TRANSCRIPT OF PRESENTATION OF QUARTERLY FINANCIAL STATEMENTS AS AT JUNE 30, 2016 Held on the 16 th of August, 2016 CANACOL ENERGY LTD. (Translated from Spanish to English) Nicolás Acuña - Financial Vice President Good morning to all and thank you for accompanying us in the presentation of our Financial Statements as at June 30, 2016. In this first slide you can see the production of oil in Llanos-23, the production of gas in La Esperanza and VIM-5, and the incremental production in Ecuador. The corporate netback for this quarter ended on June 30 was $25.58 dollars per barrel of oil equivalent, improving the results that we had been having in former quarters. This is a new graph that we present in this opportunity to report and show you cash sales. What is the difference that we have with respect to production? The difference is based on the concepts of take or pay and gas nominations not delivered. This means that under the contracts that we have signed with our main gas clients there are situations in which they cannot always take the gas and according to the conditions of the contract there are two options. One of them is take or pay, in which clients have to pay for the gas and nothing happens. We basically receive the revenue and we do not have any subsequent obligation; and in addition we have others which are what we call gas nominations not delivered, which for the quarter were eight hundred barrels per day in average. Gas nominations not delivered consist in that clients also pay us but, according to the contract, they have the opportunity to later on take the gas which they have already paid. So, we are not reporting such sale as income but as deferred income, because it is when clients can take the gas that it becomes an income. Now, there is a special condition, as I said, in each one of such contracts: if after the time that clients have to take the gas, which in some cases is six months and in other cases is twelve months, if they do not take it, we can record it as other income and we do not have to deliver the gas. That is why this level of sales and invoicing is higher than that of production with an average in the quarter of 17,817 barrels equivalent. As to operational expenses of the company, we keep having a cost reduction trend with respect to all former quarters. A year ago we had corporate operational expenses of $9.18 dollars per barrel and for this quarter we managed to lower them to $3.47 dollars per barrel. This cost reduction responds to expenses efficiencies in Llanos-23, the fact that we have managed to have service contracts resumed, as all the industry has, and the depreciation of the Colombian peso. As you see, from the former quarter we have come back to the trend of corporate netbacks around $26 dollars per barrel of oil equivalent, again explained by the
increase in production in our gas fields, as you well know, and the reduction of costs. In addition, costs in gas fields are quite controlled and quite low. As we have announced, we had the goal to increase and quadruple gas sales, which we achieved in this quarter from the month of April. This means that we have achieved an adjusted income, which include income from Ecuador, of $45.4 million dollars for the quarter, which is quite higher than the trend that we have, obviously explained by the drop in oil prices, but compensated with these higher gas sales. Our adjusted funds from operations, are also reaching a level of $27 million dollars with respect to what we had a year ago of $16.4 million dollars during the comparable quarter. It is very important to highlight that all the foregoing is reflected in our statements of results in which, despite the negative oil prices which keep being volatile, we generate a net profit of $11.2 million dollars after having very significant losses in the former quarters, such as the case of the loss that we had in the quarter ended on December 31 st , 2015. Only to remember, this loss was not related to cash but it occurred because of the application of IFRS rules for impairment, due to the drop of prices, so that we had to make the adjustment in our oil projects. However, it is very important to highlight the profit that we are having in this quarter, which will be maintained throughout the rest of this year 2016. With respect to EBITDA, making adjustments for taxes, interests and depreciation, when comparing with what we had in the same quarter of the former year, we have a much better result of $28.6 million dollars with respect to $10.5 million dollars that we had in the same quarter of the former year. And if we see this on a six- month basis, for the six months from January to June, we had an EBITDA result of $40.3 million dollars with respect to $21 million dollars that we reported a year ago for those six months. Now, a special fact to highlight in the month of August, in addition to the results that are being reported as at June 30, is that the company made a private placement, placing in a first tranche 9.6 million shares at $4.08 Canadian dollars for total proceeds of $39.5 million Canadian dollars. In the following days, the company placed a second tranche of 1.8 million shares, for total proceeds of $7.3 million Canadian dollars, which represent a total placement of almost 11.5 million shares for almost $47 million Canadian dollars, more or less equivalent to $35 million American dollars. The company currently has a base of 172.7 million shares after this placement. So, what does it represent for us? That in cash, as at June 30, we ended with $26.3 million dollars available, and with this placement we are adding $35.6 million dollars, that is, $62.5 million dollars of available cash. In addition, we have restricted cash for $62.5 million dollars which are mainly to back the investment commitments of Ecuador. Besides, we have a capital surplus of almost $40 million dollars and in August we should add $35 million dollars resulting from the private placement to get to more than $70 million dollars of working capital, which strengthen the financial position of the company for the rest
of the year. Our debt with banks remains the same: $255 million dollars. $180 million dollars of the syndicated loan led by BNP and $75 million dollars of the notes we have placed with Apollo. Thinking about the rest of the year and estimating how the results would be for the whole year 2016, gas revenues are being estimated, having already reached the goal that we mentioned between 85 and 90 million cubic feet of gas per day, in $153 million dollars, with an EBITDAX of approximately $135 million dollars, which is very important with respect to our indebtedness indicator, which would give us an indebtedness ratio of 2.0 times by the end of the year. If you remember, we had been having indicators of around 3.5 times, which is the maximum that we have approved in the loan. Currently, we have closed at 2.8 times in this quarter ended on June 30. With these forecasts we would close with an indebtedness ratio of 2.0 times, quite low and very comfortable for the company. It is very important to mention what we are doing for the rest of the year 2016 in relation to drilling. We remain focused on our gas projects. In VIM-5 we finished the drilling of the Oboe-1 well, which added 2P reserves of around 5 million barrels equivalent and we will continue with the drilling of two wells in the Esperanza block. The Nispero well, which is an exploratory well, is currently being drilled. Additionally, in Esperanza we will start to drill the Nelson-6 well in the month of October. This well is located in the Nelson area, which is one of the gas production projects that we are currently developing, and is exploratory because we are targeting a different zone. The main production of La Esperanza field comes from Cienaga de Oro and the target of this well is another reservoir that is called Porquero, which has shown to have gas in the other drillings that have been made, but the target is to test this new structure for the first time. As to oil, we will continue making workovers in Llanos-23. We have already completed two workovers, and the idea is, from here to the end of the year, to keep drilling, making three additional workovers, basically to keep or reduce the impact of production declining in the Llanos-23 fields. And in the VMM-2 block we will drill the Mono Capuchino well in the last quarter of the year. VMM-2, as you remember, has as its target non-conventional crude. Here we will drill a conventional well but targeting the structure with the potential of non-conventional crude; so this well will be very interesting for us. In addition, as I mentioned, with the resources that we have collected with the recent private placement, we will drill another exploration well and another development well in our gas fields, and in addition we will have additional resources for 2017, but very important for us is to continue the drilling and development of gas fields. After achieving the goal of reaching a gas production of ninety million cubic feet per day, we have the new goal to increase in one hundred million additional cubic feet per day, and for that we require to have additional wells to add reserves. Our guidance or goal for 2016 keeps being the same. In gas, we look forward to having a production average of 75 million cubic feet during 2016. However, from April 21 st on, as we mentioned, we have a production of 90 million cubic feet
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