploration opportunities, and if a potential opportunity is identified that complements our areas of expertise, it may be pursued."

Capex for the year is to be funded with cash from operations and funds available through the company's recently renegotiated $75 million credit facility. Management also is continuing to evaluate :acquisition opportunities that complement existing operations, offer economies of scale and/or provide further development, exploitation and exploration opportunities.

A few of the investors listening to the presentation were intrigued by the company's news that it may divest of some noncore assets or enter into strategic partnerships or joint ventures that are not part of the current budget. Following the formal presentation, management answered several questions about what that might mean for the company's future.

"Double Eagle has been a survivor of this downturn, and we believe we will be a thriver of opportunities," Dole said during the conference call. "We've been approached by various capital groups to talk about how they might fund a joint venture with us," or "an aggregation strategy that could include assets..." He said the "company's in the very early stages of reviewing those opportunities. It's like a big funnel, with all of the stress of a lot of companies are under, there are opportunities coming to the top, and we're trying to sort through them, evaluate them and not let them divert us from the value of the assets that we already have..."

Earlier this month Double Eagle reported record operating results for 2008 (see NGI, March 9). For 2008 the company earned 73 cents/share, versus a net loss of $1.47 in 2007. Revenue rose to a record $49.58 million, which was 188% higher than in 2007, and cash flows from operations totaled $23 million, compared with $5.17 million a year earlier.

Dole acknowledged that the economy and low gas prices had walloped Double Eagle's share price. On Friday morning the company was trading at around $4.00/share. In the past year it has traded as high as $19.91/share.

"Our stock, like all of our peers, has suffered significant declines," Dole said. "But we are still solid, as evidenced by 2008 production levels and revenue."

He was asked by a couple of investors about what Double Eagle could face if the economy remained in a meltdown through 2009 or if gas prices remained around $4/Mcf.

"We have not modeled the question," said the CEO. "We make money at $4; our revolving credit line cost of capital is very attractive, and we think we can pretty well manage over next few years with the cash flow. Our intent is to grow reserves...Part of the problem with growing reserves is to get production from the existing asset portfolio with the current credit facility, and with what we have that is entirely possible..."

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