Filed
by Gran Tierra Energy, Inc.
Pursuant
to Rule 425 Under the Securities Act of 1933
and
Deemed Filed pursuant to Rule 14a-12 of the
Securities
Exchange Act of 1934
Subject
Company: Solana Resources Limited
Gran
Tierra Energy, Inc. (AMEX: GTE; TSX: GTE)
Second
Quarter 2008 Conference Call
August
11, 2008, 11:00am ET
Operator:
Good
day
ladies and gentleman and welcome to the second quarter 2008 Gran Tierra Earnings
conference call. My name is Marcia and I will be your coordinator for today’s
call. At this time all participants are in a listen only mode. We will conduct
a
question and answer session towards the end of this conference. If at any time
during the call you require assistance please press “*” followed by “0” and an
operator will be happy to assist you. As a reminder this conference is being
recorded for replay purposes. I would now like to turn the call over to Mr.
Dana
Coffield, CEO of Gran Tierra Energy, Inc. Please proceed sir.
Dana
Coffield:
Thank
you
Marcia.
Good
morning everyone and welcome to Gran Tierra Energy’s second quarter 2008
earnings conference call. We issued a press release this morning outlining
our
results for the quarter. In addition, our Form 10-Q is expected to be filed
later today.
This
investor call is being broadcast over this conference line and is available
via
the web as noted in our press release. It will also be available after the
call
in a recorded format through the conference service and on our
website.
With
me
on the line today is Martin Eden, our Chief Financial Officer. It’s been a great
quarter for Gran Tierra on all fronts and we’re eager to bring you the
highlights.
Before
we
begin, I would like to ask Al Palombo of our investor relations firm, Cameron
Associates, to read our disclaimer regarding forward-looking statements.
Al
Palombo
Thanks
Dana.
In
order
to comply with the forward-looking statements Safe Harbor, I want to advise
you
that in addition to historical information, certain comments made during this
conference call, particularly those anticipating future financial performance,
business prospects, and overall operating strategies constitute forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such statements may be identified
by
words such as anticipate, believe, estimate, expect, intend, predict, hope,
or
similar expressions. Such statements which include estimated financial
information or results are based on management's current expectations and are
subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements.
Listeners
are urged not to place undue reliance on these forward-looking statements,
which
speak only as of the date of this call. Gran Tierra assumes no obligation to
update these forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this call, other than as may
be
required by applicable law or regulation. Listeners are urged to carefully
review and consider the various disclosures made by Gran Tierra in its reports
filed with the Securities and Exchange Commission, including those risks set
forth in the Gran Tierra’s Annual Report on it most recent Form 10-K, as
amended, which attempt to advise interested parties of the risks and factors
that may affect Gran Tierra’s business, financial condition, results of
operation and cash flows. If one or more of these risks or uncertainties
materialize, or if the underlying assumptions prove incorrect, Gran Tierra’s
actual results may vary materially from those expected or projected. Gran Tierra
undertakes no obligation to update forward looking statements.
And
finally, this earnings call is the property of Gran Tierra Energy Inc., and
any
copying or rebroadcasting of this earnings call is expressly forbidden without
the written consent of Gran Tierra Energy Inc.
With
that
said, I will now turn the call over to Dana.
Dana
Coffield
Thank
you
Al.
As
I
indicated earlier Gran Tierra Energy had a fantastic second quarter in almost
every aspect of our business. We recorded our fourth consecutive quarter of
profitability, with growth driven primarily by the development of our
exploration successes; in particular, the Costayaco field in
Colombia.
To
start
things off, I’m going to hand the call over to Martin who will provide you with
a review of the numbers. I’ll then come back on the line and provide you with an
update of some of the operations and activities we have undertaken during the
quarter coupled with a quick year-to-date synopsis in each of the areas of
our
operations thus far as well as a recap of the Solana transaction.
Over
to
you Martin
Martin
Eden
Thanks
Dana.
By
all
measures, it was another outstanding quarter for Gran Tierra in almost every
financial aspect.
The
second quarter of 2008 represented our fourth consecutive quarterly increase
in
revenues and profitability. Total revenue
was
$33.1 million compared to $3.8 million for the same period in 2007, and $20.8
million for the first quarter of 2008. Net income for the quarter increased
to
$8.5 million or $0.08 per share basic ($0.07 per share diluted), compared to
a
loss of $5.1 million, or $(0.05) per share basic, and diluted, in the same
period of 2007.
This
compares to net income of $4.7 million or $0.05 per share basic ($0.04 per
share
diluted) for the first quarter of 2008.
The
results for the second quarter of 2008 reflect the growing production from
the
recent oil discoveries in Colombia and a higher WTI price, partially offset
by
higher overall operating expenses, depletion, depreciation and accretion,
general and administrative expenses and income taxes resulting from the
company’s increased level of activities. Additionally, the
combination of a higher WTI and a 42% decrease in our operating
costs per barrel to $12.04, have been extremely beneficial to the company.
When
looking at the Q2-07 and Q2-08 comparison, it is important to note that the
results for the second quarter of 07 were impacted by non-cash expenses of
$3.2
million for liquidated damages associated with a previous financing and Q2
2008
was impacted by the derivative financial instrument loss of $6.3 million of
which $5.1 million was unrealized.
Average
oil production for the second quarter of 2008, net after royalties, increased
233% to 3,399 barrels of oil per day (BOPD) compared to approximately 1,021
BOPD
in the second quarter of 2007, and 2,842 BOPD for the first quarter of 2008.
The
Costayaco discovery added 2,237 BOPD of production and the Juanambu discovery
added 227 BOPD of production during the quarter. In Argentina, second quarter
oil production also grew, from 476 BOPD for the first quarter to 557 BOPD,
net
after royalty, in the second quarter, 2008.
To
put
the WTI increase I mentioned a moment ago into perspective, during the quarter
the average price received per barrel of oil increased 174% to $106.80 for
Q2-08
from $39.00 per barrel in the second quarter of ’07. In each of our regions of
operations the break down is as follows:
| |
·
|
The
average price of oil realized in Colombia during Q2-08 was $119.05
per
barrel compared to $43.33 in Q2-07.
|
| |
·
|
In
Argentina, the average realized price for oil during the quarter
was
$44.35 per barrel compared to $34.88 in the second quarter of ‘07. In
Argentina, prices are effectively
capped.
|
For
the
six month period ended June 30, 2008, revenue was $54.0 million compared to
$8.3
million for same period of 2007. Net income for the period was $13.2 million,
or
$0.13 per share basic ($0.11 per share diluted), compared to a net loss of
$11.7
million or $0.12 per share basic and diluted for the same period of 2007.
Average
oil production for the first six months of 2008, net after royalties, increased
by 174% to 3,121 BOPD compared to approximately 1,140 BOPD for the same period
in 2007. The Costayaco discovery added 1,924 BOPD of production and the Juanambu
discovery added 305 BOPD of production during the six months ended June 30,
2008. Average realized oil sales prices, net after royalty, were $94.69 per
barrel for the six months ended June 30, 2008.
Here
are
some of the other financial highlights:
| |
·
|
We
were able to add $17.1 million to cash on the balance sheet as compared
to
the end of ’07 as we ended the quarter with approximately $35.3 million in
cash and equivalents,
|
| |
·
|
We
remain free of long term debt, while we continue to maintain a credit
facility of $50 million with Standard Bank, that has yet to be drawn
down,
|
| |
·
|
And
finally, working capital increased to $31.7 million as compared to
$8.1
million at December 31, 2007.
|
From
a
capital structure perspective, we ended the second quarter with warrants to
purchase 4.7 million common shares at an exercise price of $1.25 per share
and
warrants to purchase 13.7 million common shares at an exercise price of $1.05
per share. During the six months ended June 30, 2008, 15.4 million common shares
have been issued on exercise of warrants for proceeds of $16.2 million,
providing an additional source of funds to the company. Our basic and diluted
share counts are 101.1 million and 119.1 million, respectively for the six
months ended June 30, 2008.
We
also
have the option to call the $1.05 warrants outstanding if the trading price
of
our common shares on the AMEX exceeds $3.50 for 20 or more consecutive trading
days. We have now passed this trading day threshold, but have made no decisions
at this time with regards to the call option.
New
Reserves Report
As
a
result of the completion of an independent reserve audit by our reserve
auditors, Gran
Tierra Energy’s reserves, net of royalty, compared to year end 2007 for the
Costayaco Field as of July 1, 2008 are as follows:
| |
·
|
Proved
reserves are 6.67 million barrels of oil compared to 3.27 million
barrels
of oil at year end 2007, an increase of
104%;
|
| |
·
|
Probable
reserves are 4.32 million barrels of oil compared to 3.32 million
barrels
of oil at year end 2007, an increase of
30%;
|
| |
·
|
Possible
reserves are 7.91 million barrels of oil compared to 2.60 million
barrels
of oil at year end 2007, an increase of
204%;
|
| |
·
|
Total
proved, probable and possible, net after royalty, reserves in the
Costayaco Field are 18.90 million barrels of oil compared to 9.19
million
barrels of oil at year end 2007, an increase of
106%.
|
It
is
important to note that this report excludes test results for Costayaco-4 and
drilling results of Costayaco-5, as these were completed after the effective
date of the report.
Finally,
in addition to the financial success we achieved, the second quarter was
highlighted by our approval for listing on the AMEX in April, as well as the
company joining the Russell 3000 index.
All
in
all, it was a great quarter.
I’ll
now
hand the call back to Dana.
Dana
Coffield:
Thanks
Martin,
During
the quarter the company
continued field delineation drilling operations, production testing operations,
exploration drilling operations, and remote sensing data acquisition operations
in our operations in Colombia, Peru, and Argentina; and we continue to be on
track for what looks like another extremely successful year for our company.
Additionally,
by now most of you will have noted that on July 29th
we
announced our intention to combine Gran Tierra Energy and Solana Resources,
our
partner in the Costayaco Field, together into a single company. I’m going to
take the next few moments to provide
with you an update of our drilling progress during the quarter and then I will
provide a recap of the Solana transaction.
Starting
with Colombia:
We
completed drilling of Costayaco-5 on July 27th when total measured depth of
8,703 feet was reached in basement. This was a delineation well to test the
lateral extent of the Costayaco Field. We encountered good oil shows in cuttings
in the Kg Sand Unit of the Rumiyaco Formation, the U Sandstone Unit of the
Villeta Formation, the T Sandstone Unit of the Villeta Formation and the Upper
Caballos Formation.
Electric
logs, cuttings and shows indicate excellent reservoir with fair to good oil
saturations in the primary Villeta T reservoir, with thicknesses comparable
to
previous wells in the field. Of particular note is that no definitive oil-water
contact is apparent in the Villeta T reservoirs. With that said, testing will
be
required to confirm whether water is present in certain intervals.
The
underlying Upper Caballos reservoirs also appear to have good oil saturations
and thicknesses comparable to previous wells drilled in the field. The Lower
Caballos reservoirs are well developed, but appear to be water bearing.
The
top
of the Villeta T and Caballos were encountered at a shallower depth than
expected and oil shows were encountered deeper than expected in both the Villeta
T and the Upper Caballos reservoirs; both results have the potential to add
significant reserves to the west flank of the field. We expect to begin testing
C-5 this week and that it will take about one month to complete.
As
Martin
mentioned, it is important to note that the recently reported Costayaco mid-year
reserve update did not incorporate potential oil at the Costayaco-5 location
as
this well was drilled outside the control provided by previously drilled
Costayaco wells. If hydrocarbon testing is successful in C-5, we expect that
these new reserves will be incorporated in Gran Tierra Energy’s year-end reserve
report thereby increasing our asset base beyond the gross 3P reserves of 61
MMBO
currently documented for the field.
Turning
now to Costayaco-4 Testing:
Initiation
of testing at Costayaco-4 has been delayed as the result of successful extended
testing at the Palmera-1 well on the nearby Azar Block. The rig is now at C-4
and testing operations have now begun.
We’re
very excited about C-4: As many of you will remember, log interpretations from
data acquired after drilling indicate potential hydrocarbon pay in the Kg Sand
Unit in addition to the U Sandstone Unit of the Villeta Formation, the T
Sandstone Unit of the Villeta Formation and the Caballos Formation. This is
almost 25% more potential net pay than in any of the previous three wells in
the
field. Located near the crest of the field, we are very excited about the
potential of this well; we are now expecting results from C-4 in about a month’s
time.
As
for
future drilling in the Costayaco field :
The
drilling of Costayaco-6 and initiating of drilling of Costayaco-7 remain on
the
program for 2008, with a continuous delineation and development drilling
campaign in the Costayaco field continuing through 2009. The details of the
2009
program will be finalized in the fourth quarter of 2008.
I’d
like
to now turn your attention to the Azar Block, where Palmera-1 Tested First
Oil
As
previously announced, we initiated re-entry operations of the Palmera-1 well
in
May 2008, an exploration well drilled in 1996 that had potential oil pay in
the
Kg Sandstone of the Rumiyaco Formation indicated on logs, but it was a well
that
was never tested. Drill stem testing operations were conducted in June and
July
after a liner was set and perforated in the Kg Sandstone.
Stabilized
natural flow of 13-15 degree API oil at a rate of approximately 47 barrels
of
oil per day with no water was obtained. The reservoir and oil appear to be
similar to the producing Miraflor field in the adjacent Santana Block operated
by Gran Tierra Energy. The well has been completed with a production string
and
will be shut-in for two months to evaluate optimum artificial lift systems
and
production facilities. The company expects initial production rates from the
well to be in the range of 150 bopd to 250 bopd gross with artificial lift,
with
early production to be transported by truck.
As
a
reminder, Gran Tierra is the operator of the Azar Block and has an 80% working
interest. Under the terms of a farm-in agreement, Lewis Energy will earn a
50%
share of the company’s interest by paying 100% of Gran Tierra Energy’s costs
associated with the first three exploration periods, including the Palmera-1
workover and drilling of one exploration well. The Azar Block is subject to
the
new ANH contract terms, with attractive fiscal terms and no back-in rights
by
the state company Ecopetrol.
Turning
to the Rio Magdalena Block where Popa-2 Testing Operations are wrapping
up.
The
company initiated drill-stem testing operations of the Popa-2 exploration well
in the Rio Magdalena Block in the Middle Magdalena Basin, on July 4, 2008.
We
encountered oil and gas shows during drilling in the Cretaceous Monserrate
Formation, the primary reservoir target in the Popa prospect, and in the
underlying basement. Seven drill stem tests have now been completed and results
of the testing are expected in August.
Gran
Tierra Energy, with a 100% working interest, is the operator of the 144,670
acre
Rio Magdalena Block. Under the terms of a recently completed farm-in agreement,
Omega Energy Colombia will earn a 60% share of the company’s interest by paying
100% of the costs associated with drilling, testing and completing the Popa-2
well. In the event of a commercial discovery, Ecopetrol S.A. has a right to
back
in for a 30% working interest, to be split proportionally between Gran Tierra
Energy and Omega Energy Colombia.
Now
on to
Argentina:
In
the
Surubi Block, Gran Tierra initiated drilling of the Proa.x-1 exploration well
on
July 9, 2008. The well is planned to be drilled to a depth of 12,992 feet to
test the Cretaceous Palmar Largo reservoir section, which is productive in
the
Palmar Largo field approximately 2 miles to the northeast in the adjacent Palmar
Largo Block. The company expects drilling of this exploration well to be
completed in late August.
In
addition, Gran Tierra Energy obtained provincial ratification of a new contract
for the 90,688 gross acre Surubi Block with the Formosa Province on July 29,
2008. This new contract includes a 10-year contract extension to August 15,
2026. As part of this revised agreement, Gran Tierra Energy has assigned a
15%
working interest to REFSA, the provincial government company, while retaining
an
85% working interest and operatorship. REFSA will be carried by Gran Tierra
Energy during drilling of the Proa.x-1 well. In the event of success, Gran
Tierra Energy will be reimbursed for all of the costs incurred during drilling
from 50% of the net production assigned to REFSA.
So
as you
can see, we’ve achieved outstanding operational progress and results during the
quarter. Successful testing of oil from Costayaco-5 has the potential to
significantly add to the total reserve potential of the Costayaco field, which
has already grown significantly in size as delineation drilling has shown in
the
first half of 2008. With our first produced oil on the nearby Azar Block, and
the promising testing taking place in the Rio Magdalena Block, and exploration
drilling continuing in Argentina, we expect the coming quarters of this year
to
prove to be very exciting for Gran Tierra.
Moving
now to the Solana transaction:
As
many
of you will recall on July 29th
we
issued a release indicating our intention to bring Solana Resources and Gran
Tierra Energy into one company. By coming together we expect the transaction
will create a much more substantial company in a consolidating global industry
while preserving Gran Tierra Energy’s operating leadership. The combination
creates a company with a 100 percent working interest in one of the most
important oil discoveries in Colombia in recent years. The combined company
will
have a working interest in 26 blocks of land, 24 of which will be operated
by
Gran Tierra Energy. This prospective land base will encompass 7.1 million gross
acres, or 6.2 million net acres, across three countries - Colombia, Peru and
Argentina.
Pro-forma
proved reserves, based on YE2007 numbers for the respective companies and the
Costayaco mid-year reserve update, will total 18.4 million barrels of oil
equivalent, the vast majority consisting of light sweet oil. The anticipated
combined production of 15,000 barrels per day by year end 2008, and the
potential cash flow growth from the combined companies will fund continued
exploration on the resulting company’s overall land position, in addition to
increasing the capability to undertake much larger and material new venture
initiatives in the future. In consolidating our premium light oil asset in
Colombia, we launch a substantive, well financed, South American entity with
an
enviable land position, outstanding cashflow, no debt, and a portfolio of
exploration opportunities across the risk and reward spectrum.
In
summary you can see we’ve had a very busy quarter with our activity level and
our levels of production continuing to grow.
Before
we
open the call up for questions, I’d like to take this opportunity to thank all
of the staff at Gran Tierra Energy for their hard work; without their
dedication, none of this could happen. I would like also like to thank you,
our
shareholders and associated stakeholders, for your continued support. Our
performance in for the first half of 2008 can best be characterized with three
words - growth, value, performance. We intend to live by these words throughout
the remainder of the year and beyond.
That’s
the end of our prepared statements. I would now like to open the call to
questions. Operator may we have your assistance please?
Operator:
Ladies
and Gentleman if you wish to ask a question please press “*” followed by “1”. If
your question has been answered or you wish to withdraw your question press
“*”
followed by “2”. Questions will be taken in the order received. Press “*” “1” to
begin.
And
your
first question comes from the line of Neil Dingman of Dalhman Rose. You may
proceed.
Neil
Dingman:
Good
morning guys, nice results. The beginning of my question refers to Costayaco-5,
now that you’re seeing decent shows up there will you keep drilling the plate
more as delineation or, once 6 and 7 are drilled, will you start to go back
and
fill in. What is the plan after 6 and 7?
Dana
Coffield:
After
6
and 7 I suspect, most likely, it will be a full blown development drilling
campaign. That assumes we figure out how the large the field is at that time.
To
date because of the permitting for drilling locations we’ve actually had a mix
of development and delineation drilling but we certainly need to define how
big
this field is as soon as we can so that we can commit to a full field
development plan. My expectation is that we’ll have it delineated with the next
couple of wells and it will be a full field development through 2009.
Neil
Dingman:
Ok
so at
that point you would decide how many rigs, etc.?
Dana
Coffield:
Correct.
Neil
Dingman:
Ok,
and
then obviously the Palmera sounds quite good. You are 40% interest there, is
that correct?
Dana
Coffield:
That’s
correct.
Neil
Dingman:
As
far as
plans after this well, has anything been decided yet?
Dana
Coffield:
We
shot a
3-d seismic program last year on a prospect and the plan is still to drill
an
exploration well in this coming exploration period. So we are developing plans
for an exploration well on the block.
Neil
Dingman:
Around
these Costayaco wells, what is your comment these days on rig availability,
tubulars, that sort of thing?
Dana
Coffield:
Our
rig
availability remains tight and I expect it will remain tight in the future.
As
you know, Columbia has generated a huge amount of interest. Exploration activity
continues to grow in the country so there will be continuing demand growth
for
rigs. We do see continuing growth in rigs being brought into the country and
we
are being proactive in identifying rigs for our future needs. So to date it
hasn’t been a problem and our intention is, of course, for it not to be a
problem going forward. So we are working on that.
Neil
Dingman:
My
last
question is how long are any expectations as far as when you’ll have the Solana
properties fully incorporated? When you start looking at your ‘09 plan have you
decided on which of theirs you would drill versus some of these other blocks
that you already had?
Dana
Coffield:
I
expect
we’ll have the full portfolio of opportunities ranked by the end of this year.
Obviously our blocks and Solana’s blocks each will have individual work program
commitments that we cannot change but above and beyond that, by the end of
this
year we will be making decisions on which prospects we want to pursue
aggressively and which we do not.
Neil
Dingman:
Ok
guys,
sounds like you have a lot to do. Thanks again.
Dana
Coffield:
Thanks
for your call.
Operator:
And
you
next question comes from the line of Ian Macqueen of Macquarie Capital. You
may
proceed.
Ian
Macqueen:
Hey
guys.
Congratulations, good quarter. Just wanted to ask you a few questions. One
of
the things that has been made public was an exit rate in 2008 of 15,000 barrels
a day after royalties. Firstly, can you give us an average royalty? A lot of
that is skewed towards Costayaco so it would be in the 8% percent range, but
do
you have a before royalties number that that would equate to? And secondly
can
you give us a little bit more guidance on the milestones that have to be
achieved to get to that 15,000 barrels a day?
Dana
Coffield:
I
don’t
have a hard before royalty number but it might be around 18,000. Ballpark,
that
is not an exact number. The milestones to get there involve… Well, we just
completed the pipeline from Costayaco to the existing pipeline system so that
will have to be up and running which we expect to happen imminently. We will
also have to have truck loading facilities completed at Santana, and unloading
facilities at Orito. In addition we will have to have truck loading and
unloading facilities at Uchupayaco and Neiva. So I would assume that we have
trucking operations in Orito and trucking operations to Neiva
completed.
Ian
Macqueen:
Quickly,
how much production a day is going by truck to Neiva?
Dana
Coffield:
Between
3,000 and 5,000 barrels a day.
Ian
Macqueen:
And
the
rest of it goes through the pipeline and additional trucking capacity going
to
Orito?
Dana
Coffield:
Correct.
Ian
Macqueen:
And
that
trucking capacity there I believe would be 3,000 barrels a day?
Dana
Coffield:
Yes.
Ian
Macqueen:
And
is
there any potential, aside from average delays and timing on getting things
all
organized, is there any potential for delays to the exit? What is your biggest
risk in not getting to 15,000 barrels a day?
Dana
Coffield:
It’s
really the trucking efficiency on the road system. And I believe the Neiva
segment would be the biggest efficiency risk. Facilities construction is really
not an issue.
Ian
Macqueen:
Ok,
that’s good to hear. Following up on Neil’s question, I wanted to know with the
combined Solana-Gran Tierra companies how many rigs would you actually have
under contract?
Dana
Coffield:
More
or
less two. There would be one rig in the Llanos Basin and one rig in the Putumayo
Basin.
Ian
Macqueen:
If
you
needed to you could move both to Putumayo I suppose?
Dana
Coffield:
Yes
we
could do that or bring in other rigs.
Ian
Macqueen:
Ok,
that’s great. Thanks guys, appreciate it.
Dana
Coffield:
Alright,
thanks.
Operator:
Your
next
question comes from the line of David Dudlyke of Thomas Weisel. Please proceed.
David
Dudlyke:
Hi
good
morning everyone. Once again great results. Couple questions of detail, firstly
on operating costs. If my math is correct the operating cost per post royalty
barrel for Q1 was of the order of about $9.90 and change. By my math the
operating cost this quarter on an enlarged production basis is about $12.00
per
post royalty barrel. You guys have always been kind enough to provide some
operating cost estimates by block in the back of your various presentations.
On
a weighted average basis the operating costs inferred by your presentations
would stand quite a bit lower from that reported in Q2. Could you perhaps
provide some color on what I see as an uplift in unit operating
costs?
Martin
Eden:
Yes
the
average for the quarter combined was $12.04, that in Columbia was $8.75 which
is
a little bit higher than in our presentations. But that was kind of an estimate
so this is what we are coming in at. There is a little bit of trucking in there
as well, about 70 cents trucking. The rest is the actual costs that we
experienced. As we continue to grow we expect the per unit cost to
decline.
David
Dudlyke:
Ok,
moving to the tax. This follows on from a previous conversation we’ve had here
with yourself Martin. At a corporate level you’ve done a great job in terms of
reducing the tax rate from what I inferred from Q4 last year and Q1 of this
year
in the 50% level at the corporate level down to the 37% reported. Can we expect
any further modest improvement in the corporate tax rate? Perhaps down to what
I
believe is the marginal tax rate of 33% in Columbia, given that most of the
earnings are coming out of Columbia?
Martin
Eden:
We
are
trying to improve our tax efficiency so we will try but hopefully we shouldn’t
be paying any more than 33%. So we are working on that right now.
David
Dudlyke:
You
would
be comfortable with 33 being used as a forward number or could that be a few
percent below what you think you are likely to achieve?
Martin
Eden:
That
is
our tax rate but obviously we have some additional tax depreciation in Columbia
but we are also subject to U.S. tax. So I would just stick with that rate for
the time being.
David
Dudlyke:
Martin,
you made mention of the fact that you have a call option on some warrants and
that you said that you made no decision as to whether to force the exercise.
I
may have missed the number, how many warrants are outstanding in the $1.05
traunch that you could, if wished, press the button on?
Martin
Eden:
There
are
about 13.7 million shares that would be issued on the exercise of those
warrants. So that’s what we are talking about, about 13.7 million
shares.
David
Dudlyke:
Ok
fair
enough. Moving to the operations, others have asked about rig capacity. If
I
recall Solana has a rig drilling the Los Aceites well and I recall that that
was
on a 1 plus 1 contract. I presume that, assuming the merger goes through, that
will be assumed into the Gran Tierra portfolio?
Dana
Coffield:
That’s
correct.
David
Dudlyke:
That’s
all the questions I’ve got. Once again, great quarter.
Operator:
And
your
next question comes from the line of Paul Weiner of Wachovia Securities. Please
proceed.
Paul
Weiner:
Thank
you. I have two questions. Can you talk a little bit in detail about the cap
on
the price of oil in Argentina? How does that work going forward and with that
kind of a number what is the attractiveness of drilling in Columbia? That’s one
question and the second one is: on your Solana acquisition, are a lot of the
projects they have there pretty far along in terms of seismic
evaluation?
Dana
Coffield:
So
the
first question, in Argentina the federal government controls the price of oil,
gas, and refined products. And the price of oil is capped so what the producers
can receive is capped at $42 per barrel. So obviously investments in Argentina
are not as attractive as investments say in Columbia or other parts of the
world. So the bulk of our capital program is in fact going into Columbia. There
is a lot of potential in Argentina in terms of resource potential, but at this
time it doesn’t make sense to pursue that given the current fiscal structure. We
expect that at some point in the future the fiscal terms will change and improve
given that Argentina is now a gas importer and poised to be net oil importer.
Our activity there is essentially maintaining our position and its option value
in the company. We have a very large prospective land position there which
we
hope to capitalize on in the future but at this time it’s basically monitoring,
or maintaining our position there with the expectation of future improvement
in
the fiscal environment. I think your second question had to do with Solana
and
do we have the ability to continue developing those lands….
Paul
Weiner:
No
I want
to know how advanced are their other projects?
Dana
Coffield:
The
have
a complete suite of different projects at different levels of maturity from
prospects that are ready to drill right now to leads and prospects that need
some additional seismic to bring them to a drillable stage, as well as some
longer term exploration projects that will take more time to mature. So like
Gran Tierra’s portfolio they have a portfolio of different types of
opportunities at different levels of maturity, some ready to go right now for
drilling, others that will take more time. So it’s a diverse portfolio.
Paul
Weiner:
Is
there
any synergy at all between the properties of both companies? Is there an area
that would make the price more interesting to look at first if you both have
properties near each other?
Dana
Coffield:
The
number one property in common between the two companies is the Costayaco field
which is the vast majority of the value of the two companies. So that’s where
the major synergy comes from, having one company, one operating team, managing
and developing that field. We do have one other common property on an
immediately adjacent block, the Guayayaco Block where we had another discovery
last year called Juanambu So there will be some efficiency there as well but
most of their land is in a different basin, most of their land is in the LLanos
Basin in eastern Columbia where Gran Tierra does not have a position. And they
have a block in the far north in the Catatumbo Basin and another block in the
lower Magdalena Basin, and again Gran Tierra does not have acreage there.
Paul
Weiner:
So
the
combined company will have a lot more places to look?
Dana
Coffield:
Correct.
A lot more places to look in Columbia, a much larger land position, and our
teams that are in Columbia very much complement each other. We will be bringing
their team on board and utilizing their expertise and their basins, our
expertise and our basins to continue building the company.
Paul
Weiner:
Thank
you.
Operator:
Your
next
question comes from the line of Brian Cooney of Kingsford Capital. Please
proceed.
Brian
Cooney:
Thanks,
good morning. Dana or Martin I am not sure, if you can just confirm the revenue
sharing agreements with the ANH that governs the Chaza Block. If you can just
confirm where the break point is in the agreements and what the percentage
changes to at that break point.
Dana
Coffield:
Ok
with
the ANH contract on the Chaza Block it’s a sliding scale royalty. Below 5,000
barrels a day the royalty is 8%, and then from 5,000 to 125,000 barrels a day
the royalty increases from 8% to 20%. And then there are a couple of additional
step changes, when production is over 600,000 barrels a day then the royalty
is
25%. There is a summary of the royalty breakdown in our corporate presentation
on our website under the Investor Relations page. And that particular contract
would be on page 23. We have fiscal breakdown of each of our increasing assets
in the back of that presentation, one page for each asset.
Brain
Cooney:
Great,
I
guess the main bullet point there would be the 5,000 barrels per day. I know
you’re averaging right now around 4,100 from the presentation. Have there been
production days so far that have gone over the break point?
Dana
Coffield:
There
may
have been individual days. I believe it’s a one month average that is used to
determine the rate, I believe.
Brian
Cooney:
Ok
great.
I guess the second point is on the Uchupayaco pipeline. There was a release
from
last week, an update that the pipe extension had been completed to Costayaco.
I
just wondered if there was any update that I was being tested as of last
week.
Dana
Coffield:
The
pipeline is finished. What is happening as we speak is the documentation has
been submitted to the regulators and we are just awaiting their approval to
turn
on the taps.
Brian
Cooney:
Can
you
speak to the capacity bottleneck that’s there? I guess if you can specify where
that bottleneck is downstream from Uchupayaco to Santana to Orito. And also
how
this capacity was increased recently? When this had come up in the past the
capacity was quoted as 7,000 barrels per day and we are seeing it now at 8,500.
I’m just wondering if you could speak to how the capacity was
increased?
Dana
Coffield:
There
are
3 pieces to the pipeline system. The first you just asked about, from Costayaco
to Uchupayaco. The second piece is from Uchupayaco down to Santana, which is
where we currently sell our crudes. Then Santana west to Orito would be the
third piece. That’s the real bottleneck of today, that east-west segment from
Santana to Orito. That increase in production you just asked me about is because
we actually did some more testing on that line and it was determined that that
line actually had more capacity than we had originally suspected.
Brian
Cooney:
And
could
you just speak to what production is going towards that 8,500 barrel per day
capacity. Which currently producing fields are being sent through that
line?
Dana
Coffield:
All
the
fields on the Guayayaco Block, all the fields on the Santana Block, the
Costayaco field, and there is just one minor field, there is a little bit of
truck production from another operator but it’s a negligible amount. So the bulk
of the production is the Santana Block, the Guayayaco Block, and the Chaza
Block.
Brian
Cooney:
Ok
great,
so that is where we get the trucking numbers that you were mentioning
earlier?
Dana
Coffield:
We
will
have to bring in trucks as Costayaco continues to grow.
Brian
Cooney:
Ok
great,
thanks very much.
Operator:
And
our
next question comes from the line of Lee Wagner of Wagner Resources. You may
proceed.
Lee
Wagner:
Good
morning gentleman, I’d just like to revisit the pipeline again. There were some
discussions before, and it’s not your pipeline, but there were some discussions
that you are prepared to build a pipeline from Santana to Oritos. What would
be
the capacity of that line and is there any other further capacity problems
going
to the discharge points on the shore.
Dana
Coffield:
Let
me
answer the second question first. It’s our understanding that he spare
production capacity that the Trans Andean pipeline, today is about 45,000
barrels a day. And it’s our understanding that it can be increased if we
rebuild, or put in a pumping station along that system.
Lee
Wagner:
And
how
much capacity does that accept from GTE/Solana in the capacity that’s
available?
Dana
Coffield:
Well,
45,000 barrels a day.
Lee
Wagner:
Oh
ok,
that would be your production that would go through that line?
Dana
Coffield:
Yes.
How
much capacity are we going to build? We are still working on that, we don’t have
a hard number yet. The first segment we just finished building had 25,000
barrels a day of capacity and given the reserve report, clearly that’s going to
be sort of a base case.
Lee
Wagner:
So
your
expectation is that the Santana - Oritos pinch point will be solved by the
end
of 2009?
Dana
Coffield:
Yes
that
is correct, end of 2009.
Lee
Wagner:
Ok,
thank
you.
Operator:
And
we
have no further questions on the line at this time. I would now like to turn
the
call back over to Mr. Dana Coffield.
Dana
Coffield:
As
before, I just want to thank our audience for their interest in the Gran Tierra
story. It obviously continues to evolve over time with continuing drilling
success and we appreciate the support of all of our stakeholders. Thank you
very
much.
Additional
Information
Shareholders
are urged to read the joint proxy statement/management information circular
regarding the proposed transaction and the registration statement filed on
Form
S-3 by Gran Tierra when they become available, because they will contain
important information. Shareholders will be able to obtain a free copy of the
joint proxy statement/management information circular, as well as other filings
including the registration statement on Form S-3 containing information about
Gran Tierra, without charge, at the Securities and Exchange Commission's
internet site http://www.sec.gov. Copies of the joint proxy statement and the
filings with the Securities and Exchange Commission that will be incorporated
by
reference in the joint proxy statement and registration statement on Form S-3
can also be obtained, without charge, by directing a request to Gran Tierra
at
1-800-916-4873.
The
respective directors and executive officers of Gran Tierra and Solana and other
persons may be deemed to be participants in the solicitation of proxies in
respect of the proposed transaction. Information regarding Gran Tierra's
directors and executive officers is available in the 2007 Annual Report on
Form
10-K/A filed with the Securities and Exchange Commission by Gran Tierra on
May
12, 2008, and information regarding Solana's directors and executive officers
will be included in the joint proxy statement/management information circular.
Other information regarding the participants in the proxy solicitation and
a
description of their direct and indirect interests, by security holdings or
otherwise, will be contained in the joint proxy statement and other relevant
materials to be filed with the Securities and Exchange Commission when they
become available.
No
regulatory authority has approved or disapproved the content of this transcript.
Neither the TSX Venture Exchange nor the Toronto Stock Exchange accepts
responsibility for the adequacy or accuracy of this transcript.