Petrominerales CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 3.13 | About: Petrominerales, Ltd. (PMGLF)

Petrominerales Ltd (OTCPK:PMGLF) Q2 2013 Earnings Call August 1, 2013 11:00 AM ET

Executives

Corey Ruttan - President and CEO

Kelly Sledz - CFO

Jaime Valenzuela - VP and Columbian Country Manager

John Koch - COO

Andrea Hatzinikolas - VP, Business Development

Analysts

David Epstein - CRT Capital

Tony Pollock - Aegis

David Zhang - Credit Suisse

Andrés Cardona - BTG Pactual

Mark Vandenberg - Private Investor (ph)

Alan Knowles - Haywood Securities

Operator

Good morning ladies and gentlemen. Welcome to the Petrominerales' Second Quarter Financial and Operating Results Conference Call. I would now like to turn the meeting over to Mr. Corey Ruttan, President and Chief Executive Officer of Petrominerales. Please go ahead, Mr. Ruttan.

Corey Ruttan

Thank you Mary and good morning everyone. I'd just like to point out that I'm joined today in Calgary by John Koch our Chief Operating Officer, Kelly Sledz our Chief Financial Officer, Erik Lyngberg our Senior Vice President of Exploration and Andrea Hatzinikolas, our Vice President, Business Development and General Counsel. In Bogota I'm joined by Jaime Valenzuela who's our Vice President and Columbian Country Manager.

Before we get started I'd like to point out that during the call we will make projections or other forward looking statements regarding future events or financial performance. Actual performance, events or results may differ materially. Additional information on risk factors that could affect our operations or financial results is included in our most recent annual information form an MD&A which can be accessed through our website or the SEDAR website or by contacting our office. To begin the call we'll start with a review of our second quarter financial results and follow with an operational update.

And with that I'd like to turn the call over to Kelly Sledz.

Kelly Sledz

Thank you Corey. Good morning everyone and just before I begin the financial review, just again remind everyone that all amounts discussed today are in U.S. dollars unless otherwise stated in our financial statements MD&A for the second quarter June 30, 2013 were announced last night and are currently available on our website at www.petrominerales.com.

So first metric in our financial results our operating net back averaged $54.54 per barrel in the second quarter, decreasing 11% or $6.90 per barrel from the first quarter, primarily due to lower benchmark oil prices, offset by some operating cost reductions.

With respect to the components of our operating net back, our average crude oil sales price was $95.50 per barrel, a 9% or $9.91 per barrel decrease, consistent with the decline in Brent oil price in the quarter of 9%. Our transportation costs were consistent with the first quarter in the $7 to $8 range. So there were no notable changes on how we moved our oil.

Royalties remain consistent at 15% of realized oil price. They did decrease on a per barrel basis consistent with the lower world oil prices mentioned above. Fraction cost decreased 7% or $1.42 per barrel, primarily due to lower fixed costs as we reduced equipment rentals in the field and lower water handling costs. These reductions were partially offset by increased workovers attributing about $0.56 per barrel increase in the quarter.

We reported consolidated funds flow from operations of $86.9 million in the quarter or $1.03 per basic share. This is a $15.4 million or 15% decrease from the first quarter and it's attributable to first lower funds flow in our produced oil business segment of $19.3 million, primarily due to lower world oil prices I mentioned earlier and the remaining decrease, $0.6 million was due to 4% lower sales volumes of produced oil from an inventory bill and 2% lower production. Both of these were offset by lower royalties and production expenses.

The second change in funds flow was that we reported higher operating cash flow from our oil marketing segment of 7.5 million in the quarter. We continue to purchase third party barrels for a full quarter to generate income and maximize profits from an infrastructure assets and we also realized some oil hedging gains.

We reported net income of $2.3 million which decreased $4.2 million from prior quarter, mainly due to the 15 point formula and lower funds flow changes I just described. That was substantially by a $13.8 million lower deferred income taxes from the recognition of a deferred tax asset on certain pipeline rights.

Capital expenditures increased 8% to $88.6 million, compared to the first quarter. We drilled a consistent number of wells at 8, and in addition in the quarter we incurred incremental costs on our 282 square kilometers 3D seismic acquisition program Block 25, which we completed in July. For the second half we plan to drill up to 22 wells, spread across our asset base and Corey will speak about those in the remaining program in his operational update to follow.

In May, we acquired 87.5% interest in the Canaguaro block in the Llanos basin. This acquisition came with 416 barrels of oil per day of working interest production and 2.3 million barrels of proved plus probable working interest reserves. We paid $15.4 million cash and agreed to a $5 million work carry and we are pleased to complete this transaction as an added to our existing production reserves that attracted metrics, provides us a large, contiguous area of underexplored land adjacent to our existing acreage.

As previously disclosed, we are pursuing strategic options regarding our pipeline assets. We have two processes running, one to sell our 5% OCENSA equity investment and the second to maximize the value on our transportation rights in the Llanos basin, including our interest in the OBC pipeline.

Regarding the OCENSA equity process, we have entered into an agreement with other OCENSA shareholders to sell OCENSA equity together in a combined sales process offering 27.3% of the pipeline and we expect this transaction to be completed in the fourth quarter.

Regarding our transportation rights process, we are looking at various alternatives, whether it be a partial or our right sales capacity with a preferential right to transport our oil or to enter in joint venture marketing scenarios. I would say that interest in these assets has been very strong and we expect to complete this process around the end of the third quarter or early in the fourth quarter this year.

In terms of liquidity, the Company’s net debt as on June 30, was $745.6 million, which will be reduced with proceeds expected from our pipeline processes. Convertible events concerning liquidity in the quarter were, first we repurchased and cancelled $55 million principal value of convertible bonds, plus an additional $5.2 million subsequent to the quarter, and so that leaves $138.7 million of our 2016 convertible bonds outstanding to date.

In addition we extended the put option date on this remaining balance to February 25, 2014 and we plan to use the sale process from our pipeline assets to repay this convertible debenture and reduce overall debt levels. Secondly during the quarter, our reserve-based credit facility at the boring base was reviewed and reconfirmed at $250 million and the next review will happen later in the fall.

I would now like to turn the call back over to Corey to provide an operational update.

Corey Ruttan

Great, thank you Kelly. Moving on to production, our second quarter production averaged 21,539 barrels of oil per day or 524 barrels a day or 2% lower than the first quarter of 2013. The decrease relates to natural declines from our wells in the Deep Llanos where production decreased 13% or 1819 barrels of oil per day. This decrease was largely offset by production additions in the Central Llanos where our production increased to 1,235 barrels of oil per day or 35% as our Curito well came on production in June along with successful appraisal drilling at our Mantis field.

At Orito production increased 123 barrels of oil per day as Orito 197 came on production in June at over 1,400 barrels of oil per day. At Nueva our production decreased to 119 barrels of oil per day or 4% mainly due to natural declines. We’ve received an updated Nueva environmental license and we plan to restart our Nueva drilling program this month. July production average closed at 24,000 barrels of oil per day, which is 6% higher than our June levels due to our Curito discovery late in the month and the additions from Mantis-6.

Moving onto the Deep Llanos, our production here averaged 12,454 barrels of oil per day during the second quarter. In May we announced our Taya-1 oil discovery on the Corcel Block. Our well logs here indicate 73 feet of potential net oil pay in the Guadalupe and Mirador formations. The wells set on production from the Guadalupe and we’re currently recompleting the well in the Mirador formation which was the primary target in this well.

During the second quarter, we also drilled two unsuccessful wells Taya-2 and Guatiquia North East. In May as Kelly pointed out, we announced the acquisition of an 87.5% interest in the Canaguaro Block. Obviously the acquisition came with existing production reserves and we plan to drill a Canaguay-2 well starting in the third quarter of this year. We also plan to drill the Ceibo prospect on our Guatiquia Block starting in the fourth quarter. This is a prospect along the same full trend as our Candelilla and Yatay discoveries.

In the Foothills, we recently completed the acquisition of an additional 282 square kilometers of 3D seismic on Block 25. We look forward to the interpretation there and starting drilling on this block in early 2014. Similarly on Block 59, we are planning to commence a four well exploration program starting near the end of this year.

Moving onto the Central Llanos, our second quarter production here averaged 4,811 barrels of oil per day, which is 35% higher than the first quarter, mainly due to exploration success at Curito and our ongoing drilling at Mantis.

In April we drilled the Curito-1 prospect on our Casanare Este Block. Well logs here indicate 54 feet of potential net oil pay in four different formations, the C7, the Mirador, the Gacheta and the Ubaque and we’ve been producing the well on natural flow at a stable rate of over 2,800 barrels of oil per day with less than 1% water cut since bringing it on production.

We plan to start our exploitation program here in August by drilling a water disposal well and then an oil well targeting the Ubaque formation. In addition to this exploration success, we continue to extend our Mantis oilfield. During the second quarter we drilled three wells, Mantis-4, 5 and 6, that were not included in our year end reserve report. Mantis-4 confirmed a South West extension to the field in both the Upper and Lower Mirador formations. Mantis-5 was an infill location placed on production in June and Mantis-6 was a Northern field extension that came on production in July. We’re currently drilling Mantis-7 to continue to extend the Northern field boundary and evaluate a possible tilted oil water contact.

Our recent geological and geophysical interpretation of this field indicates additional prospectively along the Yenac, Mantis pool trend. We planned to drill up three wells through the reminder of this year to unlock this potential, starting with Pisingo-2 which is an appraisal well to prove to southern extension of the Pisingo field. We’ve also identified (inaudible) Azabache (ph) between the Mantis and Pisingo fields. Each would have a number of follow up locations if successful.

One of the other main priorities we had 2013 was to deliver a significant cost savings and I’m happy to report that we’re making great progress here and as an example I’d like to highlight our recent Mantis drilling performance. Shown on these graphs here, the Mantis-3 through 6 drilling results and as you can see we’ve realized a 40% improvement in drilling cost. We’ve moved from $2.5 million for Mantis-3, down to $1.5 million for the drilling component on Mantis-6.

If you look at it on our days drilling per well, we’ve improved from 18 days to 13 days and if you look at feet drilled per day, we’ve improved from 400 feet to 600 feet per day. I’ve talked about Mantis-7. We’re actually right at PD now and we expect this to be our new pace setter well with 10 days drilling and over 850 feet drilled per day.

Moving on to Orito, we recommenced our Orito development drilling program that happened late last year. We’ve now drilled five wells targeting the Caballos and Villeta formations. The Orito 197 well came on production in early June and has averaged over 1,200 barrels a day to date.

Next, our Orito Norte-1 well was a well designed to test field extension. It was drilled outside the field boundary. Unfortunately we’ve experienced some completion challenges there. So to fully tested play concept, we were actually doing a work over of a well that was drilled in 1967 named Caldero and we'll look to be doing a recompletion there in Villeta formation again the test is play concept. We also drilled Orito-151 and Orito-148. We plan to complete these wells for production in the third quarter and our next drilling location is a horizontal well at Orito-196, again targeting the Villeta formation.

Just a reminder, Orito was the largest oil field in the Putumayo Basin of southern Colombia. It’s produced close to 240 million barrels of oil from over 1 billion barrels of petroleum initially in place. We certainly feel there is significant opportunity for remaining at Orito and have a large inventory of development drilling locations and significant enhanced oil recovery upside.

Moving on to Neiva, this continues to be our highest netback property. It represents about 12% of our production. As I mentioned earlier we have received an updated environmental license here and we expect to resume our development drilling program at Neiva in August with one rig initially drilling up to 6 development wells and completing up to 8 workovers.

On the heavy oil, in March we recommenced our Tatama horizontal well production test at a higher fluid rate and just a reminder, the well averaged over 600 barrels of oil per day and has cumulatively produced over 55,000 barrels of oil from the Mirador formation. This test in our opinion certainly has proven the commercial capability of horizontal wells in this area and we feel like we’re well on our way to unlocking a large heavy oil resource.

We plan to drill a second location in the Mochelo area starting this quarter to test the productivity of a more optimally designed horizontal well. This is expected to provide the basis for our first phase commercial development and we expect to have this well drilled and on production in the fourth quarter.

In the Peru, we have massive land base here with four blocks covering over 5 million net acres of land. Our focus is in the Ucayali Basin in central Peru. In October of last year, we announced our Sheshea discovery on Block 126. This is a well that tested oil from two formation including 1,430 barrels of oil of 53 API, very light oil a day from the Chonta formation.

This year we’re working on obtaining regulatory approvals for three things; first to acquire 3D seismic over the prospect, second to obtain approvals for long term production test, and lastly to drill the lineation wells. I would also like remind everyone that it’s important to note that our year-end reserve for last year did not include any of the potential associated with this block or this discovery.

In addition later this year, the first of two large prospects on Blocks 114 and 131 will be drilled by our partner. We expect that to start in September and we have a carried 30% working interest in each of these blocks.

Next on Brazil, we entered Brazil late last year. Our main target here is the Gomo member of the Candeias Formation, which is the mature source rock that encases the perspective reservoir fans. This is a massive resource opportunity and we have now really virtually tied up the entire play fairway (ph).

Also in May this year we successfully bid on three new Blocks at the 11 Brazil bid round. We were awarded two Blocks in the Recôncavo Basin, Blocks 106 and 107 and also Block 177 in the Tucano Basis, all located in State of Bahia onshore Brazil.

These new blocks cover over 61,000 acres and has allowed us to more than double our land position in Brazil now to over 100,000 net acres. This also allows us to expand both our unconventional and conventional exploration opportunity base in Brazil. We also completed two farm-ins on Blocks 170 and 183. Both blocks are contiguous with our existing acreage and offer the same tight-oil potential in the Gomo.

Later this year, we plan to drill our first two exploration wells, again starting in the fourth quarter and also plan a one well recompletion. Our goal here is to unlock a large resource opportunity on our lands. On our lands we estimate that the deeper Gomo formation alone contains over 1 billion barrels of undiscovered petroleum initially in place. With success, we feel there to be over 200 development locations and our vision here is to implement a large scale repeatable low risk development program starting as early as 2014.

I wanted to talk a little about our current market valuation. Our enterprise value sits about $1.2 billion. I certainly think this is a pretty compelling opportunity on all metrics. Enterprise value to cash flow is trading 3.5 times, enterprise value per flowing barrel above $56,000, enterprise value to 2P barrels at $29 per barrel and certainly well less than that asset value and just to highlight, the dividend yield at current share prices is approaching 9%.

Just to reinforce this value proposition, our net asset value sits at about $1.2 billion and that only considers our proved plus probable reserves and the cost base of our pipeline assets, which translates collectively into just over $14 share price.

Also, I like to remind everyone what net asset does not reflect and this is really the key, I think. Obviously we have got a very high value exploration land base in Colombia with over 80 identified prospects and leads. We have got an extensive heavy oil resource base in Columbia that is well advancing towards commercialization. There is no heavy oil reserves booked in our reserve report last year.

There is obviously, significant incremental strategic value associated with our infrastructure assets which we're in the process of unlocking. I mentioned that our Sheshea light oil discovery on Block 126 in Peru is not currently reflected in our reserves. Obviously we've got a high value extensive exploration land basin in Peru with over 28 identified prospects and leads and we certainly have an extensive resource base and a very interesting opportunity in Brazil that will start to unlock here later this year.

So, certainly at current share prices, we feel an investment in Petrominerales give shareholders exposure to a great portfolio of opportunities, coupled with a very compelling dividend yield and I can assure you that we are very focused on growing shareholder value through 2013 and we are working diligently to unlock the value associated with these other opportunities that are currently not reflected in our share price.

So with that I would like to turn the call back over the Mary to explain how we will proceed with the question and answer period.

Question-And-Answer Session

Operator

Thank you we will now take questions from the telephone lines and the webcast. (Operator instructions). The first question is from David Epstein from CRT Capital. You may now proceed.

David Epstein - CRT Capital

In your net asset value slide, I think you are showing the proof plus probably value at the end of 2012. As you guys know you guys have a fairly short reserve life. So obviously that changes a lot from quarter to quarter. How do you think that has maybe moved over the middle of this year and I understand it’s tough to comment on reserves intra-year and a lot of that has to do with the commercialization of the heavy oil, but how do you think reserves have moved in general?

Kelly Sledz

I think you are right. We don’t typically comment on our reserve levels for the year based on internal estimates. The key things would be the Canaguaro acquisition. I think that was close to 2 million barrels of 2P reserves. The Curito was significant for us. I think the next few wells will really help define the potential there but obviously we still got a well that’s producing 2,800 barrels a day and haven’t seen any declines. So we are pretty happy with that.

The Taya discovery you will get more clarity on that as we do the Mirador recompletion here and then obviously I talked to both the extensions that we have making at Mantis. So we are having good success there. Obviously going forward, we are going to want to continue to see exploration success to really help drive the reserve replacement equation.

David Epstein - CRT Capital

You guys have produced around 4 million barrels in the first half. Is there sort of an over or under as to whether you think you replaced that or not.

Kelly Sledz

I think we're well on our way there and again the definition of Curito and frankly Mantis continues. We'll get more data on that over the coming months.

David Epstein - CRT Capital

And just one other question. On the dispute with the regulator, obviously you guys think it's going to go in your favor. Separate from who's right or wrong is the size of their claim going to keep increasing as additional production flows? I assume it is.

Kelly Sledz

Yes, it does. Every quarter that we produce more oil of course it increases and that will be the, it increased by about $2 million in the second quarter.

Operator

Thank you. The next question is from Tony Pollock from Aegis. Please go ahead.

Tony Pollock - Aegis

Could you go into a little more your take on the political situation in the countries you deal with?

Corey Ruttan

Sure. Obviously the most significant one is Columbia. Is there any specific aspect that you're…?

Tony Pollock - Aegis

Well the problems you've had in the past, what do you think will happen in the future or what's happening there?

Corey Ruttan

Yes you know I think on Columbia, frankly it's got to be one of the best combinations of geological prospectivity and fiscal regime and frankly political climate out there. So that being said, there have been some social challenges in the past. There's a security element that we certainly manage. A couple of years ago we had a strike situation that did impact some production. But overall I think we're doing a very good job of being a good corporate citizen in the areas that we operate and managing those challenges that frankly all operators face.

I think the other dynamic that's happening right now is obviously there's a peace negotiation process going on in Columbia. Some people would say that that’s had an impact on some of the security situation in Columbia and the other dynamic that's happening is, in May of next year there'll be elections and that certainly affects the political climate as well. Jaime, would you like to add anything to that.

Jaime Valenzuela

Yes. So, what I would say is that in general no doubt there is a little bit of social issues going around and the effect is the election process. The senate is going to take election into March and I think in November they start moving the card from the people. So that is starting to occur in the country.

In the other hand, in the case of Petrominerales, in the industry in general, the government is very aware of the situation of the oil companies and I think we have established a very good working relationship with the government in terms of the Minister of Interior. We're working closely with environmental licensing and in general to the ENH and so I would say the industry in general has not been affected too much and we keep close communications to resolve on issues. In terms of our case we haven't seen major disruptions to our operation, the one and off blockage here and there but nothing major that is affecting or which is going to affect our operation.

Operator

(Operator Instructions). There are no further questions. I do apologize we do have a question from David Zhang from Credit Suisse. You may now proceed.

David Zhang - Credit Suisse

So on the pipeline sale process and the agreement that you’ve entered with the other parties, what type of agreement is that. Is a formal agreement, and does that agreement have any sort of penalties or deterrents for people to leave that consortium?

Corey Ruttan

Yes, there is a cooperation agreement, and I would characterize it as a good faith agreement and I can say, I think all four of the parties are working very well and cooperatively together. And when you have a common goal, you get a transaction done here in the fourth quarter.

David Zhang - Credit Suisse

And maybe just moving to Brazil, with the first couple of wells in the second half, what exactly would you define as success and if you find that success what are your priorities for next year and what type of capital program are you envisioning?

Kelly Sledz

The objective of the wells that we are going to drill this year is really a technical characterization of the reservoir which will then allow us to do the detail design and exploitation plan for what we are looking at there. So I think success in this case would be the definition of the reservoir and also of course finding reservoir characteristics that would be conducive or would match up with what we are anticipating and allow us to launch into a continuous program in 2014.

David Zhang - Credit Suisse

And maybe just touching on the heavy oil; it says you’re waiting for a long term production permit. Does that permit cover a large area or just a general area where you have your existing well?

John Koch

It covers the data that we have in our current wells, it needs a large area. So basically all day, western side of the block.

David Zhang - Credit Suisse

Okay, so essentially any new success, you could probably keep on once you get the permit?

Corey Ruttan

Yes, that’s correct. This is an exploitation permit.

Operator

The next question is from Andrés Cardona, from BTG Pactual. You may now proceed.

Andrés Cardona - BTG Pactual

My question is regarding Curito. Do you have (inaudible) oil potential there? Is there a plan to get more information, something we can't as a signal that Curito can only cope with only one well?

Kelly Sledz

With respect to the Curito discovery, the next step there is, we are going to drill water disposal well which we envision needing regardless. So that will help keep our operating cost down. And again we will reevaluate this with every well we drill. But I think we see the potential for at least four follow up wells in Curito.

Andrés Cardona - BTG Pactual

So are you planning to drill different structures?

Corey Ruttan

A long trend with Curito discovery, we’ve identified two other structures that are very similar in geophysical and geological characteristics to Curito and we are currently evaluating some other leads that have been identified on our seismic database.

Kelly Sledz

Yes, and just the last point on that, remember there is four different zones there. So yes, the exploitation plan will cover all four of the perspective horizons.

Operator

The next question is from Mark Vandenberg (ph), a Private Investor. You may now proceed.

Mark Vandenberg - Private Investor

I just wanted to get clarity on your new drill program that you guys instituted, if you could elaborate a bit on the participation rates along with any motivations concerning this?

Kelly Sledz

Sorry, to be clear, you’re asking what the motivation for the drill program was…

Mark Vandenberg - Private Investor

Yes.

Kelly Sledz

I guess it’s a way for our current shareholders to provide them an avenue to continue to reinvest their dividends in the company. If they certainly like us feel like the company is undervalued, it’s an effective mechanism for allowing our existing shareholders to participate for an even bigger portion of the company.

Andrea Hatzinikolas

And to elaborate we chose (inaudible) dividend program because of the favorable tax treatment and so far the take up has been quite positive. We’ve only had it in place for one quarter and so it’s been in line with our expectations nearing 5% in the first quarter.

Mark Vandenberg - Private Investor

All right, so 5% pre-reservation rate in the first quarter…

Andrea Hatzinikolas

Correct.

Mark Vandenberg - Private Investor

Okay, I was just concerned was it the liquidity issue that you’re seeing with the bond renewal that was coming due. Did that have anything to do with it?

Kelly Sledz

I’m saying not really. To put the dividend in perspective, even without the share dividend program, its $40 million a year. So that’s about 10% of our cash flow. We certainly don’t feel like that constraining things. I think, we expect to generate significant proceeds from the pipeline process and I think our liquidity situation will come out of that looking quite favorable, quite frankly.

Mark Vandenberg - Private Investor

And excuse me if I’m repeating a question. But, did you have any clarity or any interesting party that are on this pipeline. Like, when are you expecting that you might have the release concerning that?

Kelly Sledz

We can’t comment in too much detail when we’re in the midst of a process but I can say there is significant interest and there is two processes, the second process that we’re leading independently on the transportation rights and the OBC pipeline is progressing and we would expect to be able to announce something maybe late this quarter or early in the fourth quarter. And because we have combined with the other minority shareholders in the OCENSA equity process, we would expect that process, probably something to be announced in the fourth quarter.

Operator

The next question is from Alan Knowles from Haywood Securities. Please go ahead.

Alan Knowles - Haywood Securities

Just a follow up on the Brazil. When you go through this process of, as John put it to characterize the reservoir, what risk do you put on that going forward as far as it being, the risk of it being a full development project that materializes from that work?

Corey Ruttan

Based on their current information we have Alan, look, the risk is low. But we need to catch that and determine the parameters of how that’s going to look in terms of the specific engineering of the well designs and the project going forward. So, there is several different ways to go about developing these kind of reservoirs and there is a range of things that we could do here in terms of how the exploitation is laid out. So, we’re kind of attempt to find that. I think at this point we see the risk as being low. In terms of the development it's more cases at this time of how that development would be done really.

Alan Knowles - Haywood Securities

And when you’re saying 2014, can you narrow in, would you be starting over the beginning of the year or more Q2 et cetera?

Corey Ruttan

Yes. So the way the regulatory process works in Brazil is you have about six months to permit a well. To get a well license is really what it looks like from the time you decide where you want to work and we’re trying to do as much advance work as possible but there is a fairly wide range in terms of what the exploitation plant would look like. So with catch results later this year, we’re looking at some point in the second half of 2014.

Alan Knowles - Haywood Securities

Okay. And I might have missed it but can you give us and update on what your production is currently?

Kelly Sledz

Well Alan, we never give out current numbers. I think as current as we gave out was the month that ended last night. So that was pretty current, 24,000.

Alan Knowles - Haywood Securities

So everything - there is nothing that’s not in those numbers, I wouldn’t think though at this point given the update. I guess that's what I kept going for.

Kelly Sledz

Yes. There is always some stuff Al but nothing overly material, I would say or abnormal.

Operator

Thank you. The following is a follow up question from David Zhang from Credit Suisse. Please go ahead.

David Zhang - Credit Suisse

Just back to Brazil for a second here. So let's say you find success moving forward with the continuous development. Some of your peers, things aren’t moving as quickly as they had hoped. If you had to pick two potential bottlenecks that are the most likely moving forward in Brazil, what would you say those are?

Corey Ruttan

So, in Brazil there is a couple of things. One is that I would say the two potential bottlenecks that I would check are number one would be a complex regulatory environment and number two is limited infrastructure and services. So from the regulatory standpoint the environment there is well defined. It’s complex but it’s well defined and so the timelines are relatively and flexible I would say. So you can kind of like them or not like them but you have to deal with the timeline of the process and it’s reasonably complex.

On the second part of it, there is limited services in infrastructure and the country but I think that probably more importantly is that there is limited access to the services and technology that we would define as state of the art. So, that has a direct impact on cost and efficiency. So, really in order to operate our cost effect in efficient manner in Brazil requires some very, very detail project management, and advance planning to deal with that situation and inside the regulatory environment, there are some complex local content rules and so on that have to be managed. So, it’s really fundamentally a project management exercise.

David Zhang - Credit Suisse

Are you guys planning to open an office in Brazil any time soon?

Corey Ruttan

Yes. We have an existing office. We have about 30 staff in Salvador and we have an office in Belo Horizonte as well and we have a team there that we acquired local operating company called Alvopetro and we have a team there of 30 experienced professionals how have extensive experience with the regulatory and permitting process and so on and are well experienced on the surface operations and are running existing oil fields.

David Zhang - Credit Suisse

Are they more so expands or local Brazilian?

Corey Ruttan

So in Brazil, we have no expats and we have defined a Brazil team here with technical capability in our Calgary office and they’re working really closely with our team on the ground in Brazil and at this point we’re not planning on moving expats to Brazil.

Operator

The next question is from David Epstein from CRT Capital. Please go ahead.

David Epstein - CRT Capital

Just had a covenant question. I think in your Annual Report it talks about pursuant some of the convertibles that there is a limitation on total debt to equity, I wasn’t able to find in any of convert doc, do you if that still an existence or maybe it applied to the old convert that went away?

Corey Ruttan

Yes, I do. It relates to a limitation of 35% encumbrance on total assets. So over $2 billion of total asset and would be secured debt up to 35% of total assets.

David Epstein - CRT Capital

Okay actually I did see that one but in your annual report you elude to a separate debt-to-equity, and it’s not defined as secured debt. It’s just defined as total debt?

Corey Ruttan

Yes, and the covenants did change slightly from the previous RBL to the current one that was renewed in February. So maybe that was nature of your question.

David Epstein - CRT Capital

Actually the Annual Report refers that pursuant to the convertibles. That’s why I was confused.

Corey Ruttan

In our financials we reviewed what the state of all those covenants are. I think we are well on site and I think Kelly walk you through each one of those maybe after the call.

Operator

There are no further questions registered on the telephone lines at this time. I would like to turn the meeting back over to Mr. Ruttan.

Corey Ruttan

Okay so we have a number of questions that's come through the webcast. I'll maybe get Andrea to read them and then we’ll go ahead and answer those.

Andrea Hatzinikolas

Our first question comes from George Price who asked what provision have you made for the potential loss in the event that the dispute with ANH is not ruled in your favor?

Kelly Sledz

Yes, so in our financial statements we haven’t put any provision in the financials for the ANH. We do continue to believe that’s going to be resolved in our favor and I think when you look at some of the things that we’re doing, particularly on the pipeline and expected proceeds from those processes, we’re going to be very well positioned from a financial perspective to handle anything that comes from that settlement.

Andrea Hatzinikolas

Great thanks Kelly, our next question is for Corey Ruttan and that comes from Greg Price as well. What are the projected 2013 production guidance numbers?

Corey Ruttan

Sure. As most people know, we actually don’t put firm production guidance numbers partly just because of we have such in the exploration focused business. I think most of the analyst expectations going into this announcement were for us to have roughly flat production in the 22,000 barrel a day range showed some modest growth through 2013. So obviously we’re ahead of that right now. In July there was some new wells that are in there and I think our production in the second half of the year is going to be obviously partly dependent on our ongoing exploration success rates, as well as the other important thing is we’ve got both of our Orito and Neiva programs working for us in the second half of the year.

Andrea Hatzinikolas

Great, thanks Corey. We have a couple of questions that I'll combine in relation to our infrastructure disposition packages. They came from David Sikoni (ph) and Nicolás Noreña (ph). The first question is do you believe that you can obtain the same value for your OCENSA equity rights now that you've partnered with other shareholders and I can answer that question David. Yes, we absolutely believe. In fact we believe that the value will increase. By partnering with these other shareholders our package consists of the OCENSA equity rights, few Board seats, increased governance and involvement in the OCENSA pipeline and we have managed to avoid a competing process with other sellers. So we believe it's very attractive.

Our second question, I'll now let Kelly handle this question. Can you elaborate on how the transportation right agreements work? Additionally with OCENSA and OBC still not complete, what can we expect transportation cost to be for the remainder of 2013 and 2014?

Kelly Sledz

So the transportation rights and assets give us priority to transport our contracted amount of capacity on the pipelines and so some of the scenarios we are looking at the in the transportation right sale process would include selling all or partial of those rights in exchange for a preferential right to use the production capacity to move our barrels.

So the amount of what that preferential right fee would look like is going to depend on the upfront proceeds we get for the purchase of those rights. In our first and second quarters transportation costs have been relatively consistent at $78 per barrel and I think if you look at other (inaudible) producers and what they are paying for transportation cost, I would say that would be the higher limit of transportation costs one would expect to pay and so I expect we are going to somewhere lower than that.

Andrea Hatzinikolas

Thank Kelly. Our last question on the webcast comes from Nicolás Noreña (ph) as well who asks what is the CapEx guidance for the remainder of 2013.

Corey Ruttan

So, somewhere to the production question that I just answered, we have a pretty flexible capital spending program. You can see in the first two quarters, we have been relatively consistent with cash flow. I think generally we’d like to continue that. So as a result our capital expenditure program will be also a function of our success levels going forward. I think the couple of things you are seeing in the second half of the year is we've a great deal of success in the Central Llanos.

While we are awaiting for Ciboure location to get ready and you will see some drilling dollars move out of the Deep Llanos and into the Central Llanos area but overall, kind of well counts will stay relatively consistent. I think we had 16 wells drilled in the first half of the year. Our forecast would be for roughly 22 wells in the second half.

We did highlight some of the cost savings that we were able to achieve as well. So hopefully, if we can continue that, you will see us drilling more wells for the same or less capital moving forward. The only caveat I'd give to that is that we start to ramp up our expenditures in Brazil that’s probably an extra layer on top of that and you will see that starting in the fourth quarter.

Andrea Hatzinikolas

Thanks, Corey. We don’t have any further questions from the webcast at this time.

Corey Ruttan

Okay. Mary, is there anything else on the phone lines?

Operator

There are no further questions registered on the telephone lines.

Corey Ruttan

All right. Well, thank you everyone for participating today and we look forward to updating you as we move through the rest of the year.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

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