Canacol Energy Ltd. Third Quarter 2019 Earnings Conference Call - - PDF document

Canacol Energy Ltd.

Third Quarter 2019 Earnings Conference Call November 8, 2019 at 11:30 a.m. Eastern

CORPORATE PARTICIPANTS Charle Gamba, President and Chief Executive Officer Jason Bednar, Chief Financial Officer Ravi Sharma, Chief Operating Officer Carolina Orozco, Director, Investor Relations

1 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

Operator Good morning and welcome to Canacol Energy’s Third Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask

• questions. 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. Carolina Orozco 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.

2 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

Before we begin, it is 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 Bogota, 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.

3 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

Jason Bednar 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 revenues 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 three 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.

4 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

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 a 146.4 million cubic feet a day of gas sales in Q3, which is a 27% increase

• ver the 115.3 million cubic feet day that we averaged in Q3 of 2018. We anticipate total realized contractual

sales to increase from 2019 corporate guidance of 150 million standard cubic feet per day to over 200 million standard cubic feet per day in 2020.

5 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

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 Canacol’s portfolio sold on the spot market. Transportation expenses associated with 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 growth 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 cost, 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.

6 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

General and administrative expenses per boe decrease 29% during the 3 months ended September 30, 2019 compared to the same periods in 2018. The result, this decrease is the 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 2019 and into 2020 with the new 100 million cubic feet a day pipeline now completed.

7 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

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 9 months ended September 30 compared to $75.6 million for the same period in 2018. As of 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 budget. Also of note, in August of 2019, we entered into a USD to Colombian peso foreign currency hedge in the form

• f a costless collar. The amount of the peso hedges for US$30 million being US$2.5 million over 12 months,

with the collar being at 3,383 to 3,535. The peso is 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 is it for today. Thanks very much. I will hand it now over to Ravi Sharma, our COO.

8 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

Ravi Sharma Thanks Jason. In late July 2019, we announced that the works associated with the expansion of the gas pipeline between our

• perated Jobo gas plant at Cartagena was completed. These works included in the 85-kilometer of 20-inch

pipeline and the installation of compression at the Philadelphia 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 play in the Cienaga de Oro sandstone reservoir with an average porosity of 23% and tested a 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 flowline 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, with the expansion was brought fully online. In late September 2019, we announced the successful results of Clarinete- 4 encountered a record 297 feet true vertical depth of net gas play 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 flowline between the Clarinete field and the Jobo gas processing facility.

9 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

In late July 2019, we announced that the works associated with the expansion of the gas pipeline between our

• perated Jobo gas plant and Cartagena was completed. These works included an 85-kilometer, 20-inch

pipeline and the installation of compression at Filadelphia 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 at 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 millian standard cubic feet per day respectively. The Accordian-1 discovered earlier in June and the Ocarina wells were tied in to the 8-inch Pandereta flowline and flow to the Jobo gas processing faciity. In late August 2019, we announced record gas sales of 217 MMSCFPD as the expansion was brought fully

• nline.

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%. The well tested 40 million standard cubic feet per day and has been tied into the new debottlenecked manifold and 8-inch flow line between the Clarinete field and the Jobo gas processing facility.

10 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

For the third quarter 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 in the pipeline expansion. 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.

11 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

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 in a lease we have identified on our 1.1 million net acreage exploration position in the Lower Magdalena Basin of Colombia.

12 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

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 sales 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 three months ended September 30, 2019 are primarily related to:

• Facility costs at VIM-5 and Esperanza blocks
• Seismic costs at the VIM-5 block
• Drilling of the Clarinete-4 and Pandereta-5 wells
• Post-drilling costs of Nelson-7, Ocarina-1 and Acordeon-1
• Jobo 3 completion costs

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

• utlook for the remainder of 2019 and 2020. Thanks.

13 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

Charle Gamba Thanks Ravi. For the remainder of 2019, the Corporation’s focused on executing this exploration drilling program as well as executing the necessary agreements related to the construction of a new gas pipeline to Medellin, 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 two discoveries Acordeon-1 and Ocarina-1, and three successful development wells Palmer-2, Nelson-7 and Clarinete-4. The success of the Acordeon-1 and the Ocarina-1 lifts Canacol’s commercial success to 85% in industry leading metric for conventional onshore gas play. The remainder of the drilling program for 2019 includes the Arandala-1 well, which the Corporation has recently cased and completed. With respect to the Medellin 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.

14 Canacol Energy Ltd. November 8, 2019 at 11:30 a.m. Eastern

Finally, commenced in the fourth quarter of 2019, the Corporation is pleased to announce a regular recurring quarterly dividend. The Board of Directors has approved a US$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 C$0.052 per share or a yield of approximately 4.4% annually at current share prices. This concludes my remarks concerning the outlook. Carolina Orozco 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. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.