Road to Recovery? Pacific Exploration Increases Output and Revenue Over Fourth Quarter of 2016

Pacific Exploration & Production Corporation made progress on its recovery during the first quarter of 2017, increasing its output to an average of 72,524 barrels of oil equivalent per day, according to financial reports filed by company earlier this month. This was a 4% improvement over the Canadian company’s production in the fourth quarter of 2016, with renewed drilling at its heavy oil fields and better output from a field in Peru driving the uptick.

The recovery in revenue was even more pronounced, increasing to $317 million USD in the quarter compared to $270 million in the fourth quarter of 2016. On top of higher sales volume at a better price on the global market, Pacific Exploration was able to reduce its total operating costs to $25.91 per barrel this quarter vs. $27.98 per barrel in the fourth quarter of 2016. (Total operating costs include production, transportation, and dilution costs, according to the company.) In a series of deals in the first three months of the year, Pacific Exploration was also able to reduce its exploration commitments by tens of millions of dollars.

Despite the increases, the company is still well behind where it was a year ago before its struggles really began to grow severe. Its 2017 first quarter revenue came in $140 million USD below the same period last year in one of the firm’s last quarters before it lost its stake in the Rubiales oil field, Colombia’s largest. Its operating EBITDA for the first quarter was $92 million — less than half of what it earned in the first three months of 2016.

After jointly controlling the lucrative wells there for decades with state-controlled oil company Ecopetrol, the contract expired and Pacific Exploration’s stake in the field, as well as the Piriri field in Colombia, dropped to 0% overnight on July 1. The impact was severe enough that the company formerly known as Pacific Rubiales opted to re-brand as Pacific Exploration & Production and was forced to obtain creditor protection while it pursued a debt restructuring arrangement.

Barry Larson, who took over as chief executive officer of Pacific Exploration on January 30, called this a “critical year” for the company as it “shifts focus and resources towards sustainable production through development drilling and growth through low-risk exploration.”

He noted the company’s progress in reducing overall costs this quarter as it pushes to improve margins and returns on capital. Pacific Exploration’s overall goal for the year is to cut its commitments by $67.6 million USD, according to the chief executive. “The first quarter of 2017 is a clear indication that everyone at Pacific is making the necessary adjustments to improve the company’s operational and financial performance,” said Larson.

In a statement, the company outlined its most significant results and highlights from the first quarter of 2017. Selected comments from that document are reprinted below in chronological order. (All figures in USD.)

On January 31, 2017, Block 192 in Peru reactivated operations, increasing production in the first quarter of 2017 to 3,855 bbl/d from 2,079 bbl/d.

In February 2017, the Bicentenario pipeline decreased its transportation tariff from $8.54/bbl to $7.56/bbl.

On February 22, 2017, the company received a letter from Perupetro S.A. in reference to the finalization of Block 135 contract, with an effective date of March 13, 2017, reducing its exploration commitments by approximately $15.0 million.

On March 10, 2017, the company and Amerisur Exploración Colombia Limitada entered into four farm-out agreements pursuant to which Amerisur agreed to acquire the following participating interests in certain of the company’s exploration and production of hydrocarbons contracts: (i) 60% participating interest in the PUT-9 Block; (ii) 50.5% participating interest in the Tacacho Block; (iii) 58% participating interest in the Mecaya Block; and (iv) 100% participating interest in the Terecay Block. The aggregate purchase price for the participating Iiterests was $4.9 million, plus a royalty calculated and payable on a monthly basis equal to 2% of all the hydrocarbons produced in the Terecay Block and a royalty calculated and payable on a monthly basis equal to 1.2% of all the hydrocarbons produced in the PUT-9 Block, subject to certain terms and conditions. Each farm-out agreement is subject to approval by the Agencia Nacional de Hidrocarburos. Upon closing of the transaction, the company will have reduced its exploration commitments related to these blocks by approximately $26.1 million.

On March 13 2017, the company entered into a binding term sheet with Maple Gas Corporation del Peru SRL pursuant to which the company has agreed to transfer its participating interest in Lot 126 for $0.2 million and, the assumption of contractual exploration obligations of $3.6 million.

On March 30, 2017, the company executed a farm-out agreement with Gold Oil PLC Sucursal Colombia for the transfer of its participating interest and operatorship in the Casanare Este Block for $0.2 million. The farm-out agreement is subject to ANH approval. Upon closing of the transaction, the company will have reduced its exploration commitments related to this block by $7.9 million.

On April 3, 2017, the company requested that the ANH approve the transfer of $6 million in investment commitments from the CPO-12 Blocks to two exploratory wells in the CPE-6 Block. The company continues to negotiate field commitments to focus on high-impact development drilling.

On April 25, 2017, the company and CNE Oil & Gas S.A.S., a subsidiary of Canacol Energy Ltd., entered into a farm-out agreement whereby CNE Oil agreed to acquire the company’s participating interest in the San Jacinto 7 Block in Colombia, in consideration for assuming all contractual exploration obligations of $7.8 million. The agreement is subject to approval by the ANH.