Gran Tierra Energy Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the Second Quarter 2017. My name is Andrew, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the some very brief 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 4, 2017, at 11 a.m. Eastern Standard Time. Today's discussion may include certain forward-looking information, oil and gas information and non-GAAP financial measures. Please refer to the earnings press release and operational update press release we issued yesterday for important disclaimers with regard to the 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 copy or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy. I will now turn the conference over to Mr. Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

[Gary Guidry:]

Thank you, Andrew. With me today is Ryan Ellson, our Chief Financial Officer. I'll make a few brief comments and then Ryan will summarize some of the financial highlights and then we’ll open the line to questions. After completing the new discovery testing in the first quarter, we caught up on our development production growth program in both the Middle Mag Valley and in the Putumayo-7 Block. We’re on track with some exciting exploration in the second half. And at Vonu, the exploration well, we confirmed light oil in both the Villeta U and the A-Limestone. Most exciting is the Costayaco-29 horizontal. We learned quite a bit from Costayaco-28. The well bore mechanics gave us confidence that we could drill long horizontal wells under balance. This ultimately will lower our development cost. We also have the confidence to run multiple packers to divert conventional asset simulation. From reservoir, we have tested the toe of the well and confirmed permeability from micro fracturing well away from the major faulting. We've confirmed virgin pressures and we confirmed clean oil production. Our next well Costayaco-30 is a vertical to develop the Caballos and the T sand and we will be collecting extensive data on A-limestone. I'll now turn the call over to Ryan Ellson.

[Ryan Ellson:]

Good morning everyone. Our second quarter results reflect our commitment to capital discipline, self-funded operations and are focused on full cycle profitability. Our fund flows from operations were $51 million with capital expenditures of $58 million. Funds flow was up 13% from the first quarter, despite weaker oil prices due to our top quartile offering netback and the continued efforts of our team to control costs. During the quarter, we also repurchased 4 million common shares of Gran Tierra stock pursuant to our normal course issuer bid. On June 1st, our credit facility was increased by 20% to $300 million. The undrawn capacity on our credit facility at quarter end of $145 million combined with $53 million of cash on hand resulted in current liquidity of approximately $200 million. Gran Tierra’s tightening guidance for 2017 average production and we expect it to be in the range of 330,300 to 340,300 adjusted for the sale of our Brazil business unit effective June 30, 2017. This 2017 average production would represent an increase of 23% to 27% from our 2016 average production. We have also narrowed the range of our projected 2017 capital program to $200 million to $225 million with respect to be funded from cash flow from operations. We’re currently producing approximately 34,000 boe per day and expect fourth quarter 2017 average production range of 35,000 to 37,000 boe per day. I will turn the call back to the operator and Gary and I will be happy to take questions.

[Operator:]

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

[Nathan Piper:]

Good morning, gens, and thanks for the update. A quick question on the second horizontal CYC-29. And when would we expect the long-term test of that wells take place and would you plan to press release that individual event? And also what were the implications for well costs and therefore the number of wells you might drill next year giving you drilling – to given you – you're building more pads to drill up the A-Limestone currently? Secondly, just a bit of an outlook on OpEx once you put the gas apparent place on Costayaco? And then lastly, are there any follow-on opportunities on PUT-1 following the Vonu success?

[Gary Guidry:]

Okay. The answer to the first question is we’re in the process of pulling the stimulation tubing. The rig is onsite and we're rigging up to the pull that completion. We expect to have it on, on production for the long-term cleanup of the first six stages towards the end of next week. And I think the implications, Nathan, is we could have comfortably continued drilling under balanced good hole conditions and we're quite comfortable that that 6,000 feet horizontals are achievable over the long-term. So where we think that will really cut down on our development cost is that the number of wells that it will take. We are going to collect some key data on the Costayaco-30. We expect to have that that well drilled in the September timeframe and have all of the data. We’ll integrate that and then look to a long-term continuous horizontal program. I think the answer to your gas to power, we’re on track and we expect to have the commissioning in November. That's according to schedule. That's about as fast as we can go on that. And what was your third question?

[Nathan Piper:]

Just is there any follow-on work on Vonu. Has this opened up something, something bigger where we might see some more follow-on drilling on PUT-1?

[Gary Guidry:]

All right, right. We were under the guidelines of ANH. We're in the long-term testing period. We actually drill that well from a pad on Costayaco. There will be follow on drilling at both the U and A-Limestone, we believe are looking quite interesting on the structure, but the ultimate target that excited us on the model is the N Sands. I am not sure, when we will actually get to the N Sands, but it’s confirmed our seismic that that the amplitudes are a thick N Sands and that’s a test that we still need to get to. But having the success that we've seen in both the U and the A, we will be looking at the long-term drill from the Putumayo-1 Block, the adjacent blocks and start looking at the infrastructure. There's a lots of implications to that in terms of we have an active program in Costayaco, but we'll move that one along as quickly as possible. I’ll also say, you seen in our Investor Day presentations that Putumayo-1 Block has quite a bit of our prospective resource in the N Sands, now the A-Limestone and confirmation of the U. So, we've got quite an emphasis on what we're doing, the timing of appraisal wells, we're looking at how we can build a pad on the actual Putumayo-1 Block and continue that appraisal program. That's all under study now.

[Nathan Piper:]

Thanks. And just put on – then on the CYC-29 well, and so you’re clean up now effectively and it should be on long-term test in a max sort of weeks i.e., some point through August?

[Gary Guidry:]

Yeah, it'll take us a week to get the ESP in the well and start that coming up and we'll see how that goes. We've only stimulated 60% of the well. We thought that was quite important to test the toe. So we're pretty good distance away from the major fault that traps the rest of the Villeta and it not only looks very productive, but we think it's quite important to test the toe of the well, well away from the major faulting and fracturing. And so, it's key information. The question is will we go back and stimulate the rest, we'll see how the test goes and it will require another work over to go in and pull the ASP to complete the final four stimulation zones. And we’ll make that decision in a month or two.

[Nathan Piper:]

Understood, thanks for the clarity.

[Operator:]

[Operator Instructions] Our next question comes from Jenny Xenos with Canaccord Genuity.

[Jenny Xenos:]

Good morning, gentlemen. You have narrowed your CapEx guidance for the year. I'm wondering which activity specifically were impacted by that? I noticed that a couple of exploration wells are going to get pushed into 2018 now. Could you comment on that please?

[Ryan Ellson:]

Yeah, I am on that Jenny. For the – there’s only two components of the – the tightening of the range. First component is you’re right one of the wells that has been deferred till 2018 will be prosper that. The other thing that we have is we have actually been doing the same program, but we've actually been much more efficient, at Acordionero wells, we’re drilling those for much cheaper than we have forecasted. So it's really two components – prosper that as well as just doing things cheaper.

[Jenny Xenos:]

But the development drilling otherwise is not being impacted but it at all.

[Ryan Ellson:]

No. No, we've actually added Costayaco-30 to test. As Gary had mentioned, its Caballos location that we have, but it’s also – it’s more the northern part of the field. We have some very important information from the A-Limestone out there.

[Jenny Xenos:]

Great, thank you.

[Operator:]

Thank you. And our next question comes from Isuru Sen with Radiant. Your line is now open.

[Isuru Sen:]

Good morning, team. Thanks for the update. Question on kind of – bit macro other than oil price fluctuations and what are the major risks that you see to Gran Tierra’s value and value creation process?

[Gary Guidry:]

Yeah, the philosophy that we use is we have a low cost structure. We continue to try to improve that. And our program that we set out with the first part of this year is really not a 2017 program. It's a three-year exploration program. Our engine of course is our development drilling. We're on track. We don't see any implications of that. So financing our 30 to 40 exploration wells, we believe that we’re in good shape. We do have some hedges on, on our capital program. I think the answer to your question is the macro oil price we believe that that it will continue to volatile, but we're on a three year program, exploration program, funded by our cash flow. We're in much better shape. In 2018, the development drilling program, as Ryan said, we're on a continuous program at Acordionero. We're looking at a continuous program at Costayaco and we will be operating from a much stronger cash flow base in 2018 with a higher average developed production. Ryan, did you want to add to that?

[Ryan Ellson:]

Yeah, I want to add those reviews, our referring to our 10-K ad our 10-Q for full disclosure of more the macro risk that we see facing the business.

[Isuru Sen:]

Yeah, I guess in particular, Colombia has PCL is probably very positive, but the support for that seems to be a little challenge and financing for that seems challenge. What’s the risk to operation in the Putumayo given the potential – given the changes that are going on there?

[Gary Guidry:]

I think the government has a real emphasis. They've appointed a minister specifically to the post-conflict Minister Pardo. We're working on several fronts to support the government in those efforts. Of course, we’re very active in the Putumayo Basin. And it really is – as stated by President Santos it really is about the economy and the region and providing jobs. We're well placed to support the government in those efforts from our civil works to our active exploration program with a real emphasis in the Putumayo. We’ve announced a joint project with Conservation International. We're supporting Conservation International and their efforts and the government's efforts for reforestation in the region. And we're quite active in cleaning up the remnant oil spills in the area. The governments are active in the demining process. And I think that of course there are always risks, but the emphasis that the governments are placing on this is the real activity started when the peace agreement was signed and we're trying to play an active supportive role for the government as we can. Ryan, did you want to add to that?

[Ryan Ellson:]

No, that’s a great summary.

[Isuru Sen:]

Great, thanks guys.

[Operator:]

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

[Gary Guidry:]

Okay, well, thank you Andrew. And we want to thank everyone for patience as we took a pause and do well. It's the burden of having success with discoveries, but we’ve completed that. We’re analyzing the reserve implications of the new discoveries we’ve tested and we're quite excited about the continued optimization of our programs, the real success in the Acordionero field and in the region we see some opportunities and more importantly the Putumayo Basin. And so we have an active program. We look forward to communicating that over the second half of the year. And thank you for calling in.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program and you may all disconnect. Everyone have a wonderful day.