Gran Tierra Energy Inc. (GTE) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q4 2016 Gran Tierra Energy Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session. And our instructions will be given at that time. [Operator Instructions] As a reminder to our audience, this conference is being recorded for replay purposes. It is now my please to hand the conference over to Mr. Gary Guidry, President and Chief Executive Officer. Sir, you may begin.

Thank you, operator. Good morning, and welcome to Gran Tierra’s fourth quarter and year-end 2016 results conference call. My name is Gary Guidry, Gran Tierra’s President and Chief Executive Officer. And with me today is Ryan Ellson, our Chief Financial Officer. During 2016, we did exactly what we said what we were going to do back in May of 2015 when we joined the company. We have successfully transformed our portfolio by delivering on our strategy of building high quality diversified suite of assets in Colombia with high netback production, low base production declines, an expanded drilling inventory and a large resource base. Now that we transformed the portfolio, our focus is on execution and growth through the drill bit. With our delivery of strong production growth in the fourth quarter of 2016, we are demonstrating that Gran Tierra has created a sustainable business model which we expect to be fully funded by forecasted cash flow from operating activities. Since we operate over 90% of our production, Gran Tierra also has significant control and flexibility on both capital allocation and timing. We believe the transforming and upgrading our portfolio during a commodity downturn is exactly what a company should do in order to create shareholder value. With our focus on execution in capital efficiency in 2017 and beyond, we expect to be able to maximize value from our existing high-quality asset base, both in terms of development and exploration. Our high quality asset base now has 74% of proven and probable reserves contained in three large operated conventional onshore Colombian oil assets: Acordionero, Costayaco and Moqueta. With our large resource base, we now plan to drill 30 to 35 exploration wells over the next three years, which are all expected to be funded from cash from operating activities. Our exploration campaign is designed to test a majority of the portfolio of prospective resource, including our now dominant Putumayo position in the emerging N Sands and the A Limestone play fairways. The A Limestone continues to deliver great results. Costayaco-2 is producing over 2,000 barrels of oil per day with negligible water. We have now reentered three existing wells and are producing over 4,000 barrels of oil per day from those wells. The next test will be Costayaco-28, our first dedicated A Limestone horizontal well. We continue to be highly encouraged by the development of this new play. Our technical teams in both Bogota and Calgary continue to study the development opportunities within existing wellbores in addition to new development wells within the A Limestone potential. We are most excited about the regional implications with this new play, which is expected to be tested by five of our planned exploration wells in the Putumayo during 2017. In Acordionero, results continue to exceed expectations and we will continue to further appraise the Lisama B and D sands. As in with Putumayo or any basin with stacked reservoirs, there are always surprises such as the Lisama B and D sands. Our main focus is on increasing recovery factors in the Lisama A and C. And the first step is our water injection pilot scheduled for later this year at Acordionero-8i. I will now turn the call over to Ryan Ellson, our Chief Financial Officer, who will discuss the key aspects of financial results for the fourth quarter and full year 2016. Ryan?

Thank you, Gary. Good morning. Gran Tierra had a strong fourth quarter and overall good year in 2016. We ended 2016 on a positive note by delivering production growth in the fourth quarter as we realized the first full three months of production from the PetroLatina acquisition which closed August 23, 2016. Fourth quarter gross working interest production average 31,031 BOE per day, an increase of 34% from the fourth quarter of 2015, an increase of 20% from the prior quarter. Based on the midpoint of the company’s 2017 working interest production guidance of 34,000 to 38,000 BOE per day, Gran Tierra is forecasting a 16% increase over fourth quarter 2016 production and a 33% increase over 2016 average working interest production of 27,062 BOE per day. The budget increase is achieved even with the disposal of 950 BOE per day of non-operator production in the fourth quarter of 2016. During 2016, our capital program has come in on schedule and under budget, which is positive indication that our efforts to reduce costs and improve capital discipline have been successful. In 2016, Gran Tierra incurred approximately $128 million in capital expenditures. Capital expenditures were below budget even with the acceleration of the development of the Acordionero field. Gran Tierra demonstrated overall strong financial performance in 2016 with full-year average operating, transportation and G&A expenses on per BOE basis decreasing by 9%, 37% and 28% respectively compared to 2015. We believe our low-cost structure and growing production base allow us to be successful in any price environment. Our ongoing focus on cost reductions has allowed us to increase our operating netback in the fourth quarter 2016 to $20.79 per BOE, up 31% from the prior quarter, a larger increase than 9% increase in the Brent oil price over the same period. Based on our analysis, our operating netback is in the top quartile of pure Canadian oil weighted E&P companies. Commensurate with our increased operating netbacks and production, our fund flow from operations increased 54% in the fourth quarter of 2016 to $36.2 million, this compares to $23.5 million in the prior quarter. We are able to increase our 2P net asset value to US$4.85 per share, an increase of 8.5% from 2015 despite a 10% decrease in forecasted oil pricing by a reserves auditor. Overall, we believe that Gran Tierra is in a strong financial position with visible production growth from our existing asset base through 2019 on a 2P basis, and through 2020 on a 3P basis. In addition to the visible production growth, Gran Tierra has assembled a top tier exploration portfolio. Both the development and exploration programs are expected to be funded through cash flow. We are comfortable with our debt levels and believe we have sufficient liquidity with strong cash flow generating assets and available capacity on our credit facility. In 2017 and beyond at strip pricing, we expect to generate free cash flow from Costayaco, Moqueta and Acordionero, which can be allocated to the exploration program and any future exploration discoveries. I will now turn the call back over to Gary.

Thank you, Ryan. As Ryan and I have described, we believe that our focused strategy is delivering results on several fronts in Colombia. With our positive results from development drilling in Acordionero, our exciting new A Limestone play at Costayaco, and our high potential Putumayo N sands and A Limestone exploration program, Gran Tierra is well positioned for growth in 2017 and beyond. With four acquisitions either closed or announced during 2016, we have transformed Gran Tierra’s portfolio. We plan to now focus on organic grow and we have clear visibility of production growth over the next three years through development of Acordionero and the new plays the company has developed internally. In addition to the production growth, we expect to drill 30 to 35 wells over the next three years all funded through cash flow. We believe the Gran Tierra is well positioned for an exciting year of growth in 2017 and beyond. As we efficiently create value in the multi-horizon proven hydrocarbon producing basins of Colombia through the drill bit. 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.

Thank you, Sir. [Operator Instructions] Our first question will come from the line of Adam Naughton with RBC Capital. Please proceed.

Good morning, guys. And thank you for taking my questions. Firstly, on cost equity, you had some strong initial production rates. What is ahead of expectations? It is sustainable? And could this be seen as the new norm? And secondly, on Costayaco-28, when can we expect results from horizontal well? Thanks.

I think the answer to your first question on Costayaco-2, what really was the question we wanted to answer ourselves is, are we producing a fracture system, are we producing a fracture enhanced production from matrix? And we had very interesting and positive results when we cored the first well on Costayaco-28, that we had oil within the core matrix, which was positive. So that would tend to tell us that once you’ve acidized the well, our expectation is we’re not draining fractures that are going to quickly deplete or go to water. We’re building our confidence as each month goes on from the other wells on production, Costayaco-9, Costayaco-19, where we’re still producing negligible water and not seeing dramatic declines in those wells. So everything looks positive, but time will tell. Costayaco-2, we just got on production last week. We stimulated it, conventional hydrochloric acid job. And so everything looks good to us. But time will tell. What we can tell you is that we’re enthusiastic about the results. We’ve seen so far from cores, to production, to the lack of water. And we continue to look for other wells within not only Costayaco but Moqueta as well, where we see positive petrophysical work. On Costayaco-28, we spend a lot of time gathering data on that well. That was very important to us, not only get the core, but to get open-hole logs to correlate and to extrapolate to the rest of the field, that’s been completed. We drill the build section. We expect to be running the assembly to drill the 1000-meter horizontal well sometime over the next few days. It took us a little bit longer than expected. It’s our first horizontal in the field through shales and through carbonates, but we’ll get it done. So I think the answer to your question is over the next few weeks, we expect to have the horizontal drilled, and we’ll get it on production as quickly as we can.

Thank you very much.

Thank you. Our next question will come from the line of Jenny Xenos with Canaccord Genuity. Please proceed.

Good morning. I have two questions. First, what is the breakeven price right now of your production? And at what price your business will self-sustaining? And the question is - the second question is, could you please let us know what the current management ownership is of the company? Thank you.

Okay. On the first question is, if you look at our asset bases we have a very - with both Costayaco and Moqueta, they’re both fairly mature fields, although we’re continuing to develop additional reservoirs in Costayaco. And then you have Acordionero. Looking out to 2018 - sorry, 2018, all three fields generate a significant amount of free cash flow. The way we look at the business is that we need to have that cash flow to reinvest into exploration. So we would just want to maintain production and just have a development case, our breakeven cost to maintain production is around $35 a barrel.

The answer to your second question on management ownership, it’s about 2.5% most of that - effectively all of that was bought on the open market at US$3 or higher. We’ve all been adding as we get non-blackout windows as we’ve been able to.

Thank you.

Thank you. Our next question will come from the line of Shrushen [ph] with Radiant. Please proceed.

Hi, thanks for the update, guys. A couple of questions here. In your guidance for 2017, how much production from exploration is factored into those numbers?

Zero, we don’t forecast production from exploration wells, so all of the production guidance and growth that we talk about are based on discovered resource that we’re developing. So there is no production forecasted from…

Great. So effectively half of the CapEx is expected to yield nothing - I mean, not expected, but modeled to yield nothing in those forecasts.

Yes. About a $100 million of our capital budget is exploration. And, yes, so we forecasted no value from that.

And you mentioned very recently, you renewed the [normal close issue] [ph] a bid to buy back shares here. And you previously had done that when the stock was a lot cheaper. How do you manage or how do you think of slowing down some of the exploration or development CapEx or just spending versus significantly buying back stock given where you’re trading?

Yes. As you know, we don’t control stock price or volatility in the market. But what we do believe is if we get back down into that range where we were buying - we did buy some stock back last year. And it’s below 2.50 - US$2 or US$2.50. We still believe that we’re strong enough in cash flow. We’re strong enough in balance sheet. We’re raising money, selling non-core assets in Brazil that it’s our duty to buy back stock if we get into that range, and we’ll certainly move that way. We have lots to spend money on, and we’re excited about the exploration program, and we believe we can do both going forward. So it will not take our attention off of our strategy here, which is growth through the drill bit. And we’re - as you hopefully have gathered, we’re quite excited to be in the position we are to be starting up a four, five or six rig drilling program and get exploration funded by cash flow. And so our belief is it if the market goes there that we have plenty of capacity to continue our strategy and we’ll do both.

One last question if I may. In November, you raised the $130 million to pay down the bridge loan. What was the rush to do that at again three bucks a share rather than as exploration success should come in this year, hypothetically you’d be able to raise capital at a better price?

Yes. And we - it’s a very simple answer for you. We look at alternative ways to finish the financing of the PetroLatina acquisition. And we’re quite excited about that acquisition. It’s more than we expected. It is exceeding expectation. And the $130 million equity issue, it was painful for us, the shareholders. We’re investing right alongside of you. But we believe as a management team that our program going forward is not for the next quarter, it’s not for the next year, it’s for the next three years. And positioning our balance sheet, so that we can contract and fire up a base loading of exploration rigs, of development rigs, to get our program underway, our continuous program underway outweighed the waiting for the alternative means to repay that bridge loan. And so, therefore our choice was to regardless of what’s happening with OPEC, regardless of what’s happening with oil price, we’re now in a position that we’re on a continuous program. And if we have slight hiccups in the market, it’s very simply speed up or slowdown in our operated fields, where we’re spending a majority of our capital, and the development of Acordionero and chasing the other production. And so I think the answer to your question is it was not our first choice, but it was the right choice to position the company to kick off a three-year growth program.

Thank you.

Thank you. Our next question will come from the line of Ian Macqueen with Eight Capital. Please proceed.

Morning, guys, just a few questions.

Good morning.

Mostly on Costayaco, so first of all, can you give me an estimate of how much is produced to-date from the A Limestone now from the three wells?

We can give you the exact amounts. But it’s exceeding 300,000 barrels. We’ve been on longest with Costayaco-19, 9, but we’ll give you exactly what that number is, Ian. It’s several, it’s well over 200,000 barrels, and we’ll come back to you on that.

Okay. Perfect. So one of the things that I found - what I was looking for is the water cut, which is obviously still low in the 9 and 19 well, and looks to be low in the 2 well, and then GOR as well, which looks to be flat. So while you’re producing from this, you not seeing a spike in GOR, so you are not changing the pressure regime [ph], you are not getting an inflow of water. You are still obviously connected to something that looks pretty big. And I think your estimate of how big it is, is probably increasing over time with limited water production or essentially no water production. The question really is in Vonu, which is just to the southwest of Costayaco, are you potentially going to find an oil water contact for the Costayaco field in that well or is it broken up, is it structurally separate from the Costayaco A Limestone or could that actually be a good indicator of where the oil water contact is?

I wish, I were smart enough to answer that one, Ian, on the geology side. We are not sure, what’s trapping the A Limestone even at Costayaco. We have oil on the other side of the main bounding fault at structural level, at the Caballos, the TDU [ph]. One of the wells on our list is the Guriyaco well, which is clearly across that fault. And we see good oil shows. We see as good a hydrophysical analysis as we do on the Costayaco side. And so, I don’t know the answer on - if we find oil or find a contact at Vonu - or, yes, find oil at all at Vonu and A Limestone, if they’re going to be connected. But we are - as you know we’re going to test the A Limestone and every well that we can that’s in this platform facies during the year. And so, all of the other observations you made we agree 100%. The GORs in all three wells are 200, 250. They’ve been constant, 0.5% water in all three wells once they clean up. And so, all the positive indications are there. I think the only way we are going to be able to answer your question is either through recompleting wells on the eastern side of the bounding fault or south in Vonu, where the drill bits are workovers [ph].

Interesting. I know GLJ gave you about 2 million barrels. The implications for what you’re seeing so far are much, much larger than that. The question I guess will eventually be answered on how much is there. But every indication says lots. We just - when will that be recognized by somebody like GLJ? Probably not - potentially not even this year.

Yes, we - I don’t know the answer to that. With all of the exploration we are doing, at least internally we’ll do a mid-year update on reserves and what’s changing. And if McDaniel recognize it we will publish externally what the audit numbers are.

Good. That’s great. Fantastic. Thanks very much, guys.

Thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Shahin Amini with TD Bank. Please proceed.

Good morning. A couple of questions on Putumayo-7, Confianza-1 you intersected three sections, encouraging to see the A Limestone. Could you just put the net pay in context? I mean, was - in fact if you could provide a bit more commentary on what was your pre-drill expectation on Confianza-1, and how the results compare with that? And follow-on Cumplidor and Alpha-1 wells, I mean there were some issues with production testing. And you had some issues with Cumplidor-1. I think you’ve had to stop-till [ph]. Could you just provide a bit of commentary on what are the near terms plans, what are the challenges and what would be a good outcome in the next month or so?

Sure. The answer to your first question Confianza, this was the first well we could take deep - target deep and we took it all the way to the Caballos. The oil that we found, we’ve seen in the region, we’ve seen oil charge in the U Sands, and we didn’t know whether we would find any here or not, we did. We’re going to test it and try to understand how extensive it is. In the A Limestone, we’re just on the edge of the platform facies. And so the thickness is about what we expected. We did not know if we would have ferocity that would have oil charge in it. And what it looks like to us is there is oil charge. We’re just on the edge of the platform. There is about 15 feet of pay that we would like to test primarily to see what kind of fluids we get out of the zone, because as you move west, it significantly thickens. And we’re right on the eastern part of the block. And so, it would encourage us in the other wells we’re planning to drill later this year to drill deeper and test the thickening Limestone. The answer to your question on Alpha is we had to test the flank facies on the N Sands to see if it was charged at the well, it is. It’s a bit tighter than we expected. It’s about a 60, 70 barrel a day well, we’re looking at what our options are. Now that we know that it’s productive and it’s oil, but it’s tight, we’re looking at what we can do to either stimulate that and/or depending on the results from Confianza we may deepen that well. We have the ability to deepen it to the A Limestone or as deep as the N Sands. And so, that’s a decision we’ll make with rig time going forward. And then on Cumplidor, it’s one of those situations where we’re quite confident. It’s 1,000, 1,500 barrel a day well. We need to do a work-over and we cannot interrupt the testing on Confianza. But as soon as we get to a position that we can leave Confianza producing, we will move back over on Cumplidor and complete the work over and put it on production. Our estimate is a 1,000 plus barrels a day.

Okay. Thank you.

Thank you. There are no further questions at this time. So, now, it is my pleasure to hand the conference back over to Mr. Gary Guidry, President and Chief Executive Officer for closing comments or remarks. Sir?

Thank you, operator. On behalf of the management team and our board of directors, I want to thank again everyone, for your patience and your support. It was an exciting year in 2016, but the fun really begins for us now. We’re extremely excited about being able to use the drill bit and do what we do best, which is to develop our resource base, and to look for more oil and gas. And we’re quite pleased to have a portfolio that is not only continuous, but highly prospective in our view. So thank you again and we look forward to talking to all of you again over the quarter, and at the end of this quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program. You may all disconnect. Everybody have a wonderful day.