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

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

Thank you, operator, and thank you all for joining Centaurus Energy's 2022 First Quarter Earnings Call. I'm excited to say that today, Centaurus Energy is in the strongest and most focused position that it has been in since prior to the pandemic. In recent months, the company closed on the sale of its most capital-intensive asset, namely its working interest in the Coiron Amargo Sur Este block. The Coiron Amargo Sur Este block is in the Vaca Muerta formation in the Province of Neuquén. The sale was to Centaurus' operating partner in the block, Pan American Energy. As consideration for the transfer of its working interest in Coiron Amargo Sur Este, Centaurus received a multiyear overriding royalty revenue stream totaling approximately $25 million, which will be transferred to Centaurus in U.S. dollar equivalent payments semiannually. On this call, I will refer to this asset as the Coiron Amargo royalty stream. The effective date of the sale of Coiron Amargo Sur Este was January 2021, and therefore, the company has already started to receive payments under the sale agreement. In addition, consideration for the transaction included forgiveness of all amounts owing under the loan agreement and the operating agreement, which the company had with Pan American, totaling an additional $25 million at year-end 2021. Concurrent with the sale of the Coiron Amargo working interest, Centaurus negotiated, settled and retired its largest contingent and most complex liability relating to the exploratory Curamhuele block, which is also in the Vaca Muerta formation in the Province of Neuquén. The maximum potential liability relating to Curamhuele was greater than $16 million and was secured by performance bonds agreed to and posted by the company's previous management. Centaurus was able to settle the liability at a greater than 60% discount to the contractually obligated amount. Centaurus' obligations under the Curamhuele settlement will be paid for from the Coiron Amargo royalty stream over time, leaving Centaurus with approximately $17 million of net proceeds from the Coiron Amargo royalty stream. With those transactions relating to Coiron Amargo Sur Este and Curamhuele, Centaurus has divested its unconventional E&P assets, and is now back to its basics, which are traditional conventional oil and gas exploration and production assets and operations. The company's principal areas of production are in Rinconada, Puesto Morales blocks in the Province of Rio Negro and the Surubi block in the Province of Formosa in the north of the country of Argentina. As Centaurus recently announced, the company has entered into a revenue-sharing arrangement with REFINAR, an Argentine oil and gas services company for the purposes of performing workover operations on some legacy wells in the Rinconada-Puesto Morales blocks. In addition, while the workovers are being financed by REFINAR and carried out over the next couple of months, the company will perform pulling operations on multiple high-quality wells that had been previously shut in due to failures. The company is targeting a sizable percentage increase in the total production from the Rinconada-Puesto Morales blocks, resulting from the workover plans and pulling campaign. Like the efforts in the Rinconada-Puesto Morales blocks, the company is looking for additional cost-efficient ways to increase its production and cash flow. Now I'd like to make some comments on the pricing of oil and the environment for exploration and production in Argentina. Although the price of oil has rebounded around the world, it has not rebounded as strongly in Argentina. As you know, the government of Argentina largely controls the price of oil and does not have an economy that can absorb the current very high open market price of oil. Argentina's years long depressed economy, large sovereign debt load, recent sovereign debt default, ongoing negotiations with the IMF and record inflation, leave the Argentine economy fragile and not able to shoulder the current open market price of oil. Nevertheless, the price of oil is at its highs in Argentina and should be headed higher. Moreover, last week, the government enacted laws that provide financial incentives to foreign investors in the country's oil and gas industry. As you may have read or heard, Argentina's inflation rate is greater than 50% year-over-year, which drives Centaurus' cost structure higher. Nevertheless, we have been very vigilant in keeping costs low. And thankfully, the company's revenue is entirely dollar linked. We expect that the price of oil in the open market will remain above $100 per barrel for some time to come. As that pricing pressure lingers, we expect that Argentina will be forced to increase incentives and prices for oil and gas producers. Personally, as a large shareholder and a large creditor of the company, I recognize that the past 24 months have been very difficult for stakeholders of the company. In 2020, Centaurus was an asset-rich company with serious liquidity strains and a potentially calamitous debt load and the company has succeeded in confronting a worldwide pandemic, a debt default by the country of Argentina and $20 per barrel oil. The company had 2 transformational transactions announced with Crown Point Energy and then with Humble Energy and then terminated. And nevertheless, we have emerged strong and targeting growth. I will now turn to a review of the financial statements and the financial performance for the first quarter. Centaurus' metrics across the income statement were solid. The company's operating expenses were the lowest that they have been in years. And as a result, the company achieved the best operating expense per barrel that the company has ever seen at about $17 per barrel. And therefore, Centaurus' netbacks were much higher than even in 2018, when the per barrel price reached close to $60 per barrel. The company ended the quarter with its largest cash balance since 2019. In addition, the company now has the benefit of semiannual payments coming from the Coiron Amargo royalty stream, which will begin in small size and grow sizably over the next 3 to 4 years. We are excited about and encouraged by the company's recent restructuring, deleveraging and agreements that will lead to an increase in current and future cash flow. With the Coiron Amargo royalty stream, Centaurus will have a long-term source of free cash flow. And with the company's refocused attention on its conventional assets, the company is able to rapidly develop the conventional assets into a formidable junior E&P enterprise. And with that, operator, I'd like to turn the call over for questions.

[Operator Instructions] Your first question comes from [ Kenneth Lee ], Private Investor.

Hi. My name is Kenneth calling in from Hong Kong, holding in street name. I was just wondering how many semiannual installments are we going to get from PAE?

Well, we get semiannual, so twice a year. And depending on the output from the block and that depends on the development of the block by Pan American Energy, it should be somewhere between 10 and 15 years.

Your next question comes from [ Todd Lee ], Private Investor.

David, thanks for the update. It's been a while since we've heard much. So it's good to hear some of the things that you've settled in the last several months. Two questions really. One is curious if there are any commitments at this time related to the previous management, the Penafiels. And the second question has to do with our listing on the Canadian Exchange. There was a time when a lot of conversation was around getting an exchange listing in Argentina. I'm sure that's probably not on the table anymore. But I've never been in investment on the Canadian Exchange before that has sat at this price level without being at-risk of not meeting some requirements by the Canadian Exchange. And so I'm curious if you can comment on the current price level and the requirements from Canadian Exchanges to allow us to stay at this kind of level?

Sure. So let me answer the question in reverse. I am under -- we are under no notice from any exchange, and I don't know of any particular requirements of the TSXV regarding share price. But certainly, there are, I would say, 2 things in response to that. We think, obviously, the share price is woefully low, especially in light of the guaranteed cash coming to this company or I shouldn't say guaranteed, but very likely cash coming to the company from the royalty stream. And there are ways through a consolidation of shares, go ahead and get the share price higher if need be. But we don't currently have any plans in connection with that, that we'll go ahead and announce. With respect to the question regarding the Penafiels, so as disclosed, we -- the company has previously borrowed $2 million from them. And that's all I can say about that obligation right now.

Your next question comes from [ Philip Arrow with CVN ].

Thank you for your presentation. Could you please give us an idea of where we are going in terms of size of the company in the coming 2 to 3 years, your targets? And if you plan any payments to shareholders, I mean, when cash is available from capital?

So currently, the Board has made no decision in terms of what to do with the cash. As I stated in the prepared remarks, the first couple of payments over the first few years should be small, because, as I stated, the royalty stream in terms of its size will depend on the development of Coiron Amargo, which is just getting into its development stage. So I don't think that the payments will be very meaningful over the next couple of years. And thereafter, we will go ahead and at the time, evaluate what we will go ahead and do with the cash, based on opportunities available and based on where the share price is and so forth. And then with respect to the size of the company, we are trying to currently focus on our existing assets and maximize their output. It is the best risk reward proposition that there [ is around ]. We have concessions for a number of years. We were able to attract and it was an inbound inquiry on REFINAR to go ahead and conduct the workovers that have been announced. We are also in discussions with another party, who has similar interest. And so therefore, we will go ahead and continue those types of initiatives, because they are I'd say, a, low risk; b, if our partner is capable of putting up the capital, it comes at limited cost to the company. And it will allow us to go ahead and increase production, revenue, cash flow in areas that we already know, already have staffing and have a deep historical understanding of the area.

[Operator Instructions] Your next question comes from [ Chris Fuller ], Private Investor.

On this last deal you've done, can you give us a little more insight on how many barrels of oil they pre-purchased and how long we have to put that to them? And what do you think the return on the investment for us will be?

Sure. So I can't give you as definitive metrics as you'd like. What I will say is that it is going to be, I'd say, a very short operation, meaning it should take roughly, I would expect no more than 2 to 3 months to complete everything that they are doing. And the payback should come easily within the next 9 to 12 months. And the return to us is going to be simply a sharing arrangement on the production after their return on investment is paid.

Yes. So do you have a number on our -- on the money we received? What are -- what that will produce? Is that going to double? Is that a triple? Is that a -- do you have any insight on that?

Out of the wells that are being focused on, it will probably be 100% for a period of time. These operations have a limited lifespan. And so therefore, they begin to regress fairly quickly, but there'll certainly be a period of time where the production out of those wells is going to increase substantially.

There are no further questions at this time. Please proceed.

Well, thank you very much, everybody, for participating. On behalf of the management and the Board of Directors of Centaurus Energy, I'd like to thank you for participating in our first quarter earnings call for 2022, and we look forward to speaking to you after the close of the second quarter. Thank you.

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