Pacific Rubiales Energy's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar.15.13 | About: Pacific Exploration (PEGFQ)

Pacific Rubiales Energy Corporation (PEGFF.PK) Q4 2012 Earnings Conference March 14, 2013 9:00 AM ET


Ronald Pantin – CEO and Co-Founder

José Francisco Arata – President and Co-Founder

Carlos Perez – CFO


Ian McQueen – CIBC World Markets

Frank McGann – Bank of America Merrill Lynch

Nathan Piper – RBC Capital

Matt Portillo – Tudor, Pickering, Holt & Co

Christian Audi – Santander Investment

Caio Carvalhal – J.P Morgan

Jamie Sommerville – TD Securities

Gustavo Gattass – BTG


Good morning. My name is Jonathan and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Pacific Rubiales Energy Fourth Quarter and Full Year 2012 Results Conference Call. This call is scheduled for 90 minutes.

(Operator Instructions)

This call contains forward-looking statements, which reflect the current expectations or beliefs of the Company based on information currently available to the Company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the Company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations are disclosed under the heading Risk Factors and elsewhere in the Company's annual information form dated March 14, 2012. Any forward-looking statement speaks only as of the date on which it is made, and the Company disclaims any intent or obligation to update any forward-looking statements.

Thank you. Mr. Pantin, you may begin your conference.

Ronald Pantin

Good morning, everyone. 2012 was a great year for the company not only for the important development reserves but also most of the financials, but also it was a year of transformation for the company becoming more international with a focus that was made with getting different country rigs. And also we reported that the Rubiales with contract extension on the future of the company.

The highlights of last year, we reached 514 million barrels of cubic and that’s our 400% reserve producing ratio. Our production, net production average for the year after royalty was close to 980,000 barrels a day that is a growth of 13% over 2011. Our net production average for the fourth quarter was 108,000 barrels per day, that’s 18% over the same period of 2011.

Our revenue was very close to $3.9 billion, that’s a 15% increase in a year-to-year. We have an EBITDA over $2 billion that is a 3% increase over the year 2011.We has an excellent netback $60.2 per barrel of oil equivalent. That’s remains stable over 2011 and we kept incredible filtration exploration of over 80% that is a drilling activity 55 at 30 wells and 778 kilometers of 2D seismic and a 257 square kilometers 3D seismic as well.

The company continues growing. As you can see in the page six of our presentation, we have confidence when 2000 barrels growth back in 2007 average for the year to 227,000 average now we have a gross production of 310,000 barrels per day. The net production has come from 6000 barrels per day average of 2007 to 98000 barrels last year and now we have an incredible net barrels after royalty of 120,000 barrels per day.

Also essentially we can see it in the reserves we see that the reserves have come up from 97 million back in 2007 to 513 million this year that is a growth of 26% over 2011.

One of the very important thing is the importance of Pacific Rubiales in Colombia. Colombia growth on January to December for an 140,000 barrels per day to 181,000 barrels per day that’s a growth of 41,000 barrels per day. The Pacific Rubiales grew 55,000 barrels per day, so that means that Pacific Rubiales grew more than Colombia and we have to compensate the decline of other companies in Colombia, but based on January 1990 to December 2004. So what we can say that most of the growth of Colombia was due to Pacific Rubiales.

We also had an excellent netback for the period actually in the oil netback was $63 plus few cents. On and that is due to better transportation that we will have this year in 2013 and that right now, we have additional capacity that we have contracted from Total and Talisman and that for the month of March through June.

And then we will have in June obviously the Bicentenario Pipeline that will add around 30,000 barrels more of transportation capacity. With that, we will be transporting, I would say, 100% of all our oil through pipelines.

In the case of OpEx, we also expect this year to reduce the OpEx and that’s due to power generation. As you know Pacific Rubiales is building a power line that goes from high electrification value to Rubiales and the cost is one-sixth of the cost of power generation used in diesel oil and it is one half of power generated that we are doing in Rubiales due to Rubiales Oil. So with that, we will have a huge savings in the cost of energy, of electricity.

Another thing that is important is as you know we have high water cost in the Rubiales and that recovers over 90% around 92%. So that means that is if every barrel of oil we have around 12 to 13 barrels of water, because of – that water and that injecting that into the reservoir it will be $0.30 and $0.40 per barrel of water. Underwater – cost of production also is increasing the production of oil and the production of oil.

Right now we have been through rest of plans, so 1 million capacity where we will be able to cut the cost to around $0.17 per barrel of water instead of between $0.30 to $0.40 sold with electricity with water that we will be using for purification in the 30,000 hectares of plant that we are planting at this moment.

With the completion and capacity that we have right now with the pipeline, we are reducing a lot of our cost. The other thing important is as you know, last year we acquired C&C Energy and PetroMagdalena and now we are using – for and there we have a very important reduction in cost.

We will be paying the deal with as production cost and the transportation is going to be most there, because in 2014 natural gas will be consistent to Carbonera from – taking that down to Rubiales and coming back in the pipeline blend to coordinate that will be growth in the area that will be blending with the Rubiales and our heavy tools and with that we will be able to reduce significantly the costs.

This year has been very interesting in the commercial activity. Actually we have seen a very volatile WTI, but we have seen also the spread between WTI and banks to widen. Actually it was roughly around $17.53 and right now, all our cargos are based on this.

That’s why you see in the graph from the lower corner that we have in the fourth quarter a premium of $12.35 of Castilla over WTI and that we have in Castilla that it’s more probably the largest share of our production, of our sales very close to the premium that we have with Vasconia that is 24 with WTI and Castilla 18 with WTI. So we have very good return for the fourth quarter of 2012.

Last year and the eight months of the year the production was flat and the reason for that is that we were not receiving a injection permit that we needed. Once we receive that we immediately transport 230,000 barrels per day to 310,000 barrels per day gross. And net from 97,000 to 128,000 very interesting to see here is the growth that we have in the fourth quarter that’s very important.

We had an average of 108,000 barrels net in the fourth quarter but more important than that is that since the beginning of the year, we have half of 20 and 28 and we have had a net production after royalty of 128,000 barrels per day. So that is beating our guidance at the beginning of the year when we gave the guidance we said 15% to 30% growth against last year in 2012, but we were planning to reach 130,000 in the second semester and we have reached 130,000, 128,000 from the third date of the year.

Our markets continue in Asia around one-third, the US one-third and Europe one-third and for Latin America and Africa we have around 16%. So that’s very good and gives us the advantageous position we do arbitrage.

Another thing that is happening is in the last quarter we drilled 443,000 barrels per day within in oil inventory in the first quarter and that’s happening when the quarter reaccumulate inventories and the next quarter we grow inventories and that’s happening until we have the profitable year both a signal right now going is breakout. Another important thing is that we have been selling natural gas in the domestic market at a very high price $7.71 per Mbtu that’s our three times average.

Pacific Rubiales has been very proactive in the total investment and the reason for that is to be able to take all our oil to the market to monetize our production. First, we build a oil pipeline, I still remember that was two years ago with an individual capacity of more than 60,000 barrels per day, now we have a capacity of 340,000 barrels per day and we have transported very close to 8 million barrels in 2012.

Now, the investment is the Decentnario Pipeline where we have improving interest 33% and that’s expected to be operational at the beginning of the second semester or at the end of third semester. I think that we will start pumping by June of this year and so we will fill the pipeline even before that.

The other pipeline that’s very important is the Oleoducto pipeline where we have – it has the capacity of 300,000 barrels per day and it connects the Coveñas Port with the Puerto Bahia Port. In there the Ecopetrol with safety and also with pipeline and also we serve the new refinery of Ecopetrol. We expect it to be ready by the environmental permitting by the second half of this year and the pipeline next year 2013.

Puerto Bahia growing out Pacific Rubiales of over 53% equity in Puerto Bahia we have all the investors like the IFC and that’s very important and we have contracts with a important major oil companies and which is also is going to allow to reduce the bonus that we have had drilling going the work that’s going. Another investment that is very important is the one that I mentioned is Petroeléctrica de los Llanos that is a company 100% Pacific Rubiales is a power line transmission line that we are taking from Quifa to Rubiales and the important thing about this is that will be saving a lot money.

Actually, as I mentioned before, power generating for the small power generation unit that we use for the work in Rubiales and Quifa the cost here will be one-sixth of that cost. So it’s a savings of around very close to 17% that – save will be 3% and the cost is going to be only 17% of the cost that we have there.

In the claims of the IPP 1 billion used the power generation in Rubiales that is IPP and we used Rubiales Group for fuel and the savings will be more or less half of that. So we expect to have great savings in OpEx by the end of this year. Another important point is the water treatment and that is also a company which is 100% Pacific Rubiales.

In this company, we are treating the water take through reverse osmosis; we have contracted new plants of reverse osmosis 500,000 barrels each. So by the end of the year, we will have a capacity of 1 million barrels per day of water. This water is perfect water at the consumer of environment is water that complies with all the specs and we will be using that for purification. There is a model association, Pacific Rubiales with some operators and they are planning right now towards 15,000 hectares of pump and then immediately after we will go for another 15,000 for a total of 30,000 hectares.

With this we will be able not only to add sustainability to Greenfield to the Pacific Rubiales field and Quifa but also we will be saving around half of the cost of water treatment and disposal that we have at this moment.

The LNG project is looking good. We are right now under construction. The plant, as you know the LNG plant is being build in the Exmar and it’s going to be ready by the end of 2013. Right now we are building the barges, the pipeline and we are going to start to building the right plan in the second half of this year.

We will be able to have very important netbacks from our natural gas business. Right now we have around $7.70 per million btu but this will be able to go over $13 per million btu when we export to a market that either Caribbean Islands or Central America that are used in liquid fuel storage.

One very important news, finally we initiated better injection and the ignition of the reservoir. We did that on the 18th of Peru and in that graph you can see that the production of wells, the producing wells have increased 70% in less than one month. So we have everything that’s going as it’s taken we are very happy and very optimistic with what’s happening right now.

We expect to have a closing by the second half – at the end of the second half of the year, probably the fourth quarter, we expect to have very important information on the recovery. But I have to recognize that the reaction of the closing is not happening better than we expected.

Last year we had some acquisitions, the acquisition of PetroMagdalena. That was a great acquisition and just to tell you that we almost have three fourth the net production coming out of PetroMagdalena. That was a company that was in financial interest. We paid a very good price, very accretive for the company and right now the company is close to three times almost three times but was producing when the acquisition of the company.

Then we have C&C. I am sorry, Z-1 Block in Peru now we have the platform and we have completed the seismic, 3D seismic. We have not started building the walls because right now we have seen with the seismic and the previous seismic better information and we are planning to locate the platform in a better place to see that we can core the best part of the reservoirs and that’s going to happen soon. We expect that in the probably at the end of six months and the beginning of next, we will have interpreted from the seismic and then decide where are we going to locate the CX-15 platform.

C&C Energy it’s a company as you remember we bought it. Our main focus was to reduce the cost of $1 billion. It’s producing 12,000 barrels per day. So future going very well and we are getting close to all that light crude for $1 billion, so we are saving a lot of money and that’s one of the things I want to see in the reduction of $1 billion in cost during 2013.

Okay, you can see the transformation that we had in the company last year. Actually we went from 44 blocks to 70 blocks, plus acres from almost 15 million to almost 22 million. 2P reserves as you remember transferred 407 million to 514 million, average production from 86 to 98 that was at the end of last year, but still last year we have increased our average production, for this year up to today from almost 98,000 to 128,000 barrels per day net after royalties.

Yesterday, we see the arbitration panel delivered its decision interpreting that the PAP formula should be calculated on 100% of the production of the Quifa SW field, instead of simply the shared value of 60%. However, the arbitration panel expressly denied Ecopetrol’s demand for an order for Pacific Rubiales to deliver the associated volumes of hydrocarbons as a result of its interpretation of the PAP formula. The arbitration decision is not yet firm nor does it provide enforceable remedies against the company.

As a result of the above and the prudent accounting practice a provision has been made in the company’s 2012 year end financials to account for cumulative amounts accrued as follows: U.S.$92 million negative impact on 2012 EBITDA, representing around 4% reduction and $61 million negative impact in net Income that represent around 10% reduction.

In the event that the interpretation of the PAP formula by the arbitration panel becomes enforceable, the company would be required to deliver an additional 1.393 million barrels of oil to Ecopetrol, representing Ecopetrol’s additional share in Quifa SW production from April the 3rd of 2011 to December 31st of 2012, which in any case would be delivered in kind from future production out of 10% of our daily share of production of the Quifa SW field. We fully put those number as of today will be more or less 2,270 barrels per day over a 20 month period.

These additional volume that has been – that will be paid over 20 month period and these are being provisioned as an over-lift on the company’s consolidated financial statements at December, 31, 2012.

Pacific Rubiales is evaluating all the available sources of action and will negotiate the difference with Quifa Association Contract. If that is enforceable, we would have also our 2500 barrels at today’s prices and production on a pilot project, additional 2500 and that I have to be naïve that we are producing more than 20,000 barrels per day.

So that will be less than 2% of our net production and I would expect on to something. Now, I am going to pass the word to José Francisco that’s going to be talking on our exploration and then later, Carlos Perez our CFO will be commenting on our financials.

José Francisco Arata

Thanks, Ron. Good morning to everybody. 2012 was another successful year for our exploration campaign. As a matter of fact, we drilled a total of 55 wells of which 19 were drilled this quarter, 22 in the second quarter, 6 in the third quarter and finally, six exploration of wells in the fourth quarter. In the fourth quarter we drilled one successful well in Sabanero one well, in Cubiro we drilled two wells, ones flow through and one appraisal, both of the wells were successful. In Z Block well we drilled two flow through wells that is also and it seems I have seen below Llanos basin we drilled one flow through well which is also a result of that.

In the Cubiro which was one of the filed delivery receipt which I can see from PetroMagdalena went very successfully, we drilled raw one exploration well and two appraisal wells. Both wells completed in the seven sands, a record of 13 feet of methane with no indication of an oil water compact. The both wells are currently under extended production tests producing an average of 120 and 580 barrels of both per day of 28 and 80 respectively.

We plan to drill two exploration wells. There is an arrow in the slide that you have in the presentation. The wells are going to be two additional exploration wells, one is Quifa A and one in the Quifa D wells which are in the same trend of the producing Quifa A and Quifa D producing fields.

In the Guyana field located in the lower Magdalena basin we during the fourth quarter, we had discovery of natural gas and condensate in the Manamo-1X well. With the physical evaluation of the well indicated a total of 151 feet of net of 54 API degree, the core. The well was expected across a 91 foot reserve reaching a cash flow rate of almost 109 million cubic feet per day and almost 300 barrels per day. We plan to drill one additional explorative well in this block during the first half of this year.

Moving to Peru, I will provide an update on our exploratory plan in Peru. In the Z-1 Block while Pacific Rubiales own 49% working interest. The company is presently processing and integrating 1142 square kilometers of 3D seismic that’s one I mentioned is very important to allocate – to locate out new platform and also to decide our flow through well (inaudible) that we had already identified with all the two billion barrels of potential resources that we had in the Z-1 Block.

An additional 462 square kilometers of 3D seismic data is expected to be completed during the first half of this year. In the Block 138 where Pacific Rubiales has 100% working interest, it will seek final approval of the environmental management plan required to drill our first explorative well 1-X exploratory well that will be spudded during the next few weeks and we expect to be completing this well before the end of the first half of 2013.

In the other block located in the Eastern Peru in the Brazil Block 135 where also we had 100% working interest. We started the acquisition of 789 kilometers of 2D seismic in December the last year and we plan to have the interpretation ready by June 2012 in order to decide we are going to drill our first exploratory well in this other block.

And finally in Block 116, where we had a partnership with one of the growing Pacific Rubiales 50% working interest. We plan to drill our first exploratory well during 2020. Now those to Brazil, the beginning of this year has been very successful. We started drilling our partner in Brazil. Our first well the Kangaroo 1 well which finally was completed in February of 2013 with a discovery.

The well was drilled with total depth of 3049 meters encountering a gross water section of 25 meters. We covered 42 API degree of oil on the wide line. Then we moved the rig to the second well, the second location, the Emu-1 well which is under drill and we expect to complete the drilling operations of this well by the end of this month. The total depth target for this well is 4318 meters.

And then after – as soon as we completed the drilling of the Emu well, we will move the rig to drill the Bilby-1 well which will be started immediately after we complete the Emu-1 well. Therefore for this first half of the year, we have these two additional wells of both the discovery that we announced at the beginning of the year of the Kangarooo-1 well which will be drilled back-to-back and expect that after we drill these two wells to decide on the appraisal of the Kangaroo discovery.

But we have to then hire an additional rig to do the appraisal for this discovery. In Guatemala, we completed a 302 kilometers of 2D seismic on the two blocks that we attempt in this country, block 10-96 and 0-10-96 and we have already started the seismic contracting for our first exploration well to be discovered which is expected to be drilled during the second quarter of 2013. And then immediately after we get the results of the drilling, we will decide on further activities on this plant.

Now talking about our reserves that we announced couple of weeks ago. During 2012, the company continued its reserve growth as well as in rectifying our reserve base. The total net reserves for a total 514 million barrels of oil equivalent as of December 31 of 2012 representing a 26.2% increase over 2011.

On these reserves 59% are represented by heavy oil, 21% of our reserves 2% of natural gas and 20% are light and medium oil. We had a net 2P reserve additions of 142 million barrels of oil equivalent and this represents almost 400% to server replacement ratio with the net 2P addition of 4 barrels per every barrel that we produce.

Our CAGR is strong since 2007 is being 40%. We continue the diversification as you can see in the left side of the slide we continue the diversification of the reserves base. We now Rubiales that represented 100% of our two gross wells in 2007, now Rubiales is importantly less than 19% of our 2P reserves.

Light and medium oil reserves will be 106 million barrels of oil equivalent from 7 million barrels, representing approximately a 20% of our total 2P reserves and this reports our heavy oil production in Colombia through blending at a cheap cost as Ron mentioned before in his remarks.

We sustained that reserve replacement over the last two years of over 400% and the increase of the reserves that we achieved last year 92 billion barrels of oil equivalent were added for acquisitions, 40 million came from exploration affiliates and 10 million barrels of oil equivalent from provisions in our different producing fields. 65 million barrels of oil equivalent net to Peru position now Pacific Rubiales beyond our Colombian holders and booking our first reserves outside Colombia.

And finally, reserves additional 34 million barrels of oil equivalent from – that we got from (inaudible) in the lower Magdalena block. Now I will give the word to our CFO Carlos Perez which will assess all the financial results.

Carlos Perez

Thank you, José Francisco. Good morning everyone. I would like to start with the netbacks. You can see in the left hand side of the slide number 34, the netbacks of oil and gas and the combined netbacks for the fourth quarter is good to mention here that in the case of the fourth quarter, we are capturing starting from the adjustment which are affecting these numbers. So straightly to compare with last year I will explain in the following slides what those adjustments were.

One of the most important as Ron mentioned, taking a proven, a very conservative approach we recorded a $92 at overlay regarding the past issue. More so comparable with last year and very stable is the full year numbers the figures as you can see were in line with the figures we had last year and with a combined netback of $62.20 for the full year 2012.

In the next slide you can see the most important indicators for the fourth quarter adding and the full year and in the case of the fourth quarter and the revenues, you can see that we reached more than $1 billion, close to $1.47 billion of revenue, feasibility and reported companies, mostly drilling that volume we have an important increase of the balance in that quarter and it represented an increase of close to 4% comparing with the revenue we had in the same period last year.

Regarding the net income as we mentioned before, we are recording some adjustments here, the most important was the $92 million which a net effect of $61 million to the net income due to the effects. We have had of course a profit excluding that number in this quarter.

The EBITDA despite that we had an EBITDA of $420 million in the period in the fourth quarter of the last year and the cash flow from operations is a very important number 677 million and still continue to produce an important number of cash flow for the company which is our approach, our financial approach and we are privileged with the cash flow generation.

Looking at the full year numbers, 3.9 as Ron mentioned, it’s of course another record for the company for the time-being we continue increasing our production for sure with those are back to normal with a very good number in 2013 but last year we reported this 3.9 that represented 15% higher than the number we reported last year. In the case of the net income, $528 million slightly lower but affected by, mainly by the adjustment in the provision we made for the issue.

The EBITDA represent 2% higher compared with last year and surpassing the $2 million and the cash flow from operations is 1.8. These numbers – it is a huge number, and now once you look the financial decisions and the organic growth during the planning.

Looking at the numbers per share, as we mentioned in the fourth quarter, it was 220 million after all these adjustments reported in the fourth quarter, but mostly comparable with the figures last year and in the case of the full year numbers.

As Ron mentioned, the combining we had 12% less reaching 1.79 net income per share, which come to an increase of 37% compared with the cash flow percent last year, again resulting and related to highlight is that we have capacity to generate fund flows and cash flow for the company to be invested in the growth in the future.

And looking at the financial results, the topic on most was mentioned 3.9 worth of revenue we have a total operating cost of $1.6 billion, of this amount, the most important item was transportation. We are very close to finalize the audit fee provision that will allow us not to reduce a significant cost something between $50 million to $60 million on a year-on-year basis. And this year we will have the OBP in hopefully the second quarter, in the second half of this year.

The other important item was to be mentioned is the part of the promotion which represented 26% of that $1.6 billion and the deal as Jose mentioned before, we are working now with (inaudible) so we are mean to known for dedicate cash flow for that using that along the time and we spent $317 million in 2012 than versus 24%. This used to be the most important in cost side impact meaning that we are still reducing significantly that and something that I would like to mention here are the permits on exploration the production assets which affected the results gives us the less 1990 and it also correlate into the fourth quarter. The assets we – results were reporting in net dollars fully and in 2012 in $14 million for a total of $110, those were most important. And so we think it’s also we like to mention as when we reported $121 in some major investment for losses there and we picked up the losses in our books. But the final item with the very healthy net income profile $520 million for this year in 2012.

Finally, looking at the financial indicators, we have a very strong balance sheet with excellent liquidity ratios, of course supported by growth in production. So we consistently have shown excellent financial ratio that you can see we are keeping the data today again to EBITDA below 1, as you have seen in the last many years and this one is not an exception and also the quarter which is very healthy is close to 20 with keeping those numbers I don’t – years for the company. As the indicators are shown definitely you know a healthy company to face the future to continue in the phase of growth. So after this I open the Q&A session and we are ready for that.



Thank you. (Operator Instructions) Your first question comes from the line of Ian McQueen of CIBC World Markets. Your line is open.

Ian McQueen – CIBC World Markets

So, obviously the most important question is, with the PAP, with the ruling, how does it affect Quifa North and how should we expect production to grow in Quifa North obviously a larger volume of reserves booked to Quifa North obviously that could be an impact. Can you go over that first?

Ronald Pantin

Yes, hi, Ian. Well, one thing that we have to face what you mentioned first on the PAP it would be around 2500 barrels at a keep minimum price of today and so that is not very much compared to the net production that we have. Right now, that is 120,000. So this if it’s imposed it will be only affecting the company to 2% of our net production. Quifa North still has not reached the 5 million barrels that we interpreted, to-date it’s after the 5 million barrels.

They are planning to take Quifa North to 15,000 barrels per day and we it is in force still remember that we have some doubts and our lawyers are working on that. But if it’s taking force, it will be slightly the same as Quifa Southwest. It would be an additional portion that depends to Ecopetrol in the order of 4% to 5% more than what they have right now. So it’s really something that I want to comment is that, you see a company that Pacific Rubiales that with all that provision that related at an over-lift of almost two years of production from April 2011 to the end of December 2012 they effect on our financial was not that big. It was only a focus then on EBITDA and on net income.

Carlos Perez

I would like to add Ian it was – that the effect on the reserves is going to be approximately $4.5 million which is a percent – net percent of our net 2p reserves and that we have booked so far.

Ian McQueen – CIBC World Markets

And just a follow-up on that, how should, because 15,000 barrels a day is not going to produce 81 million barrels very quickly. There is got to be more growth coming out of Quifa North. When would we expect that to occur?

Ronald Pantin

For this year, we have 15,000 by the end of the year and then for next year, we have plans that we are not going to release now.

Ian McQueen – CIBC World Markets

So it’s beyond 2014?

Ronald Pantin


Ian McQueen – CIBC World Markets

Okay. Thanks, guys.


And your next question comes from the line of Frank McGann with Bank of America Merrill Lynch. Your line is open.

Frank McGann – Bank of America Merrill Lynch

Okay, good morning I was just wondering if you could just comment a little bit more on cost trends. I know there were a quite a few special items in the quarter that made it unusually messy, but cost seemed to be going up quite a bit related to water handling, related to transportation and I know that you mentioned the specific plans you have to reduce some of those costs, maybe if you could quantify this a little bit more in terms of the per barrel effects of the irrigation project and the electricity projects as well also maybe perhaps focus a bit on the G&A cost, how you see those trends developing during 2013?

Ronald Pantin

This could be a very important reduction in OpEx. The first one will be electricity. We now more or less 50% of the power that we generate in the Rubiales and Quifa comes from the (inaudible) and the cost of that is very high. When we have the power line going to Rubiales and Quifa, we will saving in those generators we will be saving 83% of the cost.

So we really can save with only 17% of the electricity. And since we are going to also to stop the fuel the power plant that we have there the ICP we would be saving half of the cost because of the fuel that we are using and part of the power plants is Rubiales group. So with that, as I mentioned, 50% we will have a reduction of 83% and in the case of over 50% of electricity it would be 50%.

Then we have for wall hanging more than – when we have the reverse osmosis plant we are right now planting the African palm and 50,000 hectares so at the beginning, 1 million barrels per day of water will be – it’s better to re-getting that into the reservoir, we will be doing through this and as we got some results from let’s say 35% per barrel of water, that’s a 1 million barrels of water to $0.17. So it will be half the price, half the cost for that 1 million barrels.

The other thing that’s important is transportation. We reached an agreement with Talisman and with Total to have some capacity in our center from March, April June and July and then that’s appropriate to 20,000 barrels per day around 28,000 barrels per day. So right now we have – both barrels that we were transporting by trucks.

Right now, we are transporting that by pipeline and that reduction in cost when we go to the coast is around $35 per barrel and if we use the pipeline, it’s around $12 per barrel. So it’s a huge savings that we are having in this 28,000 barrels per day. After July, we want to expand this contract.

However, we will have this continuous pipeline, and which by continued pipeline the cost will be in the order of $13 per barrel. So also we get a huge savings compared to using trucks to get out oil to the coast.

Frank McGann – Bank of America Merrill Lynch

Okay, and in terms of G&A costs this year any thoughts?

Carlos Perez

G&A, we have been able to cut a lot of G&A. We are working on that actually. This year, we moved to a new office where we have all departments together. In the past we had six buildings and we have been working hard on that. Actually, we had a very interesting reduction of G&A compared to revenues this year.

Frank McGann – Bank of America Merrill Lynch

Okay, thank you very much.


Your next question comes from the line of Nathan Piper with RBC Capital. Your line is open.

Nathan Piper – RBC Capital

Hi, good morning guys. I guess, kind of a fundamental question here, the progress you made on Star and you’ve gone back to wells on Quifa which should come up primary production only recently and do we expect the same source of results that you enjoyed there on wells on Rubiales is of course is where it’s originally planned for with the water cut is much more significant?

Ronald Pantin

Definitely, right now in the area of the pilot project, we have around 90% water cut that is very similar to the one that we have in Rubiales. And we have had this very good response. We think that to take this commercial will be very easy as we have all set, when we drilled it less we drill in a pattern that this is one that we use for star 135 wells that will begin injected and five or six horizontal wells that will be the producers. The changes that we will have to do in the future, it will be mainly a compressor, air compressor and the fertility to feed the H2S and the acid waters. But no more than that. And so the cost to convert the shipping patterns of a well to start will be able to very low cost.

Nathan Piper – RBC Capital

Okay, or just to put it in context, how much more information do you need from Star before you would roll this out more extensively? So this you are going to get all the data I suppose and how confident on success by the end of the year which you then start rolling it more extensively?

Ronald Pantin

Well, remember that we have – we made the reservoir only 22 days ago, so it’s very premature to say, but the response has been great to see that the production has grown 70% in only 20 days and we have seen also a reduction in water cut. So I think we will meet by the end of the year because the important thing here remember in starting not only the growth in production that is important but also the growth in recovery and as we have than more than really the reaction the reservoir have been better than our model.

Nathan Piper – RBC Capital

That’s clear. Thank you.


Your next question comes from the line of Matt Portillo with Tudor Pickering Holt. Your line is open.

Matt Portillo – Tudor, Pickering, Holt & Co

Good morning guys. Just one quick question on Star and then I had one follow-up. In regards to Star, could you give us an idea of the actual production levels that you’ve seen from an increase perspective? Just trying to put the 70% in context.

Carlos Perez

It’s a period I cannot give you the number, because we have to present the numbers first to the ministry regarding on that. That’s why we included into terms of growth – as a percentage growth. Sorry for that, but soon we will be releasing the numbers.

Matt Portillo – Tudor, Pickering, Holt & Co

And then just a second question, switching over quickly to Brazil, I was wondering if you could give us your initial thoughts on the Kangaroo discovery? And how you guys think about that in terms of the process moving forward to potential move that to commercial development?

Ronald Pantin

Mark, as I mentioned during this financial presentation, the Kangaroo discovery was on the structure and we had already agreed with our partner that we would like to drill an appraisal well on high on the structure in order to have a better netback column on that.

So our plan is to as soon we complete the – go through the well, immediately after the Emu which is currently under production and the drilling and we expect pretty soon to reach TD on that well.

After drilling the building one well we plan to have an appraisal well in order to assess and come out with a conventional resource into reserves in the Kangaroo discovery. Of course our plan will depend on how successful we are going to be in this next wells that we are building the Emu and the delivery cost, we can decide it to drill appraisal wells in any of these 200 wells if we have a larger discovery there. So the plan is still a preliminary.

What we are doing is looking to get the rig in order to have a rig availability for doing the appraisal well not only Kangaroo but in the discovery in the Emu-1 and the Bilby-1 we are also will likely to proceed to that fleet to appraise those two blocks.

Matt Portillo – Tudor, Pickering, Holt & Co

Thank you.


Your next question comes from the line of Christian Audi with Santander. Your line is open.

Christian Audi – Santander Investment

Hi, good morning guys. I was wondering our environmental license is still getting the way of your production or all the once you wish for already granted, in other words, right now you mentioned you are producing, Ron, 128,000 barrels per day, is there any potential upside from this number just by getting any other additional environmental license? Thanks.

Ronald Pantin

Yes, remember that we have a guidance that was between 15% and 30% over last year. So what we are between 115,000 and 130,000 hours for this year. We are right now on the top side of the guidance, 128,000. We mentioned before, we see Cajua going up to $15,000 barrels per day by the end of the year. So you can add into that Cajua is producing only 3000 now.

So it could be adding 12,000 more. Also we have in PetroMagdalena, we see also important increases in night production. And also CPE-6 in we have not received yet the license that is probably our most important project. Remember by 2015 with the Talisman and we consider that CPE-6 could be somewhere in between Rubiales and Quifa. So the important production will from Quifa once we have the license with the environmental license.

Christian Audi – Santander Investment

All right. Thank you.


Your next question comes from the line of Felipe Santos with J.P. Morgan. Your line is open.

Caio Carvalhal – J.P Morgan

Hi good morning. This is actually Caio Carvalhal speaking. Fortunately, most of my questions were already answered. So I will touch a different topic here on the Rubiales field. I remember of an old report since I remember in year end 2010 before on top of you get 2P reserves that would be recoverable and toward the end of the contract.

The report was also mentioning about 90 million barrels of oil collected by the contingency upon further development commitment, our further development wells planned to be drilled. I would expect that from that point on, the company will be freeze not dramatically.

But it’s slightly increasing its well development commitment in order to price increase a little bit of 2P reserves. However, the last two years we’ve seen reserves, proven reserves at Rubiales field, proven controllable reserves at Rubiales field is declining exactly at the same level of production.

So basically there has been no additional volumes been added on that 35 by year end 2010. My question would be is that related to the environmental permit delays or maybe the company having to direct its efforts to other areas? And therefore, we should not expect to see any further increase in Rubiales until 2016?

Or no, or actually this is something punctual and you guys lead that maybe we could see some additional volumes being added? I am always assuming that the contracts will expire by mid-2016 in case, so basically, do you believe is that possible to see some additional volumes in Rubiales or actually this is I mean, the company is actually focusing in different areas? That’s my question.

Ronald Pantin

Yes Felipe, yes our plan is to increase Rubiales this year to 120,000 to 125,000. So – and we are approaching to 110,000 barrels in Rubiales. So you’ll see an increase this year. We have also included some new areas in the Rubiales area and new areas with the southeast and southwest of the Rubiales field.

And we have done some provisions and so, I think that we will also have increases in Rubiales to keep that target of 225,000 barrels by the end of 2016. But let me tell just one thing. I think, right now we are in conversations with Ecopetrol to see a sort of extension on the way from Talisman.

We have had conventional relations with Ecopetrol actually, remember that Talisman was producing only 14,000 barrels per day only five years ago and now it’s producing 210,000 barrels per day. We have some advantage that we can bring to the association, one is the electricity, that electric power line belongs 100% to Pacific Rubiales.

The water treatment that is the company that belongs 100% to Pacific Rubiales, all the farm plantations belong, the surface belongs to Pacific Rubiales and we have to realize that with Ecopetrol that we can work together and that’s what we have done. So, yes we are going to bring out one of looking to wait – probably not one has any tension with the same conference, but we are looking forward how to expand the lack of the reservoir.

And the most important and what I mentioned before is our technology that is proven to be very good technology to increase the recovery. If we don’t do anything after 2015, or Ecopetrol doesn’t do anything after 2016, Rubiales is going to be have a work out of over 97% that barrels – of water per barrel. The cost will be very high and to expose that water re-injecting the water is going to be very expensive. So I think, for the best interest of Pacific Rubiales and Ecopetrol which we will be looking and that’s what we are doing actually for ways how to extend ways probably individual type of contracts for Pacific Rubiales field.

Caio Carvalhal – J.P Morgan

Okay. Thank you. And just a follow-up on this question. After several years of additional volumes in Rubiales, any particular reason why in the last two years the decline in reserves was exactly in line with produced volumes? Any specific reason why there was no in this last two years?

Ronald Pantin

One, because we don’t have exploration and but right now, as I mentioned we have this, we have some new reserves in Rubiales in the Piriri area and also in the Rubiales area southeast and southwest of our Rubiales and Piriri. And we will see some of that. But the most important thing for you is that, our plateau will be and we will reaching this year that plateau between 220,000 and 225,000 barrels per day.

Caio Carvalhal – J.P Morgan

Thank you very much.


Your next question comes from the line of Jamie Sommerville with TD Securities. Your line is open.

Jamie Sommerville – TD Securities

Hey guys. So I wanted to ask about the reserve valuations that have been published in your NI 51-101 Form 1 that was filed this morning as well. So on the post tax PV 10 for the 2P reserves, it looks like those have declined by about $2 billion year-over-year. I realize there is a pretty complex calculation including pricing.

There seems to be a very large increase in operating costs to over $19 billion in the assessment of future operating cost of the reserve engineers put together from less than $8 million last year. I am just wondering if you can try to explain what’s driving that.

Ronald Pantin

You know that independent engineers will do the calculations and we have to respect that. Yes, there increase in cost – was bit down in here water irrigation or water disposal and they have not included yet the power line. So that’s important. Remember, that we will producing more and more water between 20 feet less water like we are doing and that’s an incremental cost.

If the water cost goes up from 92% to 97% for sure you will have higher cost. But what we are doing is freezing that cost, using the water purification same thing I can say for – if we continue generating power in the field using diesel the cost is going to higher and higher and they have not included that into their calculations. Now, when we have the power line riding that will be now in the second semester and when we have that reversal of plans which they will be able to include that into the calculation.

Jamie Sommerville – TD Securities

Are you suggesting that previous reserve reports perhaps under estimated the operating cost impact of increasing water cuts and I realize that you have potential initiatives that are likely to reduce operating cost going forward that those haven’t been accounted for, but wouldn’t reserve engineers have taken into account the water cut would it increase over time in prior reserve reports?

Ronald Pantin

They have included, but they are increasing that in the water cuts for sure. And they have done and I have seen but they have different practicing areas and we will have to look very organic, all their calculations and see what’s happening. But the important thing which are the expected volume for 2012 – we are adding value when we have volumes.

Jamie Sommerville – TD Securities

Right. Although the independent reserve engineers are suggesting something else, but, at least year-over-year this year, just one last question on this, I assume their calculations have not yet adjusted for the arbitration decision and assume your interpretation of the high priced royalty on the Quifa contract, is that a reasonable assumption?

Ronald Pantin

No, they have not and but as Jose Francisco mentioned before, that will be around 4 million barrels and 4 million barrels for Quifa Southwest. And 2 million barrels is 0.7% of our Pacific Rubiales 2P reserves.

Jamie Sommerville – TD Securities

That’s the impact over the life of these fields?

Ronald Pantin

Exactly. Yes, yes.

Jamie Sommerville – TD Securities

Okay, thanks.

Ronald Pantin

Well, you have some assumptions $85 is high and you have to assume because it is related to prices and all of that.

Jamie Sommerville – TD Securities

Of course, of course. Thank you.

Operator your next question comes from the line of Gustavo Gattass with BTG. Your line is open.

Gustavo Gattass – BTG

Good morning guys. I had a number of questions but I limit myself to just one. I just wanted to understand the carry for the Peruvian assets that is mentioned in the press release, I wasn’t able to find how much it is reduced by as a result of how you guys settle that with PPZ. Can you let us know more or less how many million dollars are now accounted for?

Ronald Pantin

The transaction was for $235 million and we paid in $65 million ahead and the rest was a carry. Right now, we see half around $30 million to get to carry then.

Gustavo Gattass – BTG

Right now, you still have $30 million to carry, is that the number?

Ronald Pantin


Gustavo Gattass – BTG

80, okay. And how much was the adjustment for the 2012 profits?

Ronald Pantin

The adjustment

Carlos Perez

Sorry say it again Gustavo.

Gustavo Gattass – BTG

The press release that you guys sent out is one of the notes that mention we did not book profits for the BPZ during the year of 2012 until the settlement of the deal not supposed to have growth, we lowered as commitments.

Ronald Pantin

That’s right. The production, the net production has been our production since the first of January 2012 and that production was predicted through the carrying amounts. And I don’t have the number here, somebody have it? But that’s something that I don’t have but it’s the profit of this around 1500 to 1600 barrels per day during the whole year. That was created against the current.

Gustavo Gattass – BTG

Okay I will follow-up later with somebody. Thanks guys.


(Operator Instructions) Ladies and gentlemen, this is the operator. I have been informed that the time limit for this call has been met and I would like to turn the conference over at this time to the company for closing statements.

Ronald Pantin

We have seen with this call and that was announced yesterday that Pacific Rubiales is a very strong company. Actually, we provision almost 14 million barrels and the effects on our financials wasn’t that much I would say 4% in EBITDA and 10% in net income actually and this is our net income we have all the non-cash items like exploration, and all that. So this company is producing a lot of cash flow where we can really make those provisions without affecting the status of the financials of the company.

For the future, we have a company that has very large reserve of 2P reserves, we are talking about 514 million barrels. We have also a very large acreage where we will be filling our reserves through exploration and also exploration you know that we developed very quickly and in the case of key plant and which are to be fixed.

We are putting here some investment so we have the permits will be going very quickly to get production CPE-6. We have never had problems with the pipelines. Right now we are the only company in Colombia that has no problems with the transportation.

As I mentioned before, we contracted this for four months with 28,000 barrels from Talisman and Total and after that, we will have (inaudible) and so we don’t have any problem as the transportation cost is going to be low.

Again, same things happens with cost reduction, transportation, production and acquisition, handling, power, the company is always taking actions but reacting to the future to get lower cost to not to have bottlenecks in the pipelines, ports, or anything and we have also now diversified the company to mitigate counter risk and we have been very successful in that strategy and also in the field. In the field we had a important discovery in the Peru and Blocks and the Kangaroo well and we expect to have the more efficient.

And probably last but not least there is an important secondary report. We are very, very optimistic about what’s happening right now with Star as Star is going to show what we have told in the past. It’s been a long journey to get what we are right now, but right now we see in the field and the reservoir what we have planned for. We have some key drivers in the short-term.

In the case of exploration development, Cajua is one of those with 15,000 barrels per day, it’s looking good, and it’s looking excellent I would say. CPE-6 we are ready to increase production as soon as possible. We have (inaudible) to take it to CPE-6 at the moment that we have the E&P license.

The Z-1 block is right now, we will try to optimize the development of the Z-1 block. Now that we have the 3D seismic to locate in a better place the CX-15 platform. We and PetroMagdalena C&C, we see that all of these are blocks that are increasing its production. In the mid-term we see, Z-1 block, one that right now scrutiny for a second phase of our LNG project and also we did see in all these blocks that we have – at exploration covers.

In the late longer term, we see more our international like what is going to happen with price, I think it could also be at the short term, if we decide to – somebody decides to buy those assets that I think right now are under conversation with Interoil and not also think about a general – interested in the block is looking good. And then we have in that exploration in the Big E exploration in the hopper lake in Peru and CGX in Guyana that right now we are looking to have control as CGX as we already in this. Thank you very much.


Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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