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Edited Transcript of GTE.A earnings conference call or presentation 27-Feb-19 6:00pm GMT

Q4 2018 Gran Tierra Energy Inc Earnings Call

CALGARY Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Gran Tierra Energy Inc earnings conference call or presentation Wednesday, February 27, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Stephen Guidry

Gran Tierra Energy Inc. - President, CEO & Director

* Rodger D. Trimble

Gran Tierra Energy Inc. - VP of IR

* Ryan Paul Ellson

Gran Tierra Energy Inc. - CFO

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Conference Call Participants

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* Adam Naughton

RBC Capital Markets, LLC, Research Division - Associate

* Ian Macqueen

Eight Capital, Research Division - Research Analyst

* Joseph Liao

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Conference Call for Fourth Quarter and Year-End 2018 Results. My name is Michelle, and I will be your coordinator for today. (Operator Instructions) I would like to remind everyone that this conference call is being webcast and recorded today, Wednesday, February 27, 2019, at 1:00 p.m. Eastern Time.

Today's discussion may include certain forward-looking information, oil and gas information and non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important disclaimers with regard to this information and reconciliations of any 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 call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

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Gary Stephen Guidry, Gran Tierra Energy Inc. - President, CEO & Director [2]

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Thank you, Michelle. Good morning, and welcome to Gran Tierra's Fourth Quarter and Year-End 2018 Results Conference Call. With me today are Ryan Ellson, our Chief Financial Officer; and Rodger Trimble, our Vice President of Investor Relations.

We issued a press release this morning that included detailed financial and operational information about our fourth quarter and year-end 2018 results. In addition, Gran Tierra Energy's 2018 annual report on Form 10-K has been filed on EDGAR and is available on our website at grantierra.com.

Ryan, Rodger and I will make a few brief comments and then we'll open the line for questions.

In 2018, our returns-focused strategy, with an emphasis on profitable production growth, generated both strong operational and financial results.

During 2018, we achieved high-record average production of 36,209 barrels of oil equivalent per day, 15% higher than in 2017's production and 38% higher than volumes in 2016.

On a per share basis, production in 2018 was up 17% from 2017. We also increased average production in the fourth quarter of 2018 to a record high of 38,156 barrels of oil equivalent per day. Net income was $103 million or $0.26 a share compared to a net loss of $32 million or $0.08 a share in 2017.

We are pleased to report that in 2018, it is the first time Gran Tierra has reported net income since 2013.

Ryan will now summarize our key financial results and revised 2019 capital budget. Ryan?

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [3]

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Thank you, Gary. Good morning, everyone. Overall, 2018 was a great year, with net income of $103 million or $0.26 per share, with funds flow from operations increasing 39% to $306 million or $0.79 per share. EBITDA more than doubled in 2018, increasing 106% to $377 million, and net debt to EBITDA was a very manageable 1x at December 31, 2018.

Gran Tierra had an active Q4 with capital investment of $89 million, which exceeded our Q4 funds flow by $36 million, primarily as a result of additional capital spend in Acordionero.

We have continued to have top quartile performance in 2018 relative to our oil-weighted peers in terms of operating netback on a working interest sales basis, which increased to $33.51 per BOE in 2018, up 36% compared with 2017.

I really want to emphasize how much the creation of long-term shareholder value is at the center of everything we do at Gran Tierra. We are very focused on capital efficiency and return on invested capital.

As we reported about a month ago, our high-quality set of assets is forecast to deliver $1.9 billion of free cash flow over the next 5 years from existing 2P reserves. This free cash flow should provide us the requisite funding to target our large prospective resource base of over 1.4 billion barrels and return capital to shareholders.

We have updated our 2019 capital -- 2019 guidance following our acquisition of assets we announced last week. We're increasing production guidance to a range of 41,000 to 43,000 barrels per day, which represents a year-on-year growth of 13% to 19% over 2018. This strong profitable production growth is forecast to be delivered by our 2019 development capital program of $220 million, which is only approximately 55% of our cash flow. The majority of the development capital is directed at Acordionero's ongoing development, where we plan to drill a total of 14 wells and continue expanding -- continue working on expanding the central processing facility and water injection. Approximately 65% of our 2019 capital budget will be dedicated to development activities.

Elsewhere in our portfolio, we plan to drill 12 to 16 development wells in the Putumayo Basin and some other minor fields. Our 2019 exploration program of 6 to 8 wells and 3D seismic calls for investment of approximately $110 million, which will represent approximately 35% of our total 2019 capital expenditures of $320 million to $340 million.

The 3D seismic acquisition will be the largest ever shot in the Putumayo Basin. The majority of our 2018 -- 2019 exploration campaign is once again planned to be focused on the Putumayo Basin, where we forecast the drilling of 4 to 5 wells, which are designed to target both the carbonate and N Sand oil play.

At a forecasted 2019 Brent oil price of $65 per barrel, we forecast midpoint annual fund flow of approximately $385 million, which will more than cover our 2019 capital program of roughly $330 million. With our strong balance sheet and free cash flow profile, we plan on returning capital to shareholders through share buybacks. We believe we're trading at a significant discount to our net asset value, and buying back shares is consistent with our overall objective of growing our net asset value 3 to 5x over the next 5 years.

I will now turn the call over to Rodger Trimble, our Vice President of Investor Relations.

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Rodger D. Trimble, Gran Tierra Energy Inc. - VP of IR [4]

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Thanks, Ryan. Good morning, everyone. I will briefly cover a few operational highlights from today's press release and some key upcoming catalysts.

We continued to have strong performance during the quarter at Acordionero, where we drilled 3 wells on the South Pad, which focused on delineating the southern reservoir extent within the area mapped on 3D seismic. The AC-32 and AC-33 development wells from the South Pad have further proved up the southern extension of the Lisama A and C reservoirs. And the AC-34 development well, which was placed on production on January 10, 2019, has performed above original expectations, with a 30-day average oil rate of just over 2,000 barrels of oil per day. Planned activity in the first quarter of 2019 is focused on drilling and completing the AC-35, 36 and 37 development wells as well as drilling several water injectors.

We also continued to make good progress at Ayombero. The Ayombero-3 appraisal well spud on January 7, 2019, and is now in the completion phase. All 3 Ayombero wells drilled to date have confirmed similar lithologies, oil saturations and overpressure in the Galembo Member of the La Luna Carbonate reservoir, suggesting reservoir and structural continuity.

On the exploration front down in the Putumayo Basin, log evaluation at the Pomorroso-1 well in the PUT-7 Block indicates that up to 7 zones may be prospective. After stimulating the first carbonate zone, the well stabilized on natural flow at average rates of 288 barrels of oil per day of 34-degree API oil. However, the packer subsequently failed. A production logging tool confirmed that only 3 feet out of 71 feet of perforated reservoir have been effectively stimulated in this well. A second stimulation using a diverter is planned for March 2019, and we also expect to test other prospective uphole zones, including the N Sands.

Testing is ongoing at Almendrillo-1. This well is also in the PUT-7 Block. And the same rig is then expected to drill in sequence, the Pecari-1, Tajinos-1 and Northwest-1 exploration wells from the same pad. These exploration wells are designed to test the same multi-zone potential as Pomorroso-1. And at Chilanguita-1 on the Alea-1848 A Block, testing operations are ongoing, though we have yet to establish commercial oil rates from this well at this time.

Moving up to the Llanos Basin, the Prosperidad-1 well on the El Porton Block has been drilled to the intermediate casing depth of about 9,800 feet, and the well is expected to reach total depth in the second quarter. This well is designed to test the Mirador, Gacheta and Une formations.

Bottom line, we're pleased with our performance in 2018 overall, and are excited about our many potential catalysts in 2019.

I will now turn the call back to the operator. And Gary, Ryan and I will be happy to take questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Adam Naughton of RBC Capital Markets.

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Adam Naughton, RBC Capital Markets, LLC, Research Division - Associate [2]

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Just a couple of questions for me. Firstly, on the CapEx for the year of $347 million. Could you provide a bit more color on the split between development and exploration? And also I believe it was slightly ahead of what we had expected. And secondly, regarding 2019 exploration, the revised 6 to 8 wells, does that include exploration on the recently acquired PUT-8 Block, because I know there was a well scheduled, I think, Miraparriba-1 and (inaudible) in Q2 '19 from the Cohembi pad. So I was wondering if that's still on schedule.

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [3]

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Thanks for the question. With respect to the CapEx, you're referring to the 2018 CapEx, correct?

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Adam Naughton, RBC Capital Markets, LLC, Research Division - Associate [4]

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Yes, yes, yes, the $347 million.

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [5]

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Yes. About 75% of that was development and 25% exploration. And it was a little bit higher. We did accelerate some of the facilities and incurred a little additional cost in Q4 as well as there's a few wells we had some drilling problems and the cost ran over.

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Gary Stephen Guidry, Gran Tierra Energy Inc. - President, CEO & Director [6]

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And in terms of your question on exploration, yes, we do include PUT-8 in our portfolio. We have a portfolio of other exploration wells that we'll continuously review depending on what's happening in the market. But PUT-8 is certainly in our mix for 2019.

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Operator [7]

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Our next question comes from Ian Macqueen of Eight Capital.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [8]

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Just some questions on the acquisition. With respect to Suroriente, production had been kind of humming along. I had Q3 production based on the ANH data at almost 9 -- sorry, 8,000 barrels a day gross. And it sounds like if we gross up the numbers for what you bought, the 36.2% interest, it's about 6,200 barrels currently. So I'm assuming CapEx has gone down, but a couple of things on that. Why has there been such a production drop? And then, nextly, I know that the contract ends in June of 2024. How quickly -- I see you're drilling 11 or 13 development wells in the Putumayo Basin. How quickly are you going to be able to get on to drilling within the Suroriente block? So those are the first questions.

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [9]

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With regards to the production, there were a few highly productive wells that the ESPs did fail in Suroriente. And also there is -- the water injection wasn't as much as it should have been. So that impacted the production.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [10]

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And I'm assuming that means that you can get that production back on relatively easily?

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [11]

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Absolutely.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [12]

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Okay.

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [13]

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Absolutely. And with respect to the drilling plans, as of right now, I think you remember, in our Capital Markets Day presentation, we showed the positive response from the waterflood in the northern part of the field. Our strategy with this field is to significantly increase the waterflood. We think we'll maximize returns and really our capital efficiencies by really ramping up the water injection.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [14]

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And drill development wells as well or mostly just water -- water injection?

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [15]

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Mostly water injection.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [16]

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Okay. Next question as it relates to the acquisition. I believe there were some commitments on some of the other fields that I had seen before. Did you acquire any significant equipment -- or commitments when you actually acquired those assets, so either PUT-8 or the Llanos Block?

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Gary Stephen Guidry, Gran Tierra Energy Inc. - President, CEO & Director [17]

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Yes. It's only exploration commitments.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [18]

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And are they -- can you give me...

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Gary Stephen Guidry, Gran Tierra Energy Inc. - President, CEO & Director [19]

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They're not material.

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [20]

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Not material.

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Ian Macqueen, Eight Capital, Research Division - Research Analyst [21]

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Okay. So there's nothing, no big wells to drill that you have to drill. I mean, you're basically able to schedule things as you like?

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Gary Stephen Guidry, Gran Tierra Energy Inc. - President, CEO & Director [22]

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Yes. We're perfectly happy with the commitments that are there. And in fact, the reason we like those blocks as part of the acquisition is we would do more than what the commitments are if we're correct on our geology.

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Operator [23]

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Our next question comes from Joseph Liao of BMO Capital Markets.

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Joseph Liao, [24]

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Just 2 questions for me. So the first is, what are the moving parts in your production guidance? Do you see any key risks that if they transpire, we see you lower? And are there any sort of opportunities there to beat guidance? My second question is, could you try and quantify some of your exploration this year?

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [25]

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With respect to our production guidance, we're very comfortable with our production guidance. The number one risk I think I'd say would be not injecting enough water in Acordionero. That's why it's our number one objective to really increase production -- or injection in Acordionero. And as far as beating guidance, we're very comfortable with the range that we provided of the 41,000 to 43,000. And with respect to the exploration, we plan on drilling 4 to 5 wells in the Putumayo. As you know, that's targeting 6 potential pay zones. And so we will follow -- we're testing Almendrillo right now. We'll immediately follow that up and drill Pecari from the same pad. Again, we'll drill all the way down to the Caballos and test all the potential pay zones that we see in that well. And then potential to drill a few exploration wells in the Middle Mag around Acordionero. And then in the Llanos, we're drilling the Prosperidad well and we're about 10,000 feet with a TD of about 16,000 feet.

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Joseph Liao, [26]

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Is there like a particular resource number that you are targeting from these wells? Or what does the success case look like?

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Ryan Paul Ellson, Gran Tierra Energy Inc. - CFO [27]

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I think for the wells that we're targeting, what we've done with our prospective resource is we've mostly just -- especially in the Putumayo, have provided prospective resources for the N Sands as well as just for the A-Limestone. There is potential in other zones. So our objective, overall, we would like -- over the next 3 to 5 years, we want to drill 30 to 45 exploration wells, testing about 70% of the portfolio.

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Operator [28]

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

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Gary Stephen Guidry, Gran Tierra Energy Inc. - President, CEO & Director [29]

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Thank you, operator. And we want to thank everyone, once again, on behalf of the Board of Directors and management at Gran Tierra. We certainly appreciate all of your support, and look forward to keeping you updated and talking to you next quarter. Thank you very much.

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Operator [30]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.