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BPZ Resources (NYSE:BPZ)

Q2 2012 Earnings Call

August 09, 2012 11:00 am ET

Executives

A. Pierre Dubois - Head of Investor Relations and Corporate Communications

Manuel Pablo Zúñiga-Pflücker - Chief Executive Officer, President and Director

Richard S. Menniti - Chief Financial Officer and Principal Accounting Officer

Analysts

John Freeman - Raymond James & Associates, Inc., Research Division

Mostafa Dahhane - Wunderlich Securities Inc., Research Division

Irene O. Haas - Wunderlich Securities Inc., Research Division

Chris McDougall

Operator

Good day, everyone, and welcome to the BPZ Energy Second Quarter 2012 Earnings and Operations Update Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Pierre Dubois, Investor Relations of BPZ Energy. Mr. Dubois, please go ahead, sir.

A. Pierre Dubois

Well, thank you, Sammy, and good morning, everyone. We appreciate you taking the time to listen to our call. With me today are Manolo Zúñiga, President and Chief Executive Officer, who is joining the call from Peru; Richard Spies, Chief Operating Officer; and Rick Menniti, Chief Financial Officer.

Before we move forward, I would like to provide you with the customary cautionary statements. This call and related earnings release do contain forward-looking statements. These forward-looking statements are based on our current expectations about our company, our properties, our estimates of required capital expenditures and our industry.

Our actual results could differ materially from those anticipated in these forward-looking statements. Such uncertainties include the success of our project financing efforts, accuracy of well tests, refurbishment efforts, successful production of indicated reserves, satisfaction of the well test period requirements, installation of required processing facilities, receipt of required permits, acquisition of seismic data, the successful management of our capital expenditures and other normal business risks associated with our business and the global economy.

With respect to any oil and gas reserve estimates discussed on this call, we are prohibited from disclosing those estimates of oil and gas resources that do not constitute reserves in our SEC filings. With respect to probable and possible reserves, we are required to disclose the relative uncertainty of such classifications. Further, the reserve estimates and referential price information contained in the earnings call and release are not designed to be nor are they intended to represent an estimate of the fair market value of any unproved reserves.

In connection with the information conveyed in this call today, please also consider the additional disclaimers and information contained in the company's SEC filings.

With that said, I'd like to turn over the call to Manolo Zúñiga.

Manuel Pablo Zúñiga-Pflücker

Thank you, Peter. And thanks to all who have taken the time to listen to our call today. Well, as you can imagine, we're excited about the completion of our new CX-15 platform plantation. It sailed away from China to Peru this week. On Monday, we issued a press release with a picture that shows the platform and hull aboard the transport vessel bound for our Corvina field in Peru, where it will be installed. The CX-15 platform was safely completed in Nantong, China by Wison Offshore & Marine fabrication facility in a record 11 months from contract signature, and we filed a single lost time incident.

This project represents the first use of a buoyant tower design. This design, which is similar to proven cell spar technology, was critical for the project as it would not require a derrick barge for installation.

The CX-15 platform contains 24 drilling slots and will be capable of supporting production and drilling operations. The production facilities are currently designed to produce about 12,000 barrels of oil per day and about 13 million standard cubic feet per day of gas and inject 3,500 barrels per day of water.

We're impressed with the quality and efficiency of the fabrication work performed by Wison and their subsidiaries -- subcontractors in China. As we have previously stated, the importance of this design is that it allows us to have the ability to develop other future discoveries that are located between 200 feet and 700 feet of water in Block Z-1.

And I want to congratulate all those involved with the CX-15 project, including the Pacific Rubiales team that thoroughly reviewed this project. The CX-15 is another example of how we continue to execute on our plan to grow production and shareholder value. In fact, we continue to successfully advance all of our key initiatives.

At Albacora, as you know, we got the water reinjection equipment is on the platform and ready to go. We're just waiting for the necessary approvals to use it, which, based on feedback from the authorities, I'm confident we will get soon. For the interim, we were authorized to continue production taking at Albacora until December 28, which should give us plenty of time for commissioning of the reinjection equipment after the corresponding permitting to use it is obtained.

Early in the second quarter, a new joint venture agreement was signed with Pacific Rubiales Energy, known as PRE, to develop Block Z-1. As reported, the joint venture, in a nutshell, consisted in selling 49% of Block Z-1 for $150 million in cash, plus a commitment from PRE to carry BPZ's Block Z-1 capital and exploratory expenditures for $185 million after the beginning of this year. So through this arrangement, we have obtained funding for our 2012-'13 Block Z-1 capital plan, as well as part of 2014. PRE will contribute $362 million of capital for Block Z-1 during this critical exploration and development phase. So all combined, PRE has a commitment of up to $512 million.

I would like to highlight that although I spend quite a bit of time discussing permits with the local authorities, in my conversation with them, there has never been any indication that the Block Z-1 transaction with PRE will not be approved. So it is just a matter of time. As Pierre mentioned, I'm in Peru this week to move this process along and of course, meet with the new president of Perupetro and other local officials while I am here.

The Z-1 JV is already working under the joint agreement. For example, the partnership working together has already identified our local program at Corvina, which is designed to further optimize production, another one of our key initiatives. It will also work to create a mechanical column in one of the gas injection wells that has negatively impacted 2 oil-producing wells. The work-over rig is on-site and the work-over program has begun.

Properly managing Corvina's personal performance is of critical importance not only for optimizing production but reserves as well. With respect to reserves, another key initiative is to develop Corvina's 23 million barrels of crude oil reserves. As I mentioned at the beginning, the CX-15 vessel is on its way to Peru and will arrive and be installed in September 1 mile south of the existing CX-11 platform. Within the week, we'll be ready to mobilize once the platform is in place, so we expect to receive our drilling permit by this time, so we may expand on top of the first oil well of this important development drilling campaign.

Our exploration initiative continues as well. Processing continues for the first phase of the Z-1, 3-D seismic, which accounted for 1,300 of the planned 1,600 square kilometer survey. However, the remaining 20% of the seismic not yet completed is very important as it will complete the coverage I want for Albacora, Piedra Redonda, as well as Barracuda. In that regard, we contracted a smaller seismic there so it should be on location in Corvina this month to begin acquiring the remaining 3-D seismic.

At onshore, our data room is now open for Blocks XIX and XXIII. The 2 blocks comprise over 800,000 acres and hold both oil and gas potential, with Block XXIII bordering the northern part of prolific Talara oilfields. We're following our formal process, as we did before, to find a partner on these 2 blocks. Finding the right partner is important as we run from this recent Z-1 transaction where we ran a disciplined process to ensure we continue creating value for our shareholders.

So the end result of our initiative is to grow production and reserve and of course, increase cash flow and achieve profitability. And of course, our commitment to corporate citizenship underlies all the work that we do.

I am very pleased to share with you that in the formal ceremony last night here in Lima, I accepted on behalf of BPZ Energy a special distinction recognizing us as a socially responsible company in Peru. This distinction is based on a comprehensive evaluation carried out by an international group of experts or auditors from the Mexican Center for Philanthropy, who have surveyed our company in terms of community relations, employee quality of life, protection of the environment and corporate governance. This ceremony was organized by Perú 2021, an independent organization that promotes best practices in corporate social responsibility in Peru.

So again, we're working hard to meet the standard of excellence in all aspects of our business.

I am now going to hand over the call to Rick so he may provide a brief financial summary. Rick?

Richard S. Menniti

Thank you, Manolo, and good morning, everyone. Before I provide my financial summary, just a reminder that a copy of our earnings release is available on our website under the Investor Relations section, along with other company financial information. We will file our 10-Q for the first quarter tonight, Thursday, August 9.

Starting with the earnings for the second quarter 2012, the company reported an operating loss of $6.7 million and a net loss of $8.5 million, or a $0.07 loss per share. This compares to operating income of $8.9 million and a net income of $300,000 or breakeven on a per-share basis for the same period last year.

The operating loss in the second quarter was due to higher operating costs along with lower sales volumes and realized pricing compared to the same period last year. The net loss includes current quarter debt extinguishment costs of $7.3 million related to the prepayment of the $75 million secured bank facility. Recall, we reduced the facility to $35 million in the second quarter this year.

Earnings before interest, income taxes, depreciation and amortization, exploration expense and nonrecurring charges, or EBITDAX, was lower at $7.9 million for the second quarter compared to $19.6 million for the same period last year due to the higher cost in lower revenue in the second quarter this year.

For the first 6 months of 2012, the company reported an operating loss of $25.6 million and a net loss of $35.8 million, a $0.31 loss per share compared to an operating income of $9.2 million and a net loss of $7.8 million, or $0.07 per share loss, for the same period last year.

The swing to an operating loss for the first 6 months of 2012 compared to the same period last year was mainly due to increased geological, geophysical and engineering, or GG&E, expenses of $19.5 million related to the offshore 3-D seismic acquisition activity underway at Block Z-1 and higher lease operating expenses, or LOE, of $5.8 million.

For the first half of 2012, lower oil sales volumes were partially offset by higher sales prices compared to the same period in 2011. EBITDAX was lower at $24.7 million for the first half of 2012 compared to $36.7 million for the same period last year due to the higher cost and lower revenue in the first half of this year compared to the first half of last year.

Turning to our revenues in production. Total oil production from the Corvina and Albacora fields for the second quarter ended June 30, 2012 was 323,000 barrels, or 3,550 barrels of oil per day, compared to 377,000 barrels or 4,142 barrels of oil per day for the same period in 2011.

Recall all production revenues and expenses are for BPZ Energy's account into the JV transaction with Pacific Rubiales is approved by the Peruvian authorities, so all the production numbers I'm referencing are on a 100% gross basis.

For the first half of 2012, total oil production was 676,000 barrels, or 3,715 barrels of oil per day, compared to 752,000 barrels or 4,155 barrels of oil per day for the same period last year.

Year-over-year, Corvina field production was lower due to natural declines partially offset by higher production at the Albacora field.

For the 3 months ended June 30, 2012, net oil revenue decreased by $2.9 million from the same period in 2011 to $32.7 million. The lower net oil revenue is due to a decrease in the amount of oil sold of 12,000 barrels to sales of 324,000 barrels for the second quarter of 2012 and a decrease of $5.12 in the average per barrel sales price received. The average net oil sales price for the second quarter of 2012 was $101 compared to $106.12 for the same period last year.

For the 6 months ended June 30, 2012, net oil revenue decreased by $4.2 million to $69.2 million from the same period in 2011.

The decrease in net oil revenue is due to a decrease in the amount of oil sold at 7,300 barrels to 658,000 barrels for the first half of 2012. This was partially offset by an increase of $4.73 per barrel, a 4.7% increase in the average per barrel sales price received. The average net oil sales price for the first 6 months was $105.14 in 2012 compared to $100.41 for the same period in 2011.

I'll now take you through our expenses for the period. Overall, operating and administrative expenses of some $39 million were increased by $11 million for the first 3 months ended this year as compared to the same period last year. The main driver for the increases are higher LOE of $5 million related to increased repair and maintenance activities on both platform and vessels, as well as rental of production equipment. We also had an increase in the G&A with some nonrecurring costs related to the Block Z-1 transaction of $1.1 million and some additional non-income taxes.

For the 3 months ended June 30, 2012, other expense decreased $2.1 million to $3.2 million compared to the same period in 2011. The decrease was a combination of the reduction in the unrealized loss on derivatives of $8 million due to lower crude oil prices at the end of the quarter, and $800,000 in lower net interest expense, partially offset by the loss on the extinguishment of debt of $7.3 million I mentioned earlier.

For the first half of this year, overall operating and administrative expenses of some $95 million were increased by $29 million as compared to the same period last year. The main driver for the increases are higher GG&E expense of $19 million related to the seismic activities in Block Z-1 and higher LOE of $6 million related to the increased repair and maintenance expenses on both platform and vessels, as well as rental of production equipment.

For the 6 months ended June 30, 2012, other expense increased $3 million to $15.9 million compared to the same period in 2011. The increase was a combination of a loss on the extinguishment of debt of $7.3 million and $2.7 million of higher net interest expense due to higher debt levels this year.

These items were partially offset by the reduction in the unrealized loss on derivatives of $6.6 million due to the lower crude oil prices at the end of June 2012. As we reported, losses before income tax is mainly due to the increased expenses in the second quarter of 2012. We had a resulting increased tax benefit of $5.8 million compared to the same period last year. Similarly, for the first half of this year, we reported losses before income taxes mainly due to increased expenses. We also had a resulting increased tax benefit of $9.8 million compared to the same period last year.

I'll close with a comment on our liquidity and capital expenditures. At June 30, 2012, the company had cash and cash equivalents of $97.4 million, a current accounts receivable balance of $4.2 million and a working cap surplus of $94.6 million.

For the 3 months ended June 30, 2012, capital expenditures were $17.8 million, including $3.7 million of capitalized interest. For the 6 months ended June 30, 2012, capital expenditures were $40.3 million, including $6.7 million of capitalized interest.

During the first half of the year, capital expenditures, excluding capitalized interest, included $28 million related to the costs incurred in the design and fabrication of the CX-15 platform, $4.6 million for development and equipment for permanent production facilities and some $1 million for other projects.

Our capital resources at June 30, consist of our outstanding long-term debt and short-term debt, which includes the 2015 convertible notes with a par value of $170.9 million, a $40 million secured debt facility, a $35 million secured debt facility and $141.7 million of loans from PRE.

Manolo has done a good job describing the Block Z-1 venture, but I'd like to add that in connection with the agreement, PRE will provide loans to fund the Block Z-1 capital and exploratory expenditures from the effective dates of the completion date of the transaction, which is when the approvals from relevant Peruvian authorities are obtained. Once the transaction is proved, these loans will become part of the final closing adjustments. These loans will not accrue interest except in the event of a termination prior to the completion of the transaction.

In conjunction with the signing of the stock purchase agreement, the company also amended the terms of its bank facilities. The existing $75 million secured debt facility was reduced to $35 million. The final maturity was extended to July 2015, and the principal repayment schedule of covenants were revised.

With respect to the $40 million secured debt facility, the company also extended the maturity to January 2015 and amended the principal repayment schedule and covenant package.

Subsequent to the end of Q2, the company entered into a Fifth Amendment to the $75 million secured debt facility with Crédit Suisse. The Fifth Amendment deferred the date of the loan covenant related to the commercial production date in Albacora field from July 30, 2012 to November 30, 2012.

That concludes my financial summary. So now, I'll turn the call over to Sammy to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Freeman of Raymond James.

John Freeman - Raymond James & Associates, Inc., Research Division

First question I had on the JV approval process, and I realized this is a sort of a longer team deal, like a 2013 maybe event. But I'm just trying to get an idea of the kind of the steps or the kind of the gates that you have to go through to get the approval. Like with the seismic permit, we had regulatory. We had Perupetro. Just kind of we have some idea of kind of what to look for to know that the current approval process is sort of moving along.

Manuel Pablo Zúñiga-Pflücker

John, here's Manolo from Lima. The approval process is a lengthy one, but as I mentioned earlier, it's mostly a process where the government makes sure that the new company who is signing into a licensed contract is also enjoying all of the benefits that Peru's licensed contracts give the contractors. As such, it goes first of all to the review at Perupetro with the agency. And then it goes to the Board of Directors, and once it's approved by the Board of Directors -- we're expecting that approval in the near term -- it goes to the Ministry of Mines and Energy, and they go through the sort of a similar review. And when they give a green light, it goes to the Ministry of Economy and Finance, who, under that ministry, you have the Central Bank and the equivalent of the IRS of Peru. In our case, given that there was a cash involvement, there are going to be some taxes to be paid, so that is why the IRS of Peru is getting involved as well. And once they have all that determined, a supreme decree draft is sent to the President, who signs the supreme decree together with the Energy and Finance Ministers, authorizing Perupetro to sign the amendment to the license contract provide PRE contributes the project for 49%. So it's a lengthy process, but more than that, then there is full alignment in the government that it was done properly. And as such, PRE will then enjoy the benefit that we have right now under a licensed contract.

John Freeman - Raymond James & Associates, Inc., Research Division

Okay. So just so I heard that correctly, Manolo, the first step of going to Perupetro, we're almost through that. You're saying that the Board of Directors is almost about to approve that?

Manuel Pablo Zúñiga-Pflücker

It has to take a few short weeks, and it's not ready to be approved. But it is definitely the key step. Because once Perupetro board approves it and brings this up to the Ministry of Energy and Mines, it is with recommendation from Perupetro that it should move forward. And in fact, things will start moving along quicker.

John Freeman - Raymond James & Associates, Inc., Research Division

Okay. And then the other question for me since the 10-Q isn't out yet. On the CapEx number for the second quarter, the $17.8 million, how much of that amount is not covered by the JV?

Richard S. Menniti

Yes, John, this is Rick. So there's very little it has -- except for -- that piece that includes the capitalized interest, which isn't covered by the JV. But we've spent very little outside of Block Z-1 so the majority of our CapEx is covered by the JV.

John Freeman - Raymond James & Associates, Inc., Research Division

Okay. Great. And then, the second half of the year, is that -- is the outlook the same? I'm trying to get just roughly a number of how much you think you're going to be spending in the second half of the year outside of the JV?

Richard S. Menniti

Yes. Outside of the JV, again, our current plans don't have a whole lot of money being spent outside the JV. We have some minor capital related to some IT or some other facilities that are office-related that would have to be capitalized, but it's very minor.

John Freeman - Raymond James & Associates, Inc., Research Division

Okay. So maybe just the interest expense.

Operator

Our next question is from Irene Haas of Wunderlich Securities.

Mostafa Dahhane - Wunderlich Securities Inc., Research Division

Yes, I'm sorry. This is Mo Dahhane for Irene. I've got a couple of questions for you guys. First question, on the permitting at Corvina, how is the process going? And on the drilling fronts, how many wells are you guys looking to drill?

Manuel Pablo Zúñiga-Pflücker

The permitting process -- this is Manolo, again. For the permitting for the CX-15, it is moving forward, as we have mentioned. We're expecting to see that permit before we mobilize the rig into the platform or at least before we're ready to start the well. And so, that is moving forward in the different agencies. So I'm confident that we will get that permit. Nevertheless, one of the reasons I'm here is to continue pushing and pressing upon everybody about the importance of this project because it will increase production in Peru. Then in the number of wells, we have 24 slots, according to the certification. And I think we have a total, I think, of 17 or 18 in passed [ph] wells. But we also need to drill a few injector wells. So basically, I wouldn't be surprised that we end up using all of it.

Irene O. Haas - Wunderlich Securities Inc., Research Division

And Manolo, this is Irene. And so how many wells can you fit in before year-end? And could we expect any sort of incremental booking from the Corvina coming out of the new platform?

Manuel Pablo Zúñiga-Pflücker

The first well is going to be completed probably just about the end of the year, with first production coming in early next year. So given that certifications are done based off year end, I couldn't give you an exact answer for that, Irene.

Operator

[Operator Instructions] Our next question comes from Chris McDougall of Westlake Securities.

Chris McDougall

I just wanted a little bit of color on the types of other bidders and people you're engaged when looking to do some sort of partnership with that asset, and why you chose Pacific Rubiales?

Manuel Pablo Zúñiga-Pflücker

Well, for week 1, the Z-1 process, as I mentioned, it was a very difficult process and that was very important for us. We were quite happy with the type of company that wanted to look at the information. I'm expecting now for this new process that we're running for blocks XXIII and XIX also to have a good, diverse set of companies based on already some of the feedback we're receiving since we're operating the data room. Regarding why we chose PRE, of course, they also have a good proposal, but also, I believe they share some of the vision that I have for the Z-1 Block or the upside. And they will agree with that upside as you know. So that, and sharing our vision, for me was extremely important.

Operator

And at this time, I'm not showing further questions. I'd like to turn the call back to Mr. Zuniga for any further remarks.

Manuel Pablo Zúñiga-Pflücker

Thanks, Sammy. Again, I would like to thank everyone for their interest in BPZ Energy. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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