Gran Tierra Energy Inc (GTE) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the First Quarter 2018. My name is Amanda, and I will be your coordinator for today. (Operator Instructions)

I would like to remind everyone that this conference call is being webcasted and recorded today, Wednesday, May 2, 2018, at 11:00 a.m. Eastern Time.

Today's discussion may include certain forward-looking information, oil and gas information, including information about Gran Tierra's prospective resources, as well as certain non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important disclaimers with regard to this information and reconciliations of on any non-GAAP measures discussed on today's call. Please also see Gran Tierra's 51-101F1 available on SEDAR.

Finally, this earnings call is the property of Gran Tierra Energy Inc., any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.

I would now like to turn the call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please proceed.

Thank you, Amanda. Good morning, and welcome to Gran Tierra's First Quarter 2018 Results Conference Call. My name is Gary Guidry, I'm Gran Tierra's President and Chief Executive Officer. Today, with me is Ryan Ellson, our Chief Financial Officer; and Rodger Trimble, our Vice President of Investor Relations.

We issued a press -- press releases yesterday that included detailed financial and operational information about our first quarter 2018 results, which are available on our website at www.grantierra.com. Ryan and Rodger will make a few brief comments, and then we will open the line for questions.

Ryan, please go ahead.

Good morning, everyone. Our strategy of focusing on capital efficiency and returns on invested capital is delivering great results on many fronts in Colombia. During Q1 2018, our Colombia-only average production was up 23% from a year ago and 33% on a per-share basis. This growth was mostly achieved organically through the drill bit.

In Q1 2018, we reached an all-time high of approximately 35,100 BOE per day, 55% higher than Q2 2015, when we refocused the company's strategy on profitably growing in Columbia. We are well on track to meeting our 2018 guidance of 36,500 to 38,500 BOE per day.

We also remain very confident that our high-quality set of assets can deliver forecasted production of approximately 50,000 BOE per day by 2020, based on the 2P forecast from our 2017 year-end reserve report.

Gran Tierra has returned profitability generated net income of $18 million in the first quarter. In Q1 2018, our funds flow from operations was up 8% in Q4 2017 to $75 million, or $300 million on annualized basis. Our quarterly adjusted EBITDA was up 14% from last quarter to $89 million, or $355 million on an annualized basis.

Gran Tierra had a very active Q1, with capital investment of approximately $73 million, which were more than covered by our Q1 funds flow. Approximately 42% of our capital expenditure were directed to exploration facilities construction. Whilst these activities did not contribute to production growth in the quarter, they are 2 key components to our strategy. We want to ensure that we continue the development of the water injection facilities and process facilities in the Acordionero Field, and to capture and prove up resources through the exploration program.

We continue to have top quartile operating netback performance in Q1 2018, which increased by 45% compared to a year ago and by 20% from the last quarter to approximately $34 per BOE. This impressive growth in funds flow from operations greatly exceeded 23% increase in the Brent oil price in Q1 2018 and a strong indicator of our sharp focus on controlling our cost structure and optimizing oil marketing strategy is working.

With our large unrisked mean prospective resources base of 1.5 billion BOEs, we plan to drill 30 to 35 exploration wells over the next 3 years throughout Colombia, which are all expected to be funded by cash flow.

A big part of our current success at Gran Tierra was our strategic acquisition of PetroLatina in mid-2016, whose major asset in the Middle Magdalena Valley was the Acordionero Field. In the 21 months that Gran Tierra has owned and operated of these assets, the results have been stellar and represent some of our most significant operational highlights. During this time, we've almost quadrupled Acordionero's production to roughly 17,300 BOE per day by drilling and bringing on 13 oil wells, 2 water ejectors and 1 water source well.

Acordionero and the other Middle Mag assets have had -- have been a cash flow engine as well, generating oil and gas sales of $241 million and operating netback of $184 million since the acquisition, more than covering our $140 million in capital investment in the Middle Mag during this time. In fact, the Middle Mag assets have self-funded the active Acordionero development program as well as paid for our Middle Mag appraisal and exploration drilling.

To recap, we have more than tripled production from the PetroLatina assets while generating positive free cash flow. And as reported last quarter, the 2P NPV is 3x more than what we paid for the assets. We're only halfway through our full 2P development plan. We're also in the midst of expanding the central processing facilities to potential capacity of 30,000 barrels of oil per day, with $5 million incremental capital investment added in scope to support the better-than-expected production results to date.

This new higher facilities capacity could handle our 3P production forecast of over 27,000 BOE per day from Acordionero, which may be possible if our waterflood is successful as our reservoir models per day. An additional $17 million in facilities capital has been added for the construction of the Gran Tierra-owned 22 megawatt gas-to-power facility in Acordionero, which is expected to leave a significant operating cost savings of $8 million to $10 million per year and, equally important, improved production water injector reliability.

In combination with incremental capital for remote power generation capacity in the Putumayo Basin this year, we have updated our forecasted 2018 capital by $25 million to a new guidance range of $275 million to $295 million. We expect forecasted cash flow from operations to fully fund our revised 2018 capital program.

During Q1, we also believe the markets delivered a strong bode of confidence in our Colombia-focused long-term strategy, as evidenced by our successful offering of $300 million in 6.25% senior unsecured notes with a 7-year term.

After paying down our revolving credit facility and placing the excess cash on our balance sheet, we now have about $160 million of cash on our balance sheet and net debt of $255 million at March 31, 2018, which represents low leverage of roughly 0.9x debt-to-annualized Q1 funds flow.

In addition, our $300 million credit facility is undrawn and available, which provides us with a substantial additional liquidity. We believe our bond issue improved our financial flexibility and left us in a strong liquidity position such that Gran Tierra's well positioned to potentially accelerate current development projects, such as Acordionero, or future exploration discoveries in the Putumayo and Middle Magdalena Valley Basin.

We produced essentially 100% oil, and all our sales contracts are linked to Brent pricing. We have hedged 10,000 barrels of oil per day, of which, 5,000 per day have upside commodity price exposures through participating swaps. Our participating swaps have loss discount of less than $4 per barrel. Over 80% of our forecasted net production has exposure to oil price upside in 2018. Currently, we do not have any hedges in place for 2019.

Finally, during the quarter, we repurchased $1.2 million worth of shares under our NCIB.

I now turn the call over to Rodger Trimble, Vice President, Investor Relations, to discuss some of the highlights of our Q1 2018 operations and potential upcoming catalyst in 2018.

Good morning. I'll briefly mention some other key operational highlights during Q1 2018. Our Middle Mag drilling program in the north of Colombia delivered exciting results of the Ayombero-1 well, with unstimulated production tests rates from the La Luna carbonate conventional oil reservoir of up to 600 barrels of oil per day on natural flow with no water, the Ayombero-1 well may have opened up an exciting new front for appraisal and development in the Middle Mag for Gran Tierra.

As production testing of this well continues through second quarter 2018, we are already assessing the potential for future La Luna appraisals and development well locations on the Ayombero-1 Chuira structure later this year.

Our independent qualified reserve evaluator, McDaniel, has updated its prospective resource assessment of the Ayombero prospect in light of this positive well results. McDaniel has assigned mean prospective resources to Ayombero of 66 million barrels of oil per day on an unrisked basis and 31 million barrels on a risk basis. So we are very excited about the Ayombero-1 results.

Down south in the Putumayo Basin, the Vonu-1 exploration well on the PUT-1 block, where we have an operated 55% working interest, continues to be our star performer in the A-Limestone. On a 100% gross basis, it has produced at an average rate of 1,849 barrels of oil per day during Q1, with only modest natural decline observed so far. Since starting production in July of last year, Vonu-1 has produced a total of just over 500,000 barrels of oil per day with essentially no water.

With the success of the A-Limestone in the Vonu well in the PUT-1 block, we're now working to permit a new well to appraise this discovery during 2019. As Vonu-1 also discovered oil in the U Sand and net oil pay in the N Sand, our evaluation is designed to identify the best drilling location to test the stacked multizone potential of the PUT-1 block.

Also in the Putumayo and Costayaco, we have drilled or are drilling 3 infill development wells to tap into our legacy reservoirs, the Costayaco-31, 32 and 33 wells. We've already had some interesting and encouraging results with the Costayaco-32, in which we've had our first successful oil test from the new M2 Limestone, which produce from 147 to 230 barrels of oil per day of 29-degree API oil with virtually no water. We're accepting the potentially positive implication of the M2 Limestone at Costayaco and the Putumayo Basin overall.

The Costayaco-33 well, which is currently drilling, has our legacy reservoirs as primarily targets, but has a potentially interesting secondary objective of evaluating the A-Limestone's prospectivity on the other side of the main fault system that bounds the Costayaco field to the southeast.

At this point in time, our new A-Limestone and other carbonate conventional oil resource plays are still in their infancy and are just over 1.5 years old. As with other resource plays around the world, it will continue to take time to optimize drilling and completion techniques to maximize recoveries and achieve the best economics.

We remain very encouraged about the massive prospectivity of these plays, as indicated by the more than 800 million BOE of mean unrisked prospective resources assigned by McDaniel at 2017 year-end to the A-Limestone alone. We look forward to many more years of drilling in this exciting new -- in these exciting new carbonate plays in the Putumayo Basin.

Some upcoming catalysts in 2018 are as follows. First, we plan to drill 3 exploration wells in the PUT-7 block in the Putumayo Basin in second half 2018; the Pecari, Pomorroso and Northwest wells are all designed to test the N Sand, the A-Limestone and the U Sand as well as other perspective carbonate formations.

Second, we plan to drill 2 development oil wells in PUT-7, in the Cumplidor-Confianza field with the Cumplidor 2 well currently drilling. Third, we are also excited that the prospect of drilling several other A-Limestone and N Sand exploration wells in the Putumayo over the next several months. For example, the Colibri well on the PUT-4 block, the Chilanguita well on Alea 1848-A and the Comadreja well on PUT-2.

Our A-Limestone conventional resource play represents 56% of our total mean unrisked prospective resources of $1.5 billion BOE. So our 2018 exploration drilling is very much focused on assessing this massive resource base.

I will now turn the call back to the operator. And Gary, Ryan and I will be happy to take questions. Operator, please go ahead.

(Operator Instructions) And our first question comes from the line of Nathan Piper of RBC.

A couple of quick questions, please. First of all, on the additional CapEx. You're bringing forward -- well, I guess the question is, are you bringing forward activity you would have done in 2019? Or are you doing supplementary activity because results have been better than you expected? Second, on Ayombero, it looks like a decent initial result given it's an exploration well. Would you expect further drilling to generate better production numbers than you've got so far? And also, maybe as a definition thing, but why has McDaniel's called it prospective resources given you've actually drilled and tested the reservoir? And then I guess, lastly, on more of a wider point, as we go through May, we've got elections in Colombia. I wonder if you could give us your perspectives on how that presidential campaign is unfolding.

Okay. On the capital, the answer is both of the above. The results have been better than expected, and it is capital that we are pulling forward. So we're just accelerating. Ryan mentioned, the 30,000 barrels of oil per day capacity, we're just moving things forward to from 2019. The exemption is the power generation. Our commitment on the installation of gas-to-power equipment is a purchase, it's new, and we're shifting from a rental situation where we supply fuel and rent the equipment. And so that's really just about reliability. In terms of Ayombero, the reason that McDaniel's classified that as prospective resource, they're looking at the entire structure. The -- if you look at the Chuira field, that's been on production, has produced several hundred thousand barrels already. This structural closure, we just drilled on the far eastern flank of the structure, and our view is it's really a closure that we're appraising. But it'll take some wells to move that into a reserve category. Your question on could we get higher rates, we're quite enthusiastic that we can. It's a structurally complex reservoir that's fractured. And our real objective on this well, the exploratory part of this well, was the Salada. It's the deepest. It's the first test of the Salada in this area. And so we geared to our drilling program to get to that depth and tested it. It was wet with some traces of heavy oil. And the secondary objective was the Galembo, which is the -- turned out to be great in terms of productivity. It's confirmed that the closure exists all the way through the Ayombero field. In subsequent appraisal wells, which we're planning now and hope to be kicking those off to appraisals/development wells, we can gear the completions to rates and recoveries, and our team will do just that. In terms of politics, that's a loaded question, Nathan. We observed the primary, that seemed to consolidate a lot of the vote and move Iván Duque into the lead position. And we're -- we just continue to observe. All of our programs will continue whoever is the next president of the country and the next senate. All of our social programs and our development programs are all geared to long term. Hope we had answered your...

It probably was a very loaded question. But if I can go back to the prospective resources on Ayombero. In terms of the sort of $60 million number, how much of that is associated with this formation that you had success with? And how much of it is associated with the one with the Salada, which was less prospective at this location?

Yes, they -- virtually, I would say, not all but most, a very small amount. They still believe that there could be some up-dip accumulation in the Salada. They also gave us a little bit of credit, I think it's about 4 million or 5 million a barrel in the Pujamana, which is actually the best-looking information of all, looked as good or better than the Galembo, we just did not tested it yet and likely will not test it on this well due to the complex completion. But the Pujamana, between the Salada and the Galembo, very fractured. We had great shows when we drilled through it. And so we're still encouraged, and we'll likely test that on a subsequent well.

So the majority of that number is associated with the -- yes, with the success you've had.

What was that, Nathan?

Sorry. Just being clear. The numbers really associated with it, the bit of success -- the bit that you successfully tested?

That's correct.

Our next question comes from the line of Luiz Carvalho of UBS.

I basically had 2 questions here. First of all, you were able to improve netbacks quite significant recently, and you plan to keep improving. I'd like to see or get the bit more color on how do you see your oil break given currently off the (inaudible), all these improvements on that back front? And second, from a capital location perspective, I mean, the CapEx increase that you announced was mainly allocated by the facilities improvement, right? So when do you expect to see that in production and, consequently, on cash flow from this investment?

On the first question, the netbacks. Yes, the netbacks continue to improve. Part of that is Acordionero makes up a larger percentage of our production base, and Acordionero has the highest setbacks in the company. Our operating costs are sub-3 dollars in the Acordionero field. And so we've looked at our corporate breakevens, they would be sub-30 dollars for sure.

Sub-30 dollars to -- you mean just oil, right?

Correct, correct.

Okay. And we got to be -- the capital allocation in terms of the impact?

Yes. So there really is no impact on the production. There's really 2 components. The big component is the power generation, the 22-megawatt power generation that we're going to build. And really, that is not going to be reflected in production, it's reflected in operating cost savings going forward. If you look at it, we'll save $8 million to $10 million per year for a $20 million investment. It is for a 2-year payback on that investment. So no impact on production, but does impact our bottom line.

Our next question is from the line of Matías Vammalle of Argo Capital Markets.

Two quick questions. The first one is starting from our [red] low leverage point. What can you guide us in terms of where do you think the sustainable leverage for the company is? And then secondly, and I think you were just touching upon that, but how sustainable do you think your cost improvements have been, especially on the operating cost that those big achievement this quarter? And then if you can give us a bit of a guidance in terms of transportation expenses which have hedged marginally, but a bit higher this quarter?

Okay. On the first one, our -- what we target entirely is a debt to cash flow of 1:1. And so not debt to EBITDA, but more of a debt to cash flow number is what we target. So that puts the debt-to-EBITDA of around 0.75 or so. But debt to cash flow 1:1 is what we target. And with the second question as far as sustainability of the operating costs. Again, like it's on the last question is a big chunk of our operating cost decreases just the higher percentage of Acordionero production. We're quite comfortable that the -- if you look at the operating costs and transportation costs in Q1, that's a good proxy for the transportation cost and operating cost going forward, for the remainder of 2018.

Great. And if I can say, I couldn't catch it, did you say is it net debt or gross debt, both on either debt to cash flow and net to -- or debt-to-EBITDA, sorry?

Net debt. And the way we define net debt is really just the face value of our debt, which is $300 million on the bonds and $115 million on our convertible, less cash on hand.

Our next question is from the line of Josef Schachter of Schachter Energy.

Question for you. You talked about the politics in Colombia with the May 27 election. Can you talk about how you see things moving with the potential in Mexico of the left-wing candidate who seems to be anti-outsiders coming in, in the oil and gas industry? Would -- if he gets elected, would you close down the office in Mexico? How's -- what's your thoughts there?

Yes, we -- just looking at the polls, I think the consensus is that is a likely outcome of the election. All of the analysis we've seen and done ourselves that the new petroleum legislation that's gone through congress, it will be very difficult to turn back. That's not to say that it will not and it's not to say that things might slow down. We are, in fact, looking at the joint venture realm, and we're very enthusiastic about the Pemex joint venture partnerships and there's also another onshore round that we look at. Our interest in Mexico is subsurface. There, we see lots of opportunities. The way the country is set up there, their fiscal system for the petroleum industry is very similar to Colombia. And so when we compare profitability of projects, we think there's potential there, but there's also the risk of things slowing down. And so we'll weigh that. The bids are going to occur after the election and we'll look at it at that time. So our view is we will continue looking at it and assess as the election results are in.

(Operator Instructions) Our next question comes from the line of Jenny Xenos of Canaccord Genuity.

I have 3 questions, if I may, please? That's first one is do you actually have any exploration wells drilling right now?

The answer is yes. We are just about to spud -- it's the frontier Sinu basin. Then we should be drilling that well here very shortly. A little bit of exploration, Rodger mentioned, we're crossing the bounding fault at Costayaco. We're going to take a look at what the carbonates look like on the east side of the Costayaco bounding fault. And beyond that, we're drilling development wells. The one thing that I will point out that we have not declared a discovery in the carbonates in the U Sands at Cumplidor in Putamayo-7. We're about 10,000 feet on that well, we will be cutting core in the N Sands to get ready to develop. There's about 14 million barrels of undeveloped 2P reserves there that will waterflood. And we will also test the A Carbonates and U sands in that well, and then declare that discovery. We -- you'll recall we did test both of those already in the Confianza well. So that's the other exploration activity ongoing.

Okay. So these are essentially the 3 things that are happening in the second quarter. The Sinu well, then the CYC well and the Cumplidor well. Those are the 3 that are -- we should expect results kind of by the end of the second quarter.

They're ongoing now, yes.

Okay, perfect. And could you give us a little bit more color, please, on the M2 Limestone? I know that you've encountered it before. I seem to remain that pay was thinner than what you've seen in the A-Limestone. But could you give us a bit more color on kind of the -- how it compares to the A-Limestone in terms of raw quality, thickness or pay and potentially area or extent if you can say?

Yes. It's a -- the exciting part, Jenny, is it's a refill phases on top of the A, which is a platform carbonate. So you can have some, as you know, as you get into refill phases, you can have some spectacular results. Highly reactive to hydrochloric acids when we stimulated it, and we're excited to get back on it and test it. In terms of regionally, we -- we've got a pretty extensive seismic database. We see lots of potential throughout the lands that we already hold as well.

Okay. So it could be a material addition to the 800 million barrels that have already been attributed in prospective resources to the A-Limestone?

It can. And the exciting part for us was demonstrating that we can produce oil out of it, and we got a couple of hundred barrels a day last week.

Fantastic. Okay. And maybe the final question, you have significant financial capacity now in your balance sheet with $160 million in cash and $300 million in undrawn credit capacity, what do you plan to do with that other than the obvious share buybacks? Your debt is already at a well within your targeted range, so what do you plan to do with that extra financial capacity?

I think, Jenny, we have a very active, as you know, exploration program, and we are applying for success when you think we will have discoveries. And this really just gives us of the financial capacity to fast-track those discoveries.

Okay. So could we see you then potentially expanding your work program further to develop discoveries or maybe bring forward the drilling of some additional wells?

There's a possibility. I think we just want to make sure that we remain disciplined. You start to fast-tracking the program too much, that's when you run into operational challenges, cost overheads, et cetera. So we'll do it in a disciplined way.

And gentlemen, there are no further questions at this time. Please continue.

Okay. Thank you, Amanda. On behalf of the management team at Gran Tierra, I want to thank you for joining us today. We look forward to speaking with all of you during the exciting quarter that we're in now, and we'll talk to you in 3 months. Thank you.