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Executives

Ronald F. Pantin - Chief Executive Officer and Director

Jose Francisco Arata - President, Director, Member of Reserves Committee and Member of Sustainability Committee

Carlos Perez - Chief Financial Officer

Analysts

Nathan Piper - RBC Capital Markets, LLC, Research Division

Jamie Somerville - TD Securities Equity Research

Frank J. McGann - BofA Merrill Lynch, Research Division

Caio M. Carvalhal - JP Morgan Chase & Co, Research Division

Luiz Felipe Carvalho - HSBC, Research Division

Diego Usme

Pedro Medeiros - Citigroup Inc, Research Division

Justin Anderson - Desjardins Securities Inc., Research Division

Daniel Guardiola - LarrainVial S.A., Research Division

Gustavo Gattass - Banco BTG Pactual S.A., Research Division

Ian Macqueen - Paradigm Capital, Inc., Research Division

Pacific Rubiales Energy (OTCPK:PEGFF) Q2 2014 Earnings Call August 14, 2014 9:00 AM ET

Operator

Good morning. My name is Jeremy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Pacific Rubiales Energy Second Quarter 2014 Financial 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 12, 2014. 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 statement.

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

Ronald F. Pantin

Good morning, everyone. Once again, we had a record quarter for the company. We had a record in net production, of over 149,000 barrels average for the quarter. That is 17% higher than the second quarter of 2013. We also had a record in revenues of over $1.3 billion revenues, 27% higher than the second quarter of last year. Adjusted EBITDA, a new record, $722 million, 20% higher, than the second quarter of last year. Cash flow from operations, new record, that's 12% higher over the second quarter of last year of $532 million. Our new record in sales volume of over 155,000 barrels average for the quarter, that's 22% higher than the second quarter of last year. We have net earnings of $229 million, that's over 200% higher than in the second quarter of last year. And we have combined operating netbacks of $62.76 per barrel of oil equivalent, that is 3.6% higher than the second quarter of last year.

During the quarter the oil market was more stable than in the previous quarter. We had an average of almost $103 WTI, and an average of over $109 of Brent, and the realization price for the company was very close to $95 for the combined price. Our sales were mainly to Asia, where we have 63% of our cargoes, 12% went to Europe, 13% to the U.S.A. We have our first cargo to Africa, 8%, and also 4% went to Latin America and the Caribbean.

We have, as I mentioned before, a new record in the volume sales of over 14.1 million barrels sold during the quarter.

Our netbacks were very robust. We have net backs for oil of $65.54 per barrel, that's a very strong netback. We have a 4% increase over the second quarter of last year. And we have the oil netback margin of 66% that compares very good with the second quarter of last year, that was 64%. That's due to lower cost and also very strong oil prices.

In the next graph, you can see the production profile for the last year. You can see as our net production after royalty have come up from 128,000 barrels in the second quarter of 2013 to 149,000 barrels net for the second quarter of this year. You should notice here that the light medium oil has come up from 20,000 barrels average in the second quarter of 2013 to 49,000 barrels in the second quarter -- the last ended second quarter of 2014. This is a very impressive growth of more than 2.5x, and we will continue growing. You can see also that the heavy oil have come down from 97,000 barrels average for the second quarter for 2013 to 90,000 barrels net for the second quarter of this year. The reason for that was the weather conditions here in Colombia. First we have a very bad drought and also then, we have in the rainy season was an abnormal rainy reason with the floods and thunderstorms where the Rubiales field production was affected. You can see also that very important that in the second quarter of 2013, Rubiales was 55% of our net production, and now in the second quarter of this year is only 43%. Right now, it's in the order of 40%.

For the immediate future, from here to the end of the year, we expect to continue growing in light medium oil. We can see here in this graph we will be ending the year of -- here in Colombia for light medium and natural gas between 61,00 and 65,000. And in Peru, from the

[Audio Gap]

barrels by the end of the year. That means 10,000 barrels more than the average that we have in the second quarter of this year. And for next year, we will continue growing here in Colombia and in Peru, and we will end up the year between 81,000 and 87,000 barrels for light oil and natural gas, that's 25,000 barrels more than what we have in the second quarter of this year.

In heavy oil, we have had some delays in the construction of the production facilities in CPE-6. And due to very bad weather conditions during the rainy season, we have flooding and it was very difficult to take equipment to the CPE-6 area. We expect to finish and start commissioning these facilities by the first week of September. We have produced -- we're producing right now about 100 barrels per day, and we have had productions ranging between 500 and 700 barrels during the first half of the year. I feel really very optimistic about the behavior of the wells in CPE-6, and I'm going to refer to the graph that you have on your left side. The blue line is the CPE6-1X well. That is the best well that we have producing in CPE-6. And then the red line is the CPE-6H-2 that is the worst producing well that we have in CPE-6. The dots that you see are the data from the wells that we have drilled in Rubiales in the last year. You can see that the CPE6-1X is better than the all the wells that we have drilled in Rubiales in the last year. And the CPE and the red one, the CPE-6H-2 is in the average of the wells. It's not the worst well of the Rubiales, it's in the average of the wells that we have drilled during the last year. You can see the same behavior for water cost for water/oil ratio. Where you can see that blue that is the CPE-6, our best well in the CPE-6 has very low water cost in the order of 40% lower than the normal wells that we have drilled in Rubiales in the last year, and the red is in average of the older wells that we have drilled in the last year in Rubiales. So I feel very comfortable with that behavior. What it means is that we can reproduce in CPE-6, what we have done in Rubiales.

Also, we have drilled some wells in CPE-6 with high work up, and we have found the treatment for that high water/oil mobility ratio wells, using surfactants. Actually we have one well that had been treated with surfactants that was producing 100% of water. And now, it's producing over 100 barrels of water per day, that runs [ph] 120. And its water cost went down from very close to 100% to around 85%. So that is good news for the future of CPE-6. So we'll be -- when we have released these new facilities that we expect that to be in the 1st week of September, we will start resume the drilling campaign. And we expect to drill between 6 and 8 wells by the end of the year. From there, we will continue. Really, we feel very comfortable when we understand much better, the reservoir and how to drill the wells and how to produce the wells.

In the case of Rio Ariari, it's very similar to what is happening with CPE-6, we have a production of 500 barrels per day. And again, here, the ramp up of production will depend on the facilities. Right now, we're building the facilities as well in Rio Ariari.

Another important thing for the company is Mexico. As you know, Mexico has opened up to the private venture. The secondary laws were approved at the beginning of this month. And also, yesterday, we announced all the areas that we'll be bidding around and also in association with PEMEX. As you know, we have been in Mexico, looking for our portfolio for more than for 2 years. Now we have a company incorporated in Mexico, that is Pacific Rubiales Mexico. We have a President appointed and also we have offices, secured space in the area. Soon, we will also have offices in the operational areas. So we think that Mexico, having 6x the reserve, the 1P reserve of Colombia, there is a lot of opportunities and opportunities for companies like us in the heavy oil, onshore and shallow water offshore.

At STAR, as you all know, we're in the pilot test with Ecopetrol. It's really been a very successful pilot test. Actually, we have a certification from RPS Energy Group, that is the independent engineer that certifies the reserve for Quifa for a recovery factor of 29%. But as you know, double the recovery factor in Quifa. We have also learned from the project, the pilot project, a lot of operational problems that we solved. And also, we learned from good things, how to operate the test. Right now, we have a group with a technical group, with Ecopetrol looking into the future of STAR, not only in Quifa but also on the Rubiales Field, that is a proposal that we have submitted to Ecopetrol.

You can see in the graph that the 29% that we achieved as a recovery factor is more or less in the mid-range of the many U.S. pilot projects or combustion [indiscernible] combustion projects. But the important thing is that we have achieved that in only 2 years. And some of those wells or those projects have more than 40 years to reach that recovery factor.

LNG. You can see in the graph, in the lower left side, the barge is almost ready. We will start commissioning that now in the second half, and we expect that to be here in Colombia by the second half of next year. It's very impressive. Actually it's the first LNG project barge mounted. This barge is the size of a football field, so you can see the importance of this. So with that, we will bring that to the Coveñas area and we will be building a pipeline, gas line that will take gas from La Creciente to the area of the new project. That pipeline will be built by Pacific Midstream, that I will be talking about midstream. As you know, part of that, we're spinning off to the IFC. The project for the gas line will be $210 million, 70% financed and 30% equity. But that equity is going to be taken by Pacific Midstream. We expect to start construction of the pipeline now in the second half of this year. We expect completion of the project in the second half of 2015. We have also have now negotiations for the offtake agreement with the gas front [ph], and also the FSU that we will have -- that we'll be able to export in small-scale and also in standard cargoes.

Well, as I mentioned, Pacific Midstream, what we promised, we are now spinning off 40% of Pacific Midstream. I'll remind you that Pacific Midstream owns 100% of the electric line, Petro Eléctrica de los Llanos; 35% of ODL; Bicentenario, almost 42%; and the new pipeline we'll own 100% of the new pipeline for gas from La Creciente to the LNG project. We have reached an agreement with IFC and we have a nonbinding appraisal letter of intent that we expect to close by now, by October, by the end of October by the end of this year. In the agreement, we have $240 million at we will receive in cash, then we have $40 million more when we have the pipeline from La Creciente. And then the company, Pacific Midstream, where we will be keeping 60% of the company we'll receive $40 million in cash, and also $60 million more for contribution for future projects.

The order is enough of assets. We have Pacific Infrastructure. Remember that is we have 42% of Puerto Bahia, and we will have 50% of OLECAR and on the Pacific Infrastructure. And with that, the idea is when this port enters into operation, that we expect that to start at the beginning of next year. And in that project, the port facilities by the second half of next year, we will then go into an IPO of the company. And since we have, as a partner in Pacific Infrastructure and Pacific Midstream, the same partner is the IFC, probably the idea will be to do an IPO of the 2 companies next year.

Also, we have completed the cost reduction initiatives that we said. Remember that we have reduced our cost in production, transportation and dilution from $38 that we had in 2012 to around $31. That is not including the co-pay that we have to pay now for the Bicentenario. But we have been able to reduce significantly the cost to see here how we were able to reduce the dilution costs, and that's based on having reducing the expensive imported diluent and more secure lower cost with our own light oil. But as I mentioned before, we're producing 49,000 barrels of light oil. Petroelectrica de los Llanos have been working since the beginning of the year with a low cost electricity supply of $0.12 per kilowatt hours, and we estimate savings in the order of $100 million for the year. And Agrocascada, that is the reverse osmosis plant, is almost ready. We expect to commission that now in the fourth quarter. One very good news is that we have now a solution from the Ministry of Environment here in Colombia for the disposal of water via irrigation. That resolution is as of July of 2014.

Now I'm going to pass it over to Jose Francisco who is going to go through explorations.

Jose Francisco Arata

Thank you, Ronald. Good morning to everyone. During the second quarter, we drilled 10 exploration and appraisal wells. Of which, 9 wells were drilled in Colombia, 2 exploration, 6 appraisal and 1 stratigraphic well. I would like to highlight the discovery that we got at the Cubiro block, where the Copa-14 well found 60 feet of net pay. This well is presently producing 457 barrels of 40 API degrees. I would like also to mention, a well that we drilled last -- in the first quarter, the Canaguay-2 say frag well in the Canaguaro block. We're presently testing this well and is producing over 2,500 barrels per day of 29 API degree out of 32 feet of net pay in the middle of the formation. The success rate for this quarter was 89%, and when we combine first and second quarter for the first half of the year, we had a combined success rate of 68%. Regarding the seismic activity for the quarter, we completed the acquisition of the 721 square kilometers of 3D seismic in the Quifa block, and we are presently processing this seismic. The preliminary results are confirming and enlarging the size of prospect A that we drilled successfully last year. And also, we are interpreting new exploratory areas, among which, there is one to the southwest of the Cajua presently producing field, which is giving us more expectation for additional exploration activity for the third and fourth quarter for this year within the Quifa block. Therefore we expect to incorporate more reserves out of the Quifa area.

In the following slide, in Slide 18, you can see the results of the wells that we drilled during the second quarter. I would like to highlight that in CPE-6, we drilled an appraisal well, the Hamaca 7 well, and we found 41 feet of net pay, and this well is presently under testing. While in the Rio Ariari, we drilled 5 different appraisal wells, 1 horizontal and 4 vertical. The Mochelo 6 horizontal wells found 826 feet of net pay. And the other vertical wells, the Mochelo 7D and 3D and the Heliconia 2D and 5D, they found respectively, 47, 58, 29 and 56 feet of net pay, confirming the incredible potential that we have in Rio Ariari in this portion of the block.

Another well that was drilled during this quarter in the CPO-17 block was the CPO-17 East well, that was drilled to reach the paleozoic. And this well found 19 and 20 feet, respectively, of net pay in the C8 and in middle[ph] ore formations.

Now, regarding the exploration currently in progress. In Papua New Guinea, we are presently drilling the Raptor well at a depth over 3,000 meters, this is over 9,000 feet. And the final depth planned for this well is to reach 3D at 3,400 meters. In Peru, the well Fortuna-1X, located in Block 116, is presently under drilling at the depth of 7,190 feet. We already have found some good indication in the chip status with good evidence of flororsis [ph]. We plan to keep drilling and complete this well during this quarter.

Coming back to Colombia, in the Mapache block, we have 2 wells, exploratory wells there, the Erizo well, which is under testing now. This well found 5 feet of net pay in the C7 formation. In the Tucuso [ph] well, we found respectively 26 and 5 feet of net pay in the Yuwake [ph] and C7 formation. This well is under testing and is flowing 452 barrels of oil per day.

And in the Canaguaro block also, we are drilling an additional well after the good discovery of the well that I previously mentioned that is flowing over 2,400 barrels per day. The Tapiti well is presently under drilling and we had already evaluated 47 feet of net pay and we plan pretty soon to start testing this well as well.

Now, additional information regarding our production activities in [indiscernible] are related to the block [indiscernible] 1 in Peru, where the Ovangelus [ph] well produced over 3,400 barrels [indiscernible] with a 48 64 [ph] choke. Presently, this well is stabilized, producing 100 -- 1,159 barrels of oil per day, with less than 1% water cropped[ph]. And [indiscernible] and storage facilities in the location and we are planning to drill one additional

[Audio Gap]

In Brazil, as we mentioned last quarter, we contracted with our partner Karoon petro [ph] [indiscernible] of the blocks that we have in Usanto [ph]. We have contracted the semisubmersibles rig Olinda Star, and we plan to start drilling our first 2 wells [indiscernible] through appraisal [indiscernible] at the beginning of the fourth quarter. And in the rest

[Audio Gap]

the seismic campaign with our partner Queiroz Galvão Exploration and Production who is the operator of the block, we are starting a big campaign of [indiscernible] square kilometers. The exploration activities for the second half of the year, contemplating the drilling of 20 wells, as you can see in the table that we have in this slide,

[Audio Gap]

We will present in the

[Audio Gap]

results of the different campaigns, seismic campaigns that we complete during the last months. And now, I pass the work to our CFO, Carlos Perez, who is going to talk to you about the financial results.

Carlos Perez

Thank you, Jose Francisco, and good morning, everyone. As mentioned before by Ronald, Pacific Rubiales achieved a record second quarter, with all operational and most of our financial metrics at record levels. This is very important to be stressed.

Revenues went up to $1.345 billion, 27% higher than second quarter 2013. EBITDA, with similar performance, was 19% higher than the same period in prior year. Funds flow from operations was $532 million, 12% higher than second quarter 2013, confirming Pacific Rubiales' capacity to generate a substantial amount of cash.

Earnings from operations increased to $336 (sic) [$338] million, 24% more than earnings reported in the second quarter last year.

Year-to-date, Pacific Rubiales has generated over $2.63 billion in revenues and $1.43 billion in adjusted EBITDA.

As mentioned before, Pacific Rubiales has had a strong and continued high netbacks. In the second quarter, netback was $62.76 per barrel, with margins exceeding 67%.

Regarding the second quarter financial results, I'd like to again to highlight the record levels of revenues, EBITDA, funds flow from operations. Regarding operating costs, those are comprised of production cost, representing 39%; transportation cost, 35%; diluent costs, and this is very important, is only 5% after all the measures we have taken along the year; and the remaining items are represented mainly for the trading cost, the purchases of the volumes, at 21%. Cost per barrel, we were keeping under control, is $34.22 per barrel.

On a unit basis, the G&A cost decreased $0.19 per barrel of oil equivalent from $6.58 to $6.39 per barrel, as [indiscernible] to increase in overall production and sales as reported before by Ronald.

Net income of $229 million represented $0.79 per share, almost doubling the figure of prior quarter, and more than 3x comparing with the second quarter 2013.

Finally, Pacific Rubiales continues to deliver strong key financial ratios. Debt-to-EBITDA is kept at the same level of the first quarter of this year and lower than the end of 2013. Coverage ratio continues to be very strong, over 13x. Net working capital is still negative, but expected to improve in the second half of this year, as is typical in Pacific Rubiales with all the seasonal expenses concentrated in the first half. Funds flow from operation, EBITDA and net income are reflecting its best performance ever for Pacific Rubiales.

So in summary, second quarter represented a period of significant accomplishments for the company. Now, I pass over to Ronald for the final remarks.

Ronald F. Pantin

Q&A.

Carlos Perez

Q&A?

Ronald F. Pantin

Okay. Now, let's go to the Q&A, please.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Nathan Piper with RBC Capital Markets.

Nathan Piper - RBC Capital Markets, LLC, Research Division

Just one question. I only have one question, so I'll keep it brief then. So given the increasing shareholding from the Alfa Group, I wonder if you could comment on that in general terms. And second of all, have they actually made any demands on you? Do they want a seat on the Board? Do they want influence within the company? I wanted to get some color around that development, please.

Ronald F. Pantin

I've seen some in the Mexican newspaper yesterday. I think it's the General Manager that said that they want to be with Pacific Rubiales now with the opening for the private sector in Mexico. I feel that for the large economic groups in Mexico, it's very important now, what's going to happen, and the opportunities that Mexico will have. They don't have the know-how to be an operator and I think that their move is going to that direction, of joining Pacific Rubiales as we are the prime, independent company that will enter in the Mexico, new opening to the private sector.

Nathan Piper - RBC Capital Markets, LLC, Research Division

Okay. And would you expect to conclude something specific in Mexico by the end of the year? Or you would just participate new licensing [indiscernible]?

Ronald F. Pantin

Yes, Nathan. As we have told you before, we are ready. Yesterday they announced the blocks for the building ground next year, but also for the joint ventures with PEMEX, and we're ready. We love what we have seen in Mexico. They have moved very fast. Actually, they have surprised the market, moving forward before people expected, and we're are ready. We have Pacific Mexico ready. We have our President appointed that I'm going to tell you is Camilo Valencia, that is the President that we have for Pacific Peru, is moving there. We have the people already in place, and ready for the action.

Operator

The next question comes from the line of Jamie Somerville with TD Securities.

Jamie Somerville - TD Securities Equity Research

My question is around Agrocascada. So very positive that you got the agreements of the permits to go ahead. I was just wondering what the timeline is on this project because they've been shifting. I think the project was originally expected to come onstream late 2013, and I see that you're saying construction is only 65% complete at the end of this quarter, 55% in the prior quarter. You're guiding towards the project coming onstream in Q4 this year, but given the shifting timelines, can you explain why those timelines were shifting, and why we can now feel confident that the project will come onstream late this year?

Ronald F. Pantin

Yes, that thing is that we didn't have the decreed by the government, the resolution of government where we have that. And now, we are ready -- we'll be ready by the fourth quarter, no problem at all. Actually, more important than that, we will be commencing in that in the fourth quarter for sure and we were kind of waiting for the resolution to come out. But now, we have planted 3,000 hectares of palm. And so we also have the plantation for the irrigation. So we're ready now for the fourth quarter for Agrocascada.

Operator

Your next question comes from the line of Frank McGann with Bank of America, Merrill Lynch.

Frank J. McGann - BofA Merrill Lynch, Research Division

Just a follow-up on Slide 9, if I might, where you talked about the production trends that you're expecting in sort of rest of this year and for 2015. I was wondering if you could maybe just go into a little bit more detail in terms of the levels that you're expecting, where that -- where the additional production is going to come from? The levels you're expecting at the Rubiales in Quifa field in the second half of this year and for next year? Of other major fields that will contribute to the growth that you're seeing there in Colombia.

Ronald F. Pantin

Frank, I think I expect now a growth in production from Rubiales. Rubiales are still down due to the weather conditions. First, with the drought that we have, we have to stop the water disposal into the river that is a license that we have for 300,000 barrels a day, and that affected the production because we have to close the disposal of water. Then in the second quarter, we had this very bad rainy season where we have floods, we have thunderstorms, we have all kinds of things. And the Rubiales production, we couldn't pick it up. Now things are coming back to normal, and we see that the Rubiales production is going up again. So we expect Rubiales to come back to their usual figures that are in the order of 100,000 to 200,000 barrels per day and now in the fourth quarter. We also have, as has José Francisco mentioned, very important new wells for Petrominerales. One of them has over 2,500 barrels of light oil. Same thing we have seen in Pacific Stratus, and that's the guidance that you have in 9 -- in Slide 9. At the end of the year, we expect to be producing between 61,000 to 65,000 for these 2 companies here in Colombia, Pacific Stratus and Petrominerales. And in Peru, increasing our net production by the end of the year between 5,000 and 6,000 barrels per day. That is between 66,000 to 71,000 by the end of the year. That is 10,000 barrels more in average that we have in the second quarter of this year, and we will continue growing in the light oil. And the next year, with -- and the same things here in Colombia and in Peru, we would have then the Los Angeles wells, 3 wells that we'll be drilling, both the Sheshea that we are about to have the environmental license and start producing the wells that was the original discovery there, plus 3 to 4 more wells.

Frank J. McGann - BofA Merrill Lynch, Research Division

If I could just follow up in terms of people, what are you looking for the rest of this year or next year?

Ronald F. Pantin

Frank, I'm sorry, I didn't mention the CPE-6 and Rio Ariari. For sure, we will have now -- we will resume drilling, and we will start ramping up production. We couldn't do that before for the facilities were not ready. But I'm also very enthusiastic, very optimistic about the well behavior in CPE-6 and Rio Ariari. I'm sorry Frank that I interrupt you.

Frank J. McGann - BofA Merrill Lynch, Research Division

Yes, just curious if you had any ideas or estimation of what you think Quifa will be doing relative to the second quarter numbers in the second half of this year as well as in 2015?

Ronald F. Pantin

Quifa is doing very, very well. Actually, Quifa, we are producing over 61,000 barrels. Sabanero is also picking up. So you can say that Quifa plus Sabanero, around the order of 62,000 to 63,000 barrels, and we will continue at that level, probably a little more by the end of the year.

Operator

Your next question comes from the line of Caio Carvalhal from JPMorgan.

Caio M. Carvalhal - JP Morgan Chase & Co, Research Division

Just a couple of questions here. Number one, A one-off refers to the CPE-6 and the Rio Ariari. Could you give us a little bit more color on the timing? I'm not sure if you do have it now or if timing is uncertain, but if possible, let's do a little bit about the timing for that recovery in activity in CPE-6. And also, how do you view the exit production by this year? I mean, how do you believe you're going to be able to be producing by the end of this year? And the second question is about the water disposal initiatives. Could you guys just remember me how much are you are you disposing of water on a per-day basis on the river floating and reinjection? And also, how much would be the potential for the Agrocascade (sic) [Agrocascada] project, let's say, for the first phase of the project, the next maybe 1 or 2 years? Those are my questions.

Ronald F. Pantin

Well CPE-6, as I mentioned before, we've had this delay for the facilities due to very bad weather conditions. Actually, it was impossible to take the equipment to the CPE-6 area for reason of floods that we have and all the fronts. So we have a delay of around 3 months for the completion of the facilities in CPE-6. Now when we have it ready, that's -- we are planning to start commissioning that by beginning of September -- sorry, by beginning of September, then we will resume drilling. And as I mentioned before, I'm very happy. If you can see the graph that I'd mentioned when we compare the CPE-6 well's behavior with the Rubiales well behavior. You can see that we have a very good opportunity in CPE-6, and the same I can say for Rio Ariari. On the water, in Agrocascada, we will have 1 million barrels more. Now we have 0.6 million barrels. Going to -- at the end of the year, we will put 500 from Agrocascada. And at the beginning of the year of 2015, we will have 500 more. And then we can extend that 1 million to 1.5 million using the same original plants of reverse osmosis plants by the midyear of 2015.

Operator

Your next question comes from the line of Luiz Carvalho from HSBC.

Luiz Felipe Carvalho - HSBC, Research Division

I have 2 questions here. The first one on the LNG document that you released, you mentioned that the STAR pro pilot will be shut down during second half of 2014 through the [indiscernible]. I just want to know if you can give us a bit more color on this front and what would be the impact from the testing looking forward. And the second one, I'd say, regarding the recent Canaguaro pipeline, I'd say, could you give a bit more color on what will be the impact in terms of cost for the second half of this year or maybe in the third quarter? And just as a follow-up, regarding the tax rate that you have, just want to know what are you doing to try to restructure and reduce the tax rate looking forward? Just a follow-up on the question before that, I just want to know, what will we be the update on that?

Ronald F. Pantin

Excuse me, I couldn't hear you very well here. The first one is on -- the color on the LNG?

Luiz Felipe Carvalho - HSBC, Research Division

No, the first one is with regards the STAR, the LNG, and you mentioned that you did a shutdown during the second half of the year. So can you give us a bit more color on that? The second one, it's about the BT [ph] Canaguaro pipeline, the cost. What will be the cost impacts on the third quarter or the second half of the year? And the third one, it's about the structure on the tax rate, how you're working on that to try to reduce the tax rate looking forward.

Ronald F. Pantin

Well, the problem -- we're having a problem with the communication. I have to recognize here. There is a bad noise. The first one is STAR. STAR is doing very well. Right now, we are -- we have a team with Ecopetrol, and we're looking to that. As I mentioned, we have now a certification from the RPS, and RPS is an independent engineer for the Quifa research, and they have sent a certification of 29% recovery factor for the pilot. We also have the -- right now, we're looking into what we're going to do with Ecopetrol now in the second half of the year, what will be the plans to using STAR for the Quifa development. And also, we have submitted to Ecopetrol a proposal based on STAR for extending or putting a new contract based on the EUR for the Rubiales field. I think your second question was EBITDA.

Carlos Perez

I guess, what I heard from you, but as we said before, where we state is a record of $722 million EBITDA, and we're expecting to improve this figure in the coming quarters, and the main reason is because we're expecting more production. Regarding the prices, we're expecting to have similar levels, so there is no changes there. And regarding the operating cost, we are doing our job. Despite the peso depreciation, we manage that, and we get control on the operating cost of the company. Something that affected the EBITDA for the first half, it was this unexpected situation in OSE on the tax, and we have some losses for that situation of a margin of $50 million net after receiving the dividend. So money back from the OSE. Of course, we would have had more EBITDA if this situation wouldn't have happened. So in summary, we're expecting better figures in EBITDA in the third and the fourth quarter this year.

Ronald F. Pantin

You can see also that our production, we have a record production net after royalty, but we have -- the Rubiales Field went down about 7,000 barrels, and I mean, net to the company. And that's an important number, and we expect that to be before now in the second half of the year. And so we're going to have more EBITDA, and it's going to have more revenues. So we're very confident that we'll be getting into our -- for sure, in our guidelines for production that we're now ahead of the guidelines that we gave the market. But I think that if the Rubiales Field starts coming back, we'll be in the top of our guidance by the end of the year.

Caio M. Carvalhal - JP Morgan Chase & Co, Research Division

With [indiscernible] tax rate?

Carlos Perez

The tax rate is -- as you know, in that line of tax, there are 2 components. The first one is what we say the cash tax, which is the current tax, and it's very regular in its behavior because at the end, this is the taxable income multiplied by the statutory rates in the countries where we have revenues. And the other line is the deferred taxes. They have to do with a lot of things, but first, there are no cash effects included in that line, and it's affected mainly for the exposure that we have in the net assets in the 2 countries, where we have operations, but mainly, Colombia. Every time that the peso appreciates, it has a positive impact on the deferred income tax. We have an exposure of the net assets of COP 7 billion assets in Colombia. So every time there is an appreciation, there is a revenue -- a profit we would recognized and, of course, affecting these deferred income tax number. And that is the main reason of this swing. It was a significant swing from 56% reported in the previous quarter compared with 15% [audio gap] complex accounting number, but it's very much affected by this situation of exposure in Columbian Peso assets we have in Colombia.

Operator

[Operator Instructions] Your next question comes from the line of Mattheus [ph] Scatinni [ph] with Morgan Stanley.

Unknown Analyst

Just a quick question regarding the effective tax rate. Also, the aforementioned -- given the aforementioned volatility in the first and second quarter, we would like to know what is expected by the management for the second half of the year.

Ronald F. Pantin

The effective tax rate.

Carlos Perez

Well, as I mentioned before, we're expecting to have a stable Colombian peso versus U.S. dollars and recovery in the other currencies. Due to that factor, we are not expecting to have this swing which should be in a normal situation of between 40% and 45% effective tax rate in the future. So this is something that happened. There was a very sharp appreciation during the second quarter. Probably, you'll recall that in the first quarter, we have an exchange rate close to COP 2,000 per dollar. Now it's COP 1,800. So it was a very important appreciation, and that affected positively, fortunately for us, in this line of effective tax rate that we're expecting to have a higher number in coming quarters. But again, those are noncash. Those are important. You have to do more with future impacts, long-term impacts in that line. And the other question is volatility, it's related to that because we're not expecting volatility in the Colombian peso at the far end of fourth quarter.

Operator

Your next question comes on the line of Diego Usme with Ultrabursatiles.

Diego Usme

First question is regarding -- I don't have -- if I am wrong with the -- your goals with CPE-6 and Rio Ariari. Are you keeping in mind the same goals at the beginning of the year, I mean, close to 10,000 barrels per day end of the year. And the second question is regarding to the increase of participation of Alfa as a holder of Pacific Rubiales. Are you planning to be more expedite with the shares repurchasing in '14 the short term?

Ronald F. Pantin

Well, as I mentioned before, the guidance that we have for CPE-6 and Rio Ariari was affected by the completion of the infrastructure to deal with the water. We were producing, as I mentioned, between 500 and 600 barrels with high water cap, and it's very expensive to take the water out if you don't have the facilities. Now with the facilities in place, we will start ramping up production and also the drilling campaign that we have in those 2 areas. About Alfa, I already answered that question. The guys, they have been in the press, and they have said that they are interested to join venture Pacific Rubiales and now in the opportunities that Mexico offer in the oil and energy sector. So we think that, that's a great group. If that is the case, more than welcome. We're ready to proceed with all the opportunities that we see in Mexico. We have been getting ready for that for 2 years. We feel very comfortable with what we have seen in the press and all of the announcements of -- in the secondary laws and the new fields that PEMEX, they just want to take it to $1 billion rounds[ph] and also for joint ventures. So we feel that Pacific is really the time independent oil companies to partner into Mexico.

Diego Usme

Okay. As a conclusion, if you guys are planning to be more expedite with shares repurchasing in the short term?

Ronald F. Pantin

No, we're looking into that. We are -- as always, we have, right now, the authorization from the board, again, from the -- to buy back up to 10% of the company, and we'll do it depending on what happened in the market. Last time that we did it, the shares were at low price, and we took the opportunity, and we always will be moving to make value-- to create value to our shareholders.

Operator

Your next question comes from the line of Pedro Medeiros from Citigroup.

Pedro Medeiros - Citigroup Inc, Research Division

I actually have 2 quick questions and very objective ones. The first one is, can you give more color on the amount of savings achieved by Petro Eléctrica de los Llanos in the quarter that were deduced from your production costs. And the second question is related to the guidance in Sheshea and Los Angeles exit production for 2015. Should we recognize that as an extended well [indiscernible] money or as the beginning of a commercial scale facility for the 2 fields?

Ronald F. Pantin

Well, with Petro Eléctrica de los Llano, we have reduced the cost of financing. Remember that we were using diesel as fuel, and also, we also had crude as fuel. So this is a very low-cost energy, and we have been providing in the order of 100 mega a day. Right now, we are building some facilities in Quifa, and especially in Quifa, where we would be able to increase the supply of energy to -- from 100 to 131 and 140 mega a day. And the savings are very important because the cost of energy coming from the grid is much lower than the cost that we have in the -- our using the diesel fuel or using crude oil.

Operator

Your next question comes from the line of Justin Anderson with Desjardins.

Justin Anderson - Desjardins Securities Inc., Research Division

Guys, a question about the watercuts out of the vertical appraisals that went down at CPE-6 and the Rio Ariari on the quarter, the Hamaca-7, the Mochelo wells and the Helicona wells. I just wanted to know what the watercuts for the early water cuts are for those wells.

Ronald F. Pantin

Okay, one thing that we did was a core analysis to understand better all the wet-ability and also the relative permeability of oil and the relative permeability of water. And from that, we have had very successful treatment for the wells. As I mentioned before, the Hamaca does well, that was producing 100% of water, and now with this treatment, using surfactants, we took that down to around 86% work-up, and we increased the production of over -- from 0 to over 100 barrels a day, around 121, 125 barrels a day and is still increasing. So one thing that we have seen, and this is probably the most important for me, is that we have movable oil, and also, we have the way that we are doing things now, we can plan for a good water-to-oil mobility ratio. Right now, we understand very well, with this core analysis of the relative permeabilities and the mobility of the oil in CPE-6, the same as in Rio Ariari.

Operator

Your next question comes from the line of Daniel Guardiola with LarrainVial.

Daniel Guardiola - LarrainVial S.A., Research Division

I have a very brief question, is regarding the potential IPO of the midstream assets. I would like to know what needs to be done in 2015 to actually effectively IPO these assets? And what could delay this listing?

Ronald F. Pantin

Okay. Since we started, we did the joint venture with the IFC and Pacific Infrastructure. Remember that we have also OleCar, where we say that the effective strategy was going to be an IPO. When the facilities will be operational. These facilities will start commissioning sometime now in September, October of this year, but we will continue commissioning the rest of the facilities. The project is going very, very well. We will start now building the OleCar pipeline, and that's what we really need as to when we have that finished. Remember that the OleCar pipeline will fit the new refinery of Ecopetrol, plus Petra Energia. We think that this is a high value for the company. The other good thing that is happening is that our partner in Pacific Midstream is also the IFC and similar for the [indiscernible] fronts. And with that, we might -- instead of doing an IPO for Pacific Infrastructure and another IPO for Pacific Midstream, we might put them together and going into an IPO. This is too early to say what will be the value, but the projected EBITDA for both for Pacific Midstream and also for Pacific Infrastructure are very large. And as you all know, the multiples for that kind of company with a very stable cash flow are very good in the market.

Daniel Guardiola - LarrainVial S.A., Research Division

And regarding the construction of OleCarp, do you already have all the environmental permits to do it?

Ronald F. Pantin

We have all the environmental permits. We have -- the pipeline's in place. We have everything in place.

Operator

Your next question comes on the line of Catalina Rucort [ph] with Porvenir.

Unknown Analyst

I have one question. If you can expand a little bit on what was mentioned before of the proposal sent to Ecopetrol to possibly extend the contracting in Rubiales Field? And also, I would like to know if this 29% of increasing recovery that you mentioned in the presentation can become an additional operating reserves of this Llanos field?

Ronald F. Pantin

Well, yes, it can. It's based on EUR. The idea is that by June of 2016, Ecopetrol will take 100% of the production, the primary production that is coming, but we have the technology to increase the recovery from 15% to 30%. So the idea is that we'll be doing some sort of a new contract based on R Factor. Remember that R Factor is we put investment, and then we will have -- the R Factor will govern the share of production. At the beginning, we will have more production to recover our investment, and at the end, we will have more production because we have been -- we will recover our investment. This will be for the life of the reservoir. I think this is a win-win situation, and not only for Ecopetrol and Pacific, but also for Colombia. If we don't do something in the Rubiales Field, or we don't implement as soon as possible the EUR, we will see that it's a mature field, and we will see that the water costs will continue increasing, and the production of oil will come down.

Operator

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

Gustavo Gattass - Banco BTG Pactual S.A., Research Division

I had 2 quick questions. You're talking about the recovery in production at Rubiales Field. I just wanted to check, have you then, I would say, come to terms with that discussion with ANLA that was preventing the disposal of water on the river? And the second thing, if I could just check, do you expect to have dividends from the Bicentenario pipeline every quarter? Or is that going to be a bit more erratic during the year?

Ronald F. Pantin

Okay. The Bicentenario, for sure, is the profit center and the same as, right now, is OEL and all the other facilities, and we will have dividends, and that's the policy of all those companies. And in the case of the water disposal, we already have that back, so no problem at all. And we have not reached into terms into this new contract with Ecopetrol. I think that was your question. No, I'm sorry.

Gustavo Gattass - Banco BTG Pactual S.A., Research Division

No, that's perfect. The question was just the...

Ronald F. Pantin

Again, as I've mentioned we have that loss. We have the grid or the resolution of the Environmental Ministry for Agrocascada. With that, we'll be able to increase, as I mentioned before, 1.5 million barrels of water at a lower cost than we have with the reinjection of water into the aquifer. Remember that for future water disposal, if we inject it, it will be in order of the $0.30 to $0.34 per barrel of water. With this, it's in the order of $0.14, so it's half of the cost.

Operator

Your next question comes of the line of Ian Macqueen with Paradigm Capital.

Ian Macqueen - Paradigm Capital, Inc., Research Division

Just a quick question. What's your current water disposal capacity at Rubiales?

Ronald F. Pantin

2.8 million barrels per day

Another question?

Ian Macqueen - Paradigm Capital, Inc., Research Division

Can you hear me?

Ronald F. Pantin

I answered, 2.8 million barrels per day.

Ian Macqueen - Paradigm Capital, Inc., Research Division

Oh, sorry, I missed that. 2.8 million barrels. And that includes 300,000 of disposal capacity in the river?

Ronald F. Pantin

Yes.

Operator

Your next question comes from the line of Majesh [ph] Shetti [ph] with BlueBay.

Unknown Analyst

Had a quick question, actually, 2. Firstly, there was an article last week in the press regarding a potential management buyout by yourselves to block Alfa. Just wondering if you could comment on that or if that's just a baseless article. And then the second question I had was around...

Ronald F. Pantin

I have already commented on that, and the article that I have seen is the article of Alfa are saying that they want to joint venture Pacific in the Mexico new opportunities.

Unknown Analyst

Okay. All right. And then the second question was around the JVs in Mexico. I mean, are you guys -- how are you going to fund that? I mean, the opportunity of that it's quite evident. But obviously, that's going to acquire a fair amount of CapEx. So if you could walk us through what you're thinking in terms of that, that would be great.

Ronald F. Pantin

Great, open, $1 billion, and it's there.

Unknown Analyst

Right. So just using your existing lines, do you think...

Ronald F. Pantin

Yes, we might do some joint ventures. So we'll see think, but right now, we have available $1 billion.

Unknown Analyst

And just my final question. There's been quite a few today, but can you give us an update in terms of the proceeds you expect to receive from the asset sales and where you are in that process?

Ronald F. Pantin

I mean, for Pacific Midstream? Yes, everything is been signed as I mentioned, and right now, we expect to at the end of October to close the deal with IFC.

Operator

At this time, there are no further questions. Please go ahead, Mr. Pantin.

Ronald F. Pantin

Well, guys, again, Pacific Rubiales continues growing. Quarter after quarter, we said this is a new record, and quarter after quarter, we have new records in production, new records in revenues, new records in sales, and that's the company that we are right now, looking for 7 years out. Everything has started 7 years ago with a net production of less than 5,000 barrels. Now the company is producing close to 150,000 barrels. So we have had and we have become the largest independent E&P company based in Latin America.

Now with Mexico, this is a new stage for the company. When we had to start Pacific, we have grown in Colombia, but we are, right now, the second largest oil company in Colombia after Ecopetrol. In Peru, we'll be soon the largest independent oil company in Peru, but the thing was materiality. We have some very important discoveries in Brazil. We have Guyana that haven't been mentioned today but is something that is really very, very important, for me, probably, is one of the new areas, new frontiers, more important that are left here in Latin America. And now Mexico opens up after almost 80 years, and it's a great opportunity. Mexico has 13 billion barrels of reserves and compared to Colombia, 2.3 billion. The opportunities in Mexico are huge. We have seen a lot of opportunities where we can add value in a joint venture with PEMEX, the same that we did here in Colombia. I see Colombia as the Mexican story being repeated into Mexico. We have seen oilfields that have large 2P reserves with small production, and we can repeat the Rubiales and Quifa story and what we have done and have been doing here in Colombia that I want to emphasize. Also like Medion [ph], in 1 year, we have increased from 20,000 to 49,000, and in Peru, we have come from the 1,000, and we expect to be over 12,000, 14,000 next year in only 2 to 3 years. Mexico got everything that you need. It's got very good prospectivity, got all the contractors that you need, so you can move. And also what we have seen is that the laws, the secondary laws that were approved by Congress in Mexico are excellent, excellent for the new investment in the country. So we are really very optimistic. We are moving. Actually, I spent a lot of my time now in Mexico, putting together the office in Mexico. We have people, actually, people that went from Pereves [ph] to Mexico 10 years ago, and now they will be part of our team for production as well in Mexico. Thank you very much for everything, guys.

Operator

This conclude today's conference call. You may now disconnect.

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