Gran Tierra Energy Inc.
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to Gran Tierra's Energy Results Conference Call for the Third Quarter 2018. My name is Emani 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, 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 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 sale 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 would now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

[Gary Guidry:]

Thank you, Emani. 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 the capital efficiency and returns on invested capital are delivering 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 have reached an all-time high of over 36,000 BOEs a day which is 60% higher than our Colombia production was three 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 cost and deferred over 1,000 barrels per day of production, which has since been resolved, but the issue being power, clean power which we are mitigating by installing our own natural gas fired power generation at our Acordionero Field and upgrading that natural gas supplier power generation at the Costayaco Field. We believe that was the issue that we faced in the third quarter. We are also looking at performance of the suppliers of those particular pumps. Ryan will have more about that later. Lastly, I would like to point out two tuck-in accretive acquisitions that we made during the quarter. The first being in the Putumayo-1 Block, we increased our working acreage from 55% to 100% that Putumayo Block contains the 101 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 two 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.

[Ryan Ellson:]

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 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 two major reasons for our ramp-up in capital during the quarter. First, at Acordionero we had a large amount of facilities spend, because we purchased the turbines for the gas to power project, and secondly when active drilling program, including running two rigs at Acordionero for part of the quarter. However, we still expect that our forecasted full year 2018 funds will recover 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 CAD51. Gary has already mentioned the unusual replacement of nine electric submersible pumps, we have to undertake in Q3, which increased our workover expense by 51% to $3.93 per BOE comparable Q2. Gary described the actions we have taken to improve this situation to drive down our workover expenses back down to the historically lower levels. We remain confident on 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 UN Reserve Report. With our large unrest mean perspective resource base of 1.5 billion Boe, we plan to drill 30 to 35 exploration wells over the next three years throughout Colombia which are expected to be funded by cash flow. This exploration of campaign is designed to test the majority of our large portfolio of cross backs within our dominant Putumayo position as well as conventional oil plays in the La Luna carbonate in the Middle Mag Basin. We're not currently looking at any larger acquisitions as our focus will continue to be on our organic growth with an active exploration development program on a world class portfolio. I'd also like to mention exciting development occurred after the quarter in October common stock listed and commenced trading on the London Stock Exchange we believe this additional list 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 0.8 times debt to annualized Q3 funds flow and approximately 0.6 times debt to Q3 annualized EBITDA. Overall, we believe we have significant financial flexibility and are well positioned further to potentially further accelerate current development projects such as Acordionero appraisal projects like Ayombero or future exploration discoveries in Putumayo and in the Middle Magdalena Valley Basins. I'll now turn the call over to Rodger Trimble Vice President, Investor Relations to discuss some of our highlights from our Q3 operations and upcoming catalysts in Q4 2018 and early 2019.

[Rodger Trimble:]

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 through Q3 2018 average of almost 18,900 Boes per day and that's virtually all oil. During Q3, we drilled seven wells from two different pads all well achieving record low drilling times and costs for Acordionero. We also continue to make excellent progress with the expansion of the field 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 at Acordionero to 30,000 barrels of oil per day. We also drilled in Case II exploration wells during Q3. In the La Paloma Block, in the Middle Mag, the Juglar Deep exploration well appears to be respective in the primary target, the La Paloma's formation. We plan to complete and test this well before the end of 2018. Down south in Putumayo on the Alea 1848A Block, the Chilanguita-1 exploration well appears to have potential in the A-Limestone and the N Sands and testing of this well has begun. We have several exciting developments in exploration catalyst in Q4 2018 and into early 2019. On the development front, we passed the ongoing ramp up in Acordionero production and plan on drilling four new development oil wells from the south pad, which are designed to test the Southern extent of the main reservoirs. We are also pursuing several appraisal and exploration projects. First, at our IM Barrel, we plan to drill the three appraisal wells that Ryan alluded to earlier, in which successful with convert some of the $66 million barrels of oil of unrisked meaningful respective resources in the La Luna conventional carbon resource play into reserves by 2018 year-end. We spudded the IM Barrel 2 appraisal well on October 31, 2018. Second, the rig that drilled the Chilanguita well has moved down further sound in the Putumayo basin to the PUT-7 block where it is currently drilling the Pomorroso 1 exploration well, which is designed to target the A-Limestone and the U and N Sands. Immediately after finishing the Pomorroso well, we plan to drill Bakari, Tahito [ph] and Northwest multi-level exploration prospects from the same drilling pads. These three exploration wells are planned to target the same potential zone as Pomorroso 1 and are expected to be drilled through the fourth quarter 2018 and first quarter of 2019. So, our ongoing Putumayo exploration campaign is designed to test our A-Limestone conventional resource play at five 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 rates 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:]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session for securities analysts. [Operator Instructions] Our first question comes from Nathan Piper with RBC. Your line is now open.

[Nathan Piper:]

Thank you. Good morning guys. Three questions from me, if I may. First of all, on power. Can you provide a little bit more color on when you're going to get your own dedicated power generation established and up and running on both the Acordionero and Costayaco? I guess both have been - I've created real issues on productions of course last year and this year. So, we're 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 whatever is closed by and see 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 campaigns for 2019? Thanks.

[Gary Guidry:]

Okay. Thanks, Nathan. On the power generation, as we announced earlier this year, we've strategically moved to an 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. And Costayaco, Moqueta equally important where we're looking at expanding water floods starting next year. We have leased equipment. We'll look at upgrading that equipments as we expand our operations. And that will be, that will take us all of next year. However, we're comfortable in the Costayaco Moqueta with the changes that we made were pretty good shape there. So, the answer to your question is midyear next year Acordionero, towards the end of next year for an example at Costayaco, Moqueta. In terms of pace of drilling. That's one of the beauties of Colombia is the infrastructure is 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, where we're drilling through truly exploration wells. We believe that the way in which we will be testing all of these that the product will be we truck to market immediately. And we also believe with the infrastructure the Gran Tierra has through earlier and acquisitions primarily the San Tana 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 two rigs. And we'll look at what that maximum is and talk about that with our long-range plan where we're planning an events in London and at an event in New York to look at long range. But also, our 2019 budget will have some more color for you then.

[Nathan Piper:]

I think maybe we can come back to just - on the power and the pump IFGs and stuff like that. And I guess so would you say that portfolio still exposed to reliability issues, however, they manifest themselves over the next six to nine months then. So, through 2019 is there still a risk that the combination of pump failures and/or power failures which cause the pump failures could still be a seen to the first six months or the portfolio getting more robust from that point of view?

[Gary Guidry:]

Yeah. I think it's fair to say that we have supplemented the power through diesel fire 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 have mitigated even that risk if the - it's just through supplemental power.

[Nathan Piper:]

Okay. Thanks very much that's clear.

[Operator:]

Thank you. And our next question comes from David Round with BMO Capital Market. Your line is now open.

[David Round:]

Hi, guys, sorry. I quote a bit about number of wells you're drilling, but can you just clarify how many wells that you actually pore onstream during the quarter, perhaps how they are performing and how many new wells would you expect to add in Q4? There was Costayaco 36 well that you had mentioned previously, if you could just maybe touch on that as part of that. And then maybe just a bit an update on the securities situation given that you have an issue in the quarter?

[Gary Guidry:]

Sure. We'll have to come back to you with the total number, we have some of laps in Q2 that were actually completed during the quarter, we get you an exact number. In terms of how they are 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 massive A sandstone, we are also appraising. So as Ryan mentioned we moved into the southern end of the field itself and we have 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 that we did find there is oil, we produce that temporarily, but the primarily design of the well itself is an injector and we'll be converting that to injection very shortly. The real next few years that Costayaco will be expanding the water flood, as you know we have three, four reservoirs in that field and we still see plenty of upside. We had got some - as we talked about last quarter we have had some real success, as we down space and looked at the new carbonate reservoir. And our plans are to expand that going forward.

[Ryan Ellson:]

Okay. And then we expect to bring on four to six wells during the quarter depending on timing.

[David Round:]

Okay.

[Ryan Ellson:]

\ Does that answer your questions?

[David Round:]

It does. And then if you just touch on the security situation.

[Ryan Ellson:]

Right. There were a couple of news flows coming out of the country. We did an incident in country sabotaged one of our flow lines between the Costayaco and Moqueta Field. There was a minor, we had a minor fire. We were able to very quickly get that back on stream. We can't tell you the source of the sabotage, all I can tell you is that the government agencies are on - multiple agencies are on top of that and we are doing everything we can to support them.

[David Round:]

Okay. Great. Very helpful. Thank you.

[Gary Guidry:]

Thank you, David.

[Operator:]

Thank you. Our next question comes from Josef Schachter with Schachter Energy. Your line is now open.

[Josef Schachter:]

Good morning everyone and congratulations on good quarter. First thing, going back to the pumps, was it only the electricity side or was there a problem with the corrosion with the pumps and as an issue what you guys ended up to outside engineers to see if the pump still used was in a sufficient quality to handle the pressures and the demand?

[Gary Guidry:]

Yes. The answer to that, Joseph is that the primary cause of the issue was power, power off and on, we did have - we have had the change to look at a couple of these pumps, it ended up being settlement that settle back into the pump and we've could not restart. We're taking precautions in the design of more pumps that we've re-run. 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 the body in corrosion and so we have a group that focus entirely on that and we don't see any issues in terms of unpredicted corrosion.

[Josef Schachter:]

Okay, so no metallurgical fail of issues.

[Gary Guidry:]

No.

[Josef Schachter:]

No. Then my second question is, in your financial statements, you talked about repurchase of common stock only a small amount in the quarter, or in the nine months 1.3 million. What is your thought process on I know this quarter you are spending more than cash flows on the spend, given where the stock is? Where is your thought process on when you might want and a more active normal course issuer bid?

[Ryan Ellson:]

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

[Josef Schachter:]

Okay. last question from me is can you shed some light if you can on the nutty action today this morning, the stock was at popped up to CAD452 and now we're at a CAD397. Any reason why there was a real positive reaction and then it's going through the reverse. Was there anything that I have missed?

[Rodger Trimble:]

If you have missed it, so did we. We don't have any idea.

[Ryan Ellson:]

Yes, that's abnormal activity just at the beginning of the day. Josef, that's all I can say on that. It looks now, we've kind of gone close to where the markets been trending.

[Josef Schachter:]

Yes, the market is trending lower on a lower oil price. But the pop-up this morning was a bit surprising. Okay, that's it for me. Thank you very much for taking my questions and a good quarter.

[Ryan Ellson:]

Thanks.

[Operator:]

Thank you. Our next question comes from Ian Macqueen [ph] with Eight Capital. Your line is now open.

[Unidentified Analyst:]

Good morning guys. 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 one point in time going to be a fairly substantial undertaking for Canaccord [ph], but it can never really happen. There is 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.

[Rodger Trimble:]

Thanks Ian. What we see at Mono Arana is a potential EOR project in the Lisama, it's the Lisama sand play, it needs some workovers, it's currently producing about that 500 barrels a day. So, we're going 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 down spacing, it needs water plug, it needs water injection and so we look at Mono Arana as a long-term project and over the next year or two, through down spacing, through waterflood 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 iron barrel, we think we have a lot better potential and a structurally more complex iron barrels 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 that done starting with 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.

[Unidentified Analyst:]

That's great. Thanks very much.

[Operator:]

Thank you. Gentlemen, there are no further questions at this time. Please continue.

[Gary Guidry:]

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.

[Operator:]

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.