Q2 2019 Earnings Call
At this time all participants are in listen only mode. Following the initial remarks, we will conduct a question and answer session for securities analysts and institutions.
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I would like to remind everyone that this conference call is being webcast and recorded today Thursday August 20, my team at 11 o'clock in the morning is 10 times.
Today's discussion may include certain forward looking information, that's one let's say to non G.A.P. financial measures.
We supported earnings and operational update press release will be it should you have to be more important disclaimers with regard to this information and the conciliation.
Non G.A.P. measures discussed on today's call.
But a barrel of oil equivalent or be any amounts are based on a working interest so before royalties.
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I will now turn the conference call over to guard against <unk>, President and Chief Executive Officer of Gran Tierra Mr. give me. Please go ahead.
Good morning, and welcome to Gran Tierra second quarter 2019 results conference call.
My name is Gary good <unk>, President and Chief Executive Officer.
And with me today is Ryan Ellson, our executive Vice President and Chief Financial Officer.
After a few brief comments, we will then open the line for questions.
I'll now turn the call over to Ryan Ellson.
Our executive Vice President Chief Financial Officer to discuss some of our operational and financial highlights right.
First of all imagine some some significant achievements subsequent to the end of Q2.
Our team has successfully completed the commission or the expanded Accordant arrow central processing and water injection facilities as well as the installation of the gas to power turbines Weve also significantly ramped up to coordinate arrows injection to approximately 20500 barrels of water injected per day during the May to July 2019 timeframe.
And we expect to further increase the coordinator was injection dribble 40000 barrels per day during this month.
With this one water injection increase we're forecasting a positive impact on a coordinated reservoir pressure, which will support increased oil production rates from both current and future producers an ultimate oil recovery efficiency.
We're very excited about recent results from the coordinator 48 wells, which opens up a new sawmill the light oil development using the same infrastructure that would just expand it.
For context, though so I mean, you look at just below the mainland saum am and see reservoirs and all the oldest overpressured zone has been penetrated with other wells in the coordinator Oldfield extraordinary 40 wells the first opportunity for us to test this new reservoir horizon.
In terms of our Q2 results our production averaged 35340 barrels of oil per day.
What was impacted by the blockade and the southern Putumayo, which has been successfully resolved and the temporary reduction in production at a corner as we ramped up that fields water injection. Despite these temporary production issues Gran Tierra achieved strong financial performance during the quarter or Q2 net income was $39 million EBITDA increased 24% to 115 million in Q2 from Q1.
Our current quarterly funds flow from operations also grew significantly to 88 million or 23 cents on a per share basis, an increase of 17% compared with 75 million in Q1.
During the first half of 2019, we returned 24 million to stockholders through our buyback of 10.4 million shares or almost 3% over outstanding shares at the start of 2019.
Our balance sheet remains strong with our net debt to EBITDA at the end of Q2 standing at 1.4 times on a trailing 12 month basis on the basis of annualize Q2, EBITDA. This ratio was 1.2 times.
Oil and gas sales increased to $158 million during the quarter.
We can do to top quartile operating netbacks with our Q2 operating netback, increasing 10% compared with Q1 to $33 per barrel.
I'd like to touch on the updated 2019 guidance, we're now forecasting production to ramp up through the remainder of 2019, and we revised our full year 29 fewer production forecast at 36500 37500 barrels of oil per day.
We have updated our 2019 total couple gardens to range of 330 million to 340 million and EUR 20 maintain cash flow guidance to a range of 30 333 to 355 million.
I'd like to highlight two new blocks that we want in the recent and H. bedrooms.
Oh really 85 in the animal space and B M. M 24 in the middle Meg.
These blocks complement or our current acreage position in both these basins.
We officially signed contracts for our three exploration blocks in that war, which are contiguous to our proven wild basin assets on the Colombian started the border.
In terms of upcoming catalysts during the second half of 20 Anite team, we have many potential catalysts, including the drilling of 13 to 15 developments and exploration wells were planned appraisal of the assortment you said in accordance narrow and the drawing of the body rest day well in the foot one block in the food alone.
We're just arguing the fractured anyone stone and the you said.
Overall, we believe we have significant financial flexibility and off early operational momentum where their facilities expansion now complete a coordinator and the planned completion of our large threed seismic program in the Putumayo during Q3 before Greg forecast Gran Tierra will generate free cash flow in Q4. This year and 2020 looking to 2020, we plan to refocus on the sustainable free cash flow profile, which we plan to use for net debt reduction share buybacks.
We expect strong production cash flow into 2020.
And beyond well maintain an active exploration program of six to 10 wells per year.
Well the temporary reduction in production during Q2 was unfortunate or underlying asset values not change in Gran Tierra is an excellent position with a strong free cash flow profile visible production growth strong balance sheet and a world class exploration portfolio comprised of 34 blocks across four proven and prolific basins in Colombia, Ecuador with access infrastructure I'll now turn the call back to the operator will be happy to take questions. Operator. Please go ahead.
Thank you, ladies and gentlemen, we will now conduct the question and answer session for Securities analysts. If you have a question. Please press the star key followed by the one on your Touchtone phone you will hear a tone acknowledging your request. Your question will be pulled into order. They are received please ensure your lifted had said if you are using a speakerphone before pressing Keith one moment. Please for your first question.
[noise].
First question comes from the line of Ian Macqueen of eight. Please ask your question. Your line is open.
Good morning, guys. Just a quick question on Acordionero can you tell us what the production is currently and how you see the production evolving as you continue to drill development wells and start to see a waterflood response.
Yes, and what was the second part of that question.
How do you see that production evolving as you start to see a waterflood response and continue to develop Joe.
Okay Yeah.
Current production is about 16000 barrels per day from a quarter to narrow.
We're injecting right at 30000 barrels of water a day, we've tested our facility at 40.
And we have the capacity to go beyond that.
So the real.
We're very confident that we will we will be back with a four handle on our production. It's a matter of timing and you hit on it. It's the the response, we're already starting to see response, we did see response.
With our pilot pilot program, but we're in the process of ramping our water injection.
And will be there in August will be as a 40000 barrel a day, so I would say over the coming months.
We will we will see response in earnest where.
Our main objective is weighted replacement. We're we're we've achieved that already in the eight the 70, 80% of our reserves.
And we're approaching that right now with our.
Our ramping of injection so.
The short answer to your question is over the next few months.
Okay, and then I think the production that at a high peak was about 21000 barrels a day is that a reasonable expectation to think that it would go back to or.
Where should it peak again.
It's reasonable we were at 21 to 23000 barrels per day.
We're very confident that we will we will be back there we now have the facilities.
All within our control.
For both the injection and handling.
Water cuts as they as they increase and so I think it's very reasonable we can handle up to 30000 barrels of oil per day in about 40.
But over 40000 barrels of fluid per day through our facilities and so were.
Where we are quite confident we'll be able to handle those volumes.
Yes, thanks, very much guys appreciate it.
Thanks, Ken.
Your next question comes from the line of David is out of BMO capital markets. You May ask your question. Your line is open.
Hi, guys.
I might have missed it so apologies if I did but just on differentials can you talk a bit more about the.
To friends, who as you've seen in the quota if you can elaborate.
How much in particular, how much your crude is sold it for Scania and was there much of a change in the quota of between where you sold your crude and the second question is can be you said if it was responding positively to increased water injection can you just elaborate exactly what you're seeing that and what your expectations are for next year. Thanks.
Hi, David its right with respect to the differentials both the over barrels are priced off of Brent minus either Vasconia orchestra, both those differentials.
I've been quite tight this year, just with the shortage of heavies worldwide. So weve, obviously benefited by that by a couple of dollars. We also have in May we for coordinate arrow barrels in particular, we entered into new marketing arrangements, which increased our netback really narrow the differential by 75 cents to a dollar.
Okay in terms of co hemi, we're what we're we're seeing that it's very visible very very rapidly as pressure responses and the wells, we're seeing increased blood levels.
The production increases are on the order of five 600 barrels a day.
But what really is exciting for us is expanding the water injection capability, followed by water sourcing and that's what we're doing this this year as we our objective is to have all of our water source.
From produced water.
Non portable produced water.
At the same time in parallel we're expanding our facilities and our objective.
Towards the end of this year is to get up to the 50 60000 barrels a day of.
Injection capacity.
We have that capacity to handle the the production with the infrastructure that we have in place.
So the answer your question is the reason, we're quite confident as we're seeing pressure response and Surat wells surrounding the injectors that we have in place.
Yes, I do as Gary mentioned, we own production increased five 600, that's net to us. So the actual fuel production increased by 1000 barrels per day without drilling and well.
Got it okay. Thanks, guys appreciate it.
Thanks.
Thank you and next question comes from the line of Chelsea Colin The Pagan. Your line is open you may ask your question.
Hi, Thank you for the call can you comment on how your strategy would change both operationally and from a capital allocation perspective, if oil were to drop to $40 per barrel for an extended period of time.
We have about 10000 barrels a day hedged.
At the moment and our.
Objective was to protect our protect our capital program.
Our long term capital program down to about $50 a barrel below 50 if.
It is a bit extreme and let's say it does hit 40, we operate effectively all of our assets all of our exploration and so our ability to to slow down or speed up our capital program is within our control.
The one thing that is important to us as the regulatory the permitting process for exploration we have.
Fantastic portfolio, but it takes time to get that permitting and so.
Our our flexibility and control is probably the most important thing to us and we have that all within our means.
And decision.
First capital allocation in all of our core fields all of the major facilities are in place. So we don't have any large major capital projects on the horizon. So again that helps with.
With our capital allocation.
And what about your dividend and share buyback policy.
And would that change under different oil price scenarios.
Yes. Good currently we don't bid to pay dividend and our objective for next year is for free cash flow through operating cash flow less or capex.
To allocate that to net debt reduction and share buybacks.
On a 50 50 basis to extent that we didnt have free cash flow.
We would not be doing a share buyback, but we have a program in place Bogo program Boys Reno.
And we don't pay dividend.
Okay, and just one last question related to that.
What is the breakeven.
Cost of your feel on kind of a weighted average basis based on your production currently.
Oh 30 doors.
Great. Thank you.
Thank you.
Thank you next question comes from the line of Nicole I meant the chablis.
Insight Investor you May ask a question your line is open.
Hi, many thanks for the clinical.
Most of my questions have been answered just a couple on the left going forward as you mentioned that you expect free cash flow generation 2020 .
Do you expect that.
What's that make assumptions that they're using our using six to $5 oil as well.
And do you expect capital.
Capex to remain broadly stable and then the cash flow to grow as production grows.
Paul.
It's basically the dynamics.
Because this year, obviously youll be just about.
Free cash flow.
Positive right.
With respect to the free cash flow profile.
That at $65, Brent that is about $100 million a free cash flow for next year.
And the key for US is you know, we don't plan quarter by quarter, we really do five year five year plans and Gary alluded to it earlier that one of our main strategic objectives and make sure. We control all blocks operate all blocks just to have that flexibility with capital allocation and that gives us a lot of flexibility over the five year period.
Okay and.
Thanks can you still maintain that capital flexibility as well as getting cash flow crisis.
Go down further from on the contract.
Yes, correct and this year, we have 10000 barrels hedged with a floor of $60.
Okay, and then secondly, you've announced a tender that convertible that was one of three centsfive issuing bonds.
I mean do you how is the tenda pulling and.
Let's take up yet so we we've closed that tender we've repurchased all of that with the exception or the $115 million, we repurchased all but $3000.
Okay great.
Thank you very much.
Thank you.
Thank you next question comes from the line of Miguel Spina of competitive you May ask your question. Your line is open.
Hello, everyone I have two questions. The first one is with the IMO 2020 regulation coming in next year.
Where would you see your bus kornya.
Differential going on the second one is.
Where do you see your capital program next year does it make sense to assume capex again above.
$300 million. Thank you.
Yes. So the first question with respect to IMO you know, it's hard to quantify that we've been working with the water the marketing groups, who monetize our oil for US we expect on a downside scenario doesn't impact of one to $2 a barrel.
And with respect to the and that's on the downside scenario with respect to capital for next year, we'll release, our our 29 or 2020 budget in December of this year, but we are targeting free cash flow next year of that $75 million to $100 million.
Perfect. Thank you.
Thank you.
Thank you next question comes from the line of Alpha Thompson.
RBC you May ask a question your line is open.
Yes, a couple of questions from me as well please Justin.
With respect to the code in Aero and then Joe You mentioned your five year plan, how do you envisage a production growing I mean looking at the average is for this year in the second half you might act came with a four handle but you're not going to average 40, something I I don't suppose so how would we look at 2020 production and subsequent production should it be seen is that perhaps a lower for longer plateau, rather than the peak and then if I may just a quick question on exploration.
Yes, a couple of wells all a sudden some of the spending and the couple of allow shifted to the right. I was wondering if that was just delays or or whether there was some sort of financial management associated with that thank you.
Okay. Thanks, though.
The answer to your question on on a quarter to narrow.
We announced in our last operations release, we expect reserves to grow and that's because the seal was extended to the south as we.
We shot.
Vs fees, we correlated to seismic we were we were confident enough to step out.
Pretty good step as far as we can reach to the south and that proves that we are correct that the structure has changed.
And so we focus quite a.
Quite hard on our probable or possible reserves now that we've defined the tank we define both aerially and we what we have not defined as how much we might find laws that he sends discovery.
As we think quite exciting we also have a deal and that will start exploiting now that we have facilities in place we have the ability that to start wrapping our our water injection program and so we built our production facilities to handle 30000 barrels a day for a reason we believe our possible reserves, we believe our probable reserves and its a matter of how efficient we can be at asset management that flooding that field and we have a very strong team now that they have the now that they have the infrastructure to start applying it over the next next couple of years and so that hopefully answers that question in terms of exploration.
The big one for US we still are excited about the IMD barrel discovery to the north its high pressure.
And we were having because there is not equipment in country. We finally concluded that we have to do defer our workover completion.
Activity with the exception of the first well we drilled it's producing a couple of 100 barrels a day with no decline.
We had to really defer that until we can get a snubbing unit in country to work under under pressure conditions and the rest of our program really is it's not financial its more logistics getting our logistics in place.
And permitting in place and so we still believe that we can have an active five to 10 well exploration program.
Per year per year for the next couple of years.
Yeah, we're excited about the avant who else do well Oh, that's the first on the real appraise the Bonnie discovery as you recall the volume discovery, you know with Cumed over as you know 750000 barrels from the fractured limestone. So this will be a appraising that.
And one final question if I may.
Some of your peers have been talking about.
Hi, upcoming licensing rounds, I mean is your plate full or do you continue to accumulate acreage.
I think that's a as you know a constant process of upgrading.
Your your portfolio and.
What's what's been talked about by Ecopetrol the.
They are really the big acreage older big producer in the country.
At the age of talked about.
Maybe divesting some of the.
Under undeveloped fields in the country and I think that will be a competitive process and we'll all be on an equal equal footing and competing for that.
But.
Having said that were completely happy with the portfolio. We have if nothing else, yes. The table, it's really opportunity going forward and where we have a we have a great portfolio and we look forward to drilling it over the next next few years and will be continue to be selective and I'll go out and eat drawn there was over 20 blocks offered and we only bid on too.
So its acreage that we see the potential upside in the end, it's close to our existing acreage and infrastructure, we will take a look at it.
Fair enough. Thank you.
Thank you gentlemen, there are no further questions at this time please continue.
Okay. Thank you operator, I would like to thank everyone again for joining us today and we look forward to speaking with all of you over the next quarter and update you on our ongoing progress thanks for joining us.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.