Gran Tierra Energy Inc (GTE) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gran Tierra Energy's Results Conference Call for the Third Quarter 2018. My name is Imani, and I'll be your coordinator for today. (Operator Instructions) I would like to remind everyone that this conference call is being webcast and recorded today, February, November 2, 2018, at 11 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 or 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 call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Thank you, Imani. Good morning, and welcome to Gran Tierra's Third Quarter 2018 Results Conference Call. With me today are Ryan Ellson, our Chief Financial Officer; and Rodger Trimble, our Vice President of Investor Relations.

Overall, this quarter demonstrated that our strategy of focusing on capital efficiency and returns on invested capital are delivering our results on many fronts. For example, average production was up 11% from a year ago, 12% on a per share basis. I'll point out that all of this was done organically.

We reached an all-time high of over 36,000 BOEs a day, which is 60% higher than our Colombia production was 3 years ago, when we refocused the company and our strategy to grow in Colombia.

We did have a few challenges in the third quarter, primarily premature pump failures cost us, in both operating costs and deferred, over a 1,000 barrels per day of production, which has since been resolved with the issue being power -- clean power, which we're mitigating by installing our own natural gas-fired power generation at our Acordionero field, and upgrading that natural gas-fired power generation at the Costayaco field.

We believe that was the issue that we faced in the third quarter. We're also looking at performance of the suppliers of those particular pumps. Ryan will have more about that later.

Lastly, I'd like to point out 2 tuck-in accretive acquisitions that we made during the quarter. The first being in the Putumayo-1 Block, we increased our working interest from 55% to 100%. The Putumayo block contains the Vonu-1 discovery that we announced earlier.

We also acquired a 60% working interest in the VMM-2 block in the Middle Magdalena Valley. It is a Lisama sandstone reservoir. The combination of those 2 tuck-in acquisitions added 5.2 million barrels of proven plus probable reserves. We spent about $45 million or roughly $9 a barrel for proven plus probable reserves.

Our focus, however, with previous acquisitions -- these are no different -- our focus is on the organic upside through exploration and enhanced oil recovery that we see on those assets and on those blocks.

I'll now turn the call over to Ryan Ellson, our Chief Financial Officer to discuss some of the financial highlights.

Thank you, Gary. Good morning, everyone. Our quarterly net income was $75 million versus $20 million in Q2, and our quarterly funds flow from operations grew significantly to $85 million or $340 million on an annualized basis, an increase of 54% year-over-year.

EBITDA was up 93% from a year ago to $117 million or an annualized figure of roughly $470 million. We had an active quarter with capital investment of $101 million, which was $16 million higher than our Q3 funds flow.

There are 2 major reasons for our ramp up in capital during the quarter: first, at Acordionero, we had a large amount of facility spend because we purchased the turbines for the gas-to-power project. And secondly, we had an active drilling program, including running 2 rigs at Acordionero for part of the quarter. However, we still expect our forecasted full year 2018 funds flow to cover our 2018 capital program.

Oil and gas sales increased to $175 million, up 7% from last quarter. We continue to have top quartile operating netbacks. Our netback increased by 59% compared to a year ago, to approximately $38 per BOE, which is approximately CAD 51.

Gary has already mentioned the unusual replacement of 9 electric submersible pumps we had to undertake in Q3, which increased our workover expense by 51%, to $3.93 per BOE, compared with Q2.

Gary described the actions we've taken to improve the situation, drive down our workover expenses back down to their historically lower levels.

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

With our large unrisked mean prospective resource base of 1.5 billion BOE, 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 position as well as the conventional oil plays in the La Luna carbonate in the Middle Mag Basin.

We're not currently looking at any large acquisitions, as our focus will continue to be on organic growth with an active exploration development program on our world-class portfolio.

I'd also like to mention an exciting development that occurred after the quarter. In October, our common stock listed and commenced trading on the London Stock Exchange. We believe this additional listing will broaden our international investor base.

Finally, I'd like to highlight our strong liquidity position. We exited Q3 with over $130 million of cash on our balance sheet and an undrawn $300 million credit facility.

Our net debt of $285 million at September 30, 2018, represents low leverage of roughly 0.8x debt to annualized Q3 funds flow, and approximately 0.6x debt to Q3 annualized EBITDA.

Overall, we believe we have significant financial flexibility and are well positioned to further -- 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'll now turn the call over to Rodger Trimble, Vice President of Investor Relations, to discuss some of our highlights from our Q3 operations and upcoming catalysts in Q4 2018 and early 2019.

Thanks, Ryan. Good morning, everyone. We were pleased with several operational achievements in Q3. Acordionero has continued to be our star performer and a free cash flow machine. Since acquiring this field in August 2016, we have now quadrupled production to a Q3 2018 average of almost 18,900 BOEs per day, and that's virtually all oil.

During Q3, we drilled 7 wells from 2 different pads, all while achieving record low drilling times and costs for Acordionero.

We also continue to make excellent progress with the expansion of the field's production facilities, the ramp up in our water injection for enhanced oil recovery and construction of the gas to power facility.

All of this facilities work is designed to expand our maximum capacity in Acordionero to 30,000 barrels of oil per day.

We also drilled and cased 2 exploration wells during Q3. In the La Paloma Block, in the Middle Mag, the Juglar Deep exploration well appears to be prospective in the primary target, the La Paz formation.

We plan to compete and test this well before the end of 2018.

Down south in the Putumayo, on the Alea 1848-A block, the Chilanguita-1 exploration well appears to have potential in the A-Limestone and N and U Sands, and testing of this well has begun.

We have several exciting development and exploration catalysts in Q4 2018 and into early 2019.

On the development front, we've forecast the ongoing ramp up in Acordionero production and plan on drilling 4 new development oil wells from the south pad, which are designed to test the southern extent of the main reservoirs.

We're also pursuing several appraisal and exploration projects. First, at Ayombero, we plan to drill the 3 appraisal wells that Ryan alluded to earlier and which, if successful, would convert some of the 66 million barrels of oil of unrisked mean prospective resources in the La Luna conventional carbonate resource play into reserves by 2018 year-end. We spudded the Ayombero-2 appraisal well on October 31, 2018. Second, the rig that drilled the Chilanguita well has moved down further south in the Putumayo basin to the PUT-7 block, where it is currently drilling the Pomorroso-1 exploration run, which is designed to target the A-Limestone and the U and N Sands.

Immediately after finishing the Pomorroso well, we plan to drill the Pecari, Tajinos and Northwest multi-zone exploration prospects from the same drilling pad.

These 3 exploration wells are planned to target the same potential zones as Pomorroso-1, and are expected to be drilled during the fourth quarter of 2018 and first quarter of 2019, so our ongoing Putumayo exploration campaign is designed to test our A-Limestone conventional resource play at 5 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 space. Overall, we expect our very active Q4 program to positively impact our 2018 year-end reserves, 2018 exit rate and 2019 production.

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) Our first question comes from Nathan Piper with RBC.

Three question from me, if I may. First of all, on power, can you provide a bit more color on when you're going to get your own power -- dedicated power generation established and up and running, on both the Acordionero and Costayaco? I guess both have been -- created real issues on production through the course of last year and this year. So I'd be keen to understand how that comes together. Secondly, on the pace of drilling success, so if you are successful in the upcoming drilling, how quickly could you see production tied into wherever is close by, and see you actually make an impact on your production numbers? And then maybe, lastly, can you give us a bit of color on how many rigs you might have active next year, and a bit of a sense of the drilling campaign for 2019?

Okay. Thanks, Nathan. On the power generation, as we announced earlier this year, we've strategically moved to a own-and-operate, as opposed to lease, on power generation, and so we have the big natural gas turbines, the first is on the water; we will have ourselves fully self-sufficient at Acordionero by mid-year -- mid-year 2019. At Costayaco-Moqueta, equally important, where we're looking at expanding water flood starting next year, we have leased equipment. We'll look at upgrading that equipment as we expand our operations. That will be -- that will take us all of next year. However, we're comfortable in the Costayaco-Moqueta with the changes that we've made, we're in pretty good shape there. So the answer to your question is, mid-year next year at Acordionero, towards the end of next year for an expansion at Costayaco-Moqueta. In terms of pace of drilling, that's the -- one of the beauties of Colombia is the infrastructure that's in place, both pipelines and roads for trucking. The Ayombero, that both Ryan and Roger mentioned, it's on an exploitation license already. We're drilling within an exploitation license. We have facilities in place, and so that is a very rapid development. In the Putumayo, we're drilling truly exploration wells. We believe that the way in which we will be testing all of these, that the product will be trucked to market immediately. And we also believe, with the infrastructure that Gran Tierra has through earlier acquisitions, primarily the Santana station in the middle of the basin and that pipeline connecting Costayaco, any discoveries that we have would certainly be within a year, would be our forecast. And in terms of rigs, we can talk about minimum. We're not -- we're working through our long-range plans at the moment, a minimum 2 rigs. And we'll look at what that maximum is, and talk about that with our long-range plan. We're planning an event in London, an event in New York, to look at long-range, but also at our 2019 budget, we'll have some more color for you then.

[I think then] if we can come back, Gary, on the power and pump outages and stuff like that. And I guess -- so would you say that portfolio is still exposed to reliability issues, however they manifest themselves over the next 6 to 9 months then? So through 2019, is there still a risk that the combination of pump failures and/or power failures which cause pump failures could still be a theme for the first 6 months or do you -- or is the portfolio getting more robust, from that point of view?

I think it's fair to say that we've supplemented the power through diesel-fired generation -- it's not our first option to use diesel to generate. We've mitigated the interim risk between now and mid-year with supplemental power. And I would say that we've mitigated even that risk, it -- it's just through supplemental power.

And our next question comes from David Round with BMO Capital Markets.

Sorry, I caught the bit about number of wells you're drilling, but can you just clarify how many wells that you actually brought onstream during the quarter? Perhaps, how they're performing, and how many new wells you expect to add in Q4? There was Costayaco-36 well that you've mentioned previously; if you could just maybe touch on that as part of that. And then, maybe just a bit of an update on the security situation, given that you had an issue in the quarter?

Sure. We'll have to come back to you with a total number. We had some lapse in from Q2 that were actually completed during the quarter. We'll get you an exact number. In terms of how they're performing, in Acordionero, they continue to meet or exceed expectations, an average of greater than 1,000 barrels per day per well. Most of those are targeted at the A -- the mass of A Sandstone. We're also appraising, so -- as Ryan mentioned, we've moved into the southern end of the field itself, and we've just completed our first well, so we expect that success to continue from a reservoir perspective. The specific Costayaco-36 well was drilled on the top of the structure to test saturations. We did find that there is oil. We produced that temporarily, but the primary design of the well itself is an injector, and we will be converting that to injection very shortly. The real next few years at Costayaco will be expanding the water flood. As you know, we have 3, 4 reservoirs in that field, and we still see plenty of upside. We've had some -- as we talked about last quarter, we've had some real success as we downspaced and looked at the new carbonate reservoir, and our plans are to expand that going forward.

And then, David, we expect to bring on 4 to 6 wells during the quarter depending on timing. Does that answer all your questions?

Sorry, am I still live? It does. And then if you just wouldn't mind touching on the security situation?

Oh, right, right. Yes, there were a couple of news flows coming out of the country. We did have an incident in-country, sabotage to one of our flowlines between the Costayaco and Moqueta field. It was a minor -- we had a minor fire. We were able to, very quickly, get that back onstream. We can't tell you the source of the sabotage. All we can tell you is that the government agencies or all -- multiple agencies are on top of that, and we're doing everything we can to support them.

Our next question comes from Josef Schachter with Schachter Energy.

First thing, going back to the pumps, is -- was it only the electricity side or was there a problem with the corrosion with the pumps. And is it an issue where you've got to send it out to outside engineers to see if the pump and the steel used was of sufficient quality to handle the pressures and the demands?

Yes, the answer to that, Josef, is -- the primary cause of the issue was power. Power off and on. We did have -- we have had the chance to look at a couple of these pumps. It ended up being sediment that settled back into the pump and we could not restart. We're taking precautions in the design of more pumps that we've rerun. In terms of corrosion, we have a very active corrosion program, chemical program, not only to avoid corrosion but also to cut the cost of avoiding corrosion. And so we have a group that focus entirely on that. And we don't see any issues in terms of untreated corrosion.

Okay. So no metallurgical failure issues?

No.

No. Okay, my second question is, in your financial statements, you talk about repurchase of common stock -- only a small amount in the quarter or in the 9 months, $1.3 million. What is your thought process on -- I know this quarter you're spending more than cash flow on the spend, given where the stock is. Where is your thought process on when you might want a more active normal course issuer bid?

Yes, I'll touch on that one. It was -- the one challenge that we have is that we seem to be perpetually in blackout, just with the amount of activity that we have. So what we are looking at doing is doing automatic share purchase plan, which will alleviate some of those concerns. We do think it's a good use of capital to return some of those funds to shareholders, some of the free cash flow, and so we're actively looking at that.

Okay. Last question from me. Is -- can you shed some light, if you can, on the nutty action today this morning? The stock was -- popped up to CAD 452, and now we're at CAD 397. Any reason why there was a real positive reaction, and then it's gone to the reverse? Was there anything that I've missed?

I don't know. If you've missed it so have we. We don't have any idea.

Yes, that was some abnormal activity just at the beginning of the day, Josef. That's all I can say on that. And it looks now we've kind of gone close to where the market's been trending.

Yes, the margin's trending lower on a lower oil price, but the pop-up this morning was a bit surprising.

Yes. Agreed.

Our next question comes from Ian Macqueen with Eight Capital.

A simple, quick question. Mono Arana in the VMM-2 block, there's been a lot of talk about that. I think your partners have been talking about it as well. It was, at one point in time, going to be a fairly substantial undertaking for Canacol, but it kind of never really happened. There's about 575 barrels a day over the first half of the year. What is production at Mono Arana, and what do you think you can do with the asset, what are you trying to do with the asset?

Thanks, Ian. Yes, it -- what we see at Mono Arana is a potential EOR project in the Lisama. It's a Lisama Sand play. It needs some workovers. It's currently producing about that 500 barrels a day, so we're going to have to spend a little bit of money getting the field back up to the 800 to 1,000 barrels a day. But the real push for us is it needs some more wells, it needs downspacing, it needs water flood, it needs water injection, and so we look at Mono Arana as a long-term project, and over the next year or 2, through downspacing, through water flood pilots, look -- testing the real potential of those sands. We also have rights in the conventional La Luna. We're not as focused on that, at the moment, as we are over in Ayombero. We think we have a lot better potential in the -- in a structurally more complex Ayombero setting, and so our real focus on Mono Arana is getting the wells back on production. There is some remedial work that needs to be done with mechanical issues. We hope to get all of that done starting this quarter that we're in. And we'll look at our 2019 budget, looking at some wells and water flood pilots in the field.

Gentlemen, there are no further questions at this time, please continue.

Thank you, operator. I'd like to thank everyone for joining us today. We look forward to speaking with you at the end of the next quarter, and updating you with ongoing progress. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.