Centaurus Energy Inc. (CTA) Earnings Call Transcript & Summary

Good morning. My name is Colin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Centaurus Energy Fourth Quarter and Year-end Earnings Conference Call. [Operator Instructions] Thank you. Mr. Tawil, you may begin your conference.

Thank you, operator. Thank you all for joining Centaurus Energy's fourth quarter conference call. Pursuant to actions taken in late March by the Board of Directors of Centaurus Energy, I'm happy to address as the interim CEO of the company. As many of you know, Maglan Capital, a hedge fund, I co-founded with Steven Azarbad approximately 10 years ago, has been one of Centaurus' largest shareholders for a number of years, with our initial investments in the company predating the prior management team. Under the new leadership, which is aligned in interest with shareholders generally, the company is being as proactive and as creative as possible to navigate through and thrive in the current environment. I'm honored to lead the company at this time. First and foremost, regarding COVID-19, we hope that all the company's stakeholders are healthy and safe and their loved ones as well, and continue to be so. Due to COVID-19's effects on energy consumption and due to the oil price wars effect on supply, Centaurus has been fighting in a challenging environment. Nevertheless, without any traditional debt holders and without particular debt maturities, we are trying to remain as nimble as possible. Moreover, we have been able to record some real progress on the activity in Coiron Amargo Sur Este, which is operated jointly with Pan American Energy. On April 3, the company reported the results of its year-end reserves audit, resulting in a 172% jump in 2P reserves, owed overwhelmingly to the derisked assets in Coiron Amargo Sur Este. Furthermore, keeping in mind that at year-end, when the audit was completed, the company did not yet have the production data that has been released over the past few weeks. Since the end of 2019 and since the conclusion of the reserves audit, we have given updates on the average 30-day production or the IP30 and average pressure for the second, third and fourth wells of the pilot program, and we have given updated information on the average 90-day production and pressure for the first and second wells. The production has met and in some cases, well exceeded our expectations, and the production from the wells has allowed the company to pay down the loan amount that has been extended by Pan American Energy to fund Centaurus' portion of the capital expenditures relating to the pilot program. Our conventional production continues to generate revenue to support the company's conventional operations and the company's SG&A. As a result of COVID-19, there have been stay-in-place orders instituted by the federal government and the provinces in Argentina. Moreover, oil-centric provinces have halted drilling and workover activities out of safety concerns. And therefore, many of the leading energy producers in Argentina have notified provincial authorities publicly and privately that drilling projects are on hold for an indefinite period of time. Currently in Argentina, the price per barrel of oil is subject to open market conditions, including the price of Brent crude and in-country demand. However, it has been reported for some time by major media outlets that due to the importance of oil production now and in the future to the Argentine economy, oil producers, provincial officials, labor union leaders, refiners and the federal government have been in discussions regarding a fixed U.S. dollar price per barrel, referred to locally as the criollo barrel at a price materially higher than the current prevailing prices around the world. Although February and March now seem like ages ago, I'd be remiss if I didn't mention the record-breaking transactions recorded in those months relating to Bandurria Sur, the Vaca Muerta block to the West of Coiron Amargo, that is comparable in size and resources and only slightly ahead of Coiron Amargo in derisking and development. In early February, Equinor and Shell jointly purchased Schlumberger's 49% working interest in the block of Bandurria Sur for a total of USD 355 million, attaching a per acre price of approximately USD 13,000 per acre. And only a few weeks later, the partners, Shell and Equinor, exercised their purchase option to acquire an additional 11% interest from YPF's majority interest in the block. And that increased the per acre price to approximately USD 15,000 per acre, the highest ever recorded in Vaca Muerta. I will now turn to a review of the year-end financial statements and the financial performance for the fourth quarter. For the quarter, the company's revenues climbed slightly year-over-year and approximately 3.5% quarter-over-quarter. However, the company's revenue declined slightly for the full year. This performance is a result of an increase in oil production annually and a 20% increase sequentially, mostly coming from Coiron Amargo Sur Este, despite an approximately 20% drop in the price of oil over the same period of time. As expected, the company's netbacks were even more dramatically affected by the drop in the price of oil. The company's capital expenditures rose materially for the quarter and the year due to the work carried out by Pan American in Coiron Amargo Sur Este. This has also negatively affected EBITDA during the quarter. As a reminder, Centaurus' capital expenditures in that play, Coiron Amargo Sur Este, where Centaurus enjoys a 35% working interest, are financed on a limited recourse basis by Pan American for up to USD 40 million, and 100% of Centaurus' net revenue is directed to pay down the loan. The company's net loss in the quarter was dramatically affected by an impairment charge, resulting largely from the change in the price deck for oil, which affects the valuation of all of the company's assets and an adjustment for the Argentina country risk, resulting in a more aggressive discount rate for assets held by the company. Overall, management is encouraged by the company's operational progress during the quarter, and the leadership is looking forward towards succeeding in the current environment. And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions] So your first question comes from [ Joseph Saffie ].

David, it's nice to have management finally aligned with shareholders. A few questions, if I may. The criollo barrel, do you have any indication if that's going to be backdated?

[ Joe ], thank you for the question. Currently, there has been a lot of discussions regarding the criollo barrel and a lot of proposals. Even if the criollo barrel is backdated, there are agreements in place on a one-off basis for oil that has been sold in the month of April that cannot be affected by the criollo barrel. So some producers have chosen to sell their oil giving up the criollo barrel potential true-up and some producers have not and has taken a lower price. The most important dynamic, I would say, in the price of oil right now is the demand side of the equation. Like everywhere else in the world, refineries are generally full. Storage is full. And certainly, for larger suppliers, it's hard to place oil. We've been actually quite successful at placing our oil. I will say with respect to all the production in Coiron Amargo Sur Este, that production goes to a Pan American-controlled refinery, so it continues to be bought. But in fact, what will happen with the criollo barrel is unclear in terms of how -- how even if it is related back, how much effect that will have on revenues generated prior to the institution of the criollo.

Understood. And just one other question. Obviously, like you said, February and March feels like a lifetime ago for the oil industry. But considering the $15,000 per acre price that was paid and the relatively comparable stats for that tract and our Coiron Amargo. Are you guys contemplated some sort of M&A activity? And is that market even viable right now?

So with regard to -- we have no formal plans regarding any sort of M&A activity, any sort of sale process. As part of its normal course, the company may at any time be in conversations about transactions for some or all of its assets. At this point, there isn't much more I can say on that front, but certainly to the extent that we can, as soon as we can, we certainly will.

Your next question comes from [ Kevin Bogner ], private investor.

My concern comes through the drilling commitments of Centaurus, specifically in Curamhuele and Puesto Morales, with the size of the drilling commitments, do we have any indication as to how we're going to be able to meet them this year? And secondarily, if we do not meet them, how do you perceive our ability to negotiate an extension of those commitments, so we don't lose those concessions and revenue that we get from them?

Certainly, [ Kevin ]. Those issues are absolutely top of mind for the company. And not only are they top of mind, but they are -- action plans are already being acted upon. With respect to drilling generally, I will first refer you to a statement made by the CEO of Vista Oil & Gas, one of the largest energy companies in the country, also publicly traded in Mexico and in the United States. The CEO, yesterday said on the company's earnings call that there will not be any further drilling by that company in 2020. That has generally been the party line in Argentina. Notices have been sent. Again, as I stated in some of my opening remarks, but I'll make it more pointed at this point. Statements have been made to the provinces, to provincial authorities, publicly and privately, declaring various flavors of force majeure to go ahead and stave off any drilling commitments. Right now, the quarantine or the stay-in-place, which has been extended through the middle of May, certainly has put off any drilling commitment obligations because you can't even fulfill it even if you wanted to. At this point, all drilling and workover activity has been outlawed. In terms of the dynamics, it seems that the federal government is more interested in opening things up again quicker than the provincial authorities are particularly interested. And as you know, the commitments for drilling lie with the provincial authorities. So all that is to be taken, I'd say, on background. With respect to Curamhuele, which is the most near-term issue that Centaurus has to deal with, we formally reached out to the province to discuss the commitment and the milestones specifically. In light of the major macro changes that have taken place since January and the changes in the company's leadership, we're looking to go ahead and reach an agreement that modifies those commitments.

Your next question comes from [ Victor Valdes ], shareholder.

I have a very general question for you, and that is how do we -- what are your plans and plans may be the right word rather the wrong word there. But I know you've just got involved with this and you've been getting up to speed. But do you have at least a general outline of what your activities will be going forward, if I -- would you say, 60, 90, 180 days as we go throughout the year?

Sure, Vic. It's a very good question. To be totally genuine and transparent, this is not only a quarter-to-quarter or month-to-month gain at this point. I'm sure everybody feels it in whatever line of business they are in or employment or professional activity. This is a week-to-week and a day-to-day game as well. We certainly have longer-term plans, and those are as follows: First and foremost, protect the company's most valuable asset in the Coiron Amargo formation. We need to preserve that value to the extent that we're giving the opportunity to go ahead and monetize that value at the best possible price. However, certainly, if the current environment is not going to give a price that we think is appropriate. We will certainly go ahead and preserve the value there until such time as we do think that there could be a monetization event. There may not be. There may not -- what I mean there may not be -- excuse me, I mean that we may choose to continue to hold that asset. Thankfully, in some respects, that asset stands on its own for purposes of development. And so -- and we've got a very strong and very committed partner there. And we're very, very happy with the progress that has been made. Beyond Coiron Amargo, the rest of the assets of the company are, first of all, to go ahead and maximize the cash flow that can be extracted from the production of our conventional -- in our conventional assets. We're looking at creative ways to go ahead and increase the revenue that comes from those assets. We're also looking obviously to keep our expenses as low as we possibly can, so that we generate strong netback as we possibly can. And then with respect to our exploratory properties, we're looking to go ahead and preserve the optionality that exists in those properties for when there is an appropriate time to go ahead and begin to derisk those assets. And I will say with respect to this, I mean, I respect greatly the challenging environment that we're in. But you all must be aware and so are we that the comeback in the price of oil could be as violent as the downdraft. We just don't know. We don't know how much oil is going to come offline permanently. We all don't know how quickly demand is going to come back. Obviously, we all had a general thought that jet fuel will not come back particularly quickly. But from reports coming out from China, public transportation for the right reasons relating to health risks is being avoided at all costs and driving of personal automobiles have gone through the roof. So not to say that, that alone is going to go ahead and tip the balance. But we don't know yet what the dynamics are going to be once the economy is able to partially and wholly reopen. So we'll go ahead and watch and wait and do the best we can to go ahead and be able to profit as much as possible at that period of time. And I'll go ahead and additionally throw on to those remarks. We also don't know what OPEC+ is going to do. We've never seen the type of concerted effort that is being made. And certainly, at the price of oil that currently stands, it is very difficult for almost anybody in the world to go ahead and generate profitability out of their production.

Can I do a quick follow-up?

Absolutely.

With regard to caretaking operations, I've used the phrase keeping the lights on. What I wonder about is the status of the wells, and for example, if the price of oil were to get to the point and if the demand were to get to the point very quickly, like you said, as opposed to the long-drawn-out process. What are the risks involved? Or what is the preparedness -- the state of preparedness to be able to ramp backup production? Or is production being maintained without, really, any interruption to it? I'm just wondering whether we're basically limping along and are we nimble enough that if things were to change, we can get back up to speed quickly.

So I would say, certainly, the latter, which is we are -- first of all, we haven't shut-in any production at all. So all of our production that was online before this is continuing. We don't have any plans to go ahead and shut-in production. Like I said, with respect to Coiron Amargo Sur Este, I don't want to put words into Pan American's mouth, but I certainly believe that, that is a very, very important shale property for them. And therefore, I expect that production will continue. Right now, there is no further drilling going on. So with respect to the fifth well of the pilot program, that drilling has been done, but the well has not been completed. I wouldn't expect the completion to happen within a short period of time. But certainly, within the medium period, to the extent that there's either a criollo barrel put in place or to the extent that the price of oil comes back up, I don't -- not to stratospheric levels, to a moderate level, we may see drilling continue there. And with respect to our conventional assets, we have already identified very profitable workovers to be done when the conditions allow for it.

I have another 2 quick follow-ups. And I know -- I don't know who else is on the line with questions. One of them is in terms of an obvious question with governance, how long -- if you know, would you plan to maintain your position as the new Chief Executive Officer, is that indefinite? Or is it something that you want to look for a full-time replacement? And the second question is just that we were pursuing a local listing, and I get it, what it is that's going on. But in the event that the government opens up and the regulators are back at work, do we intend to rather quickly go back to listing? Or is that something you may postpone?

With respect to the question regarding the listing. So the activity in the capital markets in Argentina, which was already, I'd say, less than what we see in North America in terms of trading volumes has gotten even lower now. I think that the -- to answer your question on point, our prospectus is ready. It's been updated. We go ahead and file it any time that we need to and want to. And the operative phrase is they want two-part. Certainly, we, the management, have interests aligned with shareholders. And certainly, to the extent that it is beneficial we'll certainly go ahead and list the stock. And by the way, what we're doing with the stock to call it out forcefully, is not just about liquidity in the shares, which obviously is an important aspect, but it's also about raising the profile of the company locally. The company is an exclusively Argentine operator. And we want to benefit from everything that the local market has to offer in terms of banking services, in terms of being top of mind for lending opportunities -- lending to us, I mean, borrowing opportunities, M&A transactions and a local listing will help tremendously. You'd be surprised that not being listed on an exchange down there, either debt or equity puts us -- I wouldn't say at disadvantage. But certainly, we're not in the limelight of bankers' minds. And so we would expect that, that would help. And by the way, one of the activities that we have made that we can make during this period of time on raising the profile and access to capital in the country is under us over the last 5 weeks or so, we've been able to go ahead and obtain small-to-medium business status for our operating company in Argentina. You all know from North America, Canada and the United States, there are certainly a bunch of government-related programs particularly focused right now on small-to-medium business. Similarly, there are those types of programs in Argentina. We've retained that status. And now we're pushing full force to go ahead and get the available resources that are under those programs. With respect to the first question that you asked regarding the leadership of the company, I'd make a couple of points: First of all, I want to call out that I'm working for free. Everybody on the Board is working for free. I don't know if and when we'll get compensation. You'll be -- as shareholders, you'll know. And we also have a number of people helping us inside and outside the company that Steven and I know quite well. We've been working with for a long time, know the company very well, so forth on the ground in Argentina and here in the United States and Canada that are helping the company gratis. And it has been a massive effort. I'm sure, as you can understand, over the last couple of weeks, it's been an absolutely feverish pace, but we've made tremendous headway in those weeks, and we look forward to continuing to work very hard. In terms of what it looks like going forward, in terms of searching for a permanent CEO and so forth, the company really -- it has no plans at this time. And when matters settle down on the macro front, and the company has the ability to go ahead and focus on that, considerations will be made regarding that issue.

That's all I have. And you're doing a great job. Personally, I'm happy to see the changes that have been made and I've got -- what a modest amount of hope that things are going to turn around for us.

Thank you, [ Victor ].

Your next question comes from [ Floyd Rakoff ].

The old Board stepped aside, and I'm wondering if you can just shed some light on what you think a new Board might look like? And how many members you might be recommending to the Board as we go forward? And the other thing is, is there any other consideration for a rollback or a consolidation of the shares? So that's it.

Okay. So with regard to the Board, it's currently made up of myself, my partner, Steven Azarbad. When I say partner, I mean my partner at our hedge fund in Maglan Capital. Steven Balsam, who is new to the Board. Quite capable, knowledgeable Canadian resident that is involved deeply in the securities industry, has deep background in legal compliance as it relates to the securities industry. And then lastly, and the longest-serving Board member, Ruben Etcheverry, who is an Argentine, President of the Province of Neuquén. The Board structure right now is very much, I think, appropriate for where we are, so that shareholders know as an Alberta-based company that's publicly listed in Canada, we have an obligation to have 1/4 of our directors be Canadian residents. So if we were to increase the size of the Board, we'd have to go ahead and add a Canadian. And right now, we don't have -- we don't see any particular needs. With the members that we currently have we're able to operate very efficiently to the extent that we foresee or are experiencing a lack of expertise in certain areas, certainly, we'll go ahead and consider adding to the Board. But we do think that generally that we want to keep the Board size manageable. And then with regard to the stock. Currently, there are no plans to do a reverse split. Although we appreciate Steven and I, and Steven Balsam, certainly as market's professionals understand the value of having a decently dollar price stock versus stock price that we currently have. There are other additional, certainly technical considerations that surround that. That's certainly something that's in our mind, but it is not the appropriate time in our judgment to go ahead and execute on a reverse split.

[Operator Instructions] Okay. So there are no further questions at the time. Please proceed.

Thank you very much, operator. I appreciate the opportunity to go ahead and update our shareholders on behalf of the management and Board of Directors of Centaurus Energy. Thank you for participating in our 2019 fourth quarter earnings call. We look forward to speaking to you again upon the release of our 2020 first quarter results. Please stay healthy and safe, and thank you all.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.