Gran Tierra Energy Inc.
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Conference Call for Fourth Quarter and Year End 2018 Results. My name is Michelle and I will be your 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, Wednesday, February 27, 2019 at 1 P.M. Eastern Time. Today's discussion may include certain forward-looking information, oil and gas information and non-GAAP financial measures. Please refer to the earnings and operational updated 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. 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, Michelle. Good morning and welcome to Gran Tierra's fourth quarter and year end 2018 results conference call. With me today are Ryan Ellson, our Chief Financial Officer; and Rodger Trimble, our Vice President of Investor Relations. We issued a press release this morning that included detailed financial and operational information about our fourth quarter and year end 2018 results. In addition, Gran Tierra Energy's 2018 annual report on Form 10-K has been filed on EDGAR and is available on our website at grandtierra.com. Ryan, Rodger and I will make a few brief comments and then we'll open the line for questions. In 2019 our returns focused strategy with an emphasis on profitable production growth generated by strong operational financial results. During 2018 we achieved high record average production of 36,209 barrels of oil equivalent per day, 15% higher than in 2017's production, and 38% higher than volumes in 2016. On a per share basis, production in 2018 was up 17% from 2017. We also increased average production in the fourth quarter of 2018 to a record high of 38,156 barrels of oil equivalent per day. Net income was $103 million or $0.26 a share compared to a net loss of $32 million or $0.08 a share in 2017. We are pleased to report that in 2018 it's the first time Gran Tierra has reported net income since 2013. Ryan will now summarize our key financial results and revise 2019 capital budget. Ryan?

[Ryan Ellson:]

Thank you, Gary. Good morning, everyone. Overall, 2018 was a great year with net income of $103 million or $0.26 per share with funds flow from operations increasing 39% to $306 million or $0.79 per share. EBITDA more than doubled in 2018 increasing 106% to $377 million, and net debt to EBITDA was very manageable one-time at December 31, 2018. Gran Tierra had an active Q4 of capital investment of $89 million which exceeded our Q4 fund flow by $36 million, primarily as a result of additional capital spend in the quarter now. We have continued to have top quartile performance in 2018 relative to our oil-weighted peers in terms of operating effect on work-interest-sales basis which increased to $33.51 per BOE in 2018, up 36% compared with 2017. I really want to emphasize how much the creation of long-term shareholder value is at the center of everything we do at Gran Tierra. We are very focused on capital efficiency and return on invested capital. As we reported about a month ago, our high quality set of assets is forecast to deliver $1.9 billion of free cash flow over the next five years from existing 2P reserves. This free cash flow should provide us records [ph] of funding to target our large perspective resource base of over $1.4 billion barrels and return capital to shareholders. We've updated our 2019 guidance following our acquisition of assets announced last week. We're increasing production guidance to a range of 41,000 to 43,000 barrels per day which represents year-on-year growth of 13% to 19% over 2018. The strong profitable production growth is forecasted to be delivered by our 2019 development capital program of $220 million which is only approximately 55% of our cash flow. The majority of the development capital is directed at a Acordionero's ongoing development where we're trying to drill a total of 14 wells and continue expanding -- continue working on expanding the central processing facility and water injection. Approximately 65% of our 2019 capital budget will be dedicated to development activities. Elsewhere in our portfolio, we're trying to drill 12 to 16 developing wells in the Putumayo basin and some other minor fields. Our 2019 exploration program of 68 wells in 3D seismic called for investment of approximately $110 million which would represent approximately 35% of our total 2019 capital expenditures of $320 million to $340 million. The 3D seismic acquisition will be the largest ever shot in the Putumayo basin. The majority of our 2019 exploration campaign is once again planned to be focused on the Putumayo basin where we forecast the drilling of 4 to 5 wells which are designed to target both, the carbonate and sand oil play. Our forecast of 2019 Brent oil price of $65 per barrel, we forecast midpoint annual funds for approximately $385 million which will more than cover 2019 capital program of roughly $330 million. With our strong balance sheet and free cash flow profile we plan on returning capital to shareholders through share buybacks where we're trading at significant discounts or net asset value and buying back shares as consistent with our overall objective of growing our net asset value 3x to 5x over the next five years. I will now turn the call over to Rodger Trimble, our Vice President of Inverter Relations.

[Rodger Trimble:]

Thanks, Ryan. Good morning everyone. I'll briefly cover a few operational highlights in today's press release and some key upcoming catalysts. We continue to have strong performance during the quarter at Acordionero where we drilled 3 wells on the South Pad which focused on delineating the southern reservoir extent within the area mount on 3D seismic. The AC-32 and AC-33 development wells from the South Pad have further proved up the southern extension of the Lisama A and C reservoirs. And the AC-34 development well which is placed on production on January 10, 2019 has performed above original expectations with a 30-day average oil rate of just over 2,000 barrels of oil per day. Planned activity in the first quarter of 2019 is focused on drilling and completing the AC-35, AC-36 and AC-37 development wells, as well as drilling several water injectors. We also continue to make good progress at Ayombero. The Ayombero three appraisal well spud on January 7, 2019 and is now in the completion phase. All three Ayombero wells drilled to date have confirmed similar lithologies, oil saturations, and overpressure in the Galembo member of the La Luna Carbonate reservoir suggesting reservoir and structural continuity. On the exploration front, down in the Putumayo basin, log evaluation at the Pomorroso-1 well in the PUT-7 Block indicates that up to 7 zones maybe perspective. After stimulating the first carbonate zone, the well stigmatized [ph] a natural flow at average rates of 288 barrels of oil per day, a 34-degree ATI oil. However, the packer subsequently failed. A production logging tool confirmed that only 3 feet out of 71 feet of proofreader reservoir have been effectively simulated in this well. A second simulation using a diverter is planned for March 2019, and we also expect to test other perspectives uphold zones including the end-sense [ph]. Testing is ongoing at Almendrillo-1, this well is also in the PUT-7 Block and the same rig is then expected to drill in sequence to the Pecari-1, Tajinos-1 and Northwest-1 exploration wells from the same pad. These exploration wells are designed to test the same multi-zone potential as Pomorroso-1. And Chilanguita-1 on the Alea 1848-A Block, testing operations are ongoing though we have yet to establish commercial oil rigs from this well at this time. Moving up to the Llanos Basin, the Prosperidad-1 well on the El Porton Block have been drilled to the intermediate casing [ph] depth of about 9,800 feet, and the well is expected to reach total depth in the second quarter. This well is designed to test the Mirador, Gacheta and Une Formations. Bottom-line, we're pleased with our performance in 2018 overall, and are excited about our many potential catalysts in 2019. I will now turn the call back to the operator; and Gerry, Ryan and I will be happy to take questions. Operator, please go ahead.

[Operator:]

[Operator Instructions] Our first question comes from Adam [ph] of RBC Capital Markets.

[Unidentified Analyst:]

Just a couple of questions for me. Firstly, on the CapEx for the year of 347; could you provide a bit more color on the split between development and exploration? Also I believe it was slightly ahead of what we had expected. And secondly, regarding 2019 exploration, the revised 68 wells does not include exploration on the recently acquired PUT-8 Block, I know there was a well scheduled like [indiscernible] Pad. So I'm wondering if that's still on-schedule?

[Ryan Ellson:]

So if those are the questions, and with respect to the CapEx you're referring to the 2018 CapEx. Correct?

[Unidentified Analyst:]

Yes. Yes, of 347.

[Ryan Ellson:]

Yes, about 75% of that was development and 25% exploration. It was a little bit higher, we did accelerate some of the facilities and had a little additional cost in Q4, as well as there is a few wells that we had some drilling problems and the cost ran over.

[Unidentified Analyst:]

Okay. Fair enough

[Rodger Trimble:]

Turning to your question on exploration, yes, we do include PUT-8 in our portfolio. We have a portfolio of other exploration wells that we'll continuously review depending on what's happening in the market but PUT-8 is certainly in our mix for 2019.

[Operator:]

Our next question comes from Ian Macqueen of Eight Capital.

[Ian Macqueen:]

Just some questions on the acquisition with respect to Suroriente. Production had been kind of humming along, I had Q3 production based on the A&H data at almost 8,000 barrels a day gross; and it sounds like if we gross up the numbers for what you bought at 36.2% interest, it's about 6,200 currently. So I'm assuming CapEx has gone down but a couple of things on that; why has there been such a production drop? And then, actually, I know that that contract ends in June of 2024; how quickly I see you're drilling 11 to 13 development wells in the Putumayo basin? How quickly are you going to be able to get on to drilling within the Suroriente Block? So these are the first questions.

[Ryan Ellson:]

It was back to the production, there was a few high productive wells that ESPs did felt in Suroriente. And also there is -- the water injection was as much as it should have been; so that impacted the production.

[Ian Macqueen:]

And I'm assuming that means that you can get that production back on relatively?

[Ryan Ellson:]

Absolutely. And especially the drilling plans; as of now I think you remember in our capital market share presentation we showed the positive response from the water flood in the northern part of the field. Our strategy with this field is to significantly increase the water flood, we think it will maximize returns and raise our capital efficiencies by really ramping up the water injection.

[Ian Macqueen:]

And drill development wells as well or mostly just water injection?

[Ryan Ellson:]

Mostly water injection.

[Ian Macqueen:]

Next question as it relates to the acquisition. I believe there were some commitments on some of the other fields that I'd seen before. Did you acquire any significant equipment or commitments when you actually acquired those assets? So either PUT-8 or the Llanos Block?

[Ryan Ellson:]

Yes, it's only exploration commitments.

[Ian Macqueen:]

And are they -- can you give me a…

[Ryan Ellson:]

They're not material.

[Ian Macqueen:]

So there is nothing, no big wells to drill that you have to drill. I mean you're basically able to schedule things as you like.

[Ryan Ellson:]

Yes, we're perfectly happy with the commitments that are there and in fact, the reason we're -- we like those blocks as part of the acquisition is we would do more with them what the commitments are if we're correct on our geology.

[Operator:]

Our next question comes from Joseph Liao of BMO Capital Markets.

[Joseph Liao:]

Just two questions for me. So the first is, what are the moving parts in your production guidance? Do you see any queue risks that if they transpire with you lower and are there any sort of opportunities that to beat guidance? My second question is could you try to quantify some of your exploration this year?

[Gary Guidry:]

With respect to our production guidance, we're very comfortable with our production guidance. The number one rescue -- I think that would face would be not injecting enough water in Acordionero, that's why it's our number one objective to really increase production or injection in Acordionero. And so as far as beating guidance; we're very comfortable with the range that we've provided of the 41,000 and 43,000. And with respect to the exploration, we plan on drilling 4 to 5 wells in the Putumayo; as you know that that's targeting of 6 potential play zones. And so -- we will meet on fall, we're testing Ayombero [ph] right now, we'll immediately follow that up and drill Piccario from the same pad. Again, we'll drill all the way down to the cabbies [ph] and test all the potential play zones that we see in that well. And then potential to drill a few exploration wells in the middle mag around Acordionero. And then in the Llanos we're drilling the Prosperidad well, and we're about 10,000 feet with the TDM [ph] of 16,000 feet.

[Joseph Liao:]

Is there like a particular resource number that you're targeting from these wells or you know what it's success case look like?

[Ryan Ellson:]

I think before the wells that we're targeting, you know, what we've done with our prospective resources; we'll mostly just -- especially the Putumayo have provided perspective resources for the end-sands [ph] as well as just for the Alea, there is potential in other zones. So our objective -- overall, we would like over the next three to five years we want to drill 30 to 45 exploration wells testing about 70% of the portfolio.

[Operator:]

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

[Gary Guidry:]

Thank you, operator. And we want to thank everyone, once again, on behalf of the Board of Directors and management at Gran Tierra. We certainly appreciate all of your support and look forward to keeping you updated and talking to you next quarter. Thank you very much.

[Operator:]

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