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

Good morning. My name is Colin, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Centaurus Energy third quarter 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 2020 Third Quarter Earnings Conference Call. As I've done on previous quarterly investor calls, I'd like to first review some applicable worldwide and Argentina-specific developments that have relevance to Centaurus. Although, unfortunately, the world has witnessed the second wave of COVID infections, which has kept a lid on energy consumption, OPEC+, specifically Russia and Saudi Arabia, continues to work unitedly, cohesively and comprehensively to keep oil markets stable. Even Russian President, Vladimir Putin, recently commented that Russia is open to delaying OPEC+ output increases. And furthermore, Russia is ready to cut oil output further, if necessary. Beyond world markets, the U.S. market and its oil production is coming under intense scrutiny and pressure. The U.S. has the absolute highest market share of oil production in the world at 19% of worldwide production versus Saudi Arabia's far second place at 12%. Being that today is election day in the United States, it's quite timely to focus on the most recent public exchange between the Presidential candidates on the issue of oil production. On the night of October 22, during the final U.S. presidential debate, we witnessed the following dialogue: President Donald Trump to Joe Biden, "Would you close down the oil industry?" Biden: "Yes, I would transition." Trump: "That is a big statement." Biden: "That is a big statement." Trump: "Why would you do that?" Biden: "Because the oil industry pollutes significantly, because it has to be replaced by renewable energy over time. And I'd stop giving to the oil industry, I'd stop giving them federal subsidies." Trump: "Basically, what you're saying is you're going to destroy the oil industry. Will you remember that, Texas? Will you remember that, Pennsylvania, Oklahoma?" Biden: "It takes everything out of context, but the point is we have to move forward on net-zero emissions. The first place to do that by year 2035 is in the energy production; by 2050, totally." So even without political and policy pressures, it's likely that we've seen the peak of U.S. oil production according to the CEO of Shell on its recent third quarter earnings call and the U.S. Energy Secretary echoed that sentiment recently. I don't think anyone can call the results of the U.S. Presidential race with certainty and even more questionable is the election day results and composition of the Legislature, the Senate and the House of Representatives. However, it is possible that as a result of this election cycle, the Democrats will be in the leadership position and Democrats may even control the presidency and the legislature. Therefore, it is possible that oil production in the U.S., could be rapidly and substantially reduced if the Democrats have increasingly influence on the direction of the energy industry. In fact, Harold Hamm, the billionaire founder of Continental Resources and a pioneer fracker in the Bakken shale formation recently sensationalized and said that $6 per gallon gasoline is possible with a Biden win. JPMorgan's analysts have stated that a Biden win and the Democrats taking the Senate could add between 10% and 15% crude prices on a combination of dollar weakness and fiscal stimulus. At the same time, as all of these political shifts in the United States is going on, energy majors around the world, such as ExxonMobil, Chevron, British Petroleum, Shell, Equinor are being pushed by stakeholders, who have broader environmental policy commitments to divest from carbon-emitting energy production. Further, in short, it's a lot easier to pull back on production than to curtail demand. Therefore, the near- to medium-term outlook for oil prices could be very positive. I will now touch on a couple of developments in Argentina. As expected, the Government of Argentina unveiled its incentive plan for natural gas production locally referred to as Gas Plan 4. The plan if proposed allows for an auction in November for 3-year supply contracts that can receive a maximum price of $3.70 per million BTU, substantially higher than the current open market prices for natural gas. With the government guaranteeing the difference between the $2.30 per million BTU paid by the consumers in Argentina and the auction price up to $3.70 per million BTU. As a basis for the Gas Plant 4 rationale, the government concluded that the savings from not importing natural gas will massively outpace the cost of subsidizing the gas drillers. In addition to the direct industry subsidy, the government is planning $600 million of upgrades to 2 existing gas pipelines from Vaca Muerta. As I mentioned during our last investor call, a federal bill to spur oil investments is still being drafted. The Energy Minister recently said that drillers with overseas debt should be able to freely access dollars to service those borrowings, which would alleviate capital balance sheet and liquidity pressure on a lot of drillers with foreign-issued debt. To conclude my remarks on recent developments, I'm excited to announce that Centaurus Energy, in partnership with Pan American Energy, has completed the first stage of the pilot program in Coiron Amargo Sur Este block in the Vaca Muerta oil shale formation. Yesterday, Centaurus announced a 30-day average initial results from the fifth well drilled in the block, and those results were the best of any well yet, with an IP30 production of 1,036 barrels of oil per day and wellhead pressure of a massive 4,876 PSI. We now have 5 wells drilled at disparate points in the block, proving up the entire block, which will drive increasing value of the block. Now I'll turn to our third quarter financial results. We're very pleased with our turnaround in the third quarter. The company had much better performance all around. We expect that the worst of the oil crash and slump is behind us and that with increasing production and increasing pricing, our results will continue to improve. During the quarter, the company reported a 40% increase in revenue to close to $7 million and only 12% less than the third quarter of last year when the realized price of oil was 23% higher than in the current quarter. The company's average daily production of oil was 2,325 barrels of oil equivalent per day, which is close to multiyear highs of production for the company. A majority of the company's revenue has directed toward paying down the company's loan with Pan American Energy relating to Coiron Amargo Sur Este production, leading to a deleveraging of the company's balance sheet. The company reported positive EBITDA for the quarter, which was helped by our continued focus on running a very lean operation. In the third quarter, the company's operating expenditures were down 32% year-over-year and 22% quarter-over-quarter. Furthermore, the company's G&A has never been lower, down a massive 55% year-over-year. In short, the company has its lowest cost base ever. We brought our loss within $1.5 million on a quarterly basis of where we were a year ago, and the realized price of oil was 23% higher for the quarter. And finally, the company's per barrel netbacks doubled year-over-year, even though the company's average sales price was 23% higher last year. Centaurus' leadership is unwavering in its commitment to realize the value of the company's extraordinary resources. Leadership with its outsized investment in the company's equity is aligned with the interests of shareholders generally. Furthermore, the leadership of the company is absolutely focused on realizing value for shareholders. Our goals are concrete, and our efforts are advancing. I will now turn the call over to the operator for questions.

[Operator Instructions] So your first question comes from [ David Orlo, ] a private investor -- or sorry, [ Dan Orlo, ] a private investor.

Congratulations on the corner. I really want to congratulate as well for showing such strong management as well as turning around the D&A. I was wondering if you could reflect, consistent with your opening remarks, on sort of the strategic opportunities that may be available to the company going forward? And whether or not you feel that the change in the oil market is now being properly reflected in the current share price?

Thank you for the question. So in terms of the strategic opportunities, I think they are robust in the current environment. I think that Argentina is going to continue to grow in terms of oil output. We've seen over the past couple of months, a surge in exports out of the country. And as I said on the last call, I think that, that's been a great exercise for the path forward. I think Argentina will continue to grow and exports will be a greater and greater part of the business overall. And so therefore, the opportunity to go ahead and add production at a low-cost right now is great. And our company, as shareholders know, other than the Pan American Energy loan tied to Coiron Amargo Sur Este, essentially, company has no other form of debt either in the form of bank lines or in the form of bonds. So certainly, the company is exploring those types of opportunities in terms of moving forward. In terms of share price, I think everybody on this call, unless we have a short seller on the call, I think everybody on this call agrees that the stock price is a long ways, I don't even know what adjective to use, but very, very far away of reflecting the reality of the value of the company's assets and resources. On the one hand, the world in terms of asset prices is generally being held down by COVID on the one hand. On the other hand, the one very positive thing in Argentina as Argentines look for investments, whether private investors or institutional, is that the oil and gas business is dollar-linked, which is really a very high priority for Argentine investors because of the volatility in the currency of pesos. And so the opportunity to go ahead and invest in dollar-linked related businesses, and there aren't many of those is a very good thing. And so therefore, between the opportunity set on the one hand and the capital availability on the others, the company is trying its best to go ahead and utilize both ends in order to create additional value for the company.