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Edited Transcript of CNE.TO earnings conference call or presentation 20-Mar-20 2:00pm GMT

Q4 2019 Canacol Energy Ltd Earnings Call

Calgary Apr 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Canacol Energy Ltd earnings conference call or presentation Friday, March 20, 2020 at 2:00:00pm 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

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Conference Call Participants

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* Chen Lin;Lin Asset Management;Analyst

* Diego Alexander Buitrago Aguilar

Bancolombia S.A., Research Division - Energy and Gas Analyst

* Ian Macqueen

Eight Capital, Research Division - Principal

* Josef I. Schachter

Schachter Energy Research Services Inc. - Author & President

* Luiz Carvalho

UBS Investment Bank, Research Division - Director and Analyst

* Nicolás Erazo Arias

CrediCorp Capital, Research Division - Analyst

* Steven Bodzin;REDD Intelligence;Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Canacol Energy Fourth Quarter and Year-End 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, Vice President 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 Fourth Quarter and Fiscal Year-End 2019 Conference Call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charle Gamba, President and Chief Executive Officer; and Mr. Jason Bednar, Chief Financial Officer.

Before we begin, it's important to mention that the comments on this call by Canacol's senior management 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 President and CEO, Mr. Charle Gamba, who will continue the operational highlights for the fourth quarter 2019. Mr. Jason Bednar, our CFO, will then discuss the financial highlights. Mr. Gamba will close with a discussion of the corporation's outlook for fiscal year 2020. A Q&A session will follow Mr. Gamba's closing segment. Mr. Gamba is joining us today from the line from Bogotá and Mr. Bednar is joining us today from the line from Calgary.

I will now turn the call over to Mr. Charle Gamba, President and CEO of Canacol Energy.

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

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Thank you, Carolina, and welcome to Canacol's Fourth Quarter and Fiscal Year 2019 Conference Call. In 2019, the corporation achieved several important goals with respect to growing its gas business in Colombia, including a 26% increase in gas sales year-over-year related to the expansion of transportation infrastructure, a 12% increase in 2P reserves year-over-year related to continued exploration and development success, the award of 3 new conventional gas exploration blocks in the 2019 exploration bid round and the sale of our last remaining oil-producing asset.

Following the completion of the new Jobo to Cartagena gas pipeline expansion in third quarter 2019, fourth quarter 2019 marked our eighth consecutive quarter of year-over-year production growth. In fourth quarter, we increased our realized contractual gas sales by 54% to 181 million standard cubic feet per day, up from 119 million standard cubic feet per day during the same period in 2018, growing our position as the largest independent gas producer in Colombia behind Ecopetrol, the state oil and gas company.

Our production now supplies approximately 25% of the Colombian gas market. This trend of increasing gas sales continued through January through mid-March 2020, with gas production averaging 207 million standard cubic feet per day, 14% higher than average gas sales for fourth quarter 2019.

Our gas exploration and development drilling programs also continued to deliver positive results in 2019. We achieved a 224% 2P reserves replacement ratio and a 12% increase in our 2P gas reserves base to 624 billion cubic feet. The largest driver of those reserves additions has been successful exploration drilling, where we continue to build on the strategic advantage and our growing experience of seismic interpretation and geological modeling.

Our gas exploration drilling results over the past 6 years have yielded an industry leading 83% hit rate in respect to commercial gas discoveries. I also want to highlight the substantial technical revisions that have contributed to the growth in our reserves, driven primarily by our reservoir management team that has allowed us to target previously unrecognized, undeveloped or less developed sand reservoirs and sections in a very cost-efficient manner within our existing producing fields. The estimated net present value of future net revenues from reserves discounted at 10% has increased year-over-year by 46% to $1.6 billion on an after tax basis and $2.1 billion on a pretax basis, which equates to CAD 15.47 per share of reserve value and CAD 13.41 per share of 2P net asset value. 2P finding and development costs came in at an industry leading $0.87 per Mcf and $0.67 per Mcf for the 1- and 3-year periods ending December 31, 2019, respectively. We also achieved a 4.4x and 5.7x 2P recycle ratio for the 1- and 3-year periods ending December 31, 2019, respectively. I would...

(technical difficulty)

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Operator [4]

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Pardon me, ladies and gentlemen, it appears we have lost connection to our speaker line.

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Jason Michael Bednar, Canacol Energy Ltd - CFO [5]

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It's okay. It's Jason here. That was just Charle. He obviously has a connection issue. He was just about to hand it over to me. So I will take over here. It happens to be good timing from the drop off as it turns out.

So 2019 was a great year for Canacol, both operationally and financially, as we continue to execute our plan and drive our growing natural gas business forward. Largely driven by the increase in 2019 gas sales following the completion of the Promigas expansion in late August of 2019 that Charle has already spoken to, we reported approximately $125 million in funds from operations for the full year of 2019, being a 19% increase from 2018. In combination with reduced capital expenditures as we focused on the most value-enhancing activities within our core gas operations, this allowed us to generate substantial amounts of free cash flow, supporting our new quarterly dividend that was initiated in the fourth quarter, while also improving our leverage ratios.

Our net debt to EBITDAX ratio was reduced from 2.4x as at December 31, 2018, to 2.1x as at December 31, 2019. Looking forward, we anticipate this leverage ratio to fall dramatically to approximately 1.1x by the end of 2020.

Focusing on the fourth quarter 2019, financial highlights include: revenues increasing 30% to $66 million compared to $51 million for the same period in 2018. Adjusted funds flow from operations increasing 15% to $33 million from $29 million and EBITDAX increasing 36% to $43 million from $32 million. As expected, increased gas sales allowed us to substantially decrease our operating costs and G&A expenses on a per unit basis. With respect to G&A, this slide shows a year-over-year 9% decrease in the fourth quarter. However, included in the above numbers are onetime severance costs. In the absence of these, G&A per BOE was $3.28 or a 28% reduction from the prior year. Of course, Q4 also includes additional seasonal costs such as accounting and reserve audits, and as such, it's typically the highest quarter in the year.

Looking forward to 2020, we anticipate G&A to be approximately $2 a BOE or $0.35 an Mcf. Gas operating costs decreased from $0.42 an Mcf in 2018 to $0.28 in 2019. We expect further reductions in 2020 with our current budget being approximately $0.25 an Mcf for gas OpEx.

While the main driver of that is sales growth, we shouldn't underestimate the achievements of our operations teams and their continuous efforts to achieve increased operational efficiencies. We have built a culture of continuous operational learning that we expect to continue yielding positive results. At a time of increased volatility in the energy commodity markets globally, I want to highlight one thing that didn't really change for us in 2019, but did support our ability to continue producing positive financial results, which, of course, is our high and stable gas prices. Those high gas prices were driven by continued strong demand for natural gas that we produced in Northern Colombia, which we expect to continue in 2020 and beyond. The drivers behind this are continued declines in the main historic natural gas producing fields on the Caribbean Coast of Colombia, a rapidly growing local economy with growing energy demand, limited alternatives to supply increasing energy demand and an increasing preference for clean burning natural gas over coal or oil. As a result, we continue to be very happy with our decision to focus exclusively on natural gas, where we're seeing consistently high prices and stable prices, and we're able to produce with exceptionally low costs. That operational predictability and stability makes it easier for us to operate with certainty as we negotiate with partners, debt providers and customers and as we plan our future business development.

On this slide, you can see our exceptional operating margins, which were close to 80% throughout 2019. Fourth quarter funds from operations, netbacks and margins were down slightly from the third quarter levels due to a number of seasonal factors, cash tax adjustment and costs associated with pipeline commissioning, while the increased pipeline capacity is not fully utilized in October and November. However, over 90% of the corporation's natural gas operating expenses are fixed. And as such, as I mentioned earlier, the corporation expects its natural gas OpEx per unit to further decrease to approximately $0.25 an Mcf or $1.42 a BOE during 2020, now that the Promigas pipeline is operating at full capacity.

We are maintaining our guidance for 2020 for operating netbacks of $3.80 an Mcf, which is approximately $22 a BOE. After G&A, we expect to generate approximately $265 million of EBITDA, which after interest payments, taxes and CapEx of $114 million, will translate into approximately USD 80 million of free cash flow that we will -- that will support continued payment of our newly introduced dividend, debt reduction and share buybacks.

As we have indicated, sales increased substantially to slightly exceed our 2020 guidance of 205 million cubic feet a day from the start of the year through to mid-March.

I want to briefly comment on foreign currency during these volatile times. As a result of recent world events, the corporation is benefiting from the current depreciation of the Colombian peso and the Canadian dollar. The peso has declined approximately 22% against the U.S. dollar, effectively reducing peso-denominated expenditures on capital expenditures, operating costs and G&A of approximately $15 million for the remainder of 2020 as compared to the corporation's original budget estimates. Our foreign currency exchange collar on the peso, which expires in July 2020, on which Canacol has historically been in on money on, effectively reduces the $15 million savings by approximately 15% for the remainder of 2020.

Similarly, the recent 8% weakness in the Canadian dollar effectively reduces our Canadian-based G&A. There was also a press release last night with the -- reaffirming our dividend at $0.052. I believe at today's prices, that's roughly a 6.6% dividend yield. And of course, the details of that are in that press release, which I am going to look at.

At this point, I would like to hand it back to Charle for closing comments. Let's just check and see if Charle's on the line. If not, I'll proceed with those.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [6]

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Thanks, Jason. I'm back on the line here. For 2020, the corporation remains focused on the following objectives: firstly, the drilling of 12 exploration, appraisal and development wells and a continuous program representing the largest program ever executed by Canacol for gas; secondly, the execution of a definitive agreement to construct a new gas pipeline, which will increase the corporation's gas sales by an additional 100 million standard cubic feet per day in 2023; thirdly, continuing our program of quarterly dividend payments and scheduled debt repayment; and lastly, continue with our commitment of strengthening our environmental, social and governance strategy and reporting to ensure successful results for our stakeholders. Our production mix consists of 100% natural gas with no oil production. Approximately 80% of our gas production is sold under take-or-pay contracts denominated in U.S. dollars priced at the wellhead. The other 20% of our gas sales is sold under interruptible contracts denominated in U.S. dollars and priced at the wellhead. As such, the corporation is insulated from the current effects of low worldwide oil prices, which has seen its oil-weighted peers recently cut capital programs, production forecasts and return of capital to shareholders. The corporation, therefore, maintains its previously announced 2020 capital expenditure production and return of capital guidance. The 2020 capital budget remains at $114 million, which will be fully funded from existing cash held and 220 (sic) [2020] cash flow. Forecasted realized contractual gas sales for 2020, including off-taker downtime, are anticipated to average approximately 205 million standard cubic feet per day, representing a 43% increase over the 2019 average natural gas realized contractual sales of 143 million standard cubic feet per day. The average natural gas sales price net of transportation costs, where applicable, is expected to be approximately $4.80 per Mcf. We're currently in the process of contracting a second drilling rig in order to achieve our drilling target of 12 wells, with the goal of replacing production by more than 200% and continuing to increase our reserve base. The corporation's forecasted production, EBITDAX and cash flow from operations for 2020 is anticipated to be substantially higher than previous years, with EBITDAX forecasted to be approximately $265 million, up 58% from $167.5 million in 2019. During 2020, the corporation plans to use its excess cash to maintain our quarterly dividend payment, which is being set at CAD 0.052 per share, totaling approximately $7 million for the first quarter of 2020, payable on April 15, 2020, to shareholders of record at the close of business on March 31, 2020. Secondly, reduced debt by approximately $15 million. And thirdly, continue to repurchase common shares of the corporation under its normal course issuer bid. Also notable is a significant forecast decrease in the corporation's net debt to EBITDAX ratio, which stood at 2.1x at December 31, 2019, and is anticipated to be approximately 1.1x on December 31, 2020.

Over the past 6 years, the corporation has been transitioning to a clean energy company, and I invite you to visit our website to view our updated corporate presentation, which focuses on our effort to deliver positive financial and operational results, while transitioning to a lower carbon footprint.

Finally, with respect to the coronavirus crisis, the corporation has taken all of the appropriate measures to ensure the continuity of its operations and business in Colombia and Canada, including compliance with all local, provincial and national mandatory decrees. Operations in the field are running smoothly with no operational interruptions. Staffing in the Bogotá and Calgary offices have been reduced to essential personnel with the remainder of personnel working remotely from their homes. In the event of an emergency, contingency plans have been put in place to ensure that operations and gas sales continue smoothly.

We are now ready to answer any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nicolás Erazo with CrediCorp Capital.

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Nicolás Erazo Arias, CrediCorp Capital, Research Division - Analyst [2]

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Congratulation for 2019 results. For the moment, I have 3 topics I would like to discuss with you, if you let me. The first one is the buyback program. Given the current pricing scenario for the equity, should it be relevant in your consideration to give some pressure to this buyback program, taking into account the current discount prices? The second one is the dividend payout. Regarding the dividend program, with 2019 net income results of $34 million approximately and the $28 million in dividends expected for this year, the cash out represented a payout nearly about the 80%. Would you remain with the quarterly program of the $77 million indefinitely from the net income? Or how can we reap the further payout intending from the corporation?

And the last topic I want to discuss with you, if you let me, is the competition and contracts. What are the threats for the gas offer in Colombia coming from the Plexaport LPG and spec LNG? And how is the rating for the risk in the gas spot market for Colombia? And is there need to be more flexible in your contracts with your clients considering these spot prices in the Henry Hub?

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

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Okay. Thank you. I can start with the first 2 questions. With respect to the normal course issuer bid, also known as the share buyback, as outlined in the press release a couple of months ago, we are allowed to participate to a maximum of approximately 46,000 shares a day, which we are currently doing at these levels. So we currently intend at these levels to participate to the maximum on that share buyback. With respect to the dividend payout, as you properly note, it's approximately USD 7 million a quarter, which is CAD 0.052 that will be paid on April 15 to shareholders of record on March 30 or 31. I think your question was revolving around the size of the payout being 80% of net income. So the bond covenant indentures allow us to pay 50% of net income, not 80%, which it happens to be. Having said that, that's a cumulative net income and there's certain baskets that -- there's a starter amount that I can use, there's annual additions to that. So that dividend at this point in time and certainly, we've stress tested that is safe. The exact ratio on net income on any given quarter may vary, but we expect to continue to keep paying that $7 million dividend.

With respect to your contract question, I'll hand that over to Charle.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [4]

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Thanks again, Nicolás. With respect to the contract question, recall that 80% of our gas sales are foreign take-or-pay contracts priced in U.S. dollars. So there's no impact whatsoever with respect to external threats, such as the spec LNG. 20% are interruptibles, which could be affected by spot LNG prices, but of course, the forward curves on both Henry Hub and LNG are both increasing. So we continue to maintain that the LNG spec is not a significant threat over the mid-to-long term as well as the fact that with the impact of oil prices on U.S. shale production should see a significant decrease in the amount of associated gas production in the continental U.S. as well, putting some stress on -- upward stress on Henry Hub prices. So we don't see -- we continue not just to -- to not see spec LNG imports as a significant threat to our netbacks.

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Operator [5]

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Our next question comes from Luiz Carvalho with UBS.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [6]

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Jason, Charle, 2 quick questions from my end. The first one is regarding the transportation costs. We saw that, I mean, it had a real increase during the quarter. But I mean, reading my past notes here from previous conference calls, you mentioned about a reduction after Promigas was somehow online. So just trying to get a bit more color on where the transportation costs would stabilize looking forward? The second one is about the new project in terms of capacity increase. I mean, do you see any -- I mean, with the, I would say, current oil environment, do you see any impact in terms of prices on how these contracts would be affected, I mean, by the time that you sign them? Or would you expect the same, I would say, average price from the contracts that you already have in your portfolio?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [7]

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Thanks, Luiz. I'll answer the first question with respect to transportation. So as you're familiar, we only look at our gas price being net of transportation, and let me explain that further. So certain off-takers historically would have signed to pick up our gas at the plant gate and pay us in a simple example, $4.80, and then they would pay Promigas the transportation. Certain other off-takers would request or have requested that we deliver the gas to the plant gate, in which case, we get a much higher price and then pay Promigas the transportation. And it's in that second example where you would see the transportation expense on our income statement. Regardless, we typically get the exact same price net of transportation. So fluctuating transportation costs on the income statement from quarter-to-quarter are largely irrelevant because once again, we only deal with the price net of transportation. And to deal with the fourth quarter specifically as to why it would have gone up, as you know, the -- given the delays of the Promigas pipeline, and many new contracts coming in effect on, as it turned out, December 1. So during the first 2 months being October and November, we had more sales into the spot markets and many of those interruptible/spot contracts wanted it delivered to their plant gates. Hence, we paid the transportation. But once again, net of transportation would have realized the exact same price. Hope that answers it fulsomely. With respect to your pricing question, I'll hand it over to Charle.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [8]

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With respect to pricing, electrical demand and refining demand remain very robust in Colombia, as does the declining production from the mature fields that have been supplying the majority of gas in Colombia, namely the Caribbean Coastal Fields of the Guajira and the Piedemonte of the [Colombia]. So we still see very strong fundamentals with respect to demand, certainly across the medium-to-long term. There might -- depending on how effective the Colombian economy is in the very short term with -- related to the current coronavirus outbreak, we do see some possibility for interruptions with respect to the daily demand, particularly, in the spot market, as more people stay at home. In quarantine, obviously, electrical demand is going to be impacted. So we do see some very short-term possible fluctuations with respect to spot sales and pricing in the very near term. But in the long term -- the medium-to-long term, the business model remains the same, the fundamentals of declining supply are still a fact, and that places us, as always, very favorably to sell into a demand start of market.

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Operator [9]

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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 [10]

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So 2 questions. Firstly, obviously, we're in very challenged times, but wondering if you can give us an outlook on spot prices and how they relate to the current hydropower demand? And the second question is, your free cash flow, Jason, is USD 80 million, which is a little higher than mine. Just wondering what of the impacts of the Colombian peso might have been factored into your costs, your operating and G&A costs and what might factor into your CapEx costs?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [11]

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Thanks, Ian. Currently, in the current environment here in Colombia, we've seen an impact on some spot contracts of 2% to 3% in terms of pricing. So quite minor. So, so far, so good. That's not to say, however, that if the crisis worsens that might not change, particularly with respect to demand on the spot market. But currently, the spot pricing is relatively stable, as I mentioned, 2% to 3% currently yesterday below outlook, but relatively stable. But that, in the very short term, all depends, of course, on how bad or not bad, the crisis gets here in Colombia.

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Jason Michael Bednar, Canacol Energy Ltd - CFO [12]

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Okay. So with respect to the $80 million of free cash. So I think there was a slide there, which, of course, started at $265 million of EBITDA less $30 million of interest, $40 million of taxes, $114 million of CapEx, which brings you down to approximately $80 million of what's labeled here as free cash flow. The use of that $80 million, of course, which is also labeled on here would be $28 million of dividend. We're paying off approximately $15 million of debt reduction, just to go down that path a little bit. We have the $30 million credit Swiss loan, which was not new debt. It was simply different debt when we bought out the Promisol Jobo 2 lease. That begins terming out in June of 2020, and we'll pay off about $8.2 million of that. We also have another finance commitment, which will be roughly $2.5 million that we'll pay off this year and the remaining $5 million is on our finance leases, largely some compressors and there's some of those totaling about $15 million, right? So from the $80 million, once again, $28 million to the dividend, $15 million of debt reduction, which will, in fact, leave then approximately $37 million of other free unallocated cash flow for things like the normal course issuer bid, potentially some additional debt reduction or things like that.

With respect to your question of how much of the peso, I spoke to $15 million of peso savings once denominated in USD for the remainder of the year. These numbers that I just went through are all on the original budget, i.e. do not contemplate whatsoever any peso depreciation that's occurred recently.

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Operator [13]

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Our next question comes from Steven Bodzin with REDD Intelligence.

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Steven Bodzin;REDD Intelligence;Analyst, [14]

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Just a quickie. The service -- the price of services in Colombia, I know they normally drop in a downturn. I don't think we've ever seen a downturn quite this steep. So I'm wondering just how much you expect your cost to decline.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [15]

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Yes. Thanks, Steven. Yes, obviously, a lot of our Colombian peers -- a lot of oil-producing peers have been announcing recently cutbacks to the capital programs. Obviously, that predominantly impacts drilling and associated services. So if we can sort of compare this in some way through price collapse in 2014, 6 years ago, I think if it's similar to what happened in 2014, I think within the next 6 to 9 months, we can see service costs coming down between 20% to 30%, which would be comparable to what happened in 2014 when the oil price collapsed in the summertime in 2014. So that's what we're sort of anticipating with respect to services going forward.

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Operator [16]

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Our next question comes from [Ari Cole] with Cole Capital.

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Unidentified Analyst, [17]

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Charle and to the management team, first off, I just want to congratulate you on the strategic changes and redirection you've made for Canacol over the past 4-plus years. In hindsight, obviously, it's proven to be a very astute change. So congratulations. So first question, regarding just Colombia as a country and this whole coronavirus situation, can you just kind of explain what the politicians and the health officials are trying to do here? What sort of change in practices have happened inside the country? How is the country kind of operating going forward? And do they have a plan in place or they're going to figure it out as -- if and when things get worse relative to the current number of infections?

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

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Yes, [Ari,] thanks -- thank you first for those kind words. With respect to the situation here in Colombia and coronavirus in particular, I think what we're seeing here is a very similar response to elsewhere. I think there are currently 120 or 130 cases reported country-wide. The majority of those are in the main metropolitan centers like Bogotá and Medellin and Cartagena. What has been put in place over the past week have been a complete closure of the borders of Colombia with the bordering countries. So no land traffic is allowed in or out of the country. All international flights coming into Colombia and leaving Colombia were suspended on Monday evening this week. And also the government -- the local governments, particularly the mayors of the various cities such as Bogotá have now mandated a mandatory quarantine of all of its citizens. So all of its citizens are quarantined to their houses, effective last night through till Tuesday morning. So I would say that the response has been one mainly of trying to limit the spread of the virus through those 3 particular efforts. The Colombian government has also relaxed various financial mechanisms as well. So they've essentially mandated that no critical services can be cut off during the course of the next 2 months for any of its citizens. And that all essential services are available for provision. So I would say, [Ari], that Colombia has taken a very similar tact to what we're seeing elsewhere in the world.

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Unidentified Analyst, [19]

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And then just 2 more questions to clarify the financial questions from earlier. You've provided this USD 265 million EBITDA target for 2020. I just want to double check that the $15 million of reduced G&A and other costs that may happen here in the next -- rest of the year, those are not included in that $220 million guidance. Is that correct?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [20]

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Yes, the $265 million, that's correct. Confirmed.

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Unidentified Analyst, [21]

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Got it. And then just lastly, obviously, you have a very strong balance sheet and free cash flow here. There are unfortunately going to be probably distressed assets out there and the opportunity for acquisitions. I'm just trying to understand strategically what sort of areas you would be looking opportunistically, potentially to spend some money or are you going to just say, no, thank you, we're going to focus on reducing our debt and sticking to our -- or narrow our focus of being a natural gas-only producer in Colombia?

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

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Yes, I can state that the focus is purely natural gas in Colombia in the lower and middle Medellin valleys. So we're not looking currently at any acquisitions inside or outside of Colombia. We are looking, however, at the potential of accelerating some of our drilling and seismic programs, the exploration programs. Taking advantage of the previous caller's questions, Steve's question, about the likely impact on services company prices going into this downturn. So we're looking at the potential of accelerating some of our exploration drilling programs and the acquisition of exploration seismic. So that would be the strategy that we're considering in terms of potential additional uses of cash. But the strategic focus is purely on natural gas exploration and commercialization in our existing assets.

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Jason Michael Bednar, Canacol Energy Ltd - CFO [23]

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Thanks, Ari. I'm just going to -- I'm going to revisit your question and Ian's question with respect to the $15 million savings. So the bulk of that being $10 million of the $15 million is CapEx related. The other $5 million would be a split between operating costs and G&A. So if I were to include the Colombian peso depreciation into the EBITDAX calculation, it would have roughly a $5 million benefit, whereas the other $10 million being capital, of course, doesn't hit EBITDA. It's just a cash savings.

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Operator [24]

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Our next question comes from Josef Schachter with Schachter Energy Research.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [25]

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Again, congratulations on the quarter and the year and it's nice to be on an optimistic phone call relative to all the others that we've been having in the last few weeks. I have 2 questions and quite a few of them were answered. On the Jobo potential cogen facility, is that still in the cards? Are you working on that? When will you have more insight on potentially that moving forward and that taking some more of your gas volumes in the area?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [26]

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Yes, thank you, Joe. Yes, with respect to the Jobo power project, yes, as we indicated, we were -- we formed a consortium last year with Celsia, which is a very large thermoelectric power generation company here in Colombia, and we're awarded by the Colombian government, a 200-megawatt project called El Tesorito, which will be constructed very close to our producing facilities, about 7 kilometers to the south of our producing facilities, very close to a substation, a 500-megawatt substation. So that project is ongoing. That consortium recently has made the selection in terms of the motors and the equipment they're going to use. And the current time line for that project sees the project come online in December of 2021. 200 megawatts will consume approximately 40 million cubic feet per day of gas. We, of course, have the gas sales contract to the consortium. So we can anticipate ending 2021, with that plant coming online, a 200-megawatt plant coming online with an additional uptick in sales -- gas sales related to supplying that power station. We're also evaluating another project of similar size, which would also be constructed close to our facilities and provide power to a specific industry partner. So we are very interested in evaluating and participating in that project as well. So I would say that the project that we do have in our hands, El Tesorito, the 200-megawatt project looks to be online -- looks to be on schedule to come online in December of next year.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [27]

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And pricing would still be in that USD 4.80 range for the per Mcf?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [28]

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Yes, the pricing is similar to our other contracts, that's correct. There is, however -- obviously, because the plant is being constructed very close to our producing facilities, there's very little with respect to transportation costs, of course.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [29]

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Okay. Second question for me. Some of your competitors on the south have had farmer problems where they weren't getting paid by the government related to changing kind of the crops they were growing. Do you have any of those problems in your area? And do you have any insight if those issues have been resolved with the farmers across the country?

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

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Well that continues to be a problem countrywide. The program to supplement -- or to exchange that particular type of farming for legal types of crops has not worked out particularly well anywhere in Colombia. Fortunately that particular crop is not a predominant crop in our area of operations. So while we do have that sort of activity in and around our operations, it's nowhere near as extensive as it is on the Ecuadorian or the Venezuelan borders. So we don't see much in the way of issues with the communities, in our areas. Our relationships are very good there. We employ a lot of the locals in all of our projects. So we don't suffer from that particular problem.

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Operator [31]

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Our next question comes from Diego Buitrago with Bancolombia.

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Diego Alexander Buitrago Aguilar, Bancolombia S.A., Research Division - Energy and Gas Analyst [32]

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I only have one question. Do you think that current market condition regarding low natural gas prices could impact Canacol natural gas reserves due to a price effect has happened in oil?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [33]

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Diego, thanks for that question. Well, you have to recall that the majority of our gas contracts are take-or-pay contracts. So the price is fixed. There is no accounting for any change in the price. There is no possibility of any change in the price. So we -- unlike oil reserves, where typically, the reserve router uses a price forecast -- 10-year price forecast strip, our forecast strip is primarily, obviously, the executed take-or-pay contracts that we have signed. So we see -- we expect little to no impact whatsoever on the value of our reserves because the price of our gas is essentially fixed.

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Operator [34]

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Our next question comes from Chen Lin with Lin Asset Management.

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Chen Lin;Lin Asset Management;Analyst, [35]

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Most of my question has been answered and mostly related to the coronavirus and Colombia situation. I also like to take advantage of this opportunity and congratulate you for turning around the operation into the oil unrelated natural gas long-term contract, congratulations and -- with fixed contract and then dividend and share buyback. Your company probably one of the few energy company, very good shape. You mentioned that your contract fixed fee with not any room for [change] if in term of the crisis, if the crisis worsened in Colombia, do -- this country if they announce any emergency -- in the U.S., they are saying some utility have to provide all these facilities regardless of the customer paying or not. Do you see any possibility that happen in Colombia?

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [36]

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Thank you. Thank you, Chen. If we first of all look back to historic crises in Colombia, related to -- primarily to the provision of gas for thermoelectric power generation, we've never seen any examples historically of a price freeze on either gas or oil contracts historically. So that's one perspective. Of course, anything can happen. I mean, it could be a first time for everything. I would say that all of our contracts -- all of our gas sales contracts have counterparty guarantees that are liquid with respect to making payments. So if a party does not make a payment, we can seize those liquid guarantees and those guarantees are generally in place to cover between 1 to 3 months of current gas supply to that contract. So we do have short-term mechanisms to ensure price stability. But going forward beyond that, if there are defaults from counterparties, which at this point appear unlikely, all of our accounts are basically current. We could run into default problems if this is a deep and extended crisis.

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Operator [37]

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(Operator Instructions) Our next question comes from the webcasting portal. Alejandro Demichelis of Nau Securities asks, could you please provide an update on the Medellin pipeline project. Normally, take-or-pay contracts have embedded some flexibility swing factors causes to cope with demand moves of customers. Could you please confirm whether your take-or-pay contracts have these clauses and roughly how much swing your contracts have?

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Jason Michael Bednar, Canacol Energy Ltd - CFO [38]

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I'll start with that, Charle. So I'll start with the contracts and then you can answer the Medellin portion. So Charle's explained much of the contracts already. I'd like to add a couple of points to his already explained. So there are no such clauses with respect to swing. However, I do note that these contracts typically have 6% operator downtime, which does provide them some flexibility on when they take their gas. And of course, properly, we factor that 6% downtime into our guidance. Second point I'd like to make with respect to the contracts, is these take-or-pay contracts typically have up to 12 months time for them to take their gas. So while they pay us upfront on a monthly basis by virtue of the take-or-pay contract, should they choose to take their gas at a later date, they have the ability to do so. But we're paid upfront. And if you were to refer to the financial statements, you do see some take-or-pay revenue explicitly listed on there. Those are the instances where people have paid us upfront. Their 12 months time frame to take their gas has expired. And at that point in time, it's recorded as take-or-pay revenue. So I'll hand it over to Charle to do with Medellin pipeline updates.

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Charle A. Gamba, Canacol Energy Ltd - President, CEO & Director [39]

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Yes. With respect to the gas project, the gas pipeline from Jobo to Medline, which will provide initial 100 million cubic feet per day of gas sales through 2024. We have currently completed the negotiation of the offtake contract with EPM that is being completed. We are currently out to tender for EPC contractors who will construct the pipeline. We anticipate awarding the EPC by the end of April, and we are currently working on the financial structuring of the project, which involves both bank debt and equity. And we expect to close the financing of the project shortly after the award of the EPC contract. So that will be the update for the Medellin project.

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Operator [40]

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Showing no further questions, 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 [41]

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

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Operator [42]

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