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

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

Thank you, operator. Thank you, ladies and gentlemen, for joining us for Centaurus Energy's 2020 Second Quarter Earnings Conference Call. First and foremost, regarding COVID-19, we continue to hope and to pray that all of the company's stakeholders and their loved ones are healthy and safe and continue to be so. Since we last addressed the public, a lot has happened in the world generally in oil markets and in Argentina. I'd like to review a number of developments that relate to Centaurus. As everyone is aware, the COVID-19 virus has been recognized as being fought and seemingly is going to be a factor in personal and in professional life for some time. Also, everyone is hopeful that we've seen the worst of its effect from a health perspective and from an economic perspective. Thankfully, to date, Centaurus' direct workforce and indirect workforce have not experienced any infections, and the company continues to adhere federal safety requirements and provincial safety requirements. We have yet to witness decisively whether certain aspects of daily life will ever return, for instance, with respect to travel. Will mass transportation such as air travel and mass commuting on rails and buses recover? Or will the personal automobile become even more dominant in everyday lives worldwide. And what will that mean for gasoline and oil consumption? We are closely watching worldwide COVID activity and related economic developments, especially as they relate to oil and gas use and consumption. With respect to oil markets, except for a very recent dip and recovery in prices, oil prices have been stable and steadily rising since the lows of the late spring. OPEC+ has been operating relatively cohesively in recent months on production and supply strategy and on implementation of worldwide energy policy. That teamwork is amazing in the relative history of OPEC, and it says even more in the current divisive political and policy environment being witnessed in governing bodies worldwide. In light of recent and current oil prices, E&P companies around the world and specifically in the U.S., the top oil-producing country in the world, have come under major pressure. We've witnessed numerous restructurings and bankruptcies in U.S. bankruptcy courts, resulting from -- and in a drop in output that will likely lead to permanent reductions in oil and gas for a period of time to come. In the past few months, there have been numerous important developments in Argentina generally and in oil and gas sector in the country specifically. In August, after month's long negotiations, Argentina and its bondholders reached a historic debt restructuring, which rescued the country from default. The bondholder restructuring now allows Argentina to negotiate with the International Monetary Fund on the IMF's existing loans to the country. The success with bondholders is no panacea, but it certainly puts the country on better footing to move forward. Argentinian leaders have publicly targeted March 2021 for a revised agreement with the IMF, but it is certainly possible that the parties will achieve an agreement prior to that date since they all already began talks last month in September. In relation to COVID, the country of Argentina has had exceptional statistics of health and mortality, both relative to other South American countries and worldwide. The success in combating COVID in Argentina has come largely as a result of strong quarantine controls, which have also had an effect on the economic environment. One of the negative effects of Argentina's COVID precautions that relates directly to Centaurus is lower demand for gasoline and oil. Initially, in the spring, the pullback in consumption resulted in the dramatic building of oil inventories and refiners reducing their bidding price for oil. Since late spring, refiner inventories have been reduced and refinery demand has rebounded. It's important to note that at no point did Centaurus shut-in any production, and the company has been able to sell all of its production, including using the spot market strategically for better payment terms and pricing. In contrast to the drop in domestic demand and a positive effect from the low domestic demand for oil has been the growing volume of oil exports from Argentina. This is a very good exercise for an industry that will eventually rely on increasing exports for industry growth. Furthermore, gasoline prices at the pump have been on the rise, serving as an additional bull work for oil prices. The Argentina government is about to announce a new incentive plan for natural gas production, locally referred to as Gas Plan 4. The plan is in reaction to a projected natural gas shortage coming as early as next winter due to the lack of investment in recent years in natural gas exploration and production. The Gas Plan 4 effort is just another sign of how important the energy industry is for Argentina, and how the federal government within its limited means is willing to help. With regard to broader industry legislation, after the bondholder's settlement, the government is back at work on the expected federal energy law. Although progress is being made, we don't expect any large announcements before the Argentine economy substantially reopens. Finally, earlier in the year, and even during the COVID pandemic, numerous Argentine-focused energy executives expressed very positive outlooks on the country and the Vaca Muerta Shale formation, including executives from Shell, Exxon and Equinor to name a few. Centaurus' leadership is unwavering in its commitment to realize the value of the company's extraordinary resources. Leadership of the company with its outsized investment in the company's equity is aligned with the interest of shareholders generally. Furthermore, in the recent difficult environment and since the conclusion of the second quarter, the leadership of the company has been focused on returning to profitability, assuring liquidity and capital necessary to develop the company's holdings and to realize value for shareholders. Our goals are concrete, and our efforts are proceeding well. Now I'd like to turn to our second quarter financial results. As expected in the quarter, our progress on profitability, which was proceeding prior to the second quarter, was absolutely hampered by the collapse in the price of oil. Year-over-year, the price of oil was down more than 50% and almost 40% quarter-over-quarter. Conversely, our production rose by almost 10% year-over-year, and our production has continued to rise since the conclusion of the second quarter, some additional production coming from Coiron Amargo Sur Este our development in conjunction with Pan American Energy. The low price environment has caused us to redouble our efforts to rationalize our cost structure. Our general and administrative expenditures are down 30% year-over-year, and our operating expenses have also been reduced by approximately 10%. We expect that although we will be operating in a relatively lower-price environment for a little while, we can make up for it in increased production volumes and cost controls. At this time, I'd like to go ahead and turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from [ Jim Mulkey ], an investor.

Yes, David, I've got a question with regards -- can you highlight what's going on in the status of both Vista and PAE on your cash calls? And how much was the amount of each cash call that we're behind?

We are in discussions -- confidential discussions with both parties, and so therefore, I can't further discuss those matters right now. But certainly, we are focused on resolving those matters to the best of the company's possible outcome and to result in the best outcome for shareholders as well.

What would happen if there's no resolution? I know it looks like Vista might be trying to pull away from the partnership?

Well, in the case of Vista, we're dealing with a block that has extremely low production at this point. There are no required drilling activities. And to date, there is no production schedule for the block. The block contains some Vaca Muerta Shale in the southern part of the block that results from the extension of the Vaca Muerta Shale formation that is in Coiron Amargo Sur Este. And then there is also some natural gas resources in the block as well. Like I said, there is no current production of meaningful amount, and there is no future anticipation of that. If we were -- certainly under the legal terms, if we were to go ahead and default entirely on our obligations again, which, at this point, I would say, are relatively small, if we were to go ahead and default on those obligations, then we would forfeit at some point after a fair amount of administrative procedure inside of Vista and inside of the province, we would forfeit our interest in that block. Right now, the only -- the commitments that we've missed and the cash calls that we missed obviously relate only to operating expenditures. There is no CapEx related to that block.

Okay. Okay. And then why would we be in default with PAE? I thought we had a line of credit with them for $40 million?

No, the $40 million line relates to CapEx obligations. OpEx obligations are separate and apart from that amount. And on an annual basis, those numbers add up pretty substantially. And obviously, at the same time, I think everybody recognizes the massive value that exists in Coiron Amargo Sur Este simply because it's been heavily derisked. It has existing production. And certainly, I would say it's probably the most valuable asset at least on an immediate basis for the company. And so there, obviously, if you were to ask, based on what I've said, where the priority lies, it's certainly on Pan American and CASE before it is of Vista and CAN. That said, the company -- and again, I can't elaborate at this point, but the company is focused on both. The price tag on Coiron Amargo Norte with Vista is not a particularly large price tag because, again, it only relates to OpEx, and this is something unfortunately, I inherited. There was a default prior to my appointment as CEO of the company. But nevertheless, something that we want to go ahead and remedy. And at the same time, the CASE amount is much larger. There is a plan for development of the block, and it's certainly something that we want to go ahead and be able to continue to be the beneficiaries of that value.

It sounds like both of them have to do with OpEx. Isn't that the reason that you stepped in and took over the line of credit from KD Energy, is that in place right now, the convertible debt for $20 plus million that can be drawn down to pay the OpEx expenses?

There are 2 lines. There's a working capital line and then there is a CapEx line. Those are 2 separate lines. Those lines have not been formalized at this point. And there are reasons that relates to the company, I will say, that those lines have not yet been formalized, a; and b, drawn on.

Okay. And then, obviously, it's been going on for years, but is there any chance at all that we're going to see an Argentina listing?

Certainly. So let me say something more generally about the company's activity. Right now, with respect to -- I'm sorry, with respect to the company's, I would say, corporate activity. With respect to the current market environment, I'd say, worldwide and specifically in Argentina, certainly, as it relates to oil and gas worldwide, it's not the best time to go ahead and list the company, albeit a secondary listing, frankly, anywhere in the world. That said, we are still seriously focused on that. Our expectations is that it will come. Since the last call, the company has been engaged in some, I would say, serious conversations with respect to M&A, asset purchases and sales and business combinations. If those come to pass and some of the decision-making behind the listing is on pause due to those discussions because the listing would need to be, frankly, updated in terms of listing materials, more importantly, we would like to go ahead and make that secondary listing from a position of substantial strength. And so based on those discussions, based on where things are, the leadership of the company has decided, at least for now, to go ahead, and, I'd say, put the listing on the back burner. And when I say that, I don't mean for any extended period of time. I'm sure, as you know or maybe you don't -- I'm sorry, I should say, for the benefit of everybody on the call, this has been -- the listing has been a priority for me before being appointed to the management of the company and since then as well. Obviously, it benefits -- it should benefit all shareholders. And certainly, I firmly believe -- I'll say something beyond that, I firmly believe that the local market is very important. I think it's important for purposes of the direct effect of local investors being able to invest in the stock easily. I think it's very important for purposes of capital markets broadly in Argentina being able to access not only equity markets, but fixed income markets as well. And then I think as well, it's very important for purposes of just general overall exposure in the country, whether it be with strategic folks in the industry or banking professionals and so forth. So there's no doubt there are positive aspects to the local listing, and it's certainly something that we continue to keep in mind.

The next question comes from [ Daniel Jackson ], an investor.

I have 2 questions for you. First one is the push for green energy seems to be picking up steams, especially in the Northern Hemisphere. Obviously, as an oil driller, Centaurus is not going to be a huge beneficiary of this movement, but does the company have any long-term plan to kind of step out from behind the eight ball, so to speak, as this movement picks up steam?

Thank you for the question. I appreciate it. I'll answer it in 2 ways. First of all, the company is not considered a massive player in the oil and gas industry. Certainly, the effects of that push to the extent that, by the way, it is, I'd say, real. And I don't know if it's real more than it appears in the press. I think the jury is still out on that. Certainly, the targets for companies going carbon-neutral are quite far out over the next decades. And the largest producers in the world, to the extent that it does come to pass, that those green initiatives happen, those large producers, the global players are going to get hurt the most. So I think there will generally be carbon-based consumption in Argentina. And right now, the country doesn't even produce enough to satisfy its domestic consumption. It is still a net importer of oil on a year-round basis. So I don't think that it's going to affect the company quickly, and I don't even know if it's going to affect the company substantially. The second piece, though, however, is we have been in discussions with folks around the world that are interested in investing in Argentina, in natural gas. And we do have a couple of natural gas exploratory blocks that we've been discussing with potential partners. And those partners have been mandated from up high in their organizations not to invest in carbon-related energy sources, and they consider natural gas to fall within the parameters of green, so to say. So even if the oil production of the company gets hurt over a period of time, and I'm not saying that it will, there's certainly the opportunity for natural gas. The natural gas is abundant in the country in the Vaca Muerta Shale formation. And the recognition of that has already come from the likes of Brazil, who is inviting and potentially interested in a pipeline going from Argentina to Brazil in order to supply Brazil with natural gas. So 2-part answer. I hope that's helpful.

Yes, yes, that's really great. That's a little more reassuring, sure. The second question I had is a little bit more general, and I know it may sound like spec, so just do your best. 2020 has clearly been a tough year for all of us. Spirits are pretty low. So I was wondering if there was anything that we investors can hope for or look forward to in the next 12 months that you think might lift our spirits some.

Well, I do think the price of oil should rise in country. And I don't think that that's being overly bullish. Right now, the demand continues to be quite low because of, I'd say, stricter than we know in the United States or in Canada, quarantine provisions that exist in the province of Buenos Aires. So the population of Argentina is 50% in the province of Buenos Aires, and the rest of the country is the other 50%. The 50% outside of Buenos Aires have been on differing levels of quarantine and opening. And I'm sure, as you can imagine, Argentina is a massive land mass, and in those, I'd say, more rural provinces, there's a lot of space between people, between homes and so forth. So the province of Buenos Aires is pretty dense in terms of population. Our folks in the front office have not gone to the office, except for, I'd say, very high priority, particular documentation that was needed. But otherwise, our folks have been working remotely for the last, call it, 6 months now. And so the oil consumption by 50% of the population even until now has been drastically reduced. So once that demand starts to pick up, which should be a natural growth over the next couple of months, I don't think there's going to be, although it's been long quarantine, I don't think it's going to last much, much longer. And so therefore, consumption should go up, which should go ahead and allow prices in the country to rise. In addition, the major oil companies in the country that are integrated producers, they have been pushing for rise of price of gasoline at the pump. So it's kind of a domino effect if they can get those prices rising, and there is a price rise that just happened, and there's another one expected before year-end, so the price of oil should go ahead and begin to rise, both from raising the prices and from demand rising as well. So that's point one. The other thing is, I really would emphasize that the leadership of the company is very focused on transactional activity at this point. We have had a numerous number of inbound inquiries relating to particular assets and beyond that, and we are going to do strategically what's best for the company. I would urge all investors to look at the company, not in a vacuum. It's important to understand the company on a relative basis as well. The Coiron Amargo formation or the Vaca Muerta formation that is located in the Coiron Amargo blocks are quite valuable. They are the only ones of their kind held in the hands of, I'd say, a smaller player in the industry. The rest of them are overwhelmingly held by oil and gas majors. We want that block or that formation to be developed properly. It's well on its way. And so therefore, we want to go ahead and assure, for the benefit of shareholders, as it continues to be developed and the value is transferred into our shares. So I think that that's another thing that you can continue to kind of focus on because we are certainly over the next 12 months.

[Operator Instructions] Your next question comes from [ Kevin Bogner ], an investor.

I had a few questions kind of going with what Jim and Dan were kind of saying, but a little bit different here. In North America, like in the Bakken Formation, the Permian Formation, Eagle Ford Shale, many of the smaller companies have engaged in acreage swaps to consolidate their positions to make development even easier. Have we looked into -- because our -- in Coiron Amargo Norte with Vista, have we looked at doing any acreage swaps, such as trading our interests in the northern part of the block for their interest in the southern part of the block that bumps up to Coiron Amargo Sur Este to see if that would make that our development of that block with PAE would be easier and perhaps even more attractive to them? Has the company engaged in any discussions about those acreage swaps?

So just so I understand the question. So in Coiron Amargo Norte, we have a working interest division between ourselves and Vista Oil & Gas. We have a 35% working interest. And they have a 55% working interest with the remaining 10% held by the provincial oil and gas company, GyP. And that relates -- that division of interest relates to the entire Coiron Amargo Norte block. Coiron Amargo Sur Este essentially swap out in the case of that block, Vista does not own any interest in that block. And instead, Pan American is the holder of the 55% working interest in that block. So is your question, can we subdivide the Coiron Amargo Norte block between ourselves and Vista so that we are left with just the shale piece, so to say, at the southern part of the block that is...

Yes. I may not be explaining myself clearly. So yes -- and I appreciate you working with me because I may not be explaining it clearly, but giving up our rights in the northern part of the block to secure full rights in the southern part of the block for the acreage.

The problem is that it's 2 separate counter-parties, right? In other words, our partner in the north is not the same as our partner in the south. So...

Oh, yes. With Vista, what I'm saying is on the Coiron Amargo Norte, we have 35% of the interest in the northern part of Norte and in the southern part. I mean it's even throughout the entire block. What I'm saying is a lot of times in these other shale formations with other companies that I've seen, they will take their interest when they have minority interests in some blocks, they will trade part of that interest in one part to gain full interest in another part. And that, to me, would be are we engaging in those discussions, which would allow us to then seek with the authorities to enlarge Sur Este from the amount of our interest that we would then secure? If that makes sense?

It does make sense. The answer to that question is, so now, no. But it certainly is a justified idea and concept. Clearly, in terms of the history of the company, we could point to how we got to the Coiron Amargo Sur Este block, generally. I mean we went way back and redrew the lines entirely with Shell involved and then receiving the Coiron Amargo Sur Oeste block as part of the division that we did, I'd say, for that major transaction back then. So certainly, there is precedent for doing something like that. And certainly, we continue to think creatively on how to secure the best value for the company.

Okay. And then my next question would be in terms of Curamhuele. Here, you mentioned and alluded to the fact that the country continues to run a deficit with natural gas, and it is suspected that Curamhuele will be heavily gas prone. Have you had or entertained any ideas of conversations with the government of a public-private partnership on that block to develop that for the country's resources at all?

Don't I wish the country had enough money to become an active partner in the block, whether the country federally or whether the province specifically. I'm not saying something that is not otherwise recognized in the markets. After the country restructured its debt, pretty much every province in the country either has gone through -- is in the midst of or will try to restructure their provincial debt. So at this point, I think the expectation of getting the government, whether broad or local, to invest in a project like that is low, plus to be totally forthcoming, it is an exploratory block at this point. There are other blocks that are in production that can use additional investment, and they've been essentially derisked. That said, in terms of your comment about it being gas-rich, the Curamhuele block is incredibly rich. It has multiple formations that are recognized, certainly 3 benches that people are aware of. And certainly can be very prolific once it is, a, explored and then, b, goes into a pilot phase. And we are -- we have engaged in discussions on that block. We're currently engaged in discussions on that block in order to go ahead and explore it appropriately. And when I referred to earlier about counter-parties that are particularly interested in natural gas from a noncarbon emissions perspective, that was the block I was referring to in those comments.

Okay. All right. Excellent. I know it's been a very, very tough quarter. I expected it to be ugly with the prices of oil going down. I appreciate the efforts you and the Board are making to continue to stabilize the company and pursue other endeavors. We appreciate that very much.

Thank you very much. Sure.

The next question comes from [ Victor Voltas ], a shareholder.

I got into the call late. And I do have a question about the Coiron Amargo Norte in regards to the management discussion that I saw, I believe, in the -- either the -- on the first quarter call. And that was that there was a time clock going were upon if you're not resolving the financial issues you have there, you can, I believe, request to Vista to pull out. I may have not characterized that accurately, but it looked like that there was a way to disengage with Vista. Have we done anything about that? Am I characterizing that correctly? And if we haven't done anything with that, why? Because they're not drilling there.

They have no -- Vic, thank you for the question. I appreciate it. And just to be clear and set the record straight, there are no immediate drilling commitments on that block. They don't have and -- as the operator, they don't have any obligations to drill. There is very limited production that comes from that block. The only costs relating to that block now and for the foreseeable future are operating expenditures that go to maintain that block. As a matter of fact, under current prices, at least in the last couple of months and quarters, that block has been cash flow negative. And if we don't make our cash calls on that block, which, as disclosed, we did not as early as late last year, we missed the cash call, then there is a process for them to go ahead and legally, I would say, get us to relinquish our working interest in that block. We have been in discussions with them regarding that activity. And at this point, I can't disclose any more on where things are because finality has not been reached and leadership of both companies are engaged, and we'll see where things go. But I do want to make it abundantly clear that you cannot even -- at this point, based on what we know now, based on where development is and so forth, you cannot even compare Coiron Amargo Norte to Coiron Amargo Sur Este. It's possible that Coiron Amargo Norte could become somewhat prolific with oil production coming from the Vaca Muerta formation that is in that block, but no testing has been done on that. And it doesn't occupy the entire block. So it is certainly further out on the time line than everything that's going on in Coiron Amargo Sur Este.

Okay. When I look at the release that you had in regards to this meeting, I didn't see anything as to whether there would be a replay on this call? Because I was, unfortunately, in a meeting and I couldn't get on until a few minutes ago. Is there going to be a replay available on this?

Yes. We'll post it on the website once it's available.

Okay. Okay. I know it's tough. And I know there's radio silence there for a reason. You guys are the largest shareholders, you've got a vested interest in making sure that doing everything possible to increase shareholder value. So I suppose we just have to stand by and be patient.

You got it, Vic. We're working as hard as we can. And frankly, there is a lot of positive activity going on. I think we certainly past the worst of things.

I'll try to reach out to you if I see something in your presentation and one of the earlier questions, but otherwise, I don't have anything to ask.

Thank you so much, Vic.

The next question is a follow-up from [ Daniel Jackson ].

I thought of one other question. When I was reading through the release, I saw something that seemed a little confusing. So I must have just misunderstood it. There was some talk about negotiations between Centaurus and Maglan Capital and that those negotiations were still ongoing. But as far as I understand it, you and Steve are the Head of Maglan. So I was wondering how there could be negotiations and contention there between those 2 entities?

Well, there has to be negotiations between those 2 entities. And obviously, we are not involved in the negotiations on behalf of Centaurus. That is something obviously that we abdicate ourselves from because we have to go ahead and manage for the fiduciary obligations that we have to Maglan investors. And so we negotiate with the independent members of the Board with respect to any obligations that Maglan has to the company. I will say, and this goes back to a question made earlier about the capitalization of the company and the loans, there are very specific strategic reasons regarding the extensions on those credit lines. And those specific reasons do not relate at all to Maglan. They are specific substantive reasons that relates to the company. And at this point, there's not more that I can say on that, but they are strategic, they are very justified, and real reasons that the company at this point should not be demanding that Maglan go ahead and finalize and fund.

There are no further questions at this time. You may proceed.

Well, thank you very much, everybody, for joining us on the second quarter earnings call. We look forward to a strong third quarter and being able to report to you at the conclusion of that quarter. Thank you, and we look forward to speaking to you again.

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