Conducted by Keith Schaefer & Tommy Humphreys — July 2017

Introduction:  Pentanova is about speed, size and team. This team—led by Chairman Serafino Iacono—grew Pacific Rubiales in Colombia from 9000 boepd to 300,000 boepd in just a few years, and the stock went from $1.80 - $34. 

They are now back in Latin America, though this time the growth engine of the company is a heavy oil play in Argentina—Llancanelo—(pronounced Jackanello) that has already been discovered and drilled. Even with the oil price right here at $45-$50/barrel, Iacono and his team believe they can get to 40,000 boepd in four years:

To get a better handle on the growth engine of the company, I sat down with Warren Levy, President of Argentina Operations at Pentanova, along with Tommy Humphrey, editor/owner of, who has followed the story since it was an idea in Mr. Iacono’s mind.

Tommy: In your own words, what is the PentaNova story right now? What do investors need to know?

Warren: The current oil price environment creates an opportunity for acquiring assets at an attractive cost. In the short term, the Argentine market provides some insulation from low oil prices because of the fact that oil prices there are controlled and above international market values. But leaving that aside, we have our hands on three gas assets in Colombia which are very attractive, with immediate development potential on one of them, which is what we’re working on today — that generates cash flow for the company and allows the company to focus on what we believe to be the core of the story going forward, which is massive heavy oil assets in Argentina.

Keith: What kind of break-even oil price do those heavy oil assets need to be developed rapidly?

WARREN: It’s a question of scale. There’s one answer to that question when you’ve got production of two to three thousand barrels a day, and that’s probably $40 a barrel — or maybe $35 a barrel — but $40 if you’re all in including capex and everything. Once you scale the operation up above five to seven thousand barrels a day, and you can start to justify the investments of infrastructure, the all-in operating costs for these fields is about $25 a barrel.

Keith: Are you talking about the Llancanelo project specifically? The one where YPF is the partner and you guys have — is it 40% today?

WARREN: Yes, we have 39% that we’re acquiring and then we have an 11% farm-in with YPF, so as part of the financing we’re doing right now, we’re acquiring the 39% and we’re maintaining the option of the 11% farm-in, so the objective is to go to 50%.

Keith: Tough market to launch a junior oil play—but you guys were able to raise the money. Well done.

WARREN: Obviously, there’s not going to be a ton of interest right now in oil stocks unless somebody thinks they’re getting good value. But certainly, the people that have joined us in the financing think they’re getting good value.

The sellers of the assets are getting good value. One thing that’s important to note is that the sellers — with the exception of YPF because they really can’t — all of the sellers have agreed to take stock as one of the primary forms of compensation for the acquisitions. So the sellers believe in the story, they believe in the value, and it’s a way for us to use a smaller capital raise to get done the majority of the plan that we wanted to get done.

Keith: So how much cash do you have in hand now—and where are you spending it first?

WARREN: We still have about US$28M in hand — which is about CAD$35M out of the CAD$50M. The balance went to acquisition costs. That will see us drill two wells in Maria Conchita, which is the development property in Colombia, and we believe that when Maria Conchita comes online, we’re talking about a project that can generate $20+ million of free cash flow a year.

Tommy: So you’re operating Maria Conchita — do you own 100% of that asset?

WARREN: We own 80%. This allows us to control our own destiny. We have a 20% minority partner that really has no say in how we run the field and so you’re in the driver’s seat, if you will. In Argentina, the KM8 property, we will also be operating. And then the Llancanelo field is a joint operatorship with YPF. And there we see the need to manage our partner relations well, but there’s some benefits to having the state oil company as your partner, especially when it comes to needing support on infrastructure.

Tommy: Big picture, the story is to use expertise in heavy oil, and also in Colombia, to get some initial cash flow to develop a big prize in Argentina, and bring an experienced team to a distressed market. Who do you see as your peer group, your “comp” group?

WARREN: I would say Parex and GeoPark, and maybe Gran Tierra.

Tommy: Could you see PentaNova as an acquisition target itself?

WARREN: Once we prove up the Llancanelo field, once we take it from the 1,700 or 1,800 barrels a day that it’s currently at, show that our drilling concept and development concept is the optimal way to develop the field, and take it to five or six thousand barrels a day, then yes. I mean, you’re either going to become a candidate to be eaten, or be the person who’s doing the eating.

Keith: How did the core team [Warren himself; Gregg Vernon, President; Serafino Iacono, Executive Chairman] come together?

WARREN: Gregg and I both started our careers at Schlumberger. When he was at Petro Andina, which is now Parex, they hired my service company to build two custom rigs for their field, which we put into the field — actually, one of them is still operating in the field today, which is now 10 years later. It’s never left that field.

So, I got to know Gregg through Petro Andina acting as a service supplier for him. I also knew Serafino having provided services to Pacific, but I didn’t know him as well as I knew Gregg. Through Gregg and Serafino talking about going into Argentina, Gregg called me and said, what do you think — do you want to come help us get into Argentina? Initially, my role was just presenting projects to them and also to filter the stuff they were looking at. And then after a couple months, Serafino said, why don’t you just come on board and run the operations for us in Argentina.

Keith: Warren, your title is head of Argentine operations. You are the guy in charge of the Big Growth Story, the Growth Engine of the Company. Tell me a little more about your background.

WARREN: I’m an engineer by training — by education. I then I went into the oil and gas sector working for Schlumberger overseas. My career started in Venezuela. And then I went to Colombia, back to Venezuela, moved around Latin America a fair bit. Learned how to speak Spanish fluently.

And then I moved to Malaysia, where I was the managing director for East Malaysia, Brunei, and the Philippines for the Schlumberger group of companies. And then I decided for personal reasons that I wanted to move back to Latin America, and at the same time fortuitously got in contact with an old customer of mine, who was looking to set up a service company headquartered in Argentina.

I went and took a look at the market and there had been no investment after the currency crisis in 2001 and 2002. So this was about 2004. And I said, look, there’s an opportunity here for someone to start up from zero, but be able to capture a big piece of the market. So, we started in Argentina at the beginning of 2005, grew the company—Estrella—into 7 countries in Latin America, took it public in 2010, and sold it to a private equity firm in 2013.

Tommy: What are you most proud of in the Estrella story?

WARREN: 45 rigs, up to 2,000 employees, operating in 7 countries. That’s what I grew it to. We were over 2,000 employees, and about $250M a year of revenue, in 7 countries, when we were at the peak — when we sold it.

Tommy: What is your strength?

WARREN: My strength is managing operations and managing contracts and negotiations. I’ve done a lot of projects where the service company is operated by an oil companies project, even mega projects like one in Malaysia where we built multiple offshore platforms, pipelines, built all the equipment to operate the field, acted as contract operators in Argentina for a number of Canadian start-ups, including Madalena Ventures when they got started.

And because I lived in Argentina for so long, and because Estrella was a unique story of an Argentine-headquartered company listing on the TSX, I have really good government relations and contacts, understanding of how the market works here, understanding of the sensitivities around labour relations, and the like — which I think will be very beneficial for this type of operation at PentaNova.

This is not an exploration company — this is a development company. We know the oil is there, we know the gas is there. It’s a question of how efficiently it’s extracted out of the ground. So this is not a case, like a lot of Canadian start-ups, where they take some acreage and drill, and either it’s a boom or a bust. In our case, operational efficiency is going to be the key to unlocking the value.

Tommy: In your mind, how should an investor measure operational efficiency?

WARREN: It’s going to be a function of lifting costs — how do you drive your lifting costs down? — how do you use scale to optimize the development costs per barrel? And our focus here is not just proving up reserves, which is very common in Canadian public markets stories — it’s how do we maximize the profit per barrel extracted out of the ground. In the case of Llancanelo, we know the oil is there, we know it can be produced — because they’re producing it today — this is a question of how do we scale it up in an intelligent fashion, applying the right techniques, to optimize the costs.

That’s what it comes down to. It’s an engineering challenge. It’s a development challenge. We have upside, right — we have upside on our properties where there’s potentially more oil there or, in the case of Llancanelo, we can extract a higher percentage of the oil out of the ground.

One way to think of it is that an exploration company has a very narrow and short fairway. Either they hit a well or they miss, and that often means the company is successful or is a bust. We have a very broad and long fairway to work with.

We have a huge heavy oil resource that we know that we can apply hundreds of wells to fully develop it, and we’re going to be looking at, how do we drive the recovery factors from, say, 7-8% to 20%. How do we optimize the infrastructure, the drilling process — how do we learn as we’re going here so that every well is a little less expensive that the well before it? And that we we can maximize the profit for every barrel that’s extracted out of the ground.

Keith: How long do you think it will take for Llancanelo to unfold?

WARREN: Over the next three years, you’re going to see the majority of the development of the project unfold. We won’t necessarily be in full-scale production after three years, but you’re going to see the trend and the ramp-up.

You’re going to see the costs come down, when it makes sense to build a pipeline, bring power lines in, blend at location instead of shipping in heated trucks — all that kind of stuff. The oil is very thick and viscous coming out of the wellhead, so right now they’re shipping in heated trucks, they’re burning LPG to generate electricity at the site. There’s lots of operational efficiencies that have nothing to do with the amount of oil in the ground — it’s just being smart about how we run the services.

YPF recognizes that these changes need to be made and they’re looking for somebody like us, who have heavy oil expertise, to come and help them understand the best way to do it.

Tommy: What was it about (Chairman) Fino (Iacono) that you thought, if I’m going to do it again, I should do it with him?

WARREN: There’s two things. One is he has incredible drive to look at a business opportunity and find a way to take an idea and convert it into reality. The other is that his understanding of the market dynamics at a macro scale — what areas of the market you want to be focused on, where value can be created that’s maybe being overlooked — he’s as good as anybody I’ve ever met.

We know there’s value in Argentina, the question was what time to enter into the market. I made the call to enter the market in 2005; Gregg did the same thing around the same time with Petro-Andina. And certainly we made money and developed businesses, but the political cycle ended up being longer than we expected.

It’s very difficult to predict political cycles and natural resource value cycles over the 1-2 year timeframe, but Fino is very good at finding undervalued assets and very good at building an organization with a huge amount of drive and energy to unlock their potential.

Tommy: And how do the three of you — yourself, Gregg, and Fino — work together?

WARREN: Gregg’s been a very close personal friend of mine for the last 12-13 years. Even before we worked together, we’d have breakfast once a week, our wives get along really well, we’re both married to Colombian women, so it works really well [laughs]. Serafino and I travelled together for 29 days non-stop [roadshow], and that was breakfast, lunch, and dinner together every day. Gregg was with us for 26 of the 29 days.

And we never had an argument. You know, we had a disagreement professionally on how we should do something on the financing, or a discussion about what the right thing to do is in the business — but we never got on each other’s nerves, which was remarkable, and surprising to be honest. We enjoyed it. We got along really well and we continue to get along really well. And Fino’s got an intense personality. Gregg’s probably the other end of the spectrum, and I’m somewhere in the middle, and it all seems to kind of work.

Tommy: So the oil price is in the gutters, how is that impacting PentaNova’s strategy?

WARREN: In Colombia, it’s largely irrelevant because we’re a gas story and the gas price is driven off of local market dynamics and it’s very healthy — $5+ a million BTU.

In the case of Argentina, the blow is softened somewhat by the fact that the oil price is still pegged by the federal government to $54 a barrel. At the end of the day, the key is we have a minimal amount of oil production today — let’s call it something in the neighbourhood of 1,000 barrels a day once we close the financing.

We have a massive resource that we expect to ramp up to 30, 40, 50 thousand barrels a day, and we’d rather be selling 30,000 barrels a day when the price recovers rather than selling it today.

You don’t need a big lift on the oil price to show that the economics actually make sense to delay the increase in production until you expect the oil price to recover a little bit, rather than do all the heavy ramp-up right away.

Keith: How do the next 12 months get mapped out?

WARREN: I think the big catalysts will be the wells at Maria Conchita, which are planned to be drilled in late Q3, or early Q4, this year. Once we see those production numbers come on from the tests, that’s going to prove the cash flow generating capacity of the company in Colombia, and that basically will fund anything and everything we want to do in Colombia and provide some capital to Argentina. We expect to see less of a catalyst, and more of a steady growth in the production of KM8.

And then the other catalyst is we’re going to deploy the first multilateral well in Llancanelo. So instead of drilling one horizontal well off of the wellhead, you basically drill a fishbone pattern and drill multiple boreholes into the producing formation — the idea being to maximize the exposure to the reservoir and optimize the production per location — not just the initial production rate, but the total recoverable.

So, if we can do what we believe is very feasible given the history in the Llancanelo field, and show that the economics per well are an order of magnitude better between this than drilling conventional horizontal wells, then what you have is you prove the value of the reservoir, you prove the capability to scale the production up, and then you decide to go drill the wells.

Tommy: When will you do that?

WARREN: We’re hoping for October, but I’m thinking it’s more likely going to be the end of the year. We probably need 2-3 months to go through all the planning and evaluation with YPF, and then get ready to drill the well. It will probably be November or December.

Tommy: Tell me a little bit about YPF. What’s their scale and size? Why haven’t they figured this out before by themselves?

WARREN: The key with YPF, or understanding the history of YPF over the last couple of years, is YPF used to be 51% owned by Repsol. There was some friction between Repsol and the state-owned side because Repsol was trying to maximize the cash-generation of YPF, but for the Argentines increasing production was as important or more important in the short term to keep Argentina from becoming a net importer.

When Argentina started becoming a net importer, there was a dispute and the 51% interest was nationalized — though they did pay for it ($5.3B) — and once they took over control of YPF, the government decided to focus on Vaca Muerta, an unconventional oil field.

You have to keep in mind that we’re talking about 4-5 years ago, when Argentina was effectively not in the international capital markets. YPF was capital-restricted. They decided to focus the capital that they did have on Vaca Muerta.

They were able to bring well costs down, increase the productivity, move up that learning curve, which is very typical for a non-conventional play, but because they were capital-constrained and because they were throwing everything into Vaca Muerta — which wasn’t in the short term producing any profitable results — they really left a lot of their conventional assets orphaned. They didn’t have the capital to invest in them.

In the case of Llancanelo, they had two partners who were under-financed, so they just kind of ticked it along, drilling 1, 2, or 3 wells a year to keep it going. So it’s a function of a lack of capital, a function of the focus of YPF, and as function of the fact that they had undercapitalized partners.

We fixed that by coming in, taking out the two partners, bringing in heavy oil expertise, and at the same time YPF has made a strategic shift away from Vaca Muerta and back onto their conventional assets. They farmed out most of Vaca Muerta to the likes of Shell, Exxon, Total, Wintershall, and a couple big Argentine groups as well. So you have a confluence of events, and we think it’s a perfect time to have them as a partner.

If you asked me, would you have done this a few years ago when YPF was fully focused on Vaca Muerta, the answer would have been no — we wouldn’t have accepted a 50-50 deal with YPF because it wouldn’t have worked — but now that the management team from YPF, all the way up to the CEO, is saying we don’t want to replicate the difficult learning curve that we had on Vaca Muerta by trying to do it on our own — we want to have a partner in heavy oil who can help us understand the optimal way to develop the asset and do it more quickly and more efficiently.

Tommy: You guys are talking about a big production ramp in the next 3 years…how confident are you that you can make those numbers.

WARREN: You have to keep in mind — and I want to hammer this in — that this is not an exploration story, this is a development story. The oil and gas is there. The reason we put this slide together is to show that our rate of production growth — the compound rate of growth — is so much faster than our peers because we’ve got a huge oil reservoir to work with and all we need to do is drill the wells.

So there’s no exploration success baked into this — this is just going and drilling the wells ... and we have a longer, broader, and wider runway. We have a resource base that right out of the gate is as big as Pacific or GeoPark and those guys have been building their companies for 10 years.

Collectively, between the projects we’ve been involved in — Gregg and Luciano and Serafino — we’ve developed heavy oil assets in Argentina, Ecuador, Colombia, and Venezuela — I did one in Asia as well. We’re not scared by heavy oil — we understand that it requires a different mindset and it’s not a question of drilling the perfect spot on the seismic and having a 5,000 barrel a day well come in — it’s a question of squeezing the production from 1,200 to 1,500 barrels a day and driving down the operating costs from $5 a barrel to $3 a barrel.

It’s a question of the hard grinding engineering work, attention and focus that is required, to optimize your cost base. But those are challenges that we like because they’re challenges that are easy to map out, and to plan, and effectively it’s an implementation and development story, not do we have some luck and hit a reservoir that’s better than our neighbour’s reservoir and therefore we’re valued more highly.

Keith: You’ve got this big field with massive OOIP—Original Oil In Place—so I’m assuming that Year 1 and Year 2 reserve additions should be huge?

WARREN: We think there’s a good likelihood of a 1000% increase, or 10x increase, in reserves in the first couple years. The big thing here is we have reserves on Maria Conchita and we have a limited reserve base on the Llancanelo field. The reserve base on the Llancanelo field — because there had only been 2 or 3 wells a year drilled and because the development program that YPF put in front of the reserves auditor is to continue that pace of development, the reserves auditor only gives credit for reserves or P2 reserves based on the development program.

So you have to show them that you have an economically viable plan to develop the reserves to get any credit for it in the reserves report. We believe, and we’ve actually now had this validated by a third party, that all we need to do is put in place a full development program, drill a number of wells, and show that the reservoir can be economically produced with this development program to go from the 6 or 7 million barrels that are currently booked under P2 reserves to the recoverable reserves base which we believe to be about 60 to 70 million barrels. And that’s based on a 7% recovery factor across the field, which is conservative.

So, it’s in large part a paperwork exercise, with a lot of technical supporting documentation. The field has been certified with 3 billion barrels of reserves in place in the field. So, the difference is basically reserve classification between a resource and a reserve number, and to date the work has not been done to do that conversion.

Tommy: If capital markets area dead — could you, with your cash and asset position, be a sustainable business from today forward?

WARREN: Yes. We’ve built our models to be sustainable in the absence of any additional capital. It will obviously limit the pace of growth that we can achieve, but we also believe that there are sources of capital available — specifically for development projects like pipelines, service facilities, and the like — that can be attained independent of the capital markets. So, we believe that we can grow irrespective, and if we can tap the capital markets, we can accelerate the pace of growth.

Tommy: Anything you’d like to mention on the team front?

WARREN: Ian Telfer is acting as an advisor to the board. Frank Giustra is very actively involved. Jeff Scott knows the space really well. Hernan Martinez know as much about the workings of the Colombian oil and gas space as anyone. We are just getting to know Susannah Pierce, but I’ve been very impressed with the entire team.

With someone as successful as Frank has been, and with so many business interests that he had, his active involvement has been really beneficial in a whole bunch of ways. Being actively involved in the story and providing guidance had been beneficial.

Tommy: How about the CEO, Luciano Biondi?

WARREN: He has a few years on me, but he has the energy or someone much younger. He’s very sharp and he’s seen everything. Two things that are important to know about Luciano. He started his career with Shell, so he was trained in a very good, professional environment.

But he ended up becoming the president of Maraven and managed a million barrels a day — directly. And there are not many people on the face of the earth who have directly managed a million barrels a day. He was instrumental in opening up the Faja, the heavy oil belt in western Venezuela. He was at the forefront of the techniques that were being developed globally on how to unlock the potential of heavy oilfields. So he’s seen it and he’s done it. He was successful in Colombia as well.

And he’s a gentleman. He’s a really pleasant, enjoyable person to spend time with. He’s invaluable to us in terms of his operating expertise and his knowledge about heavy oil and the fact that he has in his head — what does a big organization look like. And I’ve always said this — it’s very difficult for someone who is a successful entrepreneur to transition to running a medium or large sized company because you get bogged down in having to learn how to manage the administration, the back office, and the finance, and all those types of things. When you’ve done it in the past, you have the vision of how it’s supposed to be, so everyday you’re taking a small step down that path of taking a small business and converting it into a successful large or medium sized business, and he has that in his head.

Tommy: Oil & gas — it’s an amazing business, but it’s at a sentiment low. What do you say to that?

I think, even if you get into a situation where oil stays in a band of $40 to $60 a barrel, which will make it difficult to develop some of the highest cost resources in the world, like deep water, the projects that PentaNova have are all very robust and very economically exciting.

These are not project that need $100 a barrel oil. $100 a barrel oil just means we’d make a lot more money. They only need $40 to $50 a barrel oil to be very economically attractive. So, I think what you have to do as an investor is look for areas where you’re avoiding the thesis of the story being predicated on the oil price recovering so that you’re making a solid investment — you’re making money at current oil prices. Because when the price recovers — which it will at some point — that you’re able to participate in that additional upside. But that’s not the predication of the story.

You’ve got to keep in mind: I entered the industry in 1996. The price of oil was $20 and everybody was happy because it was up from $14. And we were making money at $20 a barrel. So, the economics have changed over the last 20 years, there’s been inflation — that same barrel probably needs to be $30 a barrel today to make money, because of inflation, but at $40 a barrel, most projects in the world you can make money at.

Tommy: What else should I know about this story? What are the top reasons to buy this story?

WARREN: The company has proven oil and gas resources. All we need to do is drill wells to bring them online and bring cash flow up.

The company is self-sustaining — we can develop our fields — we can bring cash flow online at current commodity prices in Colombia and Argentina. We can make good money.

And we’ve got a huge runway going for us in front of us. If you look at — you’ve got Exxon, Shell, Total, Chevron — everybody’s made big bets in Argentina, so there’s sort of an official recognition that Argentina is investment-ready again. We’re on the ground at a fraction of their cost to get in. And we’ve got a huge resource base going forward.

What you can participate in with PentaNova is a company priced at start-up pricing, but that doesn’t have exploration risk, that doesn’t have financing risk in the short term. What we have is — just need to go out and drill wells and bring production online. So, how often do you get to participate at pricing levels that are almost like an exploration play, which may be boom or bust, in a true development story? We’re sitting on a billion barrels!

Tommy: Let’s fast forward to, say, 2020 — what does PentaNova look like in terms of its assets and its market capitalization in a dream scenario?

WARREN: We think that the company is going to be the pre-eminent heavy oil company in Latin America. We think that we can build a company that has sizable production — north of 50 thousand, 60 thousand barrels a day. We can use the cash flow coming off that production to unlock the massive amount of potential in value that exists in the subsurface heavy oil in Latin America.

Tommy: And, so, in your view, what is the market cap of a company of that size?

WARREN: If we’re at 50,000 barrels a day, plus our gas, or plus whatever other assets, we’re probably a $2 billion market cap company. If we can use the Llancanelo field and do the same thing in 1, 2, or 3 other fields — then we’re a $5 to $10 billion market cap company.

Tommy: Thanks very much for taking the time, Warren.

Keith: Yes Warren, thanks, and look forward to getting updates on your progress.  

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