Gran Tierra Energy Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

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. At this time all participants are in a listen-only mode. Following the initial remarks we will conduct a question-and-answer session for securities, analysts and institutions. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]. I would like to remind everyone that this conference call is being webcast and recorded today, Friday, August 3, 2018 at 11 o’clock a.m. Eastern Time. Today’s discussion may include certain forward-looking information, oil and gas information, including information about Gran Tierra’s perspective 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 on 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 Incorporated. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy. I would now turn the conference over to Ryan Ellson, Chief Financial Officer of Gran Tierra. Mr. Ellson, please go ahead.

[Ryan Ellson:]

Than 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. Roger and I will make a few brief comments and then we will open the lines 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 Columbia. During the quarter our Columbia 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 three years ago when we refocused the company’s strategy on profitably growing in Columbia. 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 the funds flow greatly exceeded the 47% annual increase in 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 as 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 is more than covered by our Q2 funds flow. Oil and gas sales increased $163 million in Q2, up 18% from last quarter. We also continued to have top quartile operating netback. 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 of 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 also updated 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 by our 2018 capital program. We’ve learnt to increase our development program in three areas. First, we plant to drill three 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 the least, we plan to accelerate two Acordionero development wells from 2019 into the fourth quarter of 2018. These intro wells could potentially positively impact recovery factor and increase our drilling inventory. Overall, we expected this expanded capital program to possibly 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 un-risked mean prospective resource base of 1.5 billion BOEs, we plan to drill 30 to 35 exploration wells over the next three years throughout Columbia, which are all expected to be funded by cash flow. This exploration campaign is designed to test the majority of our large portfolio prospects within our dominant Putumayo Basin position, as well as the conventional oil play in La Luna carbonate in the Middle Mag Basin. Finally, I would like to highlight our strong liquidity position. We exited Q2 with about $126 million of cash on our balance sheet and undrawn $300 million credit facility. Our net debt of $289 million at June 30, 2018 represents low leverage of roughly 0.8 times debt to annualized Q2, 2018 funds flow. Overall we believe we have excellent financial flexibility and are well positioned to potentially further accelerate current development projects such as Acordionero, appraisal projects like the 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 the highlights of our Q2 operations and upcoming catalysts in 2018.

[Rodger Trimble:]

Thanks Ryan. Good morning everyone. We are very pleased with several operational achievements in Q2. In the Putumayo Basin we continue to develop the Costayaco field and the legacy Sandstone Reservoirs which have been underwater flood for over eight 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 demonstrates 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 accessing future opportunities to further optimize the field and to potentially increase its oil reserves. One of these Q2 infill well, the Costayaco 30 has yielded particularly excellent results, producing from the U Sands and the Caballos Formation, the Costayaco 30 produced at a stable average rate of 1,491 barrels oil per day with a water cut of 7% during June 2018. Further south in the Putamayo on the PUT-7 block, the Pomorroso two development well was drilled on prognosis, clearly demonstrating that 3D seismic works. 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 volume one discovery wall continues to be our star A-Limestone producer, producing 1,281 barrels of oil per day on a 100% gross spaces with less than 1% water cut during Q2, and as already produced, just over 600,000 barrels of oil. We have several exciting development 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 six development oil wells and one 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 three appraisal wells that Ryan discussed earlier and which if successful, could convert some of the 66 million barrels of oil of unrest mean perspective 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 the Juglar Deep wells, we would thus be assessing the La Luna at both the northern and southern ends of Gran Tierra extensive Middle Meg land base. Third, down in the Putumayo basin, we plan to start the Chilanguita exploration well, which is designed to target the A-Limestone and the U and T Sands on the Alea 1848A block. Fourth, we plan to drill three 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 perspective carbonate formations. So our second half 2018 Putamayo exploration campaign is designed to test our A-Limestone conventional resource play at four locations. Since the A-Limestone represents 56% of our total mean un-risked prospective resources of 1.5 billion BOE, our Putamayo 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:]

Thank you. [Operator Instructions] Our first question or comment comes from a line of Nathan Piper from RBC. Your line is open.

[Nathan Piper:]

Good morning guys; Nathan here from RBC. A question really on production growth and on the drilling plans for the second half. I guess a little on production growth, I am not sure if the production growth is based on Acordionero and Costayaco, and have you baked in any exploration success in that production number?

[Ryan Ellson:]

Thanks Nathan. Yeah, the production growth is really coming from the positional 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.

[Nathan Piper:]

Okay, and then onto the exploration well, I guess the drilling is 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. I mean to be fair, 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 are you pretty certain that the drilling will happen?

[Ryan Ellson:]

Yeah, on that we certainly feel your pain on PUT-7 Nathan. I think it’s – so when we look at what the risk can be, you know the regulatory risks, there is rig availability, etcetera. When I look at our program that we’ve outlaid for the second half of the year, we have all the reps and permits, we have the drilling rigs, we have the crews, we have everything ready. So you know there’s always unforeseen risk, but all the major ones that are typical out goes in the past, all of those have been addressed, so we were very confident in our second half program.

[Nathan Piper:]

Okay, that’s clear. It’s actually much – that’s perfect, thank you.

[Ryan Ellson:]

Thanks Nathan.

[Operator:]

Thank you. Our next question or comment comes from the line of Josef Schachter from Schachter Energy Research. Your line is open.

[Josef Schachter:]

Good morning Ryan and Roger, congratulations on the great quarter. Two questions for me, both on the politics side. With the change in government in country, has there been any you know procedural issues or slowing down in the approval process in terms of getting permits and you know 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?

[Ryan Ellson:]

Thanks Josef. With respect to the politics, no, we haven’t seen any changes in the country. Obviously the President [inaudible] has elected, has appointed a lot of his cabinet and they will 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. You know we have bought the data factors for a few blocks within the – into 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.

[Josef Schachter:]

Okay, good. Thanks so much. That’s it from me.

[Ryan Ellson:]

Thanks.

[Operator:]

Thank you. Our next question or comment comes from the line of Jenny Xenos of Canaccord Genuity. Your line is open.

[Jenny Xenos:]

Good morning, gentlemen. Congratulations on a good quarter! I have three questions please. I’ll start with production. I’d like to drill you a bit more on production please. You increased your spending twice this year now granted that majority of that was for infrastructure, but you also expanded your drilling program and now production at the same time, production guidance for the year has not changed. Now Acordionero has been exceeding expectations, so our Costayaco and Moqueta then are under performing your expectations, and if that’s the case, what specifically are you doing to try to mitigate declines there? And you know 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 both the new Costayaco and Acordionero wells.

[Ryan Ellson:]

Thanks Jenny. Yeah, 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 payback, not to mention the increased reliability, so there’s no production heads. With respect to the second half drilling program, a lot of that’s in Q4, so it will impact our Q exit rate, as well as potential reserve additions, but where we really would see the benefit is Q1 of 2019. And so really it just is the map from when the wells come on in Q4 and you average that over the year, it has a fairly minimal impact. And we do have a fairly large range in our production guidance.

[Jenny Xenos:]

Okay, and what about Costayaco and Moqueta, how are they performing versus your expectations?

[Ryan Ellson:]

Yeah, Moqueta is performing as expected. Actually it was a little bit better. Costayaco we did have some positive drilling results. We did have Costayaco 19 go down in the quarter, which we are remediating right now. As you recall, that was an older well that Gran Tierra drilled in the past that was side tracked three times and so the Bridgeport failed so that wasn’t very helpful because that was a great producer in the field. So we’re actually – right now we’re in the middle of remediating that well and we expect that to be back on production. So I don’t think that the – when you look at our internal budget, we’re right on track, so we don’t think there’s been that much underperformance or over performance in any of the fields.

[Jenny Xenos:]

Great, that’s great to hear. Thank you, Ryan. And my next question is about PUT-7 with regard to the pay-in there. Do you actually have all of your archaeological approvals to be able to move forward with the drilling there?

[Ryan Ellson:]

That’s a great question, and yes we do.

[Jenny Xenos:]

Oh fantastic! That’s really good news.

[Ryan Ellson:]

The pad is ready right now to take the rig and as soon as we drill Chilanguita, that rig is going to the pad.

[Jenny Xenos:]

Okay, great. And the final question is, what are you seeing in terms of operating cost trends in Colombia and how your Q3 cost to-date compared to Q2.

[Ryan Ellson:]

Q2, I would expect our costs to be lower in Q3 with one-time costs that we pointed out in our MD&A in Q2. So we expect our cost to trend down in Q3.

[Jenny Xenos:]

Great, thank you so much.

[Ryan Ellson:]

Thanks Jenny.

[Operator:]

Thank you. [Operator Instructions]. Our next question or comment comes from the line of David Round from BMO Capital Markets. Your line is open.

[David Round:]

Good morning guys. Can you just confirm which, if any I guess wells are drilled already are yet to come on the 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. 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.

[Ryan Ellson:]

Okay, thanks David. On the first question, wells that are drilled but haven’t come on, we drilled Acordionero 25 and 26. You know those were actually record days. Both were – you know one was 10 days, one was 9.5 days, so those were 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, you know what we do is we prepare a five 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.

[David Round:]

Okay.

[Ryan Ellson:]

And then the well that – yeah, the exploration program is quite dynamic as far as wells coming in and wells coming out. We were able to accelerate Chilanguita, so that moved up into the hopper and the [inaudible] has moved to the Q1 of 2019. The capital, we have substituted some additional wells and Juglar Deep is the 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 one that we dropped out. So the capital and exploration guidance, we’re comfortable with the range that we have in our public guidance.

[David Round:]

Okay, great. Thanks.

[Ryan Ellson:]

Thank you.

[Operator:]

Thank you. Our next question or comment comes from the line of Luiz Carvalho from UBS. Your line is open.

[Luiz Carvalho:]

Thank you very much. Basically two questions from my side. The first one is related to the Vasconia benchmark in Columbia. I mean, I think that maybe due to the lower production in Venezuela this thread has been quite sustainable and have 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 is even increasing because of the lower output from Venezuela? And second question, I mean you put an interesting chart talking about the inside of that to cash flow level from Gran Tierra against the almost 40 peers and this you have acquired, a comfortable level in this one. So a good one actually to accelerate the CapEx plan and try to actually take advantage of this lower level here. This is something that is not being considered for now. Thank you very much.

[Ryan Ellson:]

Thank you. With respect to the Vasconia, yeah the base is a bit widened a little bit in June. It went from $4.40 in May to about $5.70 in June. We expect it to trend downward to that $4 level. We’re forecasting about, I mean its $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 wanted to remain disciplined. There’s really only a certain amount of capital that you can effectively deploy, so right now I think with this last increase, it will be the last increase for the year and we’ll really look at any additional capital or a significant capital increase would be in 2019, just so we can plan accordingly.

[Luiz Carvalho:]

Okay, it’s clear. Thank you very much.

[Ryan Ellson:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Gentlemen, there are no further questions at this time; please continue.

[Ryan Ellson:]

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

[Operator:]

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