Pacific Rubiales Energy's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Pacific Exploration & Production Corp. (PEGFF)
by: SA Transcripts

Pacific Rubiales Energy Corp (OTCPK:PEGFF) Q1 2013 Earnings Conference May 9, 2013 9:00 AM ET

Operator

Good morning. My name is Matthew and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Pacific Rubiales Energy First Quarter 2013 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. We are very pleased to announce the results of the first quarter of this year. And you will see us on record production, revenues EBITDA and some other financial periods, but probably more important than that is that we have right now have the some of the initiatives that we have for the reduction in costs and also for – our production in our country.

For the operation and the financial highlights, we’ve reached 128,000 barrels per day, average per day, net production after royalties in the first quarter and that’s the growth of 37% if you compare that to the first quarter of 2012. But also a 19%, a very solid 19% over the fourth quarter of 2012.

So it means 30,000 barrels from the first quarter and 20,000 barrels from the fourth quarter. So we have increased in average 20,000 barrels over the fourth quarter of last year.

We have a very important increase and strong revenue of $1.25 billion of – that’s a 35% year-on-year. We have a record period for EBITDA that’s $695 million very close to $700 million and that is a 28% increase over the year-to-year and 55% increase – 55% of the total revenues.

Cash flow from operations was $623 million. We have also a very strong combined netback of very close to $61 per barrel of oil equivalent. One thing that is very important and you know the concern that we have with the increase in cost. We have a reduction of over $4 per barrel of oil equivalent against the fourth quarter of 2012 and we have also certified 420 billion barrels of resources and as you all know we have the submission for $1 billion of senior unsecured notes at the rate of $5.18 maturing in 2023

In the first quarter the market was very volatile. Actually, the WTI is still lower 90s, higher 80s during the quarter, but that brand went down from very close to $120 to around $100 per barrel and the pricing for instance was – came down from $17 of the pricing ratio between Brent and WTI to around $9.

But we have had very good premiums in this quarter. You can see for that Castilla we had $8.2 premium average for the quarter and for Vasconia very close to $12 premium over WTI for Vasconia $8.2 for Castilla and $12 for Vasconia.

The market – we used to have one-third to Asia, one-third to Europe and one-third to the US and during this quarter our sales were mainly to the US 53% went to the US and 11% to Europe. So it’s more or less two-thirds between the US and Europe and the rest went to Asia and Latin America.

Another thing that is important is, we have record sales, very close to 13 billion barrels during the quarter and our inventories were very low at 1.1 million barrels. So we had an excellent quarter in sales of oil.

One thing that I wanted show you is the production growth of the company. You can see h ere in the – for this first quarter from the first quarter of 2012 to the fourth quarter, by quarter and then compared to the first quarter of this year. You can see how our production has gone up from 94,000 barrels average to 128,000 barrels net after royalty.

But one thing that you can see also that we had a very important increase of around 20,000 barrels of heavy oil, but we also had a very important increase in light of our 10,000 barrels per day. And that’s due to the acquisitions that we have last year of PetroMagdalena and C&C.

This is the first time that we consolidate C&C and the results and 128,000 barrels or 12,000 barrels of oil equivalent of natural gas.

If we see the financial performance through last year and this quarter, you’ll see that the revenues well within or very strong going from $132 in the first quarter of last year to a record quarter, this quarter of $1.25 billion this quarter. We also can see here the EBITDA going from $542 million to a record of very close to $700 million this quarter.

We have always had a very strong cash flow from operations with the section of the second quarter of last year. But that’s due to the building of income taxes and the net income, we can see that we have reversed that payments here we have in net income and we are picking up again in net income.

The reason for the net income and the difference that you see higher EBITDA and a lower net income is mainly to DD&A and income tax provisions. You can see here in this graph and it’s a very interesting graph where the cash costs have – what it used to be 81% of the cost and the non-cash cost only 19%.

Now you can see that for us depreciation and some income provisions, but right now the non-cash cost is almost 33% of our cost. Carlos Perez, our CFO is going to give you more detail on that because this is a trend that we see with the DD&A and that’s mainly due to the depreciation that we have in two years.

Operational netback, you see that we had a trend of – in the order of 63 to 66 during the year with exception of the first quarter where we have a 78, but that was due to very high oil prices. Almost $11 per barrel more than the rest of the year.

And also in the fourth quarter of last year, where we had a provision for the PAP arbitration that was over $9 per barrel and that’s why we have EBITDA netback of $47. But you can see also the cost – the total cost and you can see that the total cost went from the $32 to $37 then it went up to $43 with the PAP, but now, again we have it in the order of $38. So we have a reduced total cost in $4 with the initiatives that we are taking to the reduce costs.

These initiatives are very important and you see that the harvest of this, the fruits of these initiatives during the year. One of the things is the cost of electricity, here that we have a line, a power line that belongs 100% to Pacific Rubiales that will take high electricity to the Rubiales and the Quifa field.

As you know here, we will have a very important savings in the cost of electricity. In the case when we use power generation using diesel the savings will be 83%. So that the cost of electricity there will be only 17% of the actual cost that we have when we use diesel and when we use in the IBP Rubiales that will be half of the cost that we have right now for the IBP.

Another thing, another concern that we have as you know the heavy oil again this year, we have a high water cost of nearly more than 90% and one of the important cost was handling and the disposal of water. Now we are putting some reverse osmosis plants and we will be using that water for irrigation and we will be cutting the cost of the water disposal in half in the order of $0.35 per barrel of water to $0.17 per barrel of water.

Another reduction is the using the maximum of pipeline transportation and for that we have increased the capacity of 40,000 barrels per day. We have also finished the diluents possibility in Cusiana, with that we will be able to pump from the Rubiales to Cusiana at 16 degrees API saving cost of transportation of diluents to Rubiales and then we will complete the dilution to a 10% in the area of Cusiana using our own goods.

With that, we will have the very important reduction not only in the dilution cost, but also in transportation cost. Another thing very important for the company is as you know, we have 33% of the bicentennial pipeline with that we will have 40,000 barrels capacity for the company and with that we will be able to accommodate our likelihoods and also some other tools of reducing the natural gasoline almost to zero.

And if we are ready with the natural gasoline to zero, for sure then the dilution cost will become zero and that now there is more or less one-third of our total cost. So it will be huge reduction that we will have when we can implement all the effect will be to reduce the dilution cost.

Another thing I should know prior to necessary – for Pacific Rubiales we have seen that the next quarter will be the top level. Now this is kind of crowded, but I will continue again more and more crowd when they come on to production keeps to ramping up and for that we have a new port that is Puerto Bahía where Pacific Rubiales has 56% of that port.

And it’s going to be a very important port with more than 3.3 million barrels of storage. We will be building a new pipeline between Coveñas and Cartagena, Puerto Bahía and that will be a joint venture of Pacific Rubiales 50-50. So with that we will be able to also to avoid any problems with the capacity.

Here the Pacific Rubiales has – is to get all these assets that are in the order of $2 billion and that the 35% of ODL, 33% of OBC, 100% of the transmission line, 50% of OLECAR, the percentage that will be in the order of 55% of Puerto Bahía and a spin-off of those assets during the period of Pacific Rubiales and we are still in that and in the future we will be doing an IPO with that appeal.

The idea for that is to monetize some part of that. We will stay in the order of 40% let’s say and so we will keep the operational control of that appeal, but that we will be able then to monetize growth as you know the market is giving better multiples for companies that have a very regular cash flow.

And here we will enjoy a little, because all these pipelines and transmission lines have a take or pay in long-term.

Another very important thing that is happening in the company is STAR. STAR is doing very well. It’s much better than we had it. We have to streamline some of that work to have – it’s a very important increasing production and also a reduction in water clog. In this graph in the lower left corner, you can see the fire front is progressing very well and we have the more important thing of that is the – from the STAR, that is a synchronization.

But we have been able to maneuver the fire front and we are very glad with the results of that. We think, that we will be able to get to the market at results sooner than we expect. We have seen a very important increase in the – but then that’s something that we will have to do with lifting engineers.

Now, I am going to pass it to José Francisco Arata that’s going to be talking about exploration.

José Francisco Arata

Good morning to everybody. As you know, we announced during the first quarter of this year the certification of the prospective resources which grow to 4.3 billion barrels of oil equivalent from the 2.8 billion barrels that we certified in 2011.

This represents a 55% increase. However, management numbers are slightly higher over 7.5 billion barrels of oil equivalent. These resources has been estimated in 74 prospects and 49 leads which are diversified across countries and geological risk and 46% of these potential prospective resources are located in Colombia and about 41% are located in Peru.

Now regarding the 2003 exploration plan, the company has a very aggressive plan to evaluate 1.05 billion barrels of oil equivalent on 35 prospective resources with an investment of capital expenditure investment of approximately $500 million. Approximately, 30% of the wells are high impact and high risk Big E, as you’re going to see during this presentation and we’d like to mention that during the first quarter we built 8 exploratory wells of which 5 were successful and I would like to show some of these successful wells.

In Cubiro for instance in the Llanos Basin of Colombia, we drilled the Copa D-1 and found a total net pay of 27 feet with an initial production of 900 barrels per day of 40 API oil.

The second well of this block was the Copa A Norte-1 well which showed the presence of 25 feet of net pay with 770 barrels of 42 API. Remember that this light oil very important for us for the strategy of using the light oil at the diluents for our heavy crude production.

In the other block that we have in the Llanos Basin, Arrendajo block we drilled the Yaguazo-1 exploration well which found 14 feet of net pay with an initial production of 400 barrels per day. An appraisal campaign is being prepared after testing of the Yaguazo-1 well and we are also planning to drill a second exploratory well this year in the Mirla Blanca Prospect located southwest of the Yaguazo discovery.

Regarding the Lower Magdalena Basin in the Guama Block we drilled the Manamo-1x production well which found 251 feet of net pay of 54 API condensate natural gas rich source. The Capure-1X well was spudded and the well intersected approximately 23 feet of gas condensate pay and the next activities in this block include finishing drilling this Capure-1X well and testing well and carry on extended production, but also on over the four wells that we drill in this block.

I would like to point that the exploration of this block has been adding important natural gas reserves, which further support our small-scale energy project which is undergoing and we expect to get into all operations with this project during the second half of 2014.

Now let’s talk about the high impact exploration wells and let’s go to Peru. In Peru, on April 16, we spudded the Yahuish 1X exploration well. This well is targeting Paleozoic, Copacabana and Ene Formations as its primary objectives and the formation of Agua Caliente and Cushabatay Formations of the Cretaceous as the secondary targets.

We have already intersected the Cretaceous Formation and indications from the drilling are suggesting that we have an active petroleum business within the Cushabatay Formation. This is very, very encouraging the formation and we keep drilling in this well. We presently are at 3133 and presently entering this into the Yahuish Formation.

So please keep an eye on this well because during the following weeks, we plan to reach and then have a full evaluation of this well.

Continuous with the high impact exploration, moving to Brazil, in these blocks, these five blocks where we have 30% working interest with our partner in Kangaroo. As you know, we announced during the first quarter the completion of the drilling of the Kangaroo-1X well located in the S-M-1101 block and this well encounter a 58 feet of net oil pay.

The second well, the EMU-1X was drilled which shows in the Eocene section and gas shows in the Santonian section, in the, down-flank of structures with remaining up dip potential. And we are presently drilling the third exploration well, the Bilby-1 well, an oil discovery was recently announced with an n inter-bedded sand and shale interval of late Cretaceous age, confirming from sampling over a 200 meter gross section

However, we are presently completing the analysis and interpretation of the well line locks and the fluid and pressure samples that we collected in this section and soon we will announce this result. The drilling has resumed planned to reach the lower Cretaceous target, the primary target at a total depth of 15,050 feet.

Now moving back to Colombia and in the CPE-6 block we complete the acquisition of 366 square kilometers of 3-D seismic in the northern part of the block and we are presently interpreting this 3-D seismic in order to have all necessary information for the drilling campaign that we hope is going to start in the second half. Soon we’ll receive the environmental license to resume the drilling in this block.

And in the Sabanero, a block the commerciality of the field was declared during the first quarter and two wells are for the planning of the second half of this year. Also I would like to mention that aeromagnetic and aerogravity surveys were initiated in the COR-15 and COR-24 Blocks; also processing and interpretation of the recently acquired 2D and 3D seismic data in the Muisca and COR-15 and Portofino Blocks is ongoing and we expect to have the resource identifying future exploration wells in these locations.

Finally, I would like to mention that in Guatemala, we are ready to start drilling our first exploratory well in the first – at the beginning of the third quarter. Now I will give the word to our CFO, Carlos Perez who will talk to you about the financials.

Carlos Perez

Thank you, José Francisco and good morning to everyone. I like to start, well, those who have seen me during this presentation, we have excellent results this quarter and there is no interception with profit and loss. You can see a summary of the profit and loss here. Departing from the revenues, which were $1.3 billion, we are reaching $121 million in income.

Going to the details of these financial statements we would like to mention that regarding the – in brief in – with respect of the three months ended in March the 31st 2012, we have an increase of $326 million attributable mainly to the volume in – increase in the volume as – of 4 million barrels towards the comparison of the two periods.

And despite the lower price of – we could offset totally and to have an increase of $327 million. That means that, we are less vulnerable to the market swings and this represents and the strength in our financials and in our balance sheet.

Going through the details of some of the most important items of the financials, I would like to go the operating cost, as Ronald mentioned before, these has been all of our great concerns during the last months we should remember that we have absorbed two companies in the last nine months.

And we’ve been able to control even the operating cost and the G&A during this period. Regarding the specifically to the operating cost, we have a total operating cost per barrel of the $38.72 per barrel for crude oil. That compares with a $42.89 of the fourth quarter last year, a reduction of $4.17 mentioned before by Ronald.

The same behavior with natural gas. We have a reduction of close to $1. This is attributable mainly to the optimization of water treatment. We are working and that regarding in the field and the internal transportation of fluids, there was a reduction here.

We negotiated all the tariffs with the providers, the suppliers of those services as well given the important savings and less maintenance on roads and general maintenance on equipment as well. This is part of our comprehensive program we are deploying now as Ronald mentioned. So we are expecting to have better results on this area in the future and coming months.

Regarding the transportation, we are still transporting a significant volume through trucks and in this period, in the first quarter, we transported approximately 23,000 barrels per day. As you know, after completing the OEC pipeline, we will be able to reduce this transportation cost significantly by using those facilities for getting access to the terminals.

Going to the G&A, we can see here in the case of G&A, we have 5.7% of organic comparing with the revenues. We are keeping control, as I mentioned before on this line, and in comparison favorably regarding the fourth quarter and in the first quarter of last year.

Again you should remember that we had merged two companies in nine months without any important increase in D&A in fact we have reduced it.

Going now to the details of DD&A. This is one of the most important lines in the financial statements. Of course it’s a non-tax item and of course it’s a tax shield of the company. It is an importantly tells to generate cash and of course maybe – as well. The most important impact can be seen in the Rubiales field.

We have a DD&A of close to $180 million in the case of Rubiales and the second important is Quifa and now we are adding also in this quarter and this is very important the C&C and together with PMD as well it represents an important amount within this important line of the financial statements.

It’s important to mention that we are deprecating by production units, but in the case of Rubiales the horizon of the remaining refers is four years. So that is one of the reasons, we are having more and more DD&A in the Rubiales field.

Finally, after developing all these cost now we had the result of $121 million and going through the many details I would like to stress some important points. The one is in the case of EBITDA on an annualized basis, after at the end of March of 2023 we still have an indicator less than 1 which is very good this is gross and we are expecting to reduce this to 1.7 gross and let you know 1.5 net for the net of cash.

And in the case of our EBITDA to finance cost-annualized close to 19 times, this is very important and this is one the reasons this is strong balance sheet that the debt market has been generally very positive regarding the bond recently issued and now the yield is 4.75 which compares very favorably with the original coupon of 5.18. So the debt market is giving off an important premium on this important issue we know recently.

The rest of the indicators, I think it speak by themselves, very good in the networking capital $394 million, the current assets and the current liabilities $1.21 million, the fund flow from operations is, this is a record for the company again and $506 million and the rest of indicators were mentioned before.

But finally, I have to stress this strong balance which will allow us to continue to grow, to support the growth of the company, the operations and the future CapEx for continuing with this important strength.

So thank you very much and we are ready for the Q&A session.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from the line of Frank McGann with Bank of America. Your line is open.

Frank McGann – Bank of America Merrill Lynch

Hi, good morning. Just looking at the rest of this year, how should we think of production trends overall for the portfolio, particularly looking at the Rubiales and Quifa fields? How much additional water processing and disposal capacity would you need to be able to maintain production or potentially grow production and if you can grow production in those fields from the first quarter levels what would you target as you go towards year-end this year and in 2014?

Ronald Pantin

Hi Frank. Yes, we see Rubiales growing to right now; Rubiales is 210,000 barrels per day. We expect to take it very close to 220,000 barrels per day by the end of the year. In the case of Cajua, it is now producing very close to 15,000 barrels per day. We expect to finish the year with over 10,000 barrels per day.

We also have in the case of the PetroMagdalena fields; we have been increasing our production significantly. You have seen that we grow the company. The net production was in the order of – less than 2.5000 barrels per day. Now we are in the order of 62,000 barrels per day. Going up probably to around net to around 8000 barrels per day to 9000 barrels per day.

Then we have CPE-6, in CPE-6 we are ready. We will start ramping up production when we have the license in E&P environmental license and we are pretty much structured in all the facilities. We are ready to go and we expect to have all depending when we have the environmental license we will be able to ramp up production very quickly.

Also we will see an additional production coming from Peru from the Z-1 Block that leads where we will have the CX-15 platform in place. We had a building there with some acres. But now they are ready and we will start pretty soon.

So, we are still keeping our guidance and we are on the top of our guidance. There is 128, 30% more than last year. But when we have all this things ready we will give you a new guidance for sure that guidance will have some additional volumes.

Frank McGann – Bank of America Merrill Lynch

And to get to the numbers you mentioned at year end for Rubiales and Cajua, can you do that without any additional processing capacity?

Ronald Pantin

Yes, we can do it’ remember that in the case of Cajua, it’s another field that it’s a new oil field. That is separated from Quifa southwest and also from Rubiales and we have enough capacity right now to increase the production in Rubiales as I mentioned to close to 220,000 barrels for already disposal from the 220,000 barrels. So really we are not right now, we will have restriction and water that we have.

Frank McGann – Bank of America Merrill Lynch

Okay, thank you very much.

Operator

Your next question comes from the line of George Toriola with UBS. Your line is open.

George Toriola – UBS

Thanks, morning guys. My question really is around the PAP that you talk about, the $4.17 operating cost reduction that’s due to PAP. Can you please explain what that is exactly?

Ronald Pantin

Okay, we have – remember that the day that we were announcing the fourth quarter results and year-end results, we have replacement provision where they say that the PAP should be calculated in the 100% of the share and not in our share. With that we have to make a provision that of around $96 million and that means around $9.1 per barrel of average.

We will be paying that in cash. So you don’t have to worry about the future losses in production and we have already paying the PAP the additional volumes that is 2.5000 barrels per day. But it would means that we have implemented our gross production that has not impacted the company.

When we said before we were producing the – before we have this resolution with PAP, we have 128,000 barrels net for the company and now that we are paying the additional incremental production with the – having 128, because we have increased our production. So we have already covered the additional production for the future and therefore the past we have already provisioned as I mentioned before $96 million.

George Toriola – UBS

Okay, but maybe just to be clear, the – that difference between the 100% and your interest in the field, is that recorded as operating costs or is that’s recorded as royalties? Where does that show up?

Ronald Pantin

That – in the PAP it will be a provision and it was treated as a cost and that was another list. In the future it will be shared, we are losing share.

George Toriola – UBS

Okay, so going into the future, so next – this quarter, Q2 for example, so essentially what you are saying is in Q1 that was a one-time event?

Ronald Pantin

It was a one-time event and I also told you that we are now – doing Ecopetrol as higher working interest and that has not affected the company, because I mean we have that same 120,000 barrels net because we have increased annual gross production. So, and actually that was around 1.7% of our net production and we increased our net production. So we will keep in the second quarter, we will keep exactly in the same production level we had – I mean in the first quarter, actually we are growing production.

George Toriola – UBS

Okay, thanks and maybe just a quick follow-up. Can you just in Quifa and Rubiales, what is the water contribute in each of those fields and what is your water handling capacity today?

Ronald Pantin

Right now, we have right now around 92% of water cost and we are actually releasing that because we have transit – pay and when we do drill a new well, you have initial water cost in the order of 10%. So we have been able to reduce the water amounts around 500,000 barrels per day using that strategy.

So we will have – right now we have 2.5 million barrels of capacity – disposition capacity of water and by the end of the year, we will have – I mean for the fourth quarter of this year, we will have the reverse osmosis plant and with that we will be able to use the water for irrigation and that will almost without any problem to use the water. And that will be – the water will be one million barrels more of capacity with this reverse osmosis plants.

George Toriola – UBS

Great, thank you very much.

Ronald Pantin

Okay.

Operator

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. Just a quick question for me on the midstream, downstream spend, I was curious if you could give us an idea of the rough EBITDA generation you guys see in those assets and you mentioned potentially $2 billion in value. I was curious if there is any debt associated with those assets?

Ronald Pantin

At this moment, we are not ready to give you more details on that I think, but soon, this is a project that is we are working with the investment bankers and it is separate – us to give you all the details soon, we will be announcing all the details from the first there will be a private placement and then afterwards there will be an IPO for that.

Matt Portillo – Tudor, Pickering, Holt & Co

Right and then just a quick follow-up on your share repurchase and dividend. You instituted a new share repurchase plan. Should we expect given where your equity is trading at today that that we should start to see share repurchases during this quarter and then secondly, you mentioned in the press release that you are looking at potentially increasing the dividend. I was curious if you could give us some color on where you potentially could take your dividend yield to over time to attract additional investment?

Ronald Pantin

Right now, we are preparing that for our Board of Directors and what we have is the two options open, either buybacks or EPS in the dividend. But that’s something that we – but it will be – we are looking at right now, we want to propose to our Board what is the best strategy. Actually, that – when we went with the buyback program that you see that doesn’t mean that we are going to go for 10%. Some people have mentioned it’s just off to – but it never will be a 10%.

Matt Portillo – Tudor, Pickering, Holt & Co

And then just a final question for me. On your PAP I think you mentioned at the Analyst Day that maybe something you may look to do divest. I was wondering if you could give us any update on where that stands and how much capital you have invested to-date in acquiring that asset?

José Francisco Arata

Well, as you know we had 10% working interest on that asset and we plan for this year to drill an appraisal well on the Tric/Rapt’s structure and remember that we had the discovery last year we plan with the appraisal well to get the full value and full estimation of the reserve with the Tric/Rap. And the investment for the well is going to be the order of $50 million and that adds to the – we have already invested on that which is in the order of $130 million.

Matt Portillo – Tudor, Pickering, Holt & Co

And is that now that you are looking at currently divesting?

José Francisco Arata

No, we just – with our partners which is the operator in – we want to create more value on this asset in order to see what’s going to be the partner’s stand of this. Of course this is a huge, huge discovery, which at the time we are going to be developing that discovery. But most likely we are going to be negotiating according to the strategy that our major partner who owns the majority of the portion of the block is going to follow. But most likely we are going to look to see a major partner coming into develop the prospect.

Matt Portillo – Tudor, Pickering, Holt & Co

Thank you.

Operator

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

Nathan Piper – RBC Capital Markets

Thank you. Good morning and given I am limited to one question, despite my best effort, I wanted to get a focus on the DD&A that you’ve just increased quite significantly and typically when DD&A goes up this fast as this.

I am thinking about some of the acquisitions you’ve done as much as the Rubiales field, it indicates the reserves might well be growing faster. That goes on that with Rubiales given you are not quite reaching the production levels you want to, but can you explain why the DD&A charges has more than doubled for the two acquisitions you did?

Carlos Perez

There are two factors, one of the factor is we are increasing production and in Rubiales field an important volume that there is one of the elements of this increase. And the other one is you will see the total reserves and our Rubiales field at the end of last year, that volume has to be produced in – let’s say for years.

So now we have to recover that through the tax shield. So in some way we are consolidating the total assets in the books, accounting books to go to zero in the case of the property, plant and equipment. So, this is an asset that we will continue in the coming years.

Nathan Piper – RBC Capital Markets

I guess, that makes sense, because Rubiales you are going to fix, take the returns, why have your DD&A costs gone up by more than double for the acquisitions you have done? And as you assess others are as different now to when you acquire them in order to accelerate the DD&A and whether it seems to be?

José Francisco Arata

Nathan, the thing this that all the new assets that we have in Rubiales, we will have to depreciate that in two years. Remember that a contract ends in the June of 2016 and the accounting rules for IFRS we have to depreciate the whole assets of the Rubiales field from now to June of 2016. So, the increase that you see is some additional factors that have to be depreciated in a very short term.

Nathan Piper – RBC Capital Markets

Sorry, I understand, why Rubiales has been deprecated so quickly, that’s the same reason why the C&C has – the TMB assets are being depreciated as quickly too?

Carlos Perez

Well, there are two new assets. C&C and PetroMagdalena and the accounting rules for that is to use the new one. The developed and undeveloped T1 and now we are exploring in those areas, it is likely that in the future we are going to go for it exploring them and we have to be as well.

But now, we are using the B1, if you just read the B1 you have the rise in those assets of about five years. Now we are developing the B2 of those assets in those companies and we are exploring in new areas in those companies. So we are expecting in the future to use a unique cost of DD&A for those companies. But by this quarter, we are using the B1, developed and undeveloped.

Nathan Piper – RBC Capital Markets

Okay, just to finish up, should we assume this, roughly this level of DD&A charge for the rest of 2013?

Carlos Perez

For this year, well it depends in the case of C&C we are able to incorporate more provision on 2P to1P. We will be able to reduce the rate, in this case. And the same – we have to remind that how we are developing the – volume of 2P. So it could change in the future. But this is important to mention that this is tax relief generating cash because we are developing those expenses which are not cash obviously, we are deducting those expenses from – in our tax returns.

Nathan Piper – RBC Capital Markets

Okay, and sorry I am trying to make sure I got the right number, but I understand. And switch to tax just very quickly, when do you expect to complete the Yahuish 1 well in Peru?

José Francisco Arata

Presently, as I mentioned we are drilling the Yahuish Formation and all of this is going to depend, whether or not we are going to lower the estimate but total depth is planning to be reached within three to four weeks.

Nathan Piper – RBC Capital Markets

Thank you very much.

Operator

Your next question comes from the line of Paula Kovarsky with Itau Securities. Your line is open.

Paula Kovarsky - Itau Securities

Hi guys, good morning. Two questions here, a bit of a follow-up on the dividend and the share buyback program and also I mean, you performed a pretty aggressive program of acquisitions and now – and even if you could perhaps just for a second, do you provide us with the strategic reasoning behind joining the private placement of Pacific Coal?

I understand this is not material, but I would just like to understand why, but the question is fundamentally trying to understand the company’s view going forward and in you r view what’s the ideal balance between continue making acquisitions or the buyback and increasing dividends.

And in the end, how exactly do you want to place – story as a real story of existing assets or you want to turn this really into an M&A story. And I think this is something that is of concern for investors. So it would be good to hear the company’s own views on that.

And the second question, on the cost savings, you mentioned a reduction of $4 per barrel, is this already half of the eight that you provide this guidance for the cost-cutting program? Or given that you’ve apparently manage to reduce cost faster than expected? Can we expect perhaps, more cost reductions and the one to two potential reductions in diluents cost is also part of that thing, if you could just clarify that?

Ronald Pantin

Well, the company will be – if a company that is browsing for cash, actually you see that we had for this first quarter very close to $700 million of EBITDA. We are predicting to very close to $3 billion of EBITDA by the end of the year. So that’s a very important number. So we have enough money for all our total growth and as you know, we have a CapEx of $1.7 billion, no problem for that.

And again, we’ll be looking into opportunities, for example, if I have an opportunity for – to build diluents, we might take that opportunity if it is accretive for the company. If it’s not, we are not going to do it. Our main focus will be organic growth and we will be taking chances only if we see M&A opportunities that makes sense for the company, that are very accretive for the company.

Then on the buyback and the dividend, that’s something that we will be taking to the Board. We think that we will not jeopardize our growth either organic growth or nor the acquisitions if we have a - but for this program, but we see that we are a company that is generating a lot of cash and we have grown to return some of that to our – it might go into M&A. And then we will have a policy, a very conservative policy to return value to our shareholders through buybacks or increasing dividends.

In the case of cost reduction, yes we had a cost reduction of $4, we expect to have a higher cost reduction that’s what we mentioned of the $8 and that too mainly to what is happening right now with dilution or we are using now our light crude and we will have an extra capacity in the pipeline. So we will be able to reduce all the truck transportation to almost zero and the dilution will be also reducing that to zero.

Right now we will keep this guidance, but it’s a very good news of what we have been today that we have already given you half of what we promised for the year. But we think it’s going to be more.

Paula Kovarsky - Itau Securities

If I may, back on the acquisitions debate, there is certainly a big difference between relatively small acquisitions of buying companies that produce light oil improve your cost and smaller things in Colombia and big acquisitions outside of the country. So perhaps, if you could comment when you talk about organic growth, does that mean the company will be indeed more focused in the Colombia and Peru part of the business as opposed to making additional big acquisitions outside this areas? Would that be fair?

Ronald Pantin

Well, first of all, we have to see, you know that we have – I am going to be talking at the end of that some sort of a plain – where we have a very important volume of resources, reserves that have to develop. For example, if we find on – we had a discovery now in the Bilby well and we think it will be an important discovery within the Kangaroo and Bilby, then we will need to develop that.

So that will mean organic growth in the field. And, I can say the same thing for Yahuish in Peru. So we will be using - our first focus will be using the money to explore and combat those resources into reserve and also when we have planned that sort of a reserve then to develop that.

So this is a dynamic process. But right now, what you would see that our main focus on that is going to be like that will be organic growth. If we have some extra money, and it means do small acquisitions as you mentioned, that can be viewed in the case of C&C, it’s proven that we are paying that – our value and that kind of thing we can do it. To go for a large corporation, we‘d really see if that is possible.

Paula Kovarsky - Itau Securities

And just a quick thing, can you comment on the strategic reasoning to join the private placement of Pacific Coal?

Ronald Pantin

I am sorry, there we have anything that - PTA

Paula Kovarsky - Itau Securities

The reason you have joined the private placement of Pacific Coal?

Ronald Pantin

I think it’s Pacific Power, it’s not Pacific Coal. Pacific Power is a – PROELECTRICA we are selling gas natural gas to PROELECTRICA at a very good price actually. The price here in Colombia, the official price is around $5 and we are selling to PROELECTRICA in the order of $8.

So this is really electricity, it’s not a coal. What really is increasing a – it’s not natural gas, it’s something very small. We have actually – we cannot go beyond 25% here in Colombia. In Colombia, if you are a producer of natural gas, you cannot be in the electric side to more than 25% of those companies. So I think, we have very close to 25%.

Paula Kovarsky - Itau Securities

Okay. I’ll take that question later. Thank you.

Operator

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

Gustavo Gattass – BTG

Hi guys, I had a number of small follow-up questions, but I’ll just ask very quick ones. First for Carlos, if you could, you didn’t touch on what was the others that also saw a very large increase in the DD&A, slide that you had on page 37.

I was wondering whether you could at least explain what that was all about. And I just wanted to confirm when you look at the Quifa net production that we saw for the first quarter, is that already adjusted for the post-arbitration in PAP?

Carlos Perez

So regarding your first question about the line of others in the detail we presented, well, they are included to some fields, minor fields at Cajua and also you have to remember that we are amortizing that now, some transportation and lights we have in Ocensa. We completed that transaction some years ago and we paid $180 million, well, as I remember. Now we are amortizing that in the remaining period, these transportation rights are valid until 2016.

And we are transporting using those right more than 60,000 barrels per day with the important benefit in the line of cost of transportation. Those are the most important items. There are other things there, Peru, because it’s a new asset when comparing with last year.

Gustavo Gattass – BTG

Carlos just…

Ronald Pantin

Gustavo, can you repeat your question on Cajua?

Gustavo Gattass – BTG

Yes, I can. But just before we go there, if I could, has there been a change in the rules for the amortization of Ocensa? Or when we look at first quarter 2012, fourth quarter 2012 and first quarter 2013, we’ve seen more or less the same amount of amortization for Ocensa.

Just a follow-up on that side. And to repeat the question, I just really wanted to double check on it, if when I look at the net production that was reported for Quifa, by Rubiales in the first quarter press release, is that net production is already adjusted for the arbitration resolution on the PAP? That’s what I wanted to check.

Carlos Perez

No, the answer to your question about – we have changed the rule, no. The $190 million were amortized according to the same rules. So consistently with the last year. But we are having new assets, the light. As I mentioned, Peru and Cajua which is producing as well, and some minor Pacific Rubiales fields also. There is some effect as well in this – exposed to the foreign governments and we have an impact on that, that’s one for Peru in this first quarter of 2013.

Gustavo Gattass – BTG

Okay, thanks.

Ronald Pantin

Gustavo, in the case of the PAP for Quifa Southwest, we started I think it was in the mid of the quarter. So we have some parts that will be provision and it requires that’s going to decelerating. And the important thing probably for the market is that our net production has not suffered, because we have increased our production over 312,000 barrels per day gross and so, we have the same 28 that we have before we will be looking the additional production impact.

Gustavo Gattass – BTG

Okay, thanks.

Operator

Your next question comes from the line of Diego Andres Usme with Ultrabursatiles. Your line is open.

Diego Andres Usme – Ultrabursatiles

Good morning. Could you clarify me something about water handling cost in Rubiales? I understand your initiatives with agriculture and the improvements with water for irrigation, but we can understand in the short term that could it improve your water handling cost?

Because we can see cost in Rubiales is increasing and we can realize that you backed up RO could be in the medium term, not in the short term, so the question is specifically what is your strategy in the short term for the next period for improve that cost in Rubiales?

Ronald Pantin

Okay, as I mentioned before, we have been able to optimize the water cost during the first quarter, it’s around 500,000 barrels that we have been able to produce and that’s through drilling more new wells in the area. And so, in our plan we don’t see any increase in the water handling cost.

Actually, that we have with this is a reduction because we have some of the injection plants. We have converted that to the use of Rubiales field – at Rubiales Group as fuel for the power generation injection plants. So we really don’t see for the rest of the year an increase in water handling cost, actually what we see is an increase, what we see is reduction in water handling cost.

Diego Andres Usme – Ultrabursatiles

Okay, thank you. And I can hear some – I can hear very well the answers about PAP Quifa in the net production for the first quarter. Could you repeat me about the application of PAP Quifa in the first quarter?

José Francisco Arata

Could you repeat the question, please?

Diego Andres Usme – Ultrabursatiles

Can you so the answer of the last person about – what was the application of PAP in Quifa in the first net production, the first quarter net production. I want to know what was the effect of that process.

José Francisco Arata

Well, it goes, the arbitration decision was taken in March and the additional volume regarding the PAP was provisioned. We accounted that as a provision. As Ronald mentioned, that volume together with the volume recorded at December the 1st will be paid in cash. It didn’t affect the volume in the case of PAP. We want to pay that in cash. From March onwards we will be delivering the volume to 2000 and something barrels per day to Ecopetrol.

Diego Andres Usme – Ultrabursatiles

Okay, thank you.

Operator

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

Felipe Santos – JP Morgan

Yes, two questions. I know that you are expecting now the license for CPE-6 for the second half of the year. Could you give us another view – an overview of the license in Colombia, how it’s evolving? We thought that this would be prepared in the first half of the year, but apparently you are still delaying, could you please review that? Thank you.

Ronald Pantin

Yes, well, I really see that, they are getting more efficient. In the field, we have received a lot of the licenses, as you know with the Quifa license and we have received all of the licenses. And these are – the problem that very important - the most important one that is the CPE-6.

The problem with the CPE-6 is that is not an exploration license. It’s exploration and production license. We are expecting that to come anytime, but I am not going to mention the dates, because it’s a public forum, it’s not in my control. But, I think that the agency here, the environmental license agency have included lot to do.

Felipe Santos – JP Morgan

Thank you.

Operator

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

Jamie Sommerville – TD Securities

I am just intrigued by your comment that you’ve been able to reduce water production. I think you said, because the new wells and I think you said 500,000 barrels a day of water production that you’ve produced.

I understand that you reduced the average water cost by drilling new lower water wells, but surely the only way that you can actually reduce total water production is by actually shutting in some wells. So this is what you are saying that you could be producing more production, if you are willing to produce more water?

José Francisco Arata

Yes, our production capacity will hit – is much higher than our daily production and you are right and so, when we have – we have a limit in our facilities and that’s why we are going to go up to 220,000 at the end of the year. And yes, we have some wells that have very high water that we have optimized.

Jamie Sommerville – TD Securities

Okay, thank you.

Operator

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

Frank McGann – Bank of America Merrill Lynch

I am sorry, my question was answered. I tried to take my - off, but it didn’t work I guess. Thank you.

Operator

Your next question comes from the line Ian Macqueen with CIBC World Markets. Your line is open.

Ian Macqueen – CIBC World Markets

Hi guys, just a quick question on CPE-6. Obviously, your confidence level is extremely high for your building facilities. Can you just give us a view on what you are building, what you are spending, and what you see the confidence to do that?

José Francisco Arata

Yes, we are building some fields and we have all the reservoir characteristics porosity, permeability. We have the crew that is testing in Quifa. So we have everything, we have tested, but we know that is going to flow. It’s just the production cost.

Ian Macqueen – CIBC World Markets

Can you – just as far as what you are spending it on – a quick overview…

José Francisco Arata

We are building a facility for around 20,000 barrels gross and that’s going to be in few months.

Ian Macqueen – CIBC World Markets

Okay and that would be basically when you do get your permits, you’ll drill your wells and how will it progress? Will you get testing permits, so that you can do long-term cuts and produce up to 20,000 barrels, on a test?

José Francisco Arata

When we have the license, we will be able to produce, remember that is an E&P license.

Ian Macqueen – CIBC World Markets

Right and you are projecting you could ramp up to 20,000 relatively quickly?

José Francisco Arata

Well, it depends on the when we have the license, if there is 20,000 gross, all depends on the work out to be able then to get the… when I mean the gross it’s not – what gross - working interest is gross, drilling water fluids production and then all depends on the water. Normally, you get initially water of 20% it was in three to four months to 30% and then it jumps up to 70% and from there it goes very slowly to 90%.

Ian Macqueen – CIBC World Markets

Right, just, clear on that 20,000 barrels a day of total- where is the 20,000 barrels a day of oil or it’s fluid?

Ronald Pantin

Fluid, fluid.

Ian Macqueen – CIBC World Markets

Okay, okay.

Ronald Pantin

But, that’s to start and that’s all will be – when we will have the license, I expect additional soon, we will be moving those facilities and it’s one of the – remember that what we did last year. It took us only nine months to go from 5,000 to 35,000 and I guess, you’ll be able to calculate the same time.

Ian Macqueen – CIBC World Markets

Yeah, I just. Thanks. If it works, I am very confident you guys can ramp it up quickly. It’s the license that going to impact you.

Ronald Pantin

Yeah.

Ian Macqueen – CIBC World Markets

Thanks.

Ronald Pantin

Yeah, and Carlos is saying, for sure in parallel we will be building the fund and facilities to continue ramping up in CPE-6.

Ian Macqueen – CIBC World Markets

Okay. That’s helpful. Thanks guys.

Operator

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.

Carlos Perez

Okay guys. What you have seen here is the results of the first quarter, very impressive. When we say that in only one quarter we grew 20,000 barrels that is the size of probably or larger than any of all our peer companies here in Colombia. So you’ll see that kind of growth with Pacific Rubiales is having.

Some went through D&A, that’s in case M&A, that’s the case of C&C, but then you have organic growth, I would please see that was the growth of 20,000 barrels during the first quarter. What I see and the way that the ambition of Pacific Rubiales is like meant a flying wheel. If a flying wheel that have resources that are converted into reserve that are converted into production, that are converted into money and from that money we have the CapEx to again going around in the loop.

If you see only from the first quarter of last year to the first quarter of this year, our – in that flying wheel, our resources have gone from 2.8 billion barrels to 4.3 certified resources. That’s a growth of 54% that is a huge growth. Our reserves went from 407 to 514, that’s a 26% growth. Our production went from 93,000 net to 128,000 net, that’s a growth of 37%.

And our revenues went from $132 million to over $1,259 million, that’s a growth of 35%. And just see that a very important growth in CapEx going from $267 to $600 million. That is what is doing again is that fly with is going again adding more growth to the company.

So, guys what has been here and this is been like that at the very beginning of the company back in 2007 when we were producing only 14,000 barrels per day and our EBITDA was $50 million to nowadays that we have a company that have I mean, 312,000 barrels per day gross compared with the 14,000 and EBITDA of $50,000 now compared to $1,250 million.

So you see that two times that this flying wheel was around year-by-year what you have is a company that is growing like any – no other company in the world. Thank you very much guys.

Operator

This concludes the conference call. You may now disconnect.

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