Centaurus Energy Inc.

Jose Penafiel - President and Chief Executive Officer, Director Alejandro Augusto Penafiel - Director

Jenny Xenos - Canaccord Genuity Steven Azarbad - Maglan Capital

Thank you, Leone. Good morning and just thank you all for joining us for Madalena Energy’s Q3 earnings call.

We're extremely pleased with the Q3 results so the company continues to perform well. The company is reporting a positive EBITDA $1,160,000 on an average realized crude price of $56.54 per BOE.

The reduction in EBITDA was largely due to temporary effects and we expected to revert to previous levels going forward. 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.

A few operational highlights I would like to note include continued production from the CAS 15 and CAS 14 wells in the Coiron Amargo Sur Este block. These two wells are providing production history that will support further development of the block with additional horizontal wells.

But most importantly regarding CASE is that together with our partner pan-American energy, we have obtained a 35 -year unconventional concession with the commitment to drill eight horizontal wells. Madalena also paid a bonus of $1.4 million to the province of Neuquén which was a large cash outflow of the quarter.

The importance of this the company cannot be overstated. I mean based on our resource report from GOJ Madalena has 90 million barrels of net resources in CASE and we now have a long-term concession which will allow us to move those barrels from the resources category into the reserves category through drilling new wells.

We're actively working with the operator Pan American to commence the first stage of the pilot plan which we expect to come in Q1, 2019. Regarding the future development of CASE we think that this will likely involve doing longer laterals of 2,000 meters which will provide improved economic.

On Curamhuele, our conventional block in the dry gas and condensate window of the Vaca Muerta playing, we expect the farm out to a potential partner in the next year. So we're looking at a farm out in 2019.

The recent stabilization Argentina's currency markets have also been beneficial to this process as things have settled down. The company is working with the regulators in Argentina in order to execute a dual listing on the Madalena exchange and Buenos Aires, management's focus is to ensure that the company can list without incurring overburden some reporting obligations.

We're currently waiting for final regulatory approval to provide guidance on timing for the double listing. On the M&A side, we continue to actively pursue additional conventional production assets with drilling upside is part of our dual prong strategy to have both unconventional and conventional sources of growth.

The devaluation in the currency led to some volatility in both old pricing and the peso despite the recent drop in crude prices, we do not expect our realized pricing to change materially. There's been a significant differential with Brent over the last two quarters in the Argentine market and based on our current pricing discussions with off takers, we expected domestic food markets remain flat.

Good morning. Madalena remains a strong position and we are focused on pursuing growth.

I would like to make some additional comments on the main drivers the change in the Q3 EBITDA from last quarter. The reduction from Q2 is primarily due to pulling operations performed in Puesto Morales which are periodically required to maintain the production level in the field.

This resulted in reduced production for the quarter of 1,590 BOE per day at production of what the Morales were restricted during the pulling operations. It was a temporary effect and production has since recovered to approximately 1,800 BOE per day as a result of the successful pulling of campaign.

We also had an increase in OpEx in our non operated assets of $784,000 in the quarter primarily attributable to Coiron Amargo-Norte. Despite a reduction in OpEx in our operated assets of $683,000 there was a net increase of overall OpEx of $101,000 in Q3 compared to Q2.

We expect EBITDA to recover in Q4 as the pulling operation was completed and we are working with our JV partners to reduce non operating OpEx to previous levels. Madalena continues to focus on cost control and we look to increase efficiencies wherever possible.

On a year-over-year basis comparing the nine months of 2018 to 2017, there has been a 278% increase in the company's EBITDA. We will now open the call to questions.

Good morning. I have three questions please.

The first one is could you please update us on the renegotiations of your capital commitments with the provinces? Second, what is the average natural decline rate that you're seeing in your conventional asset base?

And finally, with regards to the devaluation of the pesos, I know you have some discussion in your MD&A but could you just give us a brief overview of the effect that it has on your revenues versus your costs? Including how much of your costs are actually in the local currency and the overall impact on the company, as well as what we should --what you are assuming going forward as far as the peso goes?

Thank you.

Thank you very much for those questions. So I'll comment first on the renegotiation of our capital commitments.

So starting with the province of Salta, just to frame that the answer we have, we have two main ongoing renegotiation. So one has to do with our assets in the province of Salta, and the other one has to do with Puesto Morales in the province of Rio Negro.

With regards to Salta, we're currently in the process of transferring and as we nod over to a third party. This is extremely advanced and we expect to have this process concluded eminently.

So definitely by year-end. And with regards to our concession Santa Victoria, we currently have an agreement with the province of Salta where we are discussing the deferral of commitments pending an extension of the exploratory period of two years, and this is something that is still ongoing.

We expect this to finalize in Q1 of 2019 but as I just mentioned we already have a signed agreement with province which acknowledges that we are in a framework where we're negotiating. So there is no danger with regards to any executions or obligations to CapEx at this moment.

And then in regards to Puesto Morales in Rio Negro, we also have an agreement in executed version that is currently sitting with the provincial authorities. The precise stage of this is that it's currently being evaluated by the contract committee of the province of Rio Negro and we expect feedback shortly and also expect this to be able to conclude by year-end.

And with that I'll pass it over to Alejandro who will deal with the next two questions.

So, thank you, Jenny for your questions. So for your second question regarding the natural decline, we estimate an approximate 2% monthly decline on our PDP access.

This is also offset with pulling and work overs and we have some work over scheduled for the end of the year at Surubi which should offset some of that natural decline. And your third question regarding devaluations, I'd like to make some general comments regarding the peso, as well as the change in monetary policy as a result of the second agreement with the IMF that Argentina entered into.

We've been generally very reassured and encouraged with the implementation of the second agreement with the IMF. So the change of the head of the central bank to go to a policy of non-intervention in the foreign exchange markets.

We think is extremely beneficial as it has allowed for stabilization of the peso on the lower range of the band that was set in the IMF agreement. So close to around 36 pesos per dollar and that stabilization is generally helping us allowing the differentials that we're seeing in [Indiscernible] to stabilize.

We still expect there to be a differential to Brent around $9 based off of what we're seeing in discussions off taking. In regarding to --regards to our costs, we have approximately 40% of our costs in dollars and 60% of our costs in pesos.

And so for our operated operations the evaluation has been beneficial in terms of our operated OpEx, as you can see from the reduction of over $600,000 of reduction in OpEx. And generally we see that the currency will stabilize basically with new monetary policy which we view as sustainable since it does not risk reducing the country's reserves, and should help in terms of the current accounts as well.

And we are cautiously optimistic that this new monetary policy can also help to reduce the levels of inflation that we've seen, but we're still seeing significant inflation at the moment.

Great, thank you. And when do you plan to release your 2019 work program?

I think we're still discussing with our partners and our not operated to confirm up what our work program will look like, and as soon as we have that we'll fire it up into the market.

And will likely be a repeat in the next year?

Yes. It'll likely be early next year.

I would hope January, there's a couple of TCMS before the end of the year. I would say that the most significant and important is our TCM with five where they're going to put forward their proposals during --the initial drilling campaign in CASE.

So I would expect January.

Congratulations on the 35 big concessions in CASE, very exciting news and good to see the stability in the company given all the volatility in Argentina over the past few months. Couple I guess housekeeping questions.

In last year and earlier this year I believe the company took a number of restructuring charges some of which were cash expenses that were being born throughout this year. When do you expect those restructuring charges to cut --to finally be paid for by the company's cash flow?

So thank you for your question, Steven. We no longer expect any in restructuring charges going forward.

We have some inherited payables from previous management that we are still paying down, and we expect those to be in the large part paid off at the end of the year. So beyond the year-end there shouldn't be any material payments and those inherited payables.

Okay, great. Good to see that chapter behind us.

And then as far as Curamhuele looking forward to hopefully seeing a deal on Curamhuele what's the market in volume in like for JV pro forma deal on a block of Curamhuele and what sort of activities a company been undergoing in that process?

All right. So we saw a very healthy market just in general in the M&A sector up to April and then we saw it cooled down in tandem with the devaluation and subsequent bailout by the IMF.

And really we've just recently in the last couple of weeks seen things settle down. And then interest start up again in renewed discussions and this is also affected Curamhuele.

We're focused on finding the right partner. I think we have a program which is the base case that we will deploy where in the event that we do not find the right partner will have sufficient time to be able to extend that process.

There are several interested parties that are currently engaged in discussions with us, and we'll continue to work those opportunities but we will make sure that if there is a deal it's the right deal for the company.

Right. So currently right now I believe the company is supposed to be drilling horizontal well.

I think it's by March. I mean how's the company handling that commitment going forward.

So the current management, we formulated our intention to the province of Neuquén early in the year. Our view is that the best option that would add value to the block would be to drill a vertical pilot into the Vaca Muerta.

Just for context that the company so far has only drilled through the Lower Agrio and tested a Lower Agrio even though Vaca Muerta is very perspective. So we want to go ahead and prove up that bench and currently discussions with the province of Neuquén it has been very and the current working program is to initiate a vertical test in 2020.

Got it. So we're now running up against any -- any upcoming deadlines over the next few months.

So I guess so like whether we do a JV deal or not I mean like I said we plan it to do this well regardless.

That is our plan, yes, correct.

Okay, great. And just one last thing just to talk about I mean how are things coming along with Argentina listing and CNV inside, that you can share with us in that regard.

We're working hard to try to get regulatory approvals. These are subject to certain waivers that we've requested.

There really is no precedent with regards to a Canadian company. It doesn't have assets elsewhere.

It only has assets in Argentina to list. Usually the foreign company will have assets in its own jurisdiction and so there are some reporting issues and waivers that the company requires, so that listing would not be over burdensome.

And these are being reviewed by the CNV and we're confident that we will be successful. But, obviously, it depends on a third party.

And we're doing our best to move the process as quickly as possible.

Thank you so much for your presentation today and for the hard work over the last couple of years. I've been in Madalena for over four years now, and I appreciate what you have done in terms of riding the ship and getting it stable and I appreciate that.

A couple questions I have about the blocks here and capital commitments if you can. On Puesto Morales, and earlier you were mentioning that you are looking at getting an adjustment from the province.

One of the areas that wasn't touched or maybe I just didn't hear it is at one point there was a report about 24% royalty structure in Puesto Morales as part of your negotiations with the provincial authorities. Has that been addressed to lower that down to make economics more beneficial for opened up to drilling activity again?

Kevin, thank you for your question. And we appreciate your kind words with regards to getting the ship back in order and with regards to the Puesto Morales commitments.

The current royalty is 15%. So the royalty I believe went up to 15% effectively at the time that previous management was awarded the 10-year extension alongside the current capital commitments that were renegotiating.

So in that sense I don't know where the 24% royalty came from, but effectively it's 15%. And the current renegotiations do not assume any changes in the royalty structure which are basically a function of the regulatory framework and hydrocarbon legislation in place currently in Argentina.

Okay. Is there a plan to --at this point am I correct and saying that there is no planned resumption of drilling activity in Puesto Morales for 2019 or are you planning to initiate a drilling program on the block?

No. There is no current plan to drill the block in 2019.

Our first priority is getting the commitments renegotiated. And I think we're likely to look at drilling at Puesto Morales in 2020.

Okay and then if I can switch to Coiron Amargo-Norte with Vista Oil being the operator. They recently have indicated they intend to very aggressively increase their production in Argentina.

Is this, I know they have some contiguous blocks just north of us, are they looking or their plans are going to be including Coiron Amargo-Norte or are they going to be just on their own primarily owned blocks otherwise as are we going to be able to see any drilling activity from Vista in 2019. Are you anticipating that on that block?

So we do anticipate drilling on the Coiron Amargo-Norte block in 2019. There is a prospective gas trading where we have very promising analogs that are actually operated by Vista in some of the areas.

They acquired from both loose petrol and pump in the [Indiscernible] transaction. And so that's one of the things that we do expect, and we're waiting to hear from them by the end of the year with regards to specific plan to proposals for that drilling program.

Okay and you mentioned this earlier but I didn't quite catch it. I don't know if I heard it correctly.

There was a particular block you were looking at imminently there was going to be a change or a transfer of interests and could you read --it was at the beginning of the presentation, but my phone kind of locked out. Could you elaborate on those a little bit more for me?

I don't know.

Yes, absolutely. So we inherited a diverse portfolio in four provinces.

One of the assets is El Vinalar; El Vinalar was a concession in the province of Salta that was cash flow negative. So I think when we came in it was losing anywhere from $50,000 to $100,000 a month with what we consider really no prospective plays, and given that we embarked on a strategy to either revert the concession back to the province or to find a third party that would take over the block which is what has happened.

And the reason why this is beneficial to the company is if we were to revert it back to the province there would have been a discussion with regards to abandonment costs of existing wells. And the way we pursued this it's effectively getting rid of an asset that's losing money without having deploy any cash to cover the abandonment cost.

So specifically that's what I was discussing when I mentioned El Vinalar.

Okay and you see here the area that we have in Palmar Largo the 14% stake that we have in that. Has there been any possible discussion of selling that particular block to raise capital at 14% non operated?

I'm just wondering what our plans are with this? Are we planning to continue to keep that?

Are we looking to offload that particular block?

No, we see Palmar Largo as an interesting asset because we operate Surubi and El Chivil and especially Surubi so is really where we get our highest net backs, and I would say close to half of our production. So there are a lot of synergies there that makes sense for us.

We actually dispose a lot of the water that we produce alongside the crude from Surubi and Palmar Largo. So there are a lot of efficiencies to be gained by remaining in that position.

So we're not considering any potential divestiture or sale to raise money for other projects with that asset.

Okay and just one more question I promise. And then I will let you guys go.

With the drilling program starting in quarter one approximately for Coiron Amargo-Sur Este. At what point are we going to possibly be looking at significant impact to the production levels where we can start to see or expect the production levels to rise above their current levels?

Is there any timeframe or color you guys can give us as to when you're expecting to start seeing organic growth in those numbers?

I mean I would --this is just an estimate, I would be thinking of Q3, 2019 just because if you start in Q1 you're looking at 2,000 laterals with flow back time and then until they come on to production, I think a good idea of timeframe would be to see where production is in Q3. I think it very likely have increased significantly.

Well, thank you very much everyone for dialing in. We remain very optimistic.

We think that the macro environment has been settling down. We see that the underlying program in the industry with regards to energy deregulation in general and just fostering a productive environment for investment in the oil and gas sector is a priority for the government.

And we're very pleased on how things are progressing. And we hope to have news soon with several catalysts that are upcoming, and look forward to the next call.

Thank you very much everyone.