Centaurus Energy Inc.

Jose Penafiel - President and Chief Executive Officer Alejandro Augusto Penafiel - Chief Financial Officer

David Tawil - Maglan Capital Steven Azarbad - Maglan Capital

Thank you, Leone. Good morning and thank you all for joining us for Madalena Energy’s second quarter earnings call.

We are very pleased with second quarter results as the effects of the Company’s organization are clearly visible in the reporting. The Company is reporting a positive EBITDA of $1.79 million on an average realized crude price of $58.4 per BOE.

This marks the first quarter since the change in management with a Company had reduced levels of non-recurring charges related to the restructuring. We expect EBITDA to remain near this level in Q3.

Madalena has been able to significantly reduce its OpEx costs this quarter due to restructuring at Puesto Morales, which was completed in the first quarter. And there has also been a reduced cost from a devaluation in the peso.

The Company is excellently positions with one of the largest positions in the Vaca Muerta play outside the majors totaling around 80,000 net acres. Regarding operational highlights, there is continued production from the CAS 15 and CAS 14 wells in the Coiron Amargo Sur Este block.

These two wells and providing production history that will support further development of the block with additional horizontal wells. As mentioned last quarter, we expect our partner Pan American Energy to initiate the pilot program later this year.

We look forward to updating the market on this development as we get certainty on timing. Regarding the future developments of CAS, we think that this will likely involve during longer laterals of 2,000 to 2,500 meters, which provide improved economics and this is what we are seeing with peers in the basin.

Regarding Curamhuele our unconventional block in the dry gas and condensate windows of the Vaca Muerta play. We continue to work towards the farm out to potential partner in the next couple of quarters.

Regarding the double listing, we are working with the regulators in Argentina in order to execute a dual listing on the [indiscernible] exchange. Management’s focus is to ensure that the Company can list without incurring over burdensome reporting obligations.

And we are currently waiting for final regulatory approval to provide guidance on timing for the double listing. As mentioned on previous calls, after reviewing our internal portfolio.

We have identified a conventional gas play in the Lotena formation of the Coirón Amargo-Norte concession. We are actively working with our new partners in the block this the oil and gas with the objective of drilling a well to test display later this year.

And on the M&A side, we continue to actively pursue additional conventional production assets with drilling upside. The devaluation of the currency has led to some volatility in both oil pricing and the peso.

We are pleased with how the marketing Government has been proactive and has continued to take steps to maintain its credibility with international investors. This was a perfect example is recently, the response from the Central Bank to raise rates in order to avoid contagion from the steep drop in the Turkish Lira.

So they are quick to act and this is appreciated. From an oil producers perspective a 100% of Madalena’s oil sales are linked to dollars and only 40% of our costs are linked to dollars.

So for the Company, the recent evaluation will help keep costs down and will offset cost inflation in OpEx that will likely be seen in the next few quarters. We also continue to make very good progress in our negotiations with the provinces of Salta and Rio Negro in relation to the Company's commitments and are working towards reaching definitive agreements.

Good morning. [indiscernible], we are pleased that Madalena has improved on its first positive EBITDA last quarter.

And we look forward to building on the Company's strong position now that the restructuring phase is ending. The last non-recurring costs were captured in March 2018 to fund optimizations in [indiscernible] OpEx, which was the main driver in conjunction with the past devaluation to increase our overall net back per barrel to $24.7.

This represents an increase of 54% versus last quarter compared to the first half of last year, we had a reduction in G&A of $2 million. As you can see from the MD&A the operating costs in the first half of 2018, were reduced by $2 million compared to the same period last year.

These costs reductions allow the Company to be able to focus on using pulling operations and optimization to reduce the overall field declines and it's operated assets going forward. We will now open the call to questions.

Good morning, Jose, Alejandro, congratulations on the continued success and operational optimization at the Company. Just a couple of questions on some of the details in the financial statements.

Could you talk about two things, that I don't fully appreciate. First of all, the tax liability, it's a sizeable amount on a relative basis and where does that come from and what is the nature of it.

And then secondly, there is discussion about working capital deficit in the MD&A and I just want to understand that a little bit better as well.

Sure, David. Thank you for your question.

So, in regard to the tax liability that's regarding mainly bad credits in Argentina and there have been some change in values based off of the devaluation and in regards to those tax credits that were in Argentina were denominated in pesos. And so with the devaluation though, they have a lower value in dollar terms.

Understood. So in other words, essentially just the Company wrote down the value of the tax credits that it has.

Yes, that's correct. So even though those will be used towards peso denominated that in order to be recovered.

Another reason why there was such a large tax credit balance has to do with the fact of the corporate structure that the Company inherited. So there were seven legal entities in Argentina and a lot of these entities were incurring that but did not have revenues then reclaim.

So you effectively had a lot of tax credits in Argentina. And so we are in the process of finalizing a corporate reorganization in Argentina will be able to unlock and offset.

But in the interim with the devaluation, the carrying value in dollars had to be written down.

Oh well, okay. So we should see some reversal of that when the restructuring is completed.

That’s correct. It will make us more efficient in terms of overall less tax drag as you also have some transaction laid to taxes in Argentina.

So having more legal entities is just less efficient in that operating environment.

Understood. And then the working capital deficit?

So the working capital deficit is more of a technical issue and so there really is no new issue in terms of the cash on hand. And so it’s just a measure in terms of using conservative accounting standards.

Understood. And then could you go ahead and talk a little bit about the CapEx spending in the quarter.

I saw that there was some spending that was done with respect to CASE and I just wanted to get a little bit further detail on that?

Sure, David. So I’m glad you want to highlight that, so as briefly alluded in our remarks, we are able to use the increased EBITDA that we have to reinvest in the Company, which is something that wasn’t done previously just due to higher costs.

And so the CapEx and CASE has do with the amount of investment that was needed above the carried amounts that were initially given. So the $5.6 million of carry that Pan American gave as part of the transaction.

So the remainder of that amount, so it’s a little bit over a $1 million was invested by the Company in CASE for the completion of the CAS 14 well. And then we have also invested in other concessions through optimizations in order to off decline.

So we intend to do more of that in the coming quarters. So that we can stabilize the overall production of the Company.

Basically in this industry, generally if you don’t invest in the very least and workover and pulling operations, you won’t be able to rest decline in the overall production.

Right. That’s a great segway to my last question, which is, let’s talk about increasing production for a moment.

Let’s talk about a couple of levels of that. Firstly, the workover kind of portion.

Based on today’s producing assets, where does the Company think is the maintainable production level, is it is an upwards from where we are right now? and then secondly, we kind of know all the balls in the air, but can you give us a sense of your feelings towards anything that you could give us in terms of timing, size of production, how robust types of net backs that are going to be, that are expected from various fields on increased production and things of that sort.

Because clearly at this point the Company is extremely efficient and extremely stable in terms of its available liquidity balance sheet, current producing assets. We only want to see, I'm sure including yourselves, you know, we all see this Company now, blast to the upside in terms of production and profitability from increased production.

Thank you David. Clearly the issue with the Company when we came in as management was they had a decent amount of PDP, Proved Developed Producing reserves and the Company had a high impact strategy where they were putting money into very high risk exploratory wells with a relatively weak balance sheet.

And our strategy has been to refocus the Company on maintaining production through pulling operations and workovers and we have done that to a large degree. But to really reap the benefits of the value of our existing reserves, we need to move forward with drilling programs.

And the two main drivers are going to be the drilling of the Lotena play in Coirón Amargo-Norte, which is a play that we targeted and found after reviewing our existing portfolio to conventional gas play that we believe what will be very good for the Company. And then the second driver will be the pilot program, which we hope and American Energy will initiate at the end of this year.

So I think, those are two clear drivers that will help us increase production, within our existing portfolio. And then the third point that we are always focusing on is looking for acquisitions that make sense, that have PDPs and running room with a PUDs.

So I think those are the three main drivers that we are continuously working on. Two of which are already projects that are under way from the planning perspective.

Understood. Can you give us any more granularity on - at least on the ones that are already in motion in terms of what you expect vis-à-vis production, vis-à-vis addition to the bottom line in terms of cash flow and so forth.

So these, I mean there, I think return wise the Lotena project is in the 40s. To give you an idea of that target and in relation to the CASE program in Vaca Muerta it's, we have drilled two wells, these two wells have been proof-of-concept.

They support the full development of the asset. They have been drilled in two different geological environments.

One that has a naturally fractured reservoir and the other that doesn’t both have proven to be robust producers for their lateral ranks. And in general, in that part of the basin, operators are targeting 2,000 meter laterals to 3,000 meter laterals.

And it’s our understanding that that’s what Pan American Energy will be focused on in the pilot program. And you are looking at improved economics, but we are still at a stage, where you need scale and we need additional information from the operator to be able to give guidance regarding any range of economics with regards to those well types.

Understood . To go back to Coirón Amargo-Norte for a moment please.

So 40s in terms of net backs per barrel?

No. 40% rate of return on a single well type from our projections of what we estimate the accumulated production to be based on analogs that we have seen nearby.

Understood. And so what will the drilling costs be there in Coirón Amargo on a per well basis?

Sure. So, we are expecting 3 million to 4 million to drill and complete.

But again, this is this is something that needs work. And we have an operator which is now Vista Oil & Gas.

And so to really give any further information and guidance, we will need to have more work from them and more information with regards to precise numbers.

Understood. When, more generally, when the Company thinks about using its available cash to increase production.

Obviously, a commitment to go ahead and drill is something that is taken with a lot of thought. And once the commitment is made, it’s a pretty long-term commitment.

As opposed to having cash available to go ahead and make an acquisition for conventional production, which obviously, it takes two to tango and those assets can only come up as seller comes to market. How does the Company think about strategically using its available cash and liquidity sources?

On the one hand start production, let’s say in Coirón Amargo-Norte versus conserving cash and waiting for an acquisition target to come along based on what the environment looks like? What sellers there are in the market?

What assets are coming to market and so on?

Well, I think, where, we see the development of our existing portfolio as something that in this moment has priority. Because it’s certain we already own the concessions that we own in the case of [PAN] (Ph) for example, we have the 35% working interest.

And when we look at the new Lotena play, obviously there is a lot of thought and work in being able to identify this play. And then there has to be work with our partners in this case, Vista Oil & Gas.

I think our strategy has been to deploy CapEx in plays that are low risk, that are robust from the point of view of well control, where you have analogs and you have reserves that will allow you to increase cash flow. And with regards to opportunities on the market to acquire reserves, I think we have taken an opportunistic approach where we look at everything that comes on the market and we exclude anything that's exploratory.

We will only look at assets that have existing production or existing reserves and the way we have structured our offers have been to leverage against the target. And we have our CapEx facility, which is the amount that we can inject as equity.

And what we have also done is to bring other potential partners in the market, if we need to reach a further amount that requires additional equity above what our Company can inject into a specific deal. So I think in that sense, you know we have a good presence in the market, we have known partners with which we like to work deals and we basically looked at every opportunity that comes on the market, we evaluated and in many cases we present the offers that we think make sense for the Company and we will continue to do that.

And with acquisitions, I think, you know, if we have to go after 20 opportunities in the end, we get one, it's because it will be the right one and that's sort of our attitude towards acquisitions.

Great. I know I said last question a couple of questions ago, but this really will be my last question and I will [Technical Difficulty].

Is there any more cost cutting to go? So can we get any more efficient on the cost structure?

And then secondly, do you expect the production amount to go any lower than we are currently for the current quarter?

So there is still a cost cutting, I think there is always cost cutting. You still have some inefficiencies in the north, you have [indiscernible] which is a concession that is no longer producing and where the Company was previously spending money just to maintain the concession without any production, that whole facility has been shut in and so we have already saved a significant amount.

But we are still working with the province Salta to be able to come to a solution with that concession where we either revert that back to the province or we find a third-party to take over the operation. So it stops costing us money.

So I think you have some cost savings there. And in general I think, you know, we are always looking for ways to optimize and in relation to production, we will continue to perform our workovers, we have a workover program for September, October in our [indiscernible] concession that will help increase production a little bit.

And then we have a pulling program, which we expect to execute in Puesto Morales. But fundamentally these are activities that seek to maintain production and mitigate the natural decline of our PDP.

So I think, clearly we will only see a rise in production that will be material once we start our drilling programs. And I have mentioned both the CASE project and the [CAN] (Ph) project.

Thank you.

Hey hello there Alejandro. Thank you for making the time for the call and gradually improving the Company’s OpEx and the financial profile.

This has been a pretty, it’s been a great year for the Company and I mean thankfully we are in the right place to be able to move forward. I wanted to talk a little bit about the CASE block.

I mean Pan American is putting effort on the pilot program approvals I guess. I mean when do you expect that to happen and when do you expect the drill program to begin and how do you expect that to kind of roll out as far as number of wells and timelines?

Thanks Steven, it’s good to hear from you. So as we said, we are expecting pilot program to initiate with the commencement of the drilling of a first well of a larger pilot program by the end of the year.

And this is based on our understanding from conversations with the operator and that’s really the only guidance we can give. The CASE block is operated by Pan American Energy.

And so they are the operator and are managing the times, as well as the process whereby, they are seeking approval for a proposed pilot program. And we have full confidence in them, they are an excellent partner, they are British Petroleum subsidiary and have been in the market in Argentina for over 40 years.

They are by far the most successful local operator and they produce around 100,000 barrels a day and we are very confident about their current guidance on timing which again has been that they intend to start the pilot program by the end of the year.

Okay, now that’s fair enough. I mean, typically for a pilot program.

I mean do you drill, is it one well at a time, you do a number of them at the same time. I mean, how is that - I mean, how long do you expect the pilot program to last?

Is it a year and then that kind of drill out all the wells or I mean, how do you think about that?

I can speak to sort of the industry in Argentina and how other programs that have been carried out. Usually an initial pilot program will entail the drilling of five to 10 wells.

In general, the pilot program will seek to drill wells back-to-back. So one well after the other to optimize costs through economies of scale and better agreements with the drilling rigs where you can have more leverage to negotiate a better contract if you are going to drill five wells as opposed to one well.

So that, that's in general, I think, how the industry has been carrying out pilot programs and how the industry would view this in relation to the strategy on how to carry them out and the fundamentals of having scale to get better DNC numbers with of course longer laterals which improve productivity.

Okay that's really helpful. And then what can you tell us about what the Company has done or like where the Company is at vis-à-vis the Argentina listing process.

Sure. I think, you know, we mentioned at the beginning of the call, we are working with the regulators to be able to obtain approvals, with a focus on waivers that we have requested so that the double listing isn’t overburdened some reporting wise and this is a dynamic process where we have been trying to submit all the information that the regulator has been requesting in as quick time as possible and we are working again closely with them and hope we will have successful approval in the near future.

Sounds good. What is the reception from the regulator?

I mean, are they willing to kind of help the Company in this endeavor?

Yes, they have been very receptive, very open, obviously I think in general the Government in Argentina, is open to investment and open for business and has been trying to foster this through the CMD, which is a regulator of the [Midvale] (Ph) and you know I think, there is a very positive attitude towards what we are trying to do.

Okay, sounds good. Thank you so much for the updates.

Good luck.

A lot of good work is happened last little while. My question relates to booking reserve [GOJ] (Ph) has recognized substantial contingent reserves for the Vaca Muerta.

And I’m curious as to when we will be able to book those as even undeveloped reserves. One need to development plan and some investment plans in place.

And that may well be on its way and of course it’s subject to what the operators want to. But in terms of when do you think those substantial contingent reverse could begin to be booked as undeveloped reserves?

Hi and thank you Gerald for your question. I think it’s an excellent question because that’s I think from where we stand the largest value that the Company has with regards to resources, and I think transitioning those resources to reserves in the near-term.

So in [indiscernible] concessions, the Company has met to its working interest 90 million barrels of resources. And this was increased from 70 to 90, because of the drilling, of the two wells by Pan American Energy and CASE.

And the activity that will continue to unlock value by transitioning from resources to reserves will be the drilling of the pilot program by Pan American Energy that we hope we will start by the end of the year. And so we believe that next year you will see a strong increase in production, but you will also see that as we prove up more and more of those box, you will see a movement from resources to reserves, which will make the value that already exist a lot more tangible for the Company and its shareholders.

And what about the [indiscernible] contingent yet but when will be able to look at contingent reserves?

Well, I think we hope to find the right partner for that block that will enable us to start drilling horizontal wells. We have already proven production from vertical tests and now the challenge is to deploy CapEx such as what has occurred in the CASE block with Pan American, where we would drill two or three horizontal wells and prove that there is commercial production from that play and that’s when you are going to start seeing contingent resources and reserves.

Thank you for those answers. I think that the potential value of what we just talked about far overrides anything else about enhancing production and what not.

So I look forward to having those reserves move from contingent because I think it represents a substantial value for investors and for the Company. So, thank you.

Thank you.

Thank you. Just to pick-up on Joe’s point.

Can you talk to us about what the Company is doing beyond executing fundamentally in order to get the share price higher. What investor outreaches at doing, you know what is it doing in preparation for the listing in Argentina?

The other types of activities that the Company is doing, because clearly at this point, the Company is operating with a pretty good EBITDA number, I come to about $2.8 million of EBITDA for the quarter, but Alejandro and I could talk about that offline, but clearly it's generating fair amount to EBITDA, the multiple that just on this, so that EBITDA where stock price is trading is not particularly stratospheric. And then on top of all that, obviously the market based on that is giving no value to any of the companies blockbuster resources and reserves.

And so what is the Company doing in order to make sure that the market recognizes that?

David, thank you for your question. I think, we are still focused on the fundamentals of the Company and really to be honest with you, our management has been and will continue to be focused on the key points that I described which has to do with the development of the assets with being prudent with regards to spending the Company's money, on optimizing its operations.

And I think that our focus will be on increasing production through the Lotena play, making sure that the CASE program starts on time and we believe that when you see the results of those drilling programs and the increase in production, you will see that the market will start to recognize that we are moving from reorganization of the Company to actually growing and increasing production. And that's when you are going to see that the real recognition of value.

Of course. I appreciate that that's should be the priority for management.

I think every shareholder would agree that the fundamentals come before any sort of investor outreach. At the same time, for instance, in the case of the Argentine listing, does the Company expect to go on, non deal road shows, meet with investors in advance of the listing whenever you know it's green lighted.

So this is a perfect example. If we were to start going on road shows before any approvals from the regulator, then we would find ourselves in a situation where we would be over promising and under delivering because we are dependent on a third-party that needs to approve the listing.

So once we have the listing approved, we can have a clear coherent and definitive timeline where we can start working with partners and investment banks that would then propose the value that exists in the Company to the local Argentine market and wider LatAm market to be able to optimize the listing. So, so that's, that's our view on things.

And I think in that sense we always tend to be more conservative and more prudent.

Just other underlying, another point, I think we always believe in reaching out to our investors and shareholders and making sure that the Company has or raising awareness of the Company and what it's doing is also an important function of what management does. So that’s something that we take seriously and we are always reaching out.

And I think what is very important, it’s an expectation is some, has they mentioned and making sure that were over performing and not over promising.

Thank you.

Yes, hi. Just to go back to the Coiron Amargo Sur Este resources.

Are those 90 million or contingent resources or is that combination of contingent and perspective?

I believe those are contingent resources, the one, the 90 million from the two blocks of Coirón Amargo-Norte and Coiron Amargo Sur Este.

Okay. And any additional perspective resources?

I don’t believe so. But I believe our [GLJ] (Ph) reports are publicly available as well as I would direct you to the annual information form that’s filed on SEDAR, it has a very complete overview of the Company.

Okay. I have to look at that again, because I didn’t see the details in there I missed them.

And the two wells that were - can you tell me what the current status of them is?

So those wells are currently on production. So as mentioned in the initial part of the call the CAS 15 and CAS 14 wells, they are currently on production.

And they are being monitored with a production history to build out our type curves, as we look to develop those, that block.

So is that production being capitalized? Or is that included in the reported production that you shows around to 2,000 barrels a day?

So our net production includes our net production from the CASE block. So our 35% interest in that block.

Sorry. So could you tell me how much the production was from that block for the quarter?

So we don’t have public guidance to give at this time of that. So I think you have information from the MD&A that breaks down some of the production figures, but we are not giving guidance broken down by concession at this point.

Okay. Thank you very much.

Thank you.

Yes, good morning guys. Maybe just as kind of, so one is about the process of renegotiating the contingency in order to evacuate the issue of going concerns?

Sure. So the growing concern was move last quarter.

And we are currently working towards finalizing definitive agreements with both the provinces real Rio Negro and Salta. In the case of Rio Negro we already have deal outlined where there is a deferral of commitments and where there is also more flexibility given to the Company with regards to how they can deploy those commitments, because the main issue that we found when we came into the Company is, first of all, they had negotiated onerous terms with the province of Rio Negro, beyond what would be proportionally coherent from the point of view of the existing reserves in the Puesto Morales field.

And secondly, these commitments were so specific that they would only allow the Company to drill a specific play and would even detailed the length of lateral of the horizontal well. And so for us it was essential to sit down with the province and to renegotiate these terms and this is what we have been doing really from the outset of our work here with Madalena.

And in that regard, the progress that we have made, not just in Rio Negro, but also Salta has allowed us to show that the growing concern isn't an issue and should be removed and this has been done last quarter. And really our focus now is to be able to successfully conclude these negotiations through the execution of definitive agreements, which in the case of Rio Negro with the further commitment and increased the scope of what we can do with the CapEx commitments.

And in the case of Salta we are looking to reverse one of the fields that we had shut in and that was losing money for the Company and in the case of Santa Victoria block, we are also looking to extend the exploratory period so that we can reset the clock and retain the value of that exploratory concession.

Are you going to communicate further in the coming future about these funds?

We certainly hope to as soon as we have a definitive agreement with either of the provinces of Salta, or Rio Negro we will certainly communicate this to the market and to our shareholders.

Okay. Thank you.

Well we would like to thank everyone for dialing into the call. I wanted to make one slight correction to Jose comments.

So the EBITDA for this quarter, was not $1.79 million, it was actually $2.5 million. And so there was a brief error on his prepared statements, and so wanted to correct that.

So larger EBITDA of $2.5 million.