Gran Tierra Energy Inc.
Q3 2016 Earnings Call Transcript

Published: 7 Nov 2016

[Operator:]

Good morning, ladies and gentlemen. And welcome to Gran Tierra Energy's Results Conference Call for the Third Quarter 2016. My name is Candis 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 Monday, November 7th, 2016 at 11

[Gary Guidry:]

Thank you, operator. Good morning and welcome to Gran Tierra’s third quarter 2016 results conference call. With me today is Ryan Ellson, our Chief Financial Officer. Earlier this morning, we issued a press release that included detailed financial information about our third quarter 2016 results and our Q3 report on Form 10-Q has been filed on EDGAR and is available on our website at www.grantierra.com. I am going to begin today talking about some of our key developments and milestones during the third quarter then Ryan will take a few minutes to discuss some additional key aspects of this quarter’s results. We will then open the line to questions. After completing three acquisitions during 2016, we have successfully transformed and diversified our Colombian portfolio of development, appraisal and exploration projects. Over the next three years, we are now confident in our visible organic production growth as we appraised material, high quality possible reserves and gear up for a three year campaign to drill 30 to 35 exploration wells with all of this activity expected to be funded from our cash flow. We’re excited to report the many positive developments achieved during this very active third quarter summarized by, we closed the $525 million acquisition of PetroLatina in late August, integrated the company and already drilled and cased their first development well in the prolific Acordionero field in the Middle Magdalena Basin. We have two positive initial test results in the "A" Limestone at Costayaco which is an excited new oil play. We can now confirm that the Guriyaco-1 exploration well is an oil discovery and a previously undrilled block adjacent to the Costayaco field. And we are pleased that are highly perspective "N" sand exploration play is now underway with a spreading of the Cumplidor-1 well in our Putumayo-7 Block. I will now discuss each of these positive and exciting developments in a bit more detail. First, we are excited to be developing our new core area in the Middle Magdalena Basin with our anchor Acordionero field. The Acordionero average 5,045 barrels oil per day where less than 1% water cut during October were about 17% of our production and has infrastructure in place to produce more than 10,000 barrels of oil per day before any expansions. We are starting with a low cost structure with operating cost of approximately $3 per barrel. And with a 100% working interest and operatorship, we can apply our development expertise and cost structure as we pursue the material probable and possible reserves. We have drilled and cased our first well Acordionero-5 and from wireline logs, this is one of the best wells in the field so far for the complying total gross pay enterable of almost 1,000 feet within the targeted Lisama A and C Sands. We are currently completing the well and will have an oil production by mid-November. We now planned to immediately drill another potential oil producer from the same well pad followed by the first water injection pilot well in the field. With 39% of our proven first probable reserves in the Middle Magdalena Basin, we expect the ongoing development of the Acordionero field to help drive our future production increases and to enhance our long term growth strategy and net asset value. Second, we are highly encouraged by the development of a new play concept the "A" Limestone at our Costayaco and Moqueta fields in the Putumayo Basin. After reviewing the results of the wells drilled to develop the Caballos and T Sand in the lower Villeta formation, it was a plant from oil shale while drilling that the N Sands and the "A" Limestone in the upper Villeta have oil production potential. We’ve reported earlier this year successful test of 570 barrels oil per day on jet pump in the N Sands potential in the Costayaco-1 well which is now on Cominco [ph] production. During the third quarter, we tested a second potential bypassed horizon "A" Limestone. We completed 60 feet out a total net pay section of 100 feet in the "A" Limestone in the Costayaco-19 well. The Costayaco-19 well naturally flowed 30 degree light sweet oil at a stable average rate of 1,340 barrels of oil per day on natural flow with negligible water and gas oil ratio of 200 standard cubic feet per barrel over a 22 day period in October. We recently installed a jet pump in the Costayaco-19 well, and with pressure drawdown of about 50%, the well was producing approximately 2,000 barrels of oil per day. The second well we've tested for the "A" Limestone potential is the Costayaco-9 well were 50 feet of a total net pay section of 70 feet was perforated. The well-produced at an unstable one to 200 barrels of oil per day on artificial lift after a small conventional stimulation job, the well is cleaning up under natural flow and as averaged more than 500 barrels of oil per day of 30 degree light sweet oil negligible water and a gas oil ratio of 220 standard cubic feet per barrel. We will run artificial lift in this well once it is cleaned up from stimulation job. The positive results at Costayaco-19 and Costayaco-9 have confirmed that oil potential as indicated when originally drilling the wells. We've had a similar encouragement from most of the wells drilled both Costayaco and Moqueta, our teams are spending the development opportunities within the well bores in addition to new well development at the "A" Limestone potential. We're also studying the regional implications of this new play. Third, we are pleased to confirm that the Guriyaco-1 exploration well has been completed as an oil discovery, which we drilled into fault block adjacent to the Costayaco field. Based on Columbian regulatory requirements, all of the zones were produced in a Cominco test [ph]. The Cominco test started on September 25 and produced fluid rates of 700 to 800 barrels of fluid per day and oil rates of 350 barrels of oil per day, but a gravity of 28 degree to 30 degrees API and a gas oil ratio of 120 standard cubic feet per barrel. The total fluid production rates were dominated by the lower Caballos formations or high water-cuts were expected. We were in the process of starting the isolated reservoir test in the oil pay sections of Caballos T, U and potentially the N Sands. The Guriyaco-1 exploration well is also an excellent example of how Gran Tierra is focused on being a top quartile performer in terms of cost and efficiency. Our drilling team managed to reduce the cost per foot by 26% from $536 per foot to $395 per foot compared to previous wells drilled in the second quarter, which was the Costayaco-23 well. Therefore, the Guriyaco-1 well obtained the Gran Tierra record for the lowest cost per foot compared to prior wells drilled at Costayaco and Moqueta Fields. This well is also drilled in two tier based than previous fastest well. We fully expect to apply these lessons learned and improved drilling efficiencies and material cost reductions to all future company drilling throughout Columbia. Four, we kicked off our "N" Sands exploration program in the southern Putumayo basin in the Putumayo-7 block. The Cumplidor-1 exploration and appraisal well was spudded on October 20th, 2016 and as expected to reach the targeted measured depth of 11,200 feet early this month. Upon completion of Cumplidor-1 operations, the Alpha-1 exploration well will be drilled from the same path. These wells are defined by 2D and 3D seismic and expected to test the “N” Sands potential seen in the prolific Cohembi and Quinde fields and the joining Suroriente Block. Now I’ll briefly talk about our third quarter production. We are financially disciplined and returns driven with our funds from operations roughly matching our capital investment in the first nine months of 2016. We think that prudent to deferred Costayaco and Moqueta work over campaigns until the third quarter, as a result our gross working interest production first quarter averaged 25,835 barrels of oil per day, which is flat in the second quarter. As you can imagine, our production was temporarily impacted by these workovers on several wells in both Costayaco and Moqueta which took many of our wells outline at various times for several days during July and August. However, the positive results of these workovers combined with the addition of the Acordionero and other PetroLatina properties to our portfolio, our gross working interest production has averaged 30,000 barrels of oil per day from September 1st to October 31st. We are currently producing 31,500 barrels of oil per day and we are confident we will reach our 2016 exit target of 34,000 to 36,000 barrels of oil per day. We will outline our 2017 production growth plans and capital program in December. Last, we continue the evaluation of all alternatives to maximize shareholder value in both Peru and Brazil. We also continue to actively evaluate business development opportunities in Mexico. However, we maintain our long term view that any investment opportunity in Mexico must offer compelling value especially relative to the many high return projects that we now have in our Columbian portfolio. I will now turn the call over to Ryan Ellson, our Chief Financial Officer who will discuss the additional key aspects of this quarter’s results.

[Ryan Ellson:]

Good morning. Overall, Gran Tierra in a strong third quarter. The focus in Q3 2016 was on executing our 2016 capital program, continuing to improve our cost structure, ensuring capital disciplinant to protect our balance sheet, closing the transformational PetroLatina acquisition and increasing our committable and base. During the first nine months of 2016, our capital program has come in on schedule and under budget, which is a positive indication that our efforts for reduce costs and improve capital discipline have been successful. We're also pleased that during the first three months of 2016, Gran Tierra’s funds from operations of $69 million approximately covered our 2016 capital expenditures of $70 million over the same time period. Even with the acceleration and development of Acordionero, we expect capital expenditures to be in $120 million to $140 million range. The Crypto and Siriri exploration wells have been deferred to early first quarter of 2017. Gary has already addressed a prime example of how we are driving down our capital costs with description and material cost and time savings that we achieved with the drilling of our Guriyaco exploration well. We're also focused on top quartile performer trends of operating, transportation and G&A costs. In the third quarter, our operating costs excluding the planned increase and workover expenditures in Costayaco and Moqueta came in at roughly $8 per BOE matching the already low level achieve in Q2 2016. Our core assets have top-quartile operating costs with cost Acordionero have an operating cost of approximately $6 per barrel with Acordionero have an operating cost approximately $3 per barrel. Our Q3 transportation costs have approximately $2.50 per BOE are now more than 50% from a year ago. And we continue to drive down our G&A expenses in Q3 to approximately $2 per BOE, down 30% from a year ago. As a result of our semiannual redetermination of our borrowing base under our revolving credit facility and increase has been approved from $160 million readily available to $250 million readily available subject to final documentation. Upon an increased to the committed borrowing base, we required partially repay our Bridge Loan Facility in an amount equal to the increase in the borrowing base. We are very encouraged by the ongoing strong support from our bank and consortium during this challenging commodity price environment this for the testament to the quality of our asset base. With respect to the commodity prices, Gran Tierra has now hedged 15,000 barrels of oil per day for 2017 through a three way puts spread 35, 45 and 65 per barrel based on Brent oil price. We believe this level of hedging is a prudent way to mitigate financial risk and protect the company from potential downside in oil prices during this time. Some other key highlights from Q3 are as follows. Our third quarter funds flow from operations decreased 30% compared to the second quarter to $24 million. However this decrease was driven largely by $6.1 million of onetime transaction cost associated with the acquisition of PetroLatina. Our second quarter 2016 net loss of $230 million was largely the result of $201 million of non-cash impairment losses and net of income tax recovery resulting from the continued low commodity price environment. It’s worth noting that this non-cash impairment was higher in Q3 compared with Q2 because the PetroLatina acquisition was added into our cost base a fair value using forward curve commodity pricing. However, these acquired assets were subjected to a prescribed U.S. GAAP ceiling test which is not a fair value test and which uses constant commodity pricing drive from the preceding 12 months. Essentially booked our position using forward prices but then performs ceiling test and trailing prices. As of September 30th, 2016, Gran Tierra maintains a strong balance sheet with cash of $61 million, working capital of $29 million and short term debt of $128 million. Overall, we are in a strong financial position and well positioned in Columbia to organically grow our oil production and to drill our extensive exploration program all than cash flow over the next three years. Detailed 2017 budget ratio we’ll provide in mid-December, the 2017 capital program is anticipated to be within forecasted 2017 cash flow. I will now turn the call back over to Gary.

[Gary Guidry:]

As Ryan and I have described, we believe there are focus strategy is delivering results from several fronts in Colombia. With their positive results from development drilling in the Acordionero, our exciting new "A" Limestone play Costayaco and our high potential Putumayo "N" Sands exploration program, Gran Tierra is well positioned for growth through the end of 2016 and beyond. The fourth quarter will be exciting, as we see the results from Acordionero drilling which we expect could begin moving $43 million barrels of Acordionero possible reserves and a probable and ultimately proven reserves and finally production. Positive results from Cumplidor-1and Alpha-1 "N" Sands exploration well could also move the needle in terms of production and reserve addition. We’ve completed three acquisitions this year and have transformed Gran Tierra’s portfolio. We will now focus on organic growth where we have clear visibility of production growth over the next three years through the development of Acordionero and new plays the company has developed internally. In addition to the production growth, we plan to drill 30 to 35 exploration wells over the next three years all funded from cash flow. Our team remains focused on emerging from the current low oil price environment as one of the strongest and largest independent Columbia focused exploration and production companies with a robust portfolio to grow net asset value per share for all of our stakeholders. Now I’ll turn the call back over to the operator, and Ryan and I will be happy to take any questions. Operator, please go ahead.

[Operator:]

[Operator Instructions] And our first question comes from the line of Nathan Piper of RBC Capital Markets. Your line is now open.

[Nathan Piper:]

Thank you. Good morning, guys. I got a couple of questions, please. Firstly, on the "A" Limestone, maybe you could give bit of color on the reservoir charters is even counted so far and what implications that might have for whether it’s a regional player or not, I mean clearly "A" Limestone great but if you haven’t got probability that’s a problem. So what do you see so far and how regional significant do you think it might be?

[Gary Guidry:]

Thanks, Nathan. I think the place to start is it is a platform limestone, platform carbonate, so it is extensive. We see it all the way down into Ecuador. We also believe that there is potential for refill build us that’s its early days. We are looking at regional implications. In terms of locally, we are pretty excited about it because it’s quite permeable and from what we see and the way the wells have behaved on shutdowns and starts-ups, it is more than fractures. So early days that we’re excited that this thing is extensive throughout the put my all the way there.

[Nathan Piper:]

Can you give initial indication of the potential across Costayaco, so you’ve already had to well into it successfully and Costayaco-7 also works and its 50 feet, 60 feet of net pay across, what kind of order of maintenance that we are thinking about here?

[Gary Guidry:]

It is early days and the reason I say that I’m not hedging. We have no sign of water and we’re as deep as we can get with existing well bores, the seven wells is to in the north end of the structure, so it’s more a geographical step up. We’re pretty convinced that looking at the structural closer, there is more outside our current well pattern. So it is bit early for us to estimate that but I will assure you that we will have something for you when you come to Columbia at the end of January.

[Nathan Piper:]

That’s kind. Just to move on slightly to your exit production rate, just to get a sense of the impact of the wells you’re drilling between now and the end of the year. So how sustainable, well actually look at 2017, how sustainable is the exit rate that you guys have a planned so 34,000 to 36,000 barrels a day. How sustainable is that? But also what are the sort of production rates you are expecting per well to get from your current 31.5 to that accelerate before the end of the year?

[Gary Guidry:]

Sure. Yeah but the Cumplidor well is the - we are drilling into proven plus probable reserves defined by 3D seismic. That well should be on stream here certainly over the next four weeks or so. The sustainability question really is Acordionero. We are quite excited about what we’ve seen in the Acordionero and our plans are to continue drilling through 2017. We have capacity up to about 10,000 barrels - 10,000 to 12,000 barrels a day with existing facilities and off-loading trucking facilities. And our plans which we’ll talk about it in December will be to expand that facility. But the sustainability really comes from the 50 years so million barrels at Acordionero and the continuous drilling program.

[Nathan Piper:]

Okay. So your accelerate should be seen as a low case number for your 2017 production guidance?

[Gary Guidry:]

Yes.

[Nathan Piper:]

Thank you.

[Operator:]

Thank you. And our next question comes from David Dudlyke at Dundee Capital Markets. Your line is now open.

[David Dudlyke:]

Yeah, thank you and good morning. And you refer to numerous "A" Limestone opportunities are Costayaco and potentially Moqueta, I guess given that you are, if I am telling correctly not relying on well logs, you are rather looking at the historic mud log and oil kicks at the time of drilling. Am I to understand that you have mud log and kick day to that confirm this "A" Limestone is it in - is indeed extensive across the Costayaco field?

[Gary Guidry:]

We do, as well and Moqueta, where we do have the few logs are very limited. It is truly a bypass pay and so we’re having to rely on the mud logs. We took the company over the last few years, last four years of developing these fields, look some pretty substantial oil kicks and drilling, drilling a section and so we are quite confident that it is not just background gas, it’s oil in the form of kicks while drilling.

[David Dudlyke:]

Okay. And you also in the press release referred to relying on or having to use cased hole logs to better home in on the “N” Sands because again lack of open hole logs at the time of drilling. So beyond the “N” and the “A” stand I mean are there other plays that the cased hole logs and your analysis of the original drilling logs may reveal. I mean it’s for me the “A” Limestone is a very good surprise, are there other place that you’re looking at beyond the end EMEA?

[Gary Guidry:]

Yeah. We have the “M” too but we haven’t to talk about it yet, we haven’t tested it yet. The “M2” into that as well and it has potential andwe have some plans but we haven’t talked about it yet because we haven’t tested.

[David Dudlyke:]

I guess you just did. Now could be development to be "A" Limestone be achieved solely completion of existing wells or I guess you have to Nathan’s point you said that that particular horizon may extend beyond the current well patent, so that might bring new wells potentially?

[Gary Guidry:]

We don’t like it can be completely develop, because we are in an active water flood, certainly at Costayaco and Moqueta is just ramping up with our water injection program. It’s also although it’s very preamble when you get what rates, 1000-2000 barrel a day, although it is platform carbonated, it’s preamble. And we’re looking at a program if you go in and drill some developed wells including horizontal wells within the well parent. So it’s early days for us. We thing we can get a lot of potential and ideal wells that there will be some development drilling. The thing is 70 to 100 feet big and we haven’t seen any kind of contact yet. So it could play an active role in our sustainability of production here.

[David Dudlyke:]

If I may - I'm being greedy. If I can switch to Acordionero, you’ve cited operating costs of $3 a barrel. If I compare those with the 663 clean operating cost for the group for third quarter. I guess what I'm trying to drill down to is what the relative netback operating netback for Acordionero oil might look like relative to better the portfolio. So I guess what I'm asking is the pricing relative to the portfolio and the transportation costs relative since you've nailed down to the moment operating costs. What sort of delta could might I expect an operating netback?

[Ryan Ellson:]

David, it’s Ryan here. The operating netback is fairly similar to what we have in Costayaco and Moqueta is the oil quality isn’t good as Acordionero where operating costs are lower and our transportation costs are lower. So we pull all that together, it works about the same netback as Costayaco and Moqueta. It’s little higher now, because we are not paying the HPR in the Acordionero, but once as we are paying HPR in the Acordionero then it will be similar netback.

[David Dudlyke:]

Okay. Thank you very much. That's all from me.

[Ryan Ellson:]

Thanks David.

[Operator:]

Thank you. And your next question comes from [indiscernible] Your line is now open.

[Unidentified Analyst:]

Good morning, gentlemen, thank you very much for the call. Most of my questions have been asked. I just have one quick housekeeping question. Can you give us some shed some light on how much stock in Madalena Energy the company still controls?

[Gary Guidry:]

We’re own approximately 20 million shares.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

Thank you. And your next question comes from Gavin Wylie of Scotia Bank. Your line is now open.

[Gavin Wylie:]

Yeah, thanks guys. Just wanted to kind of follow-up on one thing just on a Acordionero, we look at the kind of the net numbers - excuse me the gross pay numbers that you’re talking about, do you have a sense of what your sort of net to gross ratio has been on average and what you'd expect for this one to be net and does this at all give you some definition around maybe extending lowest note oil as it relates to say at 2P reserve case? Second question was just on the OCP, if there's an update there on the ability to get some of those volumes through Ecuador at that slightly higher and better price? Just those two questions.

[Gary Guidry:]

Okay, Ryan address the OCP question. In terms of net to growth on Acordionero, one of the things that was a bit of a surprise to us is because this well as effectively horizontal through much of the “A” Sands, the net gross is quite high, it is higher than anything we've seen within the Acordionero field. And in terms of the exact numbers it would be easier to show you on logs the correlation of the original four wells with this first well and we’re certainly share that with you. But to the answer to your question is the highest we’ve seen in the field. Ryan?

[Ryan Ellson:]

Yeah, with respect to OCP, we’re actually doing our first - in the next few days, we do our first trial run of trucking barrels down to Ecuador. So we’ll update as we progress, but we're doing our first test run right now.

[Gavin Wylie:]

Perfect. Just a quick follow-up to just on the drilling days that you had kind of noted in there that first development well ended up costing around $3.5 million. I think going back to the 2P case and the future development capital, you had a about $6 million a well in there for the cost, correct me if I'm wrong, but it is there the ability to maybe see some of that cost come down with the results of these first three or four wells by the end of the year for the reserve report coming up for 2017?

[Gary Guidry:]

Yes, is possible and we paid a lot of attention and to in our integration of the PetroLatina team there all along board and we eliminated quite a few learnings that you might in a new field like that. So things went very well, and we expect that they'll continue to go well and get better and we're certainly going to talk to our reserve about for further cost.

[Gavin Wylie:]

Perfect, appreciate the clarity, thanks.

[Gary Guidry:]

Thank, Gavin.

[Operator:]

Thank you. Our next question comes from Shahin Amini of TD Securities. Your line is now open.

[Shahin Amini:]

Thanks, good morning. Very quick question on Guriyaco, if I’ve heard Gary correctly, you may test “N” Sand or you will test the “N” sands, but there was no mention of this “A” Limestone. So I might just take it out that is not so potentially other Guriyaco side?

[Gary Guidry:]

It is the potential, it across all, unfortunately we don’t have good logs than it either. We didn't have our tests of 19 and 9, there is potential. We're just waiting, waiting really to see if we have the time to get to the “A” Limestone this year.

[Shahin Amini:]

I guess so the mud log correlation those out suggests anything for Guriyaco size combination to the “A” Limestone?

[Gary Stephen Guidry:]

It will.

[Shahin Amini:]

Yeah, okay, thank you.

[Operator:]

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

[Gary Guidry:]

Okay, well thank you very much everyone for taking the time. It's very exciting quarter for us. And as you’ve heard Ryan and myself, it's going to be very exciting fourth quarter. The fourth quarter really is the start of our drilling campaign and I think you'll be quite pleased to hear our program for 2017. So thank you all for your support and we look forward to talking to you over the 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. Have a great day everyone.