Gran Tierra Energy Inc (GTE) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gran Tierra's Energy results conference call for the second quarter 2018. My name is Howard, and I will be your conference coordinator for today. (Operator Instructions) I would like to remind everyone that this conference call is being webcast and recorded today, Friday, August 3, 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 any non-GAAP measures discussed on today's call.

Please also see Gran Tierra's 51-101F1 available on SEDAR. Per barrel of oil equivalent, or boe amounts, are based on a working interest sales before royalties.

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 will now turn the conference over to Ryan Ellson, Chief Financial Officer of Gran Tierra. Mr. Ellson, please go ahead.

Thank you, Howard. Good morning, and welcome to Gran Tierra's Second Quarter 2018 Results Conference Call. My name is Ryan Ellson, Gran Tierra's Chief Financial Officer. And with me today is Rodger Trimble, Vice President, Investor Relations.

We issued a press release yesterday that included detailed financial and operational information about our second quarter 2018 results, which is available on our website. Rodger and I will make a few brief comments, and then we will open the line for questions.

Overall, this quarter demonstrated that our strategy of focusing on capital efficiency and returns on invested capital is delivering great results on many fronts in Colombia. During the quarter, our Colombia-only average production was up 18% from a year ago and 19% on a per share basis. I think it's important to point out that this growth was achieved organically through the drill bit. We also reached an all-time high of 35,400 BOE per day, which was 57% higher than 3 years ago when we refocused the company's strategy on profitably growing in Colombia.

In terms of our financials, our quarterly net income was $20 million versus $18 million in Q1, and our quarterly funds flow from operations grew significantly to $95 million, an increase of 86% relative to Q2 2017, or $380 million on an annualized basis. This impressive growth in funds flow greatly exceeded the 47% annual increase in Brent over -- Brent oil price over the same time period and is a strong indicator of our sharp focus on controlling our cost structure and optimizing oil marketing strategies is working.

EBITDA was up 146% from a year ago to $102 million, or on an annualized figure of almost $410 million.

We had an active quarter with capital investment of $84 million, which was more than covered by our Q2 funds flow. Oil and gas sales increased $163 million in Q2, up 18% from last quarter. We also continue to have top quartile operating netbacks. Our netback increased by 75% compared to a year ago to just over $38 per BOE, and this increase greatly exceeded the rise in Brent over the same time period.

With our Q2 production at 35,400 BOE per day and June 2018 production at 36,400 BOE per day, we remain on track to meeting our 2018 guidance of 36,500 to 38,500 BOE per day. We expect fourth quarter 2018 production to exceed 40,000 BOE per day.

We're also updating our 2018 capital budget guidance to a new total of $305 million to $325 million. We expect our forecasted 2018 cash flows in the range of $330 million to $340 million to fully fund this revised 2018 capital program. We plan to increase our development program in 3 areas: First, we plan to drill 3 Ayombero appraisal wells following the success of Ayombero-1. We expect positive production impact to be realized in 2019. Second, we are allocating additional capital for Costayaco development drilling and one additional water injection well in our legacy sandstone reservoirs. And last but not least, we plan to accelerate 2 Acordionero development wells from 2019 into the fourth quarter of 2018. These infill wells could, potentially, positively impact recovery factor and increase our drilling inventory. Overall, we expect this expanded capital program to positively impact our 2018 year-end reserves, 2018 exit rate and 2019 production. We also remain very confident that our high-quality set of assets can deliver the forecasted production of approximately 50,000 BOE per day by 2020 based on our 2P forecast from our 2017 year-end reserve report. With our large unrisked mean prospective resource base of about 1.5 billion BOEs, we plan to drill 30 to 35 exploration wells over the next 3 years throughout Colombia, which are expected to be funded by cash flow. This exploration campaign is designed to test the majority of our large portfolio of prospects within our dominant Putumayo Basin position as well as the conventional oil play in the La Luna carbonate in the Middle Mag Basin.

Finally, I'd like to highlight our strong liquidity position. We exited Q2 with about $126 million of cash on our balance sheet and an undrawn $300 million credit facility. Our net debt of $289 million at June 30, 2018 represents low leverage of roughly 0.8x debt to annualized Q2 2018 funds flow. Overall, we have excellent financial flexibility and are well positioned to potentially further accelerate current development projects such as Acordionero, appraisal projects like Ayombero, or future exploration discoveries in the Putumayo and Middle Magdalena Valley Basins.

I now turn the call over to Rodger Trimble, Vice President, Investor Relations, to discuss some of the highlights from our Q2 operations and upcoming catalysts in 2018.

Thanks, Ryan. Good morning, everyone. We are very pleased with several operational achievements in Q2.

In the Putumayo Basin, we continued to develop the Costayaco field in the legacy sandstone reservoirs, which have been underwater flood for over 8 years now. We've achieved positive results from Q2 infill drilling in this field. In particular, we encountered lower-than-expected water cuts in the legacy reservoirs, which demonstrate that areas of high oil saturation still exists even after all the years of water flooding. We are updating the Costayaco sandstone reservoir model and are assessing future opportunities to further optimize the field and to potentially increase its oil reserves.

One of these Q2 infill wells, the Costayaco-30, has yielded particularly excellent results. Producing from the U Sand and the Caballos formation, the Costayaco-30 produced at a stable average rate of 1,491 barrels of oil per day with a water cut of 7% during June 2018. Further south in the Putumayo, on the PUT-7 block, the Cumplidor-2 development well was drilled on prognosis, clearly demonstrating that 3D seismic works, and it has been producing from the N sand at a stable average oil rate of 300 barrels of oil per day with a water cut of less than 1% since June 19, 2018. This well is expected to produce greater than 500 barrels of oil per day when a larger pump is installed.

And over on the PUT-1 block, the Vonu-1 discovery well continues to be our star A-Limestone producer, producing 1,281 barrels of oil per day on a 100% gross basis with less than 1% water cut during Q2, and has already produced just over 600,000 barrels of oil. We have several exciting developments and exploration catalysts coming up in the second half of this year.

On the development front, we forecast the ongoing ramp up in Acordionero production and plan on drilling 6 development oil wells and 1 water injection well at the same time as we continue to expand the production facilities and water flood.

We are also pursuing several appraisal and exploration projects. First, at Ayombero, we plan to drill the 3 appraisal wells that Ryan discussed earlier, and which if successful, could convert some of the 66 million barrels of oil of unrisked mean prospective resources in this La Luna conventional carbonate resource play into reserves by 2018 year-end.

Second, we plan to drill the Juglar Deep exploration well in the Middle Mag La Paloma Block, which would allow us to assess the La Luna play at a location 50 kilometers to the west southwest of the Ayombero-1 well and 30 kilometers to the west southwest of Acordionero. With the Ayombero and Juglar Deep wells, we would thus be assessing the La Luna at both the northern and southern ends of Gran Tierra's extensive Middle Mag land base.

Third, down in the Putumayo Basin, we plan to spud the Chilanguita exploration wells, which is designed to target the A-Limestone and the U and T Sands on the Alea 1848-A block.

Fourth, we plan to drill 3 exploration wells in the PUT-7 block. 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 prospective carbonate formations.

So our second half 2018 Putumayo exploration campaign is designed to test our A-Limestone conventional resource play in 4 locations. Since the A-Limestone represents 56% of our total mean unrisked prospective resources of 1.5 billion BOE, our Putumayo exploration drilling is very much focused on assessing this large resource base.

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

(Operator Instructions) Our first question or comment comes from the line of Nathan Piper from RBC.

Nathan from RBC. A question really on production growth and on the drilling plans the second half. I guess first of all on production growth, how much of the production growth is based Acordionero and Costayaco? And have you baked in any exploration success in that production number?

Thanks, Nathan. Yes, the production growth is really coming from the few additional wells in Costayaco that we mentioned as well as Acordionero. That's the vast majority of the production growth. We haven't baked in any exploration success.

Okay. And then on 3 exploration wells -- I guess, the drilling in the second half, which is pretty expensive. Can you confirm any rigs you will have operating at the peak? And also, are any of these wells at risk? Because I mean, to be fair, some of them -- some of these wells, particularly on PUT-7, should have been drilled already. So within that program of development appraisal and exploration drilling, maybe you could point to any risks that are there. And on the other hand, where you're pretty certain that the drilling will happen.

Yes. On -- we certainly feel your pain on PUT-7, Nathan. I think when we look at what the risk can be, the regulatory risk, there's rig availability, et cetera, when I look at our program that we've outlaid for the second half of the year, we have all the requisite permits, we have the drilling rigs, we have the crews, we have everything ready. So there's always unforeseen risk. But all the major ones that have typically delayed us in the past, all those have been addressed. So we're very confident in our second half program.

Our next question or comment comes from the line of Josef Schachter from Schachter Energy Research.

Two questions for me, both on the politics aside. With the change in government in country, has there been any procedural issues or slowing down in the approval process from -- in terms of getting permits and local issues? Has there been anything there? And then the second question relates to Mexico. With the onshore bid rounds being delayed into 2019, has that changed any of your views on Mexico?

With respect to politics, no, we haven't seen any changes in country. Obviously, President Elect Duque has elected -- has appointed a lot of his cabinet, and they'll take power in August 7. And so we'll have to monitor the changes post them coming into their positions. But as of right now, we haven't seen any delays, and it's been actually a very good environment to work in. With respect to Mexico, our opinion hasn't changed. As you know, we're very value-focused. We have bought the data packages for a few blocks within the -- in figure of the Pemex farmouts and we'll continue to monitor that. And when they do launch the process, we will be ready, and we'll take a look at it.

Our next question or comment comes from the line of Jenny Xenos from Canaccord Genuity.

I have 3 questions, please. I'll start with production. I'd like to drill you a bit more in production, please. You increased your spending twice this year now. Now, granted the majority of that was for infrastructure, but you also expanded your drilling program. And now, production at the same the time -- production guidance for the year has not changed. Now Acordionero has been exceeding expectations, so are Costayaco and Moqueta then underperforming expectations? And if that's the case, what specifically are you doing to try to mitigate declines there? And do I understand it correctly from your answer to one of the prior questions that you expect the 4,000 barrels a day in production additions between now and year-end to come from -- largely from your drilling at -- building new Costayaco and Acordionero wells?

Thanks, Jenny. Yes. With respect to the capital increase, you're right. The first capital increase that we did in Q1, as you know, that was for the gas-to-power project, which has, what, a year of payback; not to mention, the increased reliability, so there is no production adds. With respect to the second half drilling program, a lot of that's in Q4. So it will impact our Q -- our exit rate as well as potentially reserve additions. But where we really would see the benefit is Q1 of 2019. And so really just the map from when the wells come on in Q4, and you average that over the quarter -- or sorry, over the year, it has a fairly minimal impact. And we do have a fairly large range in our production guidance.

Okay. And what about Costayaco and Moqueta? How are they performing against our expectations?

Yes. Moqueta is performing as expected; actually, a little bit better. Costayaco, as you saw, we did have some positive drilling results. We did have Costayaco-19 go down in the quarter, which we're remediating right now. And as you will recall, that was an older well that Gran Tierra drilled in the past that was sidetracked 3 times. And so the bridge plug failed, so that wasn't very helpful because that was a good producer in the field. So we're -- actually, right now, we're right -- we're in the middle of remediating that well, and we expect that to be on -- back on production. So I don't think the -- when you look at how we -- our internal budget, we're right on track. So we don't think there's been that much underperformance or overperformance in any of the fields.

Great. And my next question is about PUT-7 with regards to the pain there. Do you actually have all of your archaeological approvals to be able to move forward with the drilling there?

That's a great question. And yes, we do.

Fantastic. That's really good news.

To be honest, actually, the pad is ready right now to take the rig. And as soon as we drill Chilanguita, that rig is going to the pad.

And the final question is, what are you seeing in terms of operating cost trends in Colombia? And how are your Q3 costs to date compare to Q2?

Q2, I'd expect our costs to be lower in Q3. We had some onetime costs that we pointed out in our MD&A in Q2. So we expect our costs to trend down in Q2.

Q3.

Q3, sorry.

(Operator Instructions) Our next question or comment comes from the line of David Round from BMO Capital Markets.

Can you just confirm which, if any, I guess, wells are drilled already and yet to come on stream? And then maybe part B to that is are you running an upside case to your 40,000 barrel-a-day target if exploration is successful? And my second question, it looks like a couple of wells have come out of the exploration program, so I'm just trying to understand if we should be expecting exploration CapEx to now be trending towards the bottom of the range.

Okay. Thanks, David. On the first question, wells that have drilled that haven't come on. We drilled Acordionero 25 and 26. Those are actually record days. Both were -- one was 10 days, one was 9.5 days, so those are record wells. So those are not on production right now. We will be completing those shortly and putting them on production over the next 30 days. As far as the upside case, what we do is we prepare a 5-year forecast that really is our upside case that has the risk exploration component, but with the guidance that we have is really that is just based on our development wells. And then the wells that -- yes, the exploration program is quite dynamic as far as wells coming in, wells coming out. We were able to accelerate Chilanguita, so that moved up into the hopper. And Comadreja has moved to Q1 of 2019. The capital -- we have substituted some additional wells in. Juglar Deep is a new prospect that we're drilling. And so a lot will depend on -- there's not much change in the capital because some of the wells that we've added are a little more expensive than the ones that we dropped out. So the capital -- the exploration guidance, we're comfortable with the range that we have in our public guidance.

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

Basically 2 questions from my side. The first one is related to the Vasconia benchmark in Colombia. I mean, I think that mainly due to the, you had said, lower production of Venezuela, you had said this pad been quite sustainable and at very healthy levels. So how do you see this playing out over the next couple of quarters? Do you think that this is sustainable? Or should we see, I don't know, at some point it's even increasing because of a lower output from Venezuela? And second question, I mean, you put an interesting chart talking about, you had said the debt to cash flow level from Gran Tierra against, you had said, almost 40 peers, and (inaudible) and then comfortable level in this front. So do you plan actually to accelerate the CapEx plan and try actually to take advantage of this low level? Or this is something that is not being considered for now?

Thank you. With respect to Vasconia, yes, the basis did widen a little bit in June. It went from about $4.40 in May to about $5.70 in June. We expect it to trend downwards to that $4 level. We're forecasting about -- I think it's $4 to $4.50 for the remainder of the year, and that's what we're using for our internal forecast. With respect to capital, I think we always want to remain disciplined. There's really only a certain amount of capital that you could effectively deploy. So right now, I think with this last increase, that really would be the last increase for the year and we'll really look at any additional capital or significant capital increase would be in 2019, just where we can plan accordingly.

(Operator Instructions) Gentlemen, there are no further questions at this time. Please continue.

Well, thank you, everyone, for joining our call this morning. We appreciate it and we look forward to updating you on our catalyst-rich second half of the year. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.