Gran Tierra Energy Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript

Nov.18.08 | About: Gran Tierra (GTE)

Gran Tierra Energy Inc. (NYSEMKT:GTE)

Q3 2008 Earnings Call

November 18, 2008 10:00 am ET

Executives

Dana Coffield - President & CEO

Martin Eden – CFO

Al Palombo – Cameron and Associates, Investor Relations

Analysts

[Ian McQueen – McGuire Canada]

Jamie Somerville – Genuity Capital Markets

David Dudlyke – Thomas Weisel Partners Canada

Howard [Barkett] – [Barkett Group Inc.]

Paul Weiner – Wachovia Securities

[Dirk Wilson] – [Claire Securities]

Operator

Good day ladies and gentlemen and welcome to the third quarter Gran Tierra Energy conference call. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Dana Coffield, CEO of Gran Tierra Energy. Please proceed.

Dana Coffield

Thank you. Good morning everyone and welcome to Gran Tierra Energy’s third quarter 2008 earnings and post-Solana business combination conference call. We issued a press release earlier last week outlining our performance for the quarter and gave the timing of our vote regarding our acquisition of Solana. We decided to postpone what would have been our normally scheduled earnings call for us to include information on the shareholder vote on the transaction.

Today’s call is being broadcast over this conference line and is available via the web as noted in our press release. It will also be available after the call in recorded format and on our website.

Martin Eden and I are dialing in from different parts of the globe today. I am in Miami and Martin is in Columbia so we ask you to bear with us regarding any technical difficulties during today’s call.

As you all have no doubt noted it has been a great quarter for Gran Tierra on all fronts and we are eager to bring you the highlights. Before we begin I would like to ask Al Palombo of our investment firm Cameron Associates to read our disclaimer regarding forward-looking statements.

Al Palombo

In order to comply with the forward-looking statement Safe Harbor I would like to advise you that in addition to historical information certain comments made during this conference call particularly those anticipating future financial performance, business prospects and overall operating strategies constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as anticipate, believe, estimate, expect, intend, and predict or similar expressions. Such statements which include estimated financial information or results are based on management’s current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements.

Listeners are urged to not place undue reliance on these forward-looking statements which speak only as of the date of this call. Gran Tierra assumes no obligation to update these forward-looking statements in order to reflect any event or circumstance that may arise after the date of this call other than as may be required by applicable law or regulation.

Listeners are urged to carefully review and consider the various disclosures made by Gran Tierra in its reports filed with the Securities and Exchange Commission including those risks set forth in the Gran Tierra annual report on its most recent form 10K as amended which attempts to advise interested parties of the risks and factors that may affect Gran Tierra’s business, financial conditions, results of operations and cash flows. If one or more of these materialize or if the underlying assumptions prove incorrect Gran Tierra’s actual results may vary materially from those expected or projected.

Gran Tierra undertakes no obligation to update forward-looking statements. Finally, this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.

With that said I will now turn the call back to Dana.

Dana Coffield

We have got a lot to cover today so we are going to do our best to keep our overview brief and get to your questions as soon as we can.

As I indicated earlier, Gran Tierra Energy had a fantastic third quarter in almost every aspect of our business. We reported our fifth consecutive quarter of profitability with growth driven primarily by the development of our exploration successes and in particular the growth in production from the Costayaco Field in Columbia.

As is customary for us with these earnings reports, I am going to hand the call over to Martin who will provide you with a review of the numbers. I’ll then come back on the line and provide you with the many updates in some of the operations and activities we have taken during the quarter as well as a recap of the Solana acquisition and the vote that approved this transaction on November 14.

Over to you Martin.

Martin Eden

Thank you. It was another excellent quarter for Gran Tierra. Just to remind everyone, unless otherwise stated all of the figures I refer to today do not include any results of operations from Solana. These are Gran Tierra’s stand-alone results for the third quarter.

As Dana indicated, the third quarter 2008 represented our fifth consecutive quarter of profitability and revenue growth with total revenue of $40.3 million compared to $8 million for the same period in 2007. Net income for the quarter increased to $23 million or $0.20 per share basic and $0.18 per share diluted as compared to net income of $1.1 million or $0.01 per share basic and diluted in the same period of 2007.

The results for the quarter reflect the growing production and the recent oil discoveries in Columbia and the higher WTI price, partially offset by higher overall operating expenses, depletion, depreciation and accretion, general and administrative expenses and income taxes resulting from the company’s increased level of activities. Operating costs on a per barrel basis have decreased by 39% to $11.70 per barrel from $19.05 for the same quarter in 2007 which reflects increased production from new fields in Columbia which have lower operating costs.

When looking at Q3 2007 and Q3 2008 comparison, it is important to note the results for the third quarter of 2008 are impacted by the financial derivatives gained of $4.5 million of which $5.5 million was unrealized but was offset by realized losses of $1 million.

To put the WTI increase I mentioned a moment ago in perspective, during the quarter the average price per barrel of oil increased 78% to $150.88 for Q3 2008 from $58.26 per barrel in the third quarter 2007. In each of our regions of operations the break down is as follows: The average price of oil realized in Columbia during Q3 2008 was $113.52 per barrel. This compared to $67.99 per barrel in q3 2007. In Argentina the average realized price for oil during the quarter was $43.91 per barrel compared to $41.67 per barrel in the third quarter 2007. In Argentina prices are effectively capped. Average oil production for the third quarter of 2008 net after royalties was 4,194 barrels of oil per day compared to 1,491 barrels per day in the third quarter 2007.

Production continued growing throughout the quarter with minor interruptions primarily associated with weather and traffic capacity. The Costayaco discovery added 2,978 barrels of oil per day production and the Juanambu discovery added 275 barrels of oil per day production during the quarter.

As it relates to our balance sheet at the end of the quarter we were able to add $39.6 million in cash on the balance sheet bringing our cash and equivalents position to $57.8 million as of the end of Q3 as compared to $18.2 million at the end of 2007. We remain free of long-term debt while we continue to maintain a credit facility of $60 million with Standard Bank. That has yet to be drawn down on.

Working capital increased to $43.5 million as compared to $8.1 million at December 31, 2007. Finally, shareholder’s equity increased to $136.4 million from $76.8 million at December 2007 and we now have attained earnings of $19.7 million at the end of the quarter compared to a deficit of $6.5 million at the end of 2007.

Results for the nine-month period ended September 30, 2008 were positively impacted in a similar manner to the results of the quarter I just mentioned. Here are some of the financial and production highlights of the period.

Revenue for the nine-month period ended September 30, 2008 was $94.3 million compared to $16.3 million for the same period of 2007. Net income for the period was $36.2 million or $0.34 per share basic, $0.30 per share diluted compared to a net loss of $10.6 million or $0.11 per share basic and diluted for the same period of 2007. The average realized price of oil for the period was $98.40 per barrel compared to $49.22 per barrel for the same period in 2007. Average oil production for the first nine months of 2008 net after royalties was 3,482 barrels of oil per day compared to 1,187 barrels of oil per day for the same period 2007. The Costayaco discovery adding 2,278 barrels of production and the [inaudible] discovery adding 295 barrels of oil per day production during the period.

A more detailed description for the results for the quarter and the nine months ended September 30, 2008 is found in our form 10Q filed with the SEC on November 6, 2008.

From a capital structure perspective we ended the quarter with 7.1 million warrants, purchased 3.5 million common shares at an exercise price of $1.25 per share and 20.2 million warrants to purchase 10.1 million common shares at an exercise price of $1.05 per share. Up to September 2008, 40.6 million warrants have been exercised with resulting issuance of 2.2 million common shares, proceeds of $21.5 million providing us an additional source of funds to the company. Our weighted average basic and diluted share counts for the nine months ended September 30, 2008 are 105.5 million and 119.7 million respectively.

Dana will provide you more detail on the Solana transaction later in the call, but going forward our capital structure has been altered as a result of the Solana acquisition. I’d like to take a moment to provide a quick review of some of the mechanics of that transaction.

This was an all-share transaction which required the issuance of additional shares by Gran Tierra in order to complete the acquisition. As of today our basic and diluted share count has increased to 235.2 million and 263.1 million respectively. These figures were impacted as a result of the terms of the agreement which were as follows: Under the terms of the agreement each Solana shareholder will receive 0.9527918 common share of Gran Tierra Energy or 0.9527918 of a common share of a Canadian Subsidiary of Gran Tierra Energy which is seen as an exchangeable share. This figure represents the premium of approximately 14.1% to the 20-day weighted average trading price of July 28, 2008 of Solana shares on the TSX exchange and Gran Tierra’s July 28, 2008 closing price on the Toronto Stock Exchange in Canadian dollars 5.73.

The shares of the Canadian subsidiary of Gran Tierra Energy that I just mentioned will have the same voting rights, dividend entitlement and other attributes as Gran Tierra Energy common stock. They will be exchangeable at each shareholder’s option at a 1:1 basis and to Gran Tierra common stock and will be listed on the Toronto Stock Exchange under the symbol GTX. The exchangeable shares will automatically be exchanged for Gran Tierra Energy common stock five years from the closing of the transaction and in certain other events.

Resulting from the positive vote taken on Friday, Solana has now become an indirect wholly owned subsidiary of Gran Tierra Energy on a diluted basis upon the closing of the arrangement, Solana shareholders now own approximately 49% of the combined company and Gran Tierra Energy shareholders own approximately 51% of the combined company. A detailed description of the terms of the transaction can be found in our definitive proxy statement filed with the SEC on October 14, 2008.

That is the end of my segment. All in all it was a great quarter and one that exceeded our expectations. I’ll now hand the call back to Dana.

Dana Coffield

Thank you Martin. In addition to all the legwork associated with the Solana acquisition the company attained several operational models during the third quarter of 2008 that should lead to continued growth through the balance of 2008 and beyond. I’ll focus on these first.

Now let me start with our drilling and infrastructure update in Columbia. As noted in our release development effort activities in our Costayaco field continue. The company drilled and tested Costayaco five and initiated drilling of Costayaco six. Drilling of Costayaco six is now finished and casing is being set. We expect testing to take place in December. Preliminary findings of the drilling and log beam operations will be released shortly once processing and interpretation of the data is completed. We expect to initiate drilling Costayaco seven late in December once location construction is completed with drilling to be completed in late January. As mentioned before, we will have a continuous development drilling campaign ongoing through 2009.

During the third quarter pipeline construction for a line to the Costayaco field and existing pipeline system at Costayaco was completed and is now operational. Upon the removal of downstream constraints the find will have 50,000 barrels per day capacity, enough to handle the 35,000 per day plateau construction plan for the Costayaco field in 2010. Truck loading and unloading facilities for crude transportation were constructed to bypass bottlenecks in the existing pipeline system. Trucking operations from Santana to [Orito] are expected to begin later this week while trucking from Costayaco to [Nayva] is expected to begin in December.

We continue to plan for the deployment of the existing 100 km pipeline from and to Guayuyaco through Santana our crude oil sales point and onwards to [Orito]. We expect this downstream pipeline expansion to have capacity of 50,000 barrels per day, more than enough to handle the minimum of 35,000 barrels per day from Costayaco in early 2010.

As it relates to the reserves from Costayaco, our mid-year independent reserve measuring report by GLJ was reported. We reported that effective July 31, 2008 Costayaco field had gross crude reserves of 20.5 million barrels of oil, gross crude test probable reserves of 34.9 million barrels of oil and gross crude plus possible reserves of 61.4 million barrels of oil. As stated before, these reserves are based on the drilling results of Costayaco one, two, three and four. Costayaco five was drilled outside the five-T area used in these reserve estimates. An updated reserve report will be completed as of year-end 2008 which will include the results of Costayaco five and six and we expect this report to be released in early February 2009.

We also drilled an exploration well in the third quarter in the Rio Magdalena block called Popa-2 which resulted in the gas condensate discovery. Testing resulted in 8.5 million cubic feet of gas and 236 barrels of oil and condensate per day. Planning continues for a long-term test program in 2009. We also intend to acquire a 3-D seismic program over the discovery and drill another well based on this 3-D seismic survey results in 2009.

Turning now to the Solana acreage now in management of our new integrated team in Bogata, we will look at some of the highlights of operations in this land. Solana made a discovery on the Guachiria block in the Llanos basin in the [inaudible]-1 well. This well is currently a long-term test that rates between 1,000 and 2,000 barrels of oil per day. Results of the testing program will determine the scope of four facility construction and additional new drilling if required. Currently the crude is being transported by truck. New 3-D seismic acquisition will take place on this block in the coming year.

In the adjacent Guachiria Norte block a new exploration well, [inaudible]-1, began drilling on November 6 and is now nearing completion as we speak. We expect to have preliminary results of this well released in the coming week. A second exploration well, Carnolina-1, is also scheduled to be drilled on this block during this dry season.

Finally, plans are proceeding to drill the [Amatisa-1] exploration well in the nearby San Pablo block in early 2009. In the Catguas block in the Catatumbo basin in Northern Columbia mapping continues to return prospects which we hope we will be able to drill in 2009.

Moving now to Argentina, the company completed drilling the Proa-X1 exploration well in the Surubi block. This resulted in an oil discovery that tested 2,324 barrels of oil per day. As of September 30, 2008 no production has been sold from this well, but sales did commence in October and the well is currently producing approximately 500 barrels of oil per day on a long-term test. We are currently planning for new 3-D seismic acquisition on this trend on the adjacent Chivil block in addition to drilling a second well in the Proa field in 2009.

Whenever we speak on Argentina one has to comment on the fiscal arrangements in the country given prices are controlled and discuss the potential for improvement in fiscal terms in the country. In September 2008 Gran Tierra completed negotiations with refiner [SA] to increase the price received for all May through June 2008 to $40 per barrel and $44 per barrel from July onwards. An additional $2 will be received for the May and June 2008 production was reported as revenue in the third quarter of 2008.

Along with most other producers we are continuing deliveries to the refinery and are negotiating a price for deliveries commencing October 1, 2008. Currently we are working with other oil producers in the area, refiner [SA] as well as provincial governments to lobby the federal government to change it. Improvements in taxation, news taxation specifically, for new oil that were announced last week are interesting but the implementation and impact remain unclear.

Given our pricing challenges in Argentina, Gran Tierra will continue to limit investments in the country. We believe strongly in the prospectivity of our lands as illustrated by the success of the Proa-1 discovery. We have a talented team in place running a profitable business and we look for it to unleash the potential of our Argentine business should the fiscal environment continue to improve.

Finally for an update on our progress in Peru, results of our new 20,000 linear km airborne and gravity date program over blocks 122-128 confirms the crest of the Iquitos Arch lays under block 122 and also indicate the presence of numerous gravity anomalies that may be structurally related to block 128. We have not identified a portfolio of leads which we will mature through modeling in the coming year and over which we will begin acquiring 500 km of 2D seismic data in late 2009. An environmental impact assessment has been initiated in preparation for this seismic data acquisition.

As we have stated in the past, we expect to be drilling in these exploration blocks in 2010 with a minimum of one well in each block.

I’d like to make a few final comments on the closing of the business combination with Solana Resources that closed last Friday. With the closing of this acquisition Gran Tierra has been catapulted to become an intermediate size producer with very compelling attributes. Our current production on the combined entity as of today is in excess of 11,600 barrels of oil per day. Our estimated 2008 end production is expected to be in excess of 15,000 of BOE per day. We now have a working interest in 26 contract areas, 24 of which are operated by Gran Tierra. Our gross undeveloped land base covers over 7.1 million acres or 6.2 million net acres. That is 1.5 million in Columbia, 1.3 million net acres in Argentina and 3.4 million net acres in Peru.

We have an extensive inventory of both exploration and development drilling prospects for future growth and most importantly we now own 100% working interest in the Costayaco field, one of the largest light oil discoveries in recent years in Columbia. Finally, on a subject that is dear to all of our hearts the combined company has cash in hand in excess of $140 million and no long-term debt.

In addition to jointly continuing to explore our mass land base, this combination provides us with increased operating scale and the resources to continue executing a work program on our existing lands and increase our capabilities to undertake much larger and material initiatives in the future. With our strong balance sheet we believe the company is very well positioned for ongoing exploration and development work in its core areas in addition to new ventures in new areas.

Regarding and concerning in 2009 work program and budget, the board of directors of Gran Tierra Energy will be meeting in early December to approve the 2009 work program and budget. It is our intent to release this information as soon as practical afterwards. It is our current intent that the program and budget will be fully funded from cash and cash flow from operations. Details of this plan including any oil price assumptions supporting that plan will be announced as soon as practical after the board meeting.

That brings us to the end of our prepared remarks for this call. It has been a great third quarter and with the business combination concluded we are looking forward to what the fourth quarter and coming year will bring. Before I open the call to questions I would be remiss without pointing out the heroic effort, hard work and success of our entire team. The processes of running a day to day international in gas is tough enough when you accept additional challenges of working the logistics of a transaction that essentially doubles the size of our company, it becomes nothing short of a marathon to achieve it. I have a heartfelt thank you for all our stakeholder employees at Gran Tierra Energy. We have assembled a world-class team of experienced, international professionals with diverse skills and abilities that are focused on delivering superior financial performance and value to our shareholders.

Last month I was awarded the Ernst and Young Entrepreneur of the Year award for the Prairie Energy Section in Canada. Rather than of me, this is a reflection of the results of our outstanding team. Needless to say we are very excited about the prospects of Gran Tierra Energy. Now operator may I have your assistance with the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from [Ian McQueen – McGuire Canada].

[Ian McQueen – McGuire Canada]

Can you go through some of the details of plans for the Llanos basin, the Solano lands that I haven’t actually heard an update on that? I also would expect you would be putting a presentation on your website as well, is that correct?

Dana Coffield

Yes there will be an updated presentation on our website today, technology working with us. For the details on the Llanos basin, Solano had a pretty comprehensive summary in their third quarter release last week. We just finished drilling one of the wells in the basin which I referred to as [Sefiro-1]. This was to test stratographic concept nearby to the [inaudible] discovery and we will have results of that well forthcoming shortly in the coming couple of weeks when we finish the log interpretation. There are two more commitment wells on this group of blocks in the Llanos basin. Both are contemplating drilling additional stratographic traps different than the traditional structural play in the basin. Both of these wells will be drilled in this dry season which extends from now through the first quarter of next year.

In addition we will be acquiring additional 3-D seismic programs to better define these channels that the wells are targeting for future exploration. One last point is with the [inaudible] specifically it is currently on a long-term test. We are monitoring pressures, water tests, etc. and based on the results of the long-term tests we will then determine whether or not additional wells are required to develop the field and then we will also be able to determine the scale of the facilities that are required for the full development of the field. Currently the crude is being transported by truck.

Does that answer your questions?

[Ian McQueen – McGuire Canada]

I assume there will be additional further details on your spending in your coming budget details from December?

Dana Coffield

As I said we won’t have an official 2009 work program and budget until early December and some time in December we will get those results.

Operator

The next question comes from Jamie Somerville – Genuity Capital Markets.

Jamie Somerville – Genuity Capital Markets

On that share count, can you explain what caused the fully diluted share count to be reduced from the 268 million that you put out at the time of the deal to the 263 million you are reporting now? Secondly, I’m wondering if you can give us what you can say what proportion of Solana shareholders chose to run their exchangeable shares rather than Gran Tierra shares themselves?

Martin Eden

I can’t give you precise amounts. It is primarily because there were more Solana shareholders chose to take cash rather than roll their options over. I don’t have the exact split with me actually of the percentage of shareholders who got exchangeable shares versus Gran Tierra shares. Essentially most of the Canadian shareholders got exchangeable shares; I just don’t have that number with me right now.

Jamie Somerville – Genuity Capital Markets

One follow-up, the Solana option holders taking cash. Is that shown in any of the Q3 accounts? Presumably not.

Martin Eden

No. We will be consolidated as of November 15. So the only numbers you have are just for Q3 and Gran Tierra. It will show up on a go forward basis.

Jamie Somerville – Genuity Capital Markets

Dana, I know you are not putting out the official budget until late December but you have given us some good detail here on what your plans are for seismic and for drilling. I’m wondering could you kind of sum up what you are looking at in terms of spend on seismic or kilometers to be acquired and then on the drilling side what it means in terms of total wells and how many rigs you might need at this point in time on a preliminary basis?

Dana Coffield

We are looking at approximately 8 development wells in the Costayaco field, plus approximately two water injectors in the Costayaco field so more or less 10 wells at Costayaco. On the exploration well count for next year we don’t actually have a hard number to give you right now but the order of magnitude would be between 5-10 exploratory wells. I realize that is a bit of a range but that is what we are looking at now. For the seismic we are looking at 3D and 2D but we are looking at about 900 km of seismic acquisition. We might have about 100 square km roughly of 3D seismic.

Operator

The next question comes from David Dudlyke – Thomas Weisel Partners Canada.

David Dudlyke – Thomas Weisel Partners Canada

With regard to your exploration could you just remind me the number of rigs you have under contract and if we run with that 10 development wells and 5-10 exploration wells presumably you would be in the market for rigs, and whether you are in the market and what that market in Columbia is currently looking like?

Dana Coffield

Currently we have two rigs under contract plus one work over rig or work over unit. So we have one rig contracted in the Llanos basin and we have one rig contracted in the Putumayo basin to flush out the drilling and then we have the work over unit in the Putumayo basin also.

David Dudlyke – Thomas Weisel Partners Canada

These would be contracted through 2009 presumably?

Dana Coffield

We have that option yes. Now to do the development drilling I described at Costayaco we will need a second rig for that. We don’t have that contracted yet, so yes we would be in the market for a rig. Some of the exploration drilling there will be one-off wells there with the well in the middle Magdalena valley, perhaps one or two wells in the Catatumbo basin in the north plus a couple of wells in the Llanos. So these would be the one-off rig contracts. We don’t have those contracted yet either. Usually when we have rig contracting we have to constantly use it for the drilling I have described. The second part of your question is what is the status of the rig market. It remains tight in Columbia. More rigs are being brought in but the demand for those rigs continues to grow so the rig market remains tight in Columbia. Having said that I’m confident we will get the rigs to do the work we need.

David Dudlyke – Thomas Weisel Partners Canada

Moving to a slightly different subject with regard to the exchangeable shares. I just wonder if either yourself or Martin can confirm, of the 49% of your current share count that was issued to Solana shareholders how many were in fact took exchangeables? There is some information out there that suggests the order of $69 million but I’m just trying to get an idea as to whether that number of people that took exchangeables would have had the effect to liquidity and thus free flow to GTE given the exchangeables were issued presumably for some tax deferral purposes for shareholders?

Martin Eden

I don’t have that number with me but most of the Canadian shareholders in Solana would have taken exchangeable shares so it is going to be 69 is probably not too far out. I just don’t have the exact number with me. Those exchangeable shares do trade on the Toronto Stock Exchange and they are exchangeable into Gran Tierra Energy shares so we are not sure what the overall impact on the sheet would be but we do expect those shares to trade.

David Dudlyke – Thomas Weisel Partners Canada

In Columbia there is the ability to tax shield to develop a tax shield based on 40% of your capEx. One question that I don’t have the answer to immediately is there a clock on that with regards to that particular tax shield? Does it run out in a certain year to your knowledge?

Martin Eden

I don’t know what it would run into. We are going to apply to see if we can maintain that tax shield on a long-term basis and there is a possibility of us doing that. I don’t know when it is going to expire. It may not expire. It may not go on for perpetuity. Certainly it will be in place for 2009. I believe 2010 as well.

Operator

The next question comes from Howard [Barkett] – [Barkett Group Inc.]

Howard [Barkett] – [Barkett Group Inc.]

The $40 some odd dollar rate that was quoted during the presentation is that the same rate you are getting at the Columbia fields as well, Costayaco?

Dana Coffield

No. I believe you are referring to the $44 per barrel. In Columbia we are getting a much higher price. In Columbia the sales price is tied directly the West Texas Intermediate with some modest discount to West Texas approximately $7.50 discount. So whatever West Texas Intermediate is we are getting about $7.50 less than that versus at our Costayaco.

Howard [Barkett] – [Barkett Group Inc.]

How many months in advance do you generally contract pricing?

Dana Coffield

I believe it is reconciled on a bi-monthly basis. Martin?

Martin Eden

I think that is correct.

Howard [Barkett] – [Barkett Group Inc.]

So it is just a continuing modification depending on West Texas Intermediate?

Dana Coffield

Yes.

Operator

The next question comes from Paul Weiner – Wachovia Securities.

Paul Weiner – Wachovia Securities

You mentioned that on one of the new fields it is pretty much sounds like a natural gas discovery and natural gas liquids. Is the infrastructure there basically in place to move that to the bucket or do you have to build the infrastructure like you did with your lean field in Costayaco and are any of your prices you get on oil hedged going forward or are you pretty much sell at the market whatever that is?

Dana Coffield

The answer to the first question is at the Rio Magdalena block the Popa gas condensate discovery is located adjacent to the main north/south gas trunk line that runs through central Columbia. I would say within about 10 km or so. So it will be an easy tie in once we have a gas sales contract in place but first we have to run the long-term tests to determine the reserves before we can sign the gas sale contracts. So the short answer is yes there is infrastructure nearby and tying into that infrastructure is not a problem.

The second part of your question, we do have a small amount of production hedged. 300 barrels a day to support our borrowing days on our credit facility.

Paul Weiner – Wachovia Securities

I’m not sure of the gas prices in Columbia. Natural gas prices. Are they similar to what it is here? I understand the prices in North America are kind of low compared to the rest of the world. Have you been potentially getting a better price for gas in Columbia?

Dana Coffield

No. In Columbia they do not have an integrated gas marketing system. Prices vary quite a bit depending on the local market within Columbia. So prices can vary from say $3 mcf to $8 mcf. It varies a lot depending on where you are with the local demand is within Columbia.

Operator

The next question comes from [Dirk Wilson] – [Claire Securities].

[Dirk Wilson] – [Claire Securities]

I’m wondering if you can just outline precisely how you are going to get to the 50,000 barrel per day exit figure from the current 11,600 barrel per day number you are at?

Dana Coffield

We are going to do three things. The first thing we are going to do is initiate trucking from Santana west to [Oritos] and that is supposed to start at the end of this week. That will add 2,000-3,000 barrels per day. Then in early December we are going to initiate trucking from Costayaco north to [Nayva] which will be another 2,000-3,000 barrels per day. Then something else we have already started and actually haven’t talked about has pretty exciting results. We have been putting anti-friction material fluids mixing with the oil streak and running that and actually adding several thousand barrels per day capacity in the existing system with this [inaudible] although it is not actually a [inaudible] it is anti-friction reducer. So we are actually finding we can increase the existing pipeline capacity with this addition to the oil streak. So all three of those we are going to reach our goal by year-end.

Operator

There are no further questions in the queue. I will now turn the call over to Mr. Dana Coffield.

Dana Coffield

Thank you. I appreciate the interest everyone has shown by participating in this conference call. Gran Tierra Energy continues to show spectacular results and I appreciate all our stakeholders and all our listeners’ interest in the company and look forward to continuing to grow this company with all of you. Thank you very much for your time.

Operator

Thanks for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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