Centaurus Energy Inc.

Thank you very much, and good morning to everyone. Thank you for joining us for Madalena Energy’s Q2 earnings call.

We are very pleased with the second quarter results and are happy with the progress we are making on the current Vaca Muerta drilling campaign in the CASE block. The first well of the recently expands five well program was successfully completed with the 2,000 meter lateral and its currently flowing back.

The company is also reporting a positive EBITDA of $729,000 on an average realized crude price of $52.85 per barrel. During the quarter the company repaid its outstanding convertible debentures at maturity.

A few operational highlights I would like to note included increase of 9% on the company’s production to 2,010 barrels of oil per day equivalent from the same quarter last year. This was largely as a result of the successful workovers performed El Surubi and Palmar Largo.

We are also moving forward with planning operations to drill vertical pilot in Curamhuele, test Vaca Muerta and Lower Agrio formations in 2020. Over the first half of 2019, the company has invested over $3.8 million, which we expect investments to increase in the second half of the year as CASE drilling continues.

The company is also planning a Vertical Exploratory Well in Puesto Morales later this year and withdrawn a $10 million of its convertible loan facility with KD Energy. On the M&A side, we continue to actively pursue additional conventional production assets with drilling up side as part of our dual pronged strategy to have both unconventional and conventional source of growth.

Regarding macro situation in Argentina, the company is closely monitoring the policy implications, as a result of the recent PASO elections. Given the current governing coalitions worse than expected results in the primaries, we expect an elevated level of volatility in the run-up to the October elections and until the end of this year.

Despite the negative macro backdrop, I am confident that the company is well-positioned to weather any short-term headwinds as we have strengthened our balance sheet and we will look to capitalize on cost reductions that could be obtained with the recent devaluation in the peso. The company has adequately executed a strategy which precisely puts in a position to deal with these complexities in an emerging market and specifically in Argentina.

This is exactly where the team that we’ve assembled, that’s on ground in Buenos Aires, where we have a single operating unit will come into play successfully so the company gets through these turbulent times. And with that, I’d like to pass the rest the introduction to Alejandro.

Hello. Good morning.

This is Alejandro Penafiel, Vice President of Growth and Capital. Madalena remains in a strong position and we are focused on growing the company’s production and reserves.

The company’s negative net income this quarter is largely due to an unrealized exchange rate loss on the company -- that the company has on peso denominated tax credits in Argentina. These tax rates are mark-to-market each quarter.

The company has been able to increase production consistently over the last few quarters but has not seen a corresponding growth in EBITDA largely because of lower Brent pricing that we’ve seen since late 2018. The last driver that negatively impacted the quarter were continued higher levels of OpEx from the non-operated Coirón Amargo-Norte block, which was the main reason for higher per barrel OpEx in this quarter.

On the macro front, as mentioned by Jose, we expect higher levels of volatility in financial markets in Argentina, until at least the end of this year and management intents to keep our focus on the fundamentals of the company and building value both in our conventional and unconventional assets. With that, we will now open the call to questions.

Hey. Ggood morning.

Maybe I’ll start top down, whether political situation you mentioned in the PASO elections and you said that you expect elevated stock price volatility in the coming months leading up to the general elections. How has it affected if at all your activity on the ground and activity in the basin and new can in particular?

Thank you, Jenny. And well, specifically, on the ground things are fine.

It really hasn’t affected operations. There is a decree by the executive whereby there is a 90-day freeze on prices, which freezes Brent at $59 per barrel and then also dictates 80 exchange rate to be abide to the formula at 45.19 pesos per dollar.

And that is really the most important effect of PASO elections, and currently, the chamber of producers of oil and gas, as well as individual problem these are pushing back on this executive decree that affects pricing. And what it does basically is it allows for a heavier discount to Brent and that’s something that is currently be in meetings, discussed and in general there is a fluid situation where we are yet to really see the outcome of where price will be in the near future.

But on the ground things are -- our operations are being run smoothly. We’re currently executing our CapEx program in CASE and we are confident that in the few months we will have better visibility on where pricing will be.

Great. What about other operators in the area, have there been any rumblings at all about rigs or companies leaving as a result of this unexpected PASO elections outcome or are they pretty much keeping calm and carrying on and kind of strong buoyant activity continues in Vaca Muerta?

I think people are very focused on monitoring that situation. I think in relations to operations and drilling programs that have already been announced and in some cases commenced.

These are going to be executed. I think, large companies have two-year contracts with rigs and these are programs that will likely be executed in the case of large operators, Chevron, for example, I understand is continuing with its well program.

I know a lot of the other large operators are continuing with drilling. So I think, it’s definitely fluid, but there are no signs that any radical decisions with regards to immediate curtailing in CapEx will take place.

And I think in general the things that has been discussed among peers is that everyone recognizes the value and potential of the resourcing and everyone has also opted in the potential volatility in a country like Argentina and is focused on the medium- and long-term.

Okay. Can you walk me through your work program and capital budget for the second half of the year?

I mean, we know that you have CASE block 2 through 5 to drill and complete and then you’re planning -- still planning a workover at Palmar Largo. Well, it’s sounds like maybe delayed.

Am I wrong there? And I see one exploration well at Puesto Morales, is that makes sense.

I don’t see a Conwell, could you just walk me through the work program for the second half please and the capital budget?

Of course. So, we are -- we will go about one by one, so with regards to Con and PVC planned Lotena [ph] well, currently we don’t have any timing as to execute that and we’re still waiting on the operator Vista to give us more clarity on what that well could be performed.

So currently it’s not in our plans to announce that we will be in execution of that specific Conwell focused on Lotena the rest of this year. With regards to CASE, there’s currently five well program.

We are currently drilling the second well of the five well program and Pan American plan is to execute this program by the end of the first quarter of 2020. So I think you’ll probably see these four wells drilled and completed by the end of this year.

And with regards to our workover and second workover in Palmar Largo, we’re currently reviewing candidates, because we see that there may be better candidates than the initial well that we had selected for the second workover. And so we’re still focusing on deciding on which workover candidates that we will be focusing on.

Okay. So previously we talked about a workover potentially commencing at the end of Q3, you said its likely going to be a Q4 event now?

Correct.

Okay. And you are maintaining still your conventional production guidance around about 2,000 barrels a day, despite the shift in timing a little bit here.

Yeah.

That’s correct.

Okay. Okay.

And the budget associated with it and then one exploration well at Puesto Morales you have?

Yes. So the -- in one of the…

Right.

Yeah. In terms of the budget we don’t any immaterial changes beside that associate with Con and Lateno well which is kind of uncertain timing.

With the additional fifth well, we would expect an increase on the capital budget for the CASE program that’s roughly proportional.

Okay. Okay.

And I wanted to ask you about the first CASE well, is there any color that you can provide at all on the flow or pressure, kind of the quality of crude and how that compares to yours and Pan American pre-drill expectations or is it too early to speak of any preliminary results?

We’ve been looking back and we’re encouraged by the results that we’re seeing and we hope to be able to release an initial test results 30-day average in the next three weeks to four weeks. And that should give you an idea we’re happy with what we’re seeing and we saw both pressure and flow back and general encouraged.

Okay. Sounds good.

I wanted to ask you a question about the pricing that I think you may have addressed it already. So what’s the decrease in pricing received in the second quarter of this year due to the freeze that you discussed?

So, no, that was just market differential. So…

Okay.

… we saw slightly large differential than we saw in Q1 even though we saw higher pricing. So at this point because of the state of the local market where you just have a few exports of many that come through.

It’s generally a month-to-month negotiation refinery and producers, and so you have kind of arrange that’s kind of negotiate every month. So in Q2 we had slightly wired differential than in Q1.

But we’re kind of discussing Jose was discussing before with the potential ramifications of the decree that we’re kind of looking forward to in -- for the remainder of Q3 and into Q4 that we’re still looking how it’s going to shake out in terms of how that’s actually going to be implemented after the feedback and lobbing by industry.

Okay. What type of differential are you seeing today then?

Before the…

Before the PASO elections I think we saw stable differential, go ahead Jose.

Right. So before pretty you are seeing $7 to $8 differential to Brent with the existing decree, it fixed the price of Brent to $59 and then also obligate exchange to be at 45 pesos approximately, which effectively would create a much heavier discount between %15 -- around $15 to $20.

Oh! Wow!

So, yes, this is something that is being discussed, it’s something which is also being looked at from the provinces point of view. Because in Argentina, although, the executives has certain exposure over decrees whereby they can affect pricing that the provinces have economy over hydrocarbons, and obviously, the provinces is affected for the quantities of the royalties that they receive.

And so the province again in Rio Negro among others have currently pushed back on the executive decree and in general the government is looking at reviewing this policy, which was a knee-jerk reaction to the financial situation caused by the past elections and the runoff of the peso and devaluation from the perspective of instituting measures that would control inflation. So it is a situation that were, obviously, monitoring and we’re hopeful at this can be mitigated in the near-term to.

Yeah. I think we’re looking to mitigate as well in terms you see positive aspects of devaluation from the OpEx side that we will look to mitigate in terms of to see if there is additional cost reduction that mitigate from that impact.

And again this is still very preliminary because no one is actually closed any pricing since this decree has come out, whereas the decree [ph] effectively try to keep the price stable in pesos and it introduces a bit of exchange rate risk into the oil pricing that the producers will see it under the scheme. So again it’s still a bit kind of too soon to tell in terms of how really what kind of impact that is going to happen on realized pricing.

So it’s still very fluid situation.

Okay. But expect a wider differential in the second half of the year in the meantime unless something changes?

Yeah. We’re planning…

We have somewhat differentials and I am trying to as well as offset that through cost reduction from peso devaluation.

Right. So the decree is for 90 days, right, that’s the time period we’re looking at with regards to the current policy that they are executing.

But it’s hard point of view we’re dealing with this, managing the uncertainty, managing the risk and we’re focused on seeing how we can tie that up and focusing on past well and fundamentals, which we’re very good at. So, despite the situation and the executive policy with regards to how we manage the financials situation, I’m very confident the company will be fine.

Remind me of what portion of your OpEx is nominated in the local currency?

So…

Go ahead.

… company-wise around 60% is local currency and 40% is dollars roughly.

Okay. Great.

No that’s great color. Thank you.

And just a final question on G&A, I see that there was a substantial reduction in G&A in the second quarter. What drove that?

And is that a kind of sustainable run rate $1.4 million a quarter roughly, going forward

So, yeah, thank you for the question, Jenny. So, yes, the reduction is largely due to one-off items regarding the M&A activity that we were pursuing in Q1.

And so the Q2 levels of G&A we think are sustainable for run rate. So there might be -- maybe some additional G&A that happen kind of non-recurring items, depending on M&A or other costs.

But I think that’s -- what we were able to achieve in the second quarter is because it reflects what our kind of steady state run rate G&A should be going forward.

Great. Thank you so much for taking the questions.

Thank you, Jenny.

Hi. Thank you for making the time for the call.

Just a couple of questions. What drove Pan American to increase the work hour from four to five?

Hi, Steven. We have an eight hour commitment with province, which was negotiated in exchange for the 35-year concession that we were decreed last year.

And the fifth well just [Technical Difficulty] on that taking advantage of the fact that we have the rig and they see room to further delineate and prove up the block. That’s the reason why we added a fifth well.

Got it. I mean, do -- does Pan American and the company have an ideas to what the location is of the fifth well at this point?

No. No.

We’re not. I mean, I can’t speak for Pan American and give you guidance on the specific locations.

Understood. Understood.

How does the economics of the play kind of work at -- assuming Brent at 60 bucks, and hopefully, much more normalized, I mean, pricing policy in Argentina after the elections?

I think conceptually assuming a normalized situation, we have the discount that we were looking at previous decree and at $60 Brent with the tight curves that we are seeing with longer laterals looking at our neighbors and also some our own information, I think, with those assumptions the economics look very strong.

Great. Great.

Any activity that’s reported around Curamhuele, I believe that Chevron has a pilot program next door, the El Trapial and YPF has a program as well. Have any of those results come out recently or just generally?

So our understanding is, Chevron is just starting its eight well program. What they’ve -- our understanding is that they’ve drilled down initial wells -- initial vertical sections and they’re now bringing a bigger rig to drill the laterals on that eight-well program.

Still no results that we’ve seen announced publicly. And with regards to [inaudible] in the Puesto Morales section to the north of us, our understanding is that they have drilled well into the Lower Agrio and are currently flowing back and we haven’t seen any specific results announced.

But we are hopeful that the results of that well are encouraging.

Gog it. While YPF is testing the Lower Agrio, what’s Chevron testing?

So Chevron is focusing on the Vaca Muerta.

Got it. Got it.

So there are different benches that are being tested.

Correct.

Okay. I mean, hopefully, those results commandment there and they apply to our block in Curamhuele.

Just one last question in regards to the process on the listing and how that’s coming along?

Right. So, currently, we are working with CMD to get approval for the listing.

And although, the process is extremely advanced, both with the CMD and the exchange, we have received additional request to confirmation and we’re dealing with those as quickly as possible. But as of yet have not received approval.

Okay. Thank you so much.

Good luck.

Thank you very much.

Well, we’d like to thank everyone that joined for the call and appreciate you calling in to hear about the company and we’re very confident that we’ll be moving forward and continuing to create value through the excellent assets that company has. Thank you and hope that everyone has a good day.