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Edited Transcript of CNE.TO earnings conference call or presentation 8-Nov-19 4:30pm GMT

Q3 2019 Canacol Energy Ltd Earnings Call

Calgary Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Canacol Energy Ltd earnings conference call or presentation Friday, November 8, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carolina Orozco

Canacol Energy Ltd - Director of IR

* Charle A. Gamba

Canacol Energy Ltd - President, CEO & Director

* Jason Michael Bednar

Canacol Energy Ltd - CFO

* Ravi Sharma

Canacol Energy Ltd - COO

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Conference Call Participants

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* Daniel Felipe Duarte Muñoz

* Daniel Guardiola

Banco BTG Pactual S.A., Research Division - Director of Equity Research

* Gabriel Barra

UBS Investment Bank, Research Division - Associate Analyst

* Gavin Wylie

Scotiabank Global Banking and Markets, Research Division - Analyst

* Ian Macqueen

Eight Capital, Research Division - Principal

* Ricardo Sandoval

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Presentation

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Operator [1]

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Good morning, and welcome to Canacol Energy's Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Carolina Orozco, Director of Investor Relations. Please go ahead.

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Carolina Orozco, Canacol Energy Ltd - Director of IR [2]

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Good morning, and welcome to Canacol's Third Quarter 2019 Earnings Conference Call. This is Carolina Orozco, Director of Investor Relations.

I am with Mr. Charle Gamba, President and Chief Executive Officer; Mr. Jason Bednar, Chief Financial Officer; and Mr. Ravi Sharma, Chief Operating Officer.

Before we begin, it's important to mention that the comments in this call by Canacol's senior management team can include projections of the corporation's future performance. These projections neither constitute any commitment as to future results, nor take into account risks or uncertainties that could materialize. As a result, Canacol assumes no responsibility in the event that future results are different from the projections shared on this conference call. Please note that all finance figures on this call are denominated in U.S. dollars.

We will begin the presentation with our Chief Financial Officer, Mr. Jason Bednar, who will discuss financial highlights, followed by Mr. Ravi Sharma, our Chief Operating Officer, who will cover the operational highlights for the third quarter 2019. Mr. Gamba will close with a discussion of the corporation's outlook for fiscal year 2019 and beyond. Mr. Gamba and Mr. Sharma are joining us from Bogotá; and Mr. Bednar is joining us from Calgary. A Q&A session will follow Mr. Gamba's closing segment.

I will now turn the call over to Mr. Jason Bednar, Chief Financial Officer of Canacol Energy.

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Jason Michael Bednar, Canacol Energy Ltd - CFO [3]

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Thank you, Carolina, and welcome, everyone, to our third quarter conference call. Q3 was a historical quarter for Canacol, as it marked the completion of the new 100 million cubic feet of production pipeline expansion, which was finalized in late August 2019, resulting in record natural gas sales and production revenues.

Total natural gas revenue net of royalties and transportation expenses for the 3 months ended September 30, 2019, increased 25% to $55.1 million compared to $43.9 million for the same period in 2018. Funds from operations increased 41% to $36.4 million for the 3 months ended September 30, 2019, compared to $25.8 million for the same period in 2018. Funds from operations per share increased 33% from $0.15 per share to $0.20 per share.

The corporation realized an EBITDAX of $46 million and $122.9 million for the 3 and 9 months ended September 30, respectively, compared to $36 million and $105 million for the same periods in 2018, respectively.

For the quarter ended September 30, 2019, total realized contractual sales were 26,020 barrels of oil equivalent per day, including 146.4 million cubic feet of gas a day and 329 barrels of oil a day from our Rancho Hermoso property for the quarter. As you can see, Canacol generated 146.4 million cubic feet a day of gas sales in Q3, which is a 27% increase over the 115.3 million cubic feet a day that we averaged in Q3 of 2018.

We anticipate total realized contractual sales to increase from 29 corporate guidance -- 2019 corporate guidance of 150 million standard cubic feet per day to over 200 million standard cubic feet per day in 2020.

The average natural gas sales price net of transportation was $4.84 per Mcf, during the 9 months ended September 30, 2019, which is higher than our announced 2019 guidance of $4.75 per Mcf. The sales prices of the corporation's natural gas contracts are largely fixed, with a portion of its portfolio sold on the spot market.

Transportation expenses associated with the fixed-price contracts are generally passed through to Canacol's customers, with the exception of the corporation spot sales. The corporation's transportation expenses associated with the spot sales are compensated by higher gross gas sales prices, resulting in a higher realized price net of transportation that once again are consistent with the corporation's fixed-price contracts. As such, despite an increase in Q3 transportation costs, the third quarter net sales price is still $4.74 per Mcf in line with our annual guidance of $4.75 per Mcf net of transportation.

Natural gas operating netbacks of $3.92 per Mcf for the 9 months to date were positively impacted by both higher-than-anticipated prices and historically low OpEx, which Ravi will touch on later.

General and administrative expenses per BOE decreased 29% during the 3 months ended September 30, 2019, compared to the same periods in 2018. The result -- this decrease is a result of our focus on cost efficiencies and the increase in natural gas production during the period. G&A per BOE is expected to continue to decrease as the corporation's production base grows for the remainder of 2019 and into 2020 with the new 100 million cubic feet a day pipeline now completed.

Funds from operations increased 41% to $36.4 million for the 3 months ended September 30, compared to $25.8 million for the same period in 2018. Funds from operations increased 22% to $91.9 million for the 9 months ended September 30, compared to $75.6 million for the same period in 2018. As at September 30, 2019, the corporation had $4.6 million in restricted cash, $33.4 million cash and equivalents and a working capital surplus of $49.1 million. Canacol remains well capitalized, while also generating cash flow in excess of its planned 2019 capital budgets.

Also of note, in August of 2019, we entered into a USD to Colombian peso foreign currency hedge in the form of a costless collar. The amount of the peso hedges were USD 30 million being $2.5 million over 12 months, with the collar being at 3,383 to 3,535. The peso as now today sits at 3,345, which puts us in the money on that contract despite a small unrealized loss being posted in Q3 on that particular contract.

That's it for today. Thanks, everyone. I'll hand it now over to Ravi Sharma, our COO.

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Ravi Sharma, Canacol Energy Ltd - COO [4]

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Thanks, Jason. In late July 2019, we announced that the works associated with the expansion of the gas pipeline between our operated Jobo gas plant in Cartagena was completed. These works included an 85-kilometer 20-inch pipeline and the installation of compression at the Filadelfia station. Both resulted in an increase of 100 million standard

cubic feet per day of transportation capacity for the corporation to its clients in Cartagena and Barranquilla.

In mid-July, we announced the successful results of the Ocarina-1 well, which encountered significant gas pay in the Cienaga de Oro sandstone reservoir with an average porosity of 23% and tested at 30 million standard cubic feet per day.

The Acordeon-1 discovery earlier in June, and the Ocarina-1 wells were tied into the 8-inch Pandereta flow line and now flow to the Jobo gas processing facility.

In late August 2019, we announced record gas sales of 217 million standard cubic feet per day as the expansion was brought fully online.

In late September 2019, we announced the successful results at Clarinete-4, which encountered a record 297 feet true vertical depth of net gas pay in the Cienaga de Oro sandstone reservoir with an average porosity of 22%. This well tested 40 million standard cubic feet per day and has been tied into the new debottleneck manifold and 8-inch flow line between the Clarinete field and the Jobo gas processing facility.

For the third quarter of 2019, total natural gas operating expenses per Mcf decreased by 40% to $0.24 per Mcf for the 3 months ending September 30, 2019, compared to $0.40 per Mcf for the same periods in 2018. The decrease is mainly attributable to the increased natural gas sales volumes because of the completion of Jobo-3 and the pipeline expansion, and the majority of the corporation's operating expenses are fixed. The corporation's purchase and operation of the Jobo-2 natural gas facility and the commissioning of the Jobo water treatment and disposal plant also resulted in lower operating expenses due to operating efficiencies.

On a historical basis, Canacol has achieved 85% commercial success rate in its gas exploration and appraisal drilling programs, which is remarkable for an onshore conventional gas play. Our commercial success rate on gas development drilling is 100%. These statistics bode well for the future drilling of the over 140 exploration prospects and leads we have identified on our 1.1 million net acreage exploration position in the lower Magdalena Basin of Colombia.

Net capital expenditures for the 3 and 9 months ended September 30, 2019, were $30.8 million and $79 million. These numbers are net of the $14 million disposition proceeds related to the sale of Canacol's interest in the Sabanas pipeline in the second quarter.

Full year gross CapEx is still anticipated to be approximately $119 million as per our 2019 guidance related late last year.

Net capital expenditures during the 3 months ended September 30, 2019, are primarily related to facilities costs at VIM-5 and Esperanza blocks, the seismic costs at the VIM-5 block, the drilling of the Clarinete-4 and Pandereta-5 wells, post drilling costs on Nelson-7, Ocarina-1 and Acordeon-1 and the Jobo-3 completion costs.

I would now like to turn the call over to Mr. Charle Gamba, the CEO of Canacol, to close with the strategy and outlook for the remainder of 2019.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [5]

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Thanks, Ravi. For the remainder of 2019, the corporation is focused on executing its exploration drilling program as well as executing the necessary agreements related to the construction of a new gas pipeline to Medellín, which will transport 100 million standard cubic feet per day of new gas sales in 2023. The 2019 drilling program has been successful to date with 2 discoveries, Acordeon-1 and Ocarina-1 and 3 successful development wells, Palmer-2, Nelson-7, and Clarinete-4. The success at Acordeon-1 and at Ocarina-1 lifts Canacol's commercial chance of success to 85%, an industry-leading metric for a conventional onshore gas play.

The remainder of the drilling program for 2019 includes the Arándala-1 well, which the corporation has recently cased and completed.

With respect to the Medellín Pipeline project, the corporation anticipates executing a take-or-pay sales contract with a major Colombian utility during the current month of November 2019, whereby half of the capacity of the new pipeline will be contracted for a period of 12 years. The next step to be completed by the end of Q1 2020 will be the formation of the consortium which will build and operate the pipeline, including the selection of an EPC contractor.

Finally, commencing in the fourth quarter of 2019, the corporation is pleased to announce a regular recurring quarterly dividend. The Board of Directors has approved a USD 7 million quarterly dividend to be paid on December 31, 2019, with a record date anticipated to be December 16, 2019, subject to regulatory approvals. This amount represents approximately CAD 0.052 per share or a yield of approximately 4.4% annually at current share prices.

This concludes my remarks concerning the outlook.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gabriel Barra with UBS.

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Gabriel Barra, UBS Investment Bank, Research Division - Associate Analyst [2]

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First -- I have 2 questions here. The first one is related to the Medellín pipeline project. You have already mentioned during the call that you are expecting to complete the construction of the pipeline by 2023, and you expect to add close to 100 million cubic feet per day in total transportation volumes. Maybe provide more color on the economics of the project and its time line? And the second one is regarding the company operational expense. The company has increased almost 40% of its operational costs year-over-year. And how should we expect this operational cost going forward? Is there still now more room to general cost cutting taking into account that the company had not fully ramped up the Promigas pipeline in third Q?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [3]

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Okay. Gabriel, thanks for those questions. With respect to the pipeline project itself, the completion of the project is tied to the start date of the take-or-pay contract, the gas sales contract, which we expect to sign within the next 2 weeks with the utility company in Medellín, so that sort of pins the start date of the contract. The majority of time between now and then will be consumed by the preparation and filing of the environmental license as well as the starting of the various communities -- purchase of right-of-ways and consulta previas that required to be done. So we anticipate that we should have the license come out no later than the end of 2021 or early 2022, which would put us into position then to start construction mid- to late 2022 and see the construction completed by mid- to late 2023 in time for the December 1, 2023 start date.

With respect to the economics of the pipeline, we have formed a consortium at Canacol. Due to regulatory conditions in Colombia, can own no more than 24.9% of the consortium. We have a consortium partner who is going to have the other 75.1%, and the financing will be a 30% equity, 70% debt structure and we are well advanced with respect to negotiations with major banks on the debt side of the equation as well. The consortium, of course, will benefit in the form of a transportation tariff. We're trying to target a certain IRR, which would satisfy our partners with respect to that. So those are sort of the economic conditions. And of course, the pipeline will be used exclusively to transport our gas from Jobo to Medellín and then onwards for Medellín to Sebastopol -- a portion of the gas onward to Sebastopol to inject into the TGI line to the remainder of the interior of the country.

With respect to the OpEx, I'm going to turn that over to Ravi, he's been in charge of that effort, which has been very successful to date.

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Ravi Sharma, Canacol Energy Ltd - COO [4]

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Yes. We plan to continue to reduce OpEx through additional operational efficiencies, such as eliminating a lot -- or some rental equipment that we have and also through automation. And through that, we expect to reduce our operating costs further. Also, of course, improved gas sales will help as well as the decline of the -- of the Colombian peso.

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Operator [5]

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Our next question comes from Ricardo Sandoval with Bancolombia.

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Ricardo Sandoval, [6]

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I have 4 questions. First, about the expansion to Medellín. Can you give us more detail about the contract that you are expected to -- the contracts that are expected to be signed around November 18, maybe if you can tell us the price per 1,000 cubic feet, it will be great? The second question is about the Medellín expansion as well. I'm wondering if you may have already a plan for the orders, the 50 million cubic feet capacity to Medellín. I understand the contract you are expected to sign is just for the half of the capacity. My third question is about dividends. Maybe if you can explain us what are the regulatory -- the approvals you need to get the dividend payment? I'm wondering if it is just a shareholder meeting. And finally, my last question is, if you have maybe any expectations about reserve life in the short-term and the long-term?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [7]

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Okay. Thanks Ricardo. I'll answer the Medellín pipeline questions and Ravi -- or I should say, Jason Bednar will answer what regulatory approvals are required for the dividend, and then Ravi Sharma, our COO, can answer the question around reserves life. With respect to the take-or-pay contracts with the utility in Medellín, we will not disclose sales price, of course, of any individual contracts. But it is well within the average of our existing sales contracts with respect to this -- the gas we sell to the coast. So we're looking at wellhead pricing -- wellhead pricing in the range of around USD 4.80 to USD 5 escalated at PIB over the 12-year period. So the pricing, I can't give you the exact pricing, but I can tell you that it is well within the range of our current contracts, which average between $4.80 to $5 per MMBtu.

With respect to the remaining volume of the pipe. The pipe is being designed to transport a minimum of 100 million cubic feet per day, of which half of it approximately will go to the utility company in Medellín. We are in advance negotiations with other gas consuming clients in Medellín and gas distributors in and around Medellín as well as other consumers and distributors further into the interior in Cali and in Bogotá to take up the remainder of that $50 million or so. So we see the appetite being very good. 2023, of course, is when Cusiana-Cupiagua gas from the interior starts to decline or is projected to start to decline. Hence, the importance of this project, which will allow us to connect our gas fields into the interior market of Colombia. So that in 2023, when Cusiana-Cupiagua will start to decline, there will be another source of gas to meet demand.

I'll turn the question regarding the regulatory approvals required for the dividends over to Jason Bednar.

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Jason Michael Bednar, Canacol Energy Ltd - CFO [8]

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Okay. Thanks, Charle. Ricardo, so the approvals are just normal course filings with the exchange. There's no need for a shareholder meeting or anything like that. So after we get those, I'd anticipate issuing a slightly more detailed press release, just confirming the record date and things like that. But we don't expect an onerous process to get that approved.

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Ravi Sharma, Canacol Energy Ltd - COO [9]

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Yes. Okay. So in regards to the reserve life index, our current reserve life index is 215 million cubic feet a day, and our current reserves for -- that we expect for year-end 2019 is 8 years. I'd like to add that we've had over 200% reserve replacement ratio over the last 5 years, and we have a resource -- resources of 2.6 Tcf with a historical success rate of 85%.

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Operator [10]

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Our next question comes from Gavin Wylie with Scotiabank.

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Gavin Wylie, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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I had a quick question just on production for the quarter. If you kind of mark-to-market for what you guys reported in July through August, it looks like September production came in quite a bit below the 2 -- kind of 210 million to 215 million cubic feet a day. I'm just wondering if there's anything in that number that's kind of an indication that there might be a limiting factor on delivering full 215 million cubic feet a day into Q4. I'm just wondering if that is the case? And what is that condition? Maybe a little bit of color around that. Second question is just on the CapEx side that you have for next year. In the October presentation, you've disclosed about $120 million. So it looks like after dividends, your free cash flow would be about $50 million. How are you prioritizing that in terms of exploration, acceleration, buybacks and, say, debt reduction? And then my last question is just, once you've reached and as you've reached the full 215 million cubic feet a day, what percentage or what amount of that is still being sold at spot pricing?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [12]

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Jason, if you could address this question please?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [13]

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So with respect to September production, as you can imagine, when a pipeline comes on, there's always some small hiccups, you need to able -- to hit the full stride immediately, right? So indeed, that's what happens. We don't anticipate that moving forward.

With respect to free cash flow, you had talked about $50 million even after our dividend with some normal course issuer bid, et cetera. So I'll just deal at these one at a time. Our normal course issuer bid is set to expire on November 19. We will be renewing that. We had a Board meeting yesterday approving the renewal of that. And of course, as we move forward into our 2020 budget, we'll be considering things like how aggressive to be in the normal course issuer bid, how much more money to throw at exploration. We're deep into our 2020 budget. There are some additional wells that we're looking at adding, so those will be announced. We announced our 2019 guidance in December of 2018. My expectation this year is it'll probably be in a similar time frame, which should be the middle-ish of December this year for a 2020 guidance.

Just to touch on the normal course issuer bid briefly. We did not do any in this particular quarter. To date, we bought about USD 2.4 million worth of stock. If I take us back to when we initiated that in November of 2018, our share price at that point in time was $3.70, which obviously, we felt was too low. So we began buying shares at that stage. And of the 800,000-ish shares we bought, our average price was $4.06. So we've been a very good performer in the last 12 months. Our stock price has increased by 35%. And as such, heading into a budget time and dividend decisions and that balancing act of what more to throw at dividends versus exploration versus normal course issuer bid, we just felt prudent to lay off on this particular quarter.

With respect to debt reduction, as you know, we have a $320 million bond that we issued in May of 2018 and our other significant debt, if you will, would be a $30 million term loan. To refresh everyone's memory, we took out that term loan to simply buy out a different loan, which was the lease of the Jobo-2 gas plant, right? So it wasn't new debt, at the time, it was just different debt. That debt allowed us to operate -- to own and operate the Jobo-2 gas plant. And you've seen the efficiencies in our operating costs. So 2018, our OpEx was $0.40 or $0.42 an Mcf, for the first 2 quarters of 2019, it was roughly $0.30 and you see the wiseness in that decision, as this quarter it was $0.24. But to deal with that $30 million specifically, it begins terming out, basically $10 million a year in 2020, in 2021, in 2022. Actually, the amount due in 2020 because we entered that loan partway through a year, is $8.2 million. So we are currently scheduled to pay out $8.2 million of that particular debt in the year 2020. Hope that answers everything.

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Gavin Wylie, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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The last question, just on the spot market. What percentage of the 215 million cubic feet a day is subject to spot pricing?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [15]

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Yes. So typically, we run at 10% to 15%. I don't have the exact numbers in front of me, but it's not going to shock me if we run closer to 15% or 20% this year as we view the economics of supply and demand in our favor as all the other major gas fields continue their decline, and we feel we're one of, if not the only active explorer of gas in the country. So we may loosen up on that amount dedicated to spot sales this year.

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Operator [16]

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Our next question comes from Ian Macqueen with Eight Capital.

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Ian Macqueen, Eight Capital, Research Division - Principal [17]

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But given Gavin's questions and Jason, your detailed answers, I really got everything answered that I was going to ask. So I appreciate that.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [18]

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All right. Thanks, Ian.

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Operator [19]

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Our next question comes from Daniel Duarte with Corficolombiana.

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Daniel Felipe Duarte Muñoz, [20]

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Just got a couple of questions. So the first one is, could you please expand more on the cost efficiencies that were reached in this quarter that led to a 29% reduction on G&A expenses? Second one would be, could you also tell us a little bit more about your plan to expand into the energy generation business that was mentioned in the previous conference call with thermal plants located in non-gas production areas, please? And also, my last question would be, how different is your current EBITDAX from your EBITDA?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [21]

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Okay, so with respect to EBITDAX to EBITDA, it's the same number. There was no extraordinary things removed from it this quarter and -- or in the last previous quarter. So it's the same number. With respect to G&A, we've been very cost-conscious for the last several years. That's -- G&A was our fleet staff and other related administrative items. So I feel we've done a very good job, even though our production, let's just take it back 3 or 4 years was 20 million cubic feet of gas a day, and now it's over 200 million cubic feet of gas a day. We've actually been able to lower that amount, right? So I think we've done a good job on that, and you'll see our 2020 numbers will be in line or conceivably less than this year, right? So to reiterate, we're not expecting any additional G&A growth as the company's production growth grows. I'll leave it to the other 2 to answer your remaining operational questions.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [22]

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With respect to the electrical power generation, as we disclosed recently, we're part of a consortium that was awarded a project to generate electricity, backup electricity under the ronda for (foreign language). So we formed a consortium with Celsia and Proelectrica. We submitted a bid in 1 project that will provide 200 megawatts of backup generation, scheduled for 2023 on stream. So we're going to be building that 200-megawatt plant in the vicinity of our gas fields. The idea being that, obviously, from Canacol's part and our economic interest is the sale of that gas that will power that power plant. Obviously, we don't need to put it into a pipeline, so we can have additional gas that we would normally not be able to sell because of pipeline constraints, going to a power project like this. So those are the details concerning that particular plant, which is called the El Tesorito project. The consortium is working together essentially to license the plant and have that plant ready to generate by the end of 2021, well ahead of the December 1, 2023 start date for backup generation.

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Operator [23]

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Our next question comes from Daniel Guardiola with BTG Pactual.

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division - Director of Equity Research [24]

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I have a couple of questions here. My first question is on the upcoming bidding round, that Colombia is going to host. And I wanted to know if you could share with us your thoughts on the attractiveness of this round, and give us some color if Canacol is planning to be an aggressive bidder in this round or not? My second question is regarding the Promigas pipeline. So we saw in the local media that the Cartagena Barranquilla phase was temporarily suspended. And I wanted to know if this is going to have any negative implications for Canacol results in 4Q '19?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [25]

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Okay, Daniel, thank you for the questions. With respect to the upcoming exploration bid round, which will occur on November the 26 of this month, several new exploration areas have been offered by the ANH within the Lower Magdalena Valley in and around our operating blocks. So yes, we are very interested in several of those blocks, obviously. So we've been working -- we qualified -- we qualified as a bidder, of course, and we've completed our technical analysis of all of the blocks in the lower Mag, which we are interested in, and we are preparing to participate and submit bids on November the 26, with the intention of winning several of those blocks that we can put into our exploration portfolio in the upcoming years.

With respect to the Promigas pipeline expansion, again, some more delays associated with that on the part of Promigas. But happily, as that pipeline expansion is an expansion really between Cartagena and Barranquilla, not particularly impactful to us. Very disappointing to see additional delays, obviously, but not hugely impactful with respect to our forecast 2020 gas sales.

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Operator [26]

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(Operator Instructions) Our next question comes from [Nicola Prazo] with [Brezicorp] Capital.

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Unidentified Analyst, [27]

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Just 2 quick questions. After the 5 or 6 wells this year, what is the estimated cost per well for this year? And how -- I mean, how different can this number be for the next finding and development expenses?

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Ravi Sharma, Canacol Energy Ltd - COO [28]

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Okay. So in terms of the typical average cost for the well, which includes the drilling and completions, typically, it's around $5.5 million. This is for the wells in the Cienaga de Oro, which is deeper. In the Porquero, it's typically around $4.5 million. Going forward, we expect similar costs for these wells because these are the similar formation, similar depths. If there is a well that's deeper then the cost would go up or at a higher pressure, higher pore pressure.

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Unidentified Analyst, [29]

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Okay. And just one last question. What will be the sales mix in terms of percentages for 2020, I mean, with the ramp-up of the Promigas pipeline in terms of how many -- how much sales will be for industrials, thermal plants or retailers in terms of percentages?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [30]

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Yes, I mean, the majority of our -- majority of our gas sales historically have been to thermoelectric power generation companies in Cartagena and Barranquilla. Second -- second largest sale is probably to commercial gas distributors in Cartagena and Barranquilla. Third to industrial users, which would include Cerro Matoso, Yara, Reficar. So I expect the average mix will remain relatively constant. The majority of the sales has always been to thermoelectric power generation. With the issues associated with the lack of generation from the Ituango project, there's a real squeeze on the electrical generation markets and a lack of generating capacity. So we expect certainly over the next 2 or 3 years to see gas-fired thermoelectric power generation take an increasingly important part in providing the electricity that was supposed to come out of the Ituango project, which is now scheduled to perhaps come onstream as late as 2023. So to just sort of cut a long story short, we expect that most of our gas sales will continue to be directed towards gas-fired thermoelectric power generation.

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Operator [31]

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We will now go to a couple of questions via the webcast. The first question reads, congratulations on the results. Could you give us more detail about the exploration campaign you're planning to carry out next year? Are your current reserves high enough to satisfy the new contract of 50 million cubic feet per day?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [32]

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Yes. With respect to the new contract, yes, that is encompassed within our existing reserve base. And with respect to our exploration plans, we continue to -- we expect to continue exploring our existing land base. We've identified over 2.6 Tcf of prospective resource in over 140 locations to drill over the next 10 years. So we expect to continue exploring that at a fairly moderate pace as we have been in the past, 8 to 10 wells per year. And as we have been in the past as well successfully replacing produced reserves in generally over 200% reserve replacement per year. So we expect to maintain the pace of exploration as we drill our way through our prospective inventory of 2.6 Tcf of gas in our portfolio.

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Operator [33]

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And another question reads, in regards to reducing OpEx through efficiencies, could you go a little more in-depth on how you plan to approach this aside from reduction in rental equipment?

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Ravi Sharma, Canacol Energy Ltd - COO [34]

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Yes, certainly, certainly. Well, there's a lot of operational synergies that can be achieved. And a lot of this is through remote monitoring, consolidation of our control systems, automation. This results in reducing personnel, and also a reduction in transportation cost. So that's what we would do to really start reducing additional operational costs. There's also -- with the plants themselves, the way we operate these plants, we can cut the costs by operating certain plants at certain times. So there's a lot of -- it's a lot of small details, which I won't get into. But yes, we will certainly achieve additional reductions. And I think probably another $0.03, $0.04 per Mcf.

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Operator [35]

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Another question via the webcast reads, could you give some details about dividends?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [36]

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Yes. I mean, perhaps I can answer this, right? So we implemented a USD 7 million dividend for the quarter. Obviously, heading into 2020, we'll give more guidance on that. But we have -- our bond indenture limits us as every bond indenture does to the amount of dividends that can be issued, right? So we're relatively comfortable in this particular age, and it's certainly possible that we'll see an increase on that. I don't want to comment too much on that, but we're not able to give out all our free cash flow, let's say, $60 million, $70 million, $80 million in the form of a dividend, given our current bond indenture. But given the rate of 4% -- 4.5%-ish now and the potential to increase it further, but it's not going to be double or triple, i.e., using all of our free cash flow because that's simply not allowed under the terms of our covenants. So we'll be examining, as I touched on earlier, what portion goes to dividends, what portion may go to a normal course issuer bid, what portion may go to increased exploration, which portions go to debt reduction, like I spoke to earlier, so that's the general answer, if you will.

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Operator [37]

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This concludes our question-and-answer session. I would like to turn the conference back over to Carolina Orozco for any closing remarks.

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Carolina Orozco, Canacol Energy Ltd - Director of IR [38]

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Thank you. Thanks for participating in Canacol's third quarter conference call today. Please join us again in March 2020 for our fourth quarter and fiscal year-end 2019 conference call. Have a great day.

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Operator [39]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.