Gran Tierra Energy Inc. (GTE) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the First Quarter 2017. My name is Vickie, 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, Thursday, May 4, 2017, at 11 a.m. Eastern Standard Time. Today's discussion will 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 that Gran Tierra issued yesterday for important disclaimers with regard to this information and reconciliations of the 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 will now turn the conference over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Thank you, operator. Good morning, and welcome to Gran Tierra's first quarter 2017 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. Gran Tierra is off to an exciting start in 2017 with our first quarter operational results. After four key acquisitions during 2016, our focus is on execution on the transformed portfolio. Our most significant value creation will come from efficient development of discovered resources; increasing efficiency by applying enhanced oil recovery techniques; and most importantly, through discovery of new resources with our exploration program. Also key is funding value-creation activities with internal cash flow so we continuously focus on our net back by optimizing oil sales and minimizing transportation and operating cost. At our Costayaco Field in the Putumayo Basin, we are very encouraged by the continued success of our new A Limestone play. The Costayaco-2, 9 and 19 vertical wells have all been recompleted in the A Limestone and producing a combined 2,600 barrels per day with virtually no water. We have also successfully drilled and completed Costayaco-28, the first dedicated A Limestone horizontal well in the field. We learned a few lessons drilling this horizontal well, which has now been completed. We are currently stimulating well with acid prior to production testing and will place the well on production over the next two weeks. We look forward to sharing the production results from this important well once testing has finished. We are most excited about the regional implications of the A Limestone play. We have successfully tested oil from this zone and Confianza-1 exploration well, which is approximately 60 kilometers south of Costayaco in the Putumayo-7 block. We have now established commercial oil production rates from A Limestone in both the northern and southern limits of the Putumayo Basin. With our dominant land position, Gran Tierra controls a large portion of the A Limestone play fairway. The Confianza-1 well also discovered oil in the deeper Villeta "U" Sand, which may represent a significant new stratigraphic play in our Putumayo-7 block. Finally, Confianza successfully delineated our established N Sands play and is producing on pump a 20-degree API oil at about 700 barrels of oil per day as we clean up the formation sand production. A work-over of the adjacent Cumplidor-1 well is underway to change a failed pump and resume production. We expect Confianza-1 and Cumplidor-1 to each produce approximately 1,000 barrels per day. At Acordionero in the middle of Magdalena Basin, results continue to exceed expectations. Since we acquired this field 8 months ago, we have increased the field's production by over 60% to 7,600 barrels per day. We are on track to meeting our 2P forecast of over 15,000 barrels per day by 2019. We are also pleased with the discovery of a new oil sand, the Lisama D, which has been tested in both Acordionero-8 and 9. We will integrate the Lisama D in our overall pump development plans. In addition to development drilling in the prolific Lisama A and C sands, water injection will be important for enhancing recovery. Now that testing of the new Lisama D Sand is complete, we will commence our water injection pilot at Acordionero-8. I will now turn the call over to Ryan Ellson, our Chief Financial Officer, who will discuss the key aspects of the financial results for the first quarter of 2017. Ryan, over to you.

Good morning, everyone. Gran Tierra ended the first quarter on a strong financial position. Our first quarter funds flow from operations were $45 million, which was in line with the quarter's capital expenditures of $46 million. The strong funds flow was fueled by our top quartile operating netbacks, a function of our continued efforts to decrease cost and maximize revenue. Further, approximately 50% of our production has had until the end of this year, which we expect to provide continued fund flows support for our 2017 capital program. Subject to documentation, we expect that our credit facility will be increased by 20% to $300 million. Combined with the undrawn capacity at quarter end of $165 million on the current facility and the $27 million of cash on hand, this increased limit is expected to bring our total liquidity to approximately $242 million. Gran Tierra has a catalyst-filled 2017 with 8 to 11 exploration wells and 15 to 19 development wells planned. The company remains positioned by virtue of its strong cash flows from low-decline, high netback production, current hedge position and total liquidity to fund this exciting program. I will now turn the call back over to Gary.

Thank you, Ryan. Over the next 3 years, we continue to forecast visible production growth through development and enhanced recovery techniques of discovered resources and plan to drill 30 to 35 exploration wells. All of this activity is expected to be funded from cash flow from operations. 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. Ladies and gentlemen, we will now conduct the Question-and-Answer Session for securities analysts. [Operator Instructions]. And our first question comes from the line of Nathan Piper with RBC Capital Markets.

A couple of quick questions for me, if I may. I guess part of this quarter is a little bit to do with production not being quite where we were expecting it. I realize that a lot of these things are short term, so it will be helpful to understand a current production capacity, or what production capacity you expect to be once these pumps have been changed out and deferred production is brought online before the A Limestone horizontal well. I guess, secondly, this horizontal well, the C-28 horizontal well has taken a long time. Obviously, we've encountered a quite few mechanical issues, but I wondered if you expect that to impair the actual test. And just in terms of the expectation management, although it's taking longer and has been more difficult, is there anything wrong with the rock? And should we couch any sort of results that we'll get? And maybe a third question is, following the tragic events at Mocoa, what are the implications for your Q2 production?

Okay. On the production side, it was painful for us to have to defer some production to test the new oil discoveries, both in Acordionero and in the Putumayo-7 block. Specifically, we could not get to our N Sands, which we now have onstream. The Cumplidor well, we could not get to the work-over, and then we had two wells in Acordionero. Bringing all of those on and assuming a modest production from the Costayaco-28 horizontal well, I think the answer to your question, Nathan, is we believe we'll approach 35,000 barrels a day, 34,000, 35,000 barrels a day. And we're moving as quickly as we can to get all of that on production. We just felt it was extremely important with new discoveries to understand those, as active as we are, in developing at Acordionero, but also the exploration program. And so 34 000 to 35,000 with everything onstream. In terms of the horizontal well, 28, yes, we learned some lessons. And probably, the biggest lesson we learned was getting aggressive on our vertical to horizontal build section. We ended up having to redrill that, trying to place the well, and we achieved it with just a more modest drilling. The length of time really had nothing to do with the rock. We're quite excited about what we've seen. We, a little bit over 1,700 feet of horizontal section. We had several zones where we hit fracture swarms. And as you recall from the Investor Day that we had back in January, we're pretty comfortable from the core and from the production behavior that is a dual velocity system, with oil storage and the rock itself with fractures enhancing that. And so we're, we have not finished our stimulation job. They're actually doing that today. We're quiet encouraged by what we've seen in terms of what we predicted, and we expect to get some good results out of that well and be able to use that to extrapolate a further development across the Costayaco field. In terms of Mocoa, it was a quite a disaster. We were quite active in helping the government, both federal and regional governments. They moved very quickly, as did we, helping rebuild with temporary facilities, bridges, a lot of civil works. But the most important I think that -- was to get power generation back to the hospitals and the relief efforts. And we did so, focused on those relief efforts as opposed to flying generation to our facilities. So we were down over about a 3-week period up to 5,000, 6,000 barrels a day. It -- in addition to that, we were down on some of our water injection, but a small price to pay to help with the efforts. We're back at full capacity. The substation that was wiped out in the flood has been replaced with a temporary substation. And I will say that not because of this disaster, we were actually in the process of expanding our gas to electricity. Our plans are on schedule, on budget. We'll be off of the national grid here in the third quarter, October time frame. And that's, I think, the answer to the 3 questions you asked, Nathan.

Absolutely. If I may have one last sort of follow-up on the A Limestone. How quick do you think you ought to be drill -- ought to be able to drill these wells? And I guess, following that on, do you see more drilling than the 3 horizontal wells that you planned this year? Unsuccessful, you'll just continue drilling more horizontals?

I think the answer to that is yes. We're getting very good information on the vertical wells that are onstream. We -- our belief is that we can drill these things without drilling a pilot hole, without pouring, without collecting some of the key data we have to collect on this well and with a more modest build. We think we can drill these wells in 45 days or so. This next well that we're going to drill once we finish with the rig here on 28 is a bit different in that we're going to drill a dip well as opposed to a strike well. We're also moving very quickly. We believe that we can drill this underbalanced. The combination of those, we think, will tell us a lot about how we can develop the rest of the field. Just from the shows, as you recall, we're pretty comfortable, as charged, across -- all across the Costayaco field. So we're quite keen that oil reservoirs there to have -- best to develop that. And with the infrastructure in place and the drilling pads in place, we would see some -- several other wells. We'll focus our capital program and reallocate our capital program at midyear. That will give us time to get some results out of these 2 wells. I think the most exciting part for us is at our vertical wells, we've seen a couple hundred barrels a day out of the Confianza well down south. It was worth our time deferring production to test that. We -- it exceeded what we were actually expecting because it's in the -- probably the worst phases, the Eastern [indiscernible]. And we weren't expecting any kind of rates. We were really just looking to confirm charge. And so our view is these horizontal wells we're drilling in Costayaco are going to have regional implications as well.

And our next question comes from the line of Darren Engels with GMP.

Ryan, this is more a question for you. It's with respect to the tax reorganization you went through, I guess, in the first quarter that shows up on the retained earnings statement. What I was curious about is, what does that do for, or how does that impact cash taxes for, I guess, this year and 2018 and foreseeable future? Because you clearly did that on purpose.

Yes. One, there's some tax efficiency, and there's also some administration efficiency. With all the acquisitions that we had done through the year, we had a number of companies. I think we're up to, in our corporate structure, around 50 different companies. So we consolidated all that. And what I'd say on the tax restructuring, the benefits of that tax restructuring are, because that did happen prior to December 31 is those benefits are reflected in our 2017 guidance numbers, our tax numbers for this year. And then it's also reflective, reflected in our after-tax reserve report as well.

Okay. And could you confirm or give indications on what you expect for cash taxes in 2017? Unless I missed it.

$1 to $2 a barrel, and it's about $40 million approximately.

And our next question comes from the line of Luiz Carvalho with UBS.

Just two quick questions here. The first one, when do you expect to release a reserves report with the exploratory updates? And the second one, regarding the pumps, what has been changed? And how much impact could we see in the second quarter from what you have observed so far?

Excuse me, what was the second question?

Regarding the, I'd say, the pumps and the less updates from the recent impact on the production of the new wells.

The pumps, okay. Yes, we had quite a few workovers that occurred, normal course workovers. The challenge, the good news with having big wells is you don't have to drill as many of them. The bad news is when a 1,000-barrel a day well goes down, we have to scramble to get it back on. So that's going to continue through the life of these reservoirs, and it's normal course for us. The pump's, the pump failures, we monitored those quite closely. The key ones are the ESPs, the electrical submersible pumps, and we monitor the lives on those. And there are some big wells that we are watching very closely now and we may preemptively change before they fail, so it's planned. I hope that answers your question.

Yes. And then regarding the update on the reserves report, or the resource report, when do you expect to publish another one?

Sure, yes. And I think your other question on Confianza, what we did change on the pumps is we've gone to, we see that they were going to have to lift sand with ESPs. We tried to do it with hydraulic pumps. But we've put a lot of work, a lot of effort into this time that the well was down, and we think we have a pretty good design that will handle that. In terms of reserves, we're going to drill 9 to 12 exploration wells this year. The evolving A Limestone, the N Sands that's occurring, we're going to do both -- 2 things: a reserve report, but also a prospective resource report. It's most likely that our reserve report will be at year-end. If we have something that is material between now and year-end, we keep our reserve auditor, McDaniel, up-to-date on our progress on everything we're doing and our development projects. And if there's something that materially changes and justifies an interim report, we will do that. There's nothing that dictates when we can do that. At midyear, we can do it in any given month. So it really -- other than the normal course annual reserves, we'll play that by ear on what the results are. It's quite an active program, and we all watch it very closely.

Okay. In terms of the resources and then the exploration updates, do you plan to actually to release one? I mean, I understand that you mentioned about the reserves report, right, but what about, I'm going to say, a resource report? Do you plan to do something by midyear or just by the end of the year?

We are going to update our resource report at the same time we do our reserves. At the moment, the plans are reserves and resources at year-end, unless we have a material change.

And our next question comes from the line of Ian Macqueen with Eight Capital. Your line is now open.

Hi guys. Just wanted to get an idea on current productions. Firstly, where you are today? A breakdown of the Costayaco A Limestone production because you've now lumped into the 3 wells. Can you give us an update on the individual wells, including water rates and the GORs? I guess that's the first question. I've got one on Acordionero, too.

Okay. On the A Limestone wells, virtually no water. 1% water. The GORs have been fairly constant at about 200 FCF per barrel across all 3 of those. And what was your other question on the A Limestone, Ian?

Just a breakdown. So the last time we heard about Costayaco-19, the rate was about 1,600 barrels a day. Costayaco-9 was about 600 barrels a day. And the 2 well had come on just before your -- basically, with 2 days of production, at about 1,000 barrels a day. Can you confirm the rates on the individual wells?

We can get you the exact. But in general, a bit over 1,000 on 19, a bit over 1,000 on 2, and several hundred on 9.

Okay, okay. So if I look at the 2P forecast for 2017, it's about 14,000 barrels a day. I assume the incremental production is coming from additional A Limestone wells. Is -- so there's a plan for the next horizontal and then a -- or sorry, there's 28 and then the next horizontal. But will you continue to do additional developments to get to the 14,000 barrels a day? And do you see any problem getting there?

The 2P, the 14, you're looking at our slides. We only publish McDaniel's numbers. Our number is within 1,000 barrels a day at that. But our makeup of the production is a bit different. McDaniel has forecasted, I believe, just the 2 exploration, or 2 A Limestone wells that we did for the year. The answer to your question is, how are we going to drill Costayaco? It is the A Limestone. We're simply optimizing the water flood in the lower Villeta formations now. We're quite active in that, but the growth potential at Costayaco is the A Limestone.

Right, okay. So on a normalized period, it shouldn't be any problem getting to that number without any downtime, that type of thing?

Yes. We believe it, yes.

So the similar question at Acordionero. Obviously, the number seven well was off. The McDaniel's 2P forecast is for 9,000 barrels a day. You're at about 7,600 barrels a day today. How, in terms of wells to continue to grow at Acordionero, I know you have lots identified, but can you give us kind of a quarterly schedule of what wells are planned to come on throughout the remainder of the year at Acordionero?

Yes. We're just bringing on within the next couple of days Acordionero-10. It is one well that, because of where it's located, we will co-mingle the A and the C. In general, we try not to co-mingle. But this one in particular, we will. And we're drilling, Ian, about a well a month, drilling and completing about a well a-month in Acordionero. The expansions that we're doing on handling capacity, we think we can handle and truck a bit over 10,000 barrels a day, and that will be the limitation at Acordionero, 10,000 to 12,000 barrels a day. The big expansion that we're putting in place for both water injection, fluid handling and to get to that 15,000 to 18,000 barrels of oil per day is on schedule to come on about midyear. Our plans are to have a continuous drilling program. And potentially, if we can handle the fluid, we're going to drill a total of about 20 development wells, about 5 to 6 injection wells. We may choose to accelerate that development plan, but it has to be coordinated with our fluid handling capacity.

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

Okay. I would like to thank everyone for joining us today. We look forward to speaking with you on a regular basis, certainly, over the next quarter. We appreciate the support. It's an exciting time for the company, and we look forward to reporting results. We, as I mentioned, we will, because the Costayaco-28 well is important, as we get results, we'll release those over the next week or two here as we get the well on production. Thank you very much.

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.