Centaurus Energy Inc

XTSX:CTA

Earnings Call Transcript

[Operator]

Good morning. My name is Sylvie, 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]Mr. Tawil, you may now begin your conference, sir.

[David D. Tawil, CEO & Director]

Thank you very much, operator. Good morning, everybody, and thank you for joining us on Centaurus Energy's 2021 second quarter earnings conference call.As I've done on previous quarterly investment calls, I'd like to first review some applicable worldwide and Argentina-specific developments that have relevance to Centaurus. Unfortunately, the recovery from the pandemic that began in earnest earlier this year has been challenged by the emergence and strengthening of the Delta variant. The price per barrel for Brent crude reached a peak of $76.50 in mid-July, and since that time, the price of oil has contracted back down to $70 per barrel. Unlike North America and Western Europe, Argentina was quite late to reach pervasive vaccination. However, now the broad vaccination is underway and the country will soon be on its way into spring, revival of the country's domestic oil consumption should begin to rebound.In addition, oil production in the country is reaching pre-pandemic levels. It's important to remember that the overwhelming majority of oil production in Argentina is consumed in Argentina as opposed to being exported. The price per barrel paid in Argentina has reached $55 per barrel, and unlike most every other industry in the country that's been able to [ coagulate ] out of the pandemic trough.In spite of the bright near-term future for oil production in Argentina, capital markets in Argentina extensively remained closed with public debt offerings being very few and far between and equity trading volumes remaining at anemic levels. These circumstances are unlikely to change until: one, Argentina solidifies a renegotiated debt deal with the IMF, which isn't likely to happen until the midterm elections conclude in Argentina this fall; two, the IMF deal hopefully leads to some stability in the value of the Argentine peso; and three, the oil market receives a federal energy law, which gives transparency and stability to oil pricing. These are not simple or small steps. Also these circumstances that -- these are circumstances that have now been present quite a while.Despite the rise in the price of oil, all the majors around the world have been leading a tectonic shift away from fossil fuel production and have been increasingly emphasizing renewable energy sources. Specific recent announcements have included BHP, the Australian metal mine giant, is considering selling all of its oil assets company-wide. Shell is reportedly looking to sell all of its Permian Basin assets. Also, Shell was ordered by a Dutch court located in its home country to cut emissions by 45% by 2030 compared with 2019 levels; that's less than 10 years away. In the wake of the court decision, Shell has already publicly said that it would accelerate its carbon emissions cuts and the company has stated that it has "determination to rise to the challenge" posed by the ruling. ExxonMobil was forced by an activist investor to install 3 directors. The activist succeeded with pressing a plea regarding climate change. ExxonMobil is now targeting carbon zero within 30 years. Chevron just reassigned its Head of Permian Basin to a brand-new "low-carbon division."So it seems clear that oil majors are unlikely to be as focused as before a new expensive and expansive oil production projects. CapEx dollars are being channeled towards wind, solar, lithium and battery power, and other forms of renewable energy, and the oil majors have picked up their dividend, ratios and their buyback of debt with free cash flow. The foregoing may create an oil crisis in the medium term. In fact, US President Joe Biden last week called on OPEC to increase its oil production because the price of oil and gasoline is getting too high. It's ironic that the US has the capacity to produce, but is heavily discouraging domestic oil production and it's asking its one-time adversary OPEC to increase production.As it relates to Argentina, I think that development of the Vaca Muerta may be in jeopardy. Argentina has [ one ] touted to awesome quality and vast resources of the Vaca Muerta, and I was a big believer. The fundamentals are there, including the quality of the rock, the vastness of the resources, reasonably expandable infrastructure and nearby purchasers of oil exports. Everyone knew that it would require a lot of money and time wasn't necessarily on their side. Now the time line has shrunk massively, and the available capital has dried up like never before. The industry needs more freedom from bureaucracy than ever, massive and unobstructed investments are vital if Vaca Muerta will be developed successfully. In light of that, we have decided that the Vaca Muerta risk is too high for a company of our size. And that has led to our divestment of Coiron Amargo Sur Este as we previously reported. With the sale of Coiron Amargo Sur Este, we will principally be focused on our conventional activities in Rio Negro and in [indiscernible].Now I'd like to go ahead and turn to our second quarter financial results. For the fourth consecutive quarter, the Company has reported positive EBITDA. And the Company reported positive net income for the first time in a very long time. Our revenue was 10% higher year-over-year due to the rising price of oil; our expense base continues to remain tight; operating expenses are down 50% year-over-year; and our G&A is at all-time lows. Our netbacks have not been this high since 2018. We're continuing to review strategic options to grow our production base and deliver additional value to shareholders. Lastly, as reported in our quarterly release, Steven Azarbad has relinquished his position as interim CFO; however, he remains a member of the Board of Directors.I will now turn the call over to the operator for questions.

[Operator]

Thank you, sir. [Operator Instructions] And your first question will be from [ Kevin Bogner ].

[Unknown Analyst]

David, this is Kevin Bogner. I've talked to you several times before. It's been a while. With the change in philosophy with the Company you're talking about increasing production, the one thing that's been constant has been a lack of a production plan. When does current management expect to be able to release a production plan indicating increased drilling activity since we've now gotten rid of most of our concessions? When are we going to start being able to drill in Puesto Morales and also in Surubi to meet capital requirements? I know there has been tremendous outlying commitments on Puesto Morales. So I want to know either, a, has that definitively been put off with the province for our commitments? Or do we need to start drilling to keep that concession?

[David D. Tawil, CEO & Director]

Thank you for the question, Kevin. So as of now, we are in dialogue with the province of Rio Negro. It's actually a very productive dialogue. We have submitted a proposal for drilling to them. We are not under any immediate threat of loss of the concession. However, I can't go ahead and disclose the proposal for 2 reasons. First of all, it's a confidential proposal, and it is a work in progress right now. The second thing is, as I mentioned, at the end of my comments, the Company is currently in discussions on a number of strategic initiatives. And among those strategic initiatives, there are possibilities where we would either be a partner or some other form of relationship with another oil and gas company in order to go ahead and ramp up production. So in fact, there is a spectrum of how much the drilling plans in the places like Puesto Morales and Surubi might be over the next while. In terms of a time line, I hope to be able to go ahead and give clarity possibly by October, if not before year end.

[Unknown Analyst]

I appreciate that, David. It's just as a long-term investor, it's been a long time since we've had a positive netback like we have. And having a good positive drilling plan, I think, is the imperative for us moving forward. So I'm glad to hear that you are in negotiations and we should have information hopefully by October, as you say, or by year end.

[Operator]

Thank you. [Operator Instructions] And at this time, sir, we have no other questions. Please proceed. Mr. Tawil, we have no further questions at this time. Ladies and gentlemen, we have lost connection, but this does conclude today's conference call. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.