Frontera Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2023

There are 6 speakers on the call.

Operator

Good morning. My name is Sylvie, and I will be your conference facilitator today. Welcome to Frontera Energy's Third Quarter 2023 Operating and Financial Results Conference Call. All lines are currently on mute to prevent any background noise. I would like to remind you that this conference call is being recorded today and is also available through audio webcast on the company's website.

Operator

There will be time for questions following the speakers' remarks. Analysts and investors are reminded that any additional questions can be directed to the company at irfronteraenergy. Ca. This call contains forward looking information within the meaning of applicable Canadian securities laws relating to activities, events or developments the company believes or expects will or may occur and the future forward looking information reflects the current expectations, assumptions and beliefs of the company based on information currently available to it. Although the company believes the assumptions are reasonable, forward looking information is not a guarantee of future performance.

Operator

Forward looking information is subject to several risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward looking information. The company's MD and A for the quarter ended September 30, 2023, and the company's annual information form dated March 1, 2023 and other documents it files from time to time with securities regulatory authorities describes the risks, uncertainties, material assumptions and other factors that could influence actual results. Any forward looking information speaks only as of the date on which it is made and the company disclaims any intent or obligation to update any forward looking information except as required by law. I would now like to turn the call over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Frontera's 3rd quarter 2033 earnings call. Joining me on today's call are Orlando Tevareles, Frontera's CEO and Rene Burgos, Frontera's CFO. Also available to answer questions at the end of the call, We have Victor Vega, VP, Field Development, Reservoir Management and Exploration Alejandra Bonilla, General Counsel Ivan Alevolo, VP Operations and Leonardo Campanero, VP Marketing, Logistics and business sustainability. Frontera's 3 core businesses continue to deliver solid performance In the company's Colombia and Ecuador Optune Onshore Business, production costs, operating EBITDA and CapEx dollars are within $20.33 guidance at $80 per barrel average Brent price for the year.

Speaker 1

The company delivered strong operational and financial results and increased its total cash position, including restricted cash to $221,000,000 as of September 30. In its potentially transformational Guyana Exploration Business, Frontera, our joint venture partner, CGX Energy, announced the discovery of 342 feet, 104 meters of net pay at North Carrington, confirming the significant potential of the Carrington block. With the joint venture towards drilling program now complete, the joint venture with support of Urijah Lockey, A leading global investment bank and capital market expert is actively pursuing strategic options for its potentially transformational Guyana exploration business, including a potential farm down as it progresses its efforts to unlock value of potentially transformational investments in Guyana. It is a standalone and growing Colombian Midstream business. Income increased 14% during the quarter and pre construction activities have begun on the important pipeline connection between Frontera's Puerto Vallarta Liquids Terminal to the Cartagena Refinery.

Speaker 1

Puerto Vallarta will build, operate and maintain The 6.8 kilometer 18 inches bidirectional hydrocarbon flow line, which will have a nominal capacity of 34,000 barrels per day. The connection will be capable of handling imported and domestically produced crudes and other hydrocarbons. Importantly, during the quarter, the company continued to drive cost out of the business, reducing its G and A by 4%. Building on this positive momentum and to better position the company for sustained long term success, Subsequent to the quarter, Frontera's Board of Directors approved a performance improvement plan that will improve organizational and operational efficiencies, reduce operating costs and better align the company's workforce with current business needs, and NCIB to permit purchases of up to 10% of its outstanding float. I'm excited about the strong performance from Frontera's 3 key businesses and the tangible steps the company is taking to enhance value for its shareholders.

Speaker 1

Earnings conference call. I'll now turn the call over to Orlando Cabrales, Frontera's CEO and our CFO, Rene Burgos, who will share reviews of Frontera's 3rd quarter results and the performance of our 3 core businesses. Fernando?

Speaker 2

Good morning. Thank you, Gabriel, and good morning, everyone. Frontera delivered a positive 3rd quarter results. Year to date, our daily production has averaged 41,477 BOE per day. Compared to the same period last year, we increased our heavy oil production by 15%, due in part to increased water handling at Saara and increased natural gas liquids production by 100% compared to the same quarter last year.

Speaker 2

At Citi 6, we delivered record quarterly average production of BRL5803 per day, up 13% quarter over quarter through development drilling, new flow lines and expanded facilities. CP6 also recently achieved record daily production of 6,435 barrels per day. Capital spending for the quarter $174,100,000 primarily to drill 14 development wells at Quifa, Cajuwa and CP6 as well as one exploration well in the Perico block in Ecuador. The company has also invested in new flow lines in the Quifa block to connect with the Sahara project and has also invested in improved development facilities to increase water handling capacity in the CP6 block. Taking a closer look of our 3 core businesses.

Speaker 2

In our Colombian Ecuador Upstream business, Frontera produced 40,150 BOE per day from its Colombia operations. We currently have 3 drilling rigs and 3 workover rigs active at our Quifa and CP6 blocks in Colombia. As I have mentioned before, increasing water handling capacity is key to Frontera's efforts to grow production at Quifa, where our current water handling capacity is approximately 1,600,000 barrels of water per day. During the Q3, Frontera continued its recommissioning efforts at Saara, its reverse osmosis water treatment facility, which has mainplate capacity of up to 1,000,000 barrels a quarter per day. As of October 2023, the plant had processed 16,300,000 barrels of water as part of its recommissioning total, providing irrigation source water to the company's near the nearby Trogorellano's palm oil plantation.

Speaker 2

The company is actively engaged in discussions with Ecopetrol to permanently bring the Sahara facility online under terms mutually acceptable to both companies. In Ecuador, Frontera's share of production was BRL 652 per day of medium crude oil compared to $6.13 per day in the prior quarter. On the Frontera operated Perico block, We drilled the Pericocento 1 well during the quarter with oil found in 3 intervals and initial test delivering average production of approximately $800 per day of 28 decreased API medium crude oil. The company believes that the upper origin presents additional exploration and production opportunities. With the completion of drilling activities at the Pericos Centro-one well, the company has satisfied its 4 well exploration commitment on the block.

Speaker 2

In addition, the Pericco Norte 4 well was completed on November 4 of this year with initial production rates of approximately BRL1200 per day of 29.4 degree ACI crude oil. The company continues to conduct long term testing at the Handaya 1, 2E1 and G1 exploration wells as it prepares environmental impact assessment in advance of obtaining production environmental license. Turning now to the midstream Colombian business. We continue our efforts to unlock shareholder value from these core businesses. Building on Gabriel's comments about the pre construction activities that are between Puerto Bahia and Reficar, I would add that once in service, the connection will enable the continuous transport of crude oil and other hydrocarbons between Puerto Vallarta's core facility and the Cartagena Refinery.

Speaker 2

Since the announcement in August 2023, the connection project has already achieved notable technical, environmental, social, financing and procurement milestones. I would like to thank our partner, as Reticar and Ecopetrol for their dedication to completing connection agreement with us. I look forward to exploring the full potential of the connection in the coming months years. Regarding our midstream business results, total OBL volumes funded were approximately BRL252,000 per day in the 3rd quarter, up 17% compared Q3 of last year. For the value liquid volumes were approximately 54 1,000 barrels per day during the 3rd quarter, down 11% compared to the Q3 of last year, driven mainly by lower imported crude volumes.

Speaker 2

Porto Aella Liquids revenues were $7,800,000 during the 3rd quarter, up 1% compared to the Q3 of 2022, mainly due to higher tariffs. Adjusted midstream EBITDA in the 3rd quarter was $29,900,000 compared with $17,600,000 in the Q2 of last year. Before turning the call over to Rene, I would like to disclose our Cayenne Exploration business. As the joint venture announced yesterday, We have discovered a total of 114 feet, 35 meters of net pay at the Wade 1 well And a total net pay of 342 feet, 104 meters discovered today on the quarantine block, approximately 200 kilometers offshore from Georgetown, Guayana. The Way 1 well was targeted by Strician, Campanian and Santonian H Stack sands within channel and fund complexes in the northern section of the quarantine block.

Speaker 2

As reported on June 28 this year, The JV's data acquisition program at the Wave 1 well included one line logging, NTP fluid samples and site work occurring throughout the various intervals. Based on this data acquisition program and additional information provided through the independent laboratory analysis processes, the JV is pleased to report the following. In demonstration, Wave 1 test results confirm 13 feet of methane high quality sandstone reservoir with rock quality and all of us with that reported in the Liza discovery on the Starke block. Two examples retrieved from the administration and log analysis confirm the presence of million crude oil with a gas oil ratio of approximately 400 standard cubic feet per barrel. These results demonstrate the potential for a standalone shallow ore resource development across the current block.

Speaker 2

In the companion, petrophysical analysis confirms 61 feet of net pay almost completely contained in one contiguous confirms the presence of light crude oil. In the Santonian, petrophysical analysis confirmed 40 feet of net pay in blocking sands with indicators of all in core samples. Although core interpretation of the Cantelian Santonian horizons show lower permeability than the high quality mass treatment, The JV believes these horizons may offer additional upside potential in the future. There were no safety or environmental incidents 3rd quarter 1 operations. As is normal, following discoveries Such as those made by the JV at Wey and Cowen, additional appraisal activities will be required before commerciality can be determined.

Speaker 2

Total costs associated for the Way-one well are now estimated to be within $185,000,000 to $190,000,000 following the successful implementation of several initiatives. Final working interest calculation with our JV partner will be determined in December of this year after closeout of the Wave 1 well. I would now I'd like to turn the call over to Rene, Frontera's CFO.

Speaker 3

Thank you, Orlando and Gabriel. Good morning, everybody. Quarter. Thank you again for participating on our call, for your interest in our company and your ongoing support. I'd like to take a moment to highlight a few financial aspects of our 3rd quarter results.

Speaker 3

In the 3rd quarter, the company reported net income of roughly $33,000,000 The company's 3rd quarter net income included primarily operating income of $64,000,000 share of income from our associates, our investment in ODL, of $14,000,000 partially offset by finance expenses of $16,000,000 and total income tax expenses of $33,000,000 This last expense included a $10,000,000 tax provision related to certain 2020 withholding taxes. Operating EBITDA for the quarter was approximately $138,000,000 This compares to $116,500,000 for the 2nd quarter, an 18% increase in quarter over quarter operating EBITDA, primarily as a result of higher Brent oil pricing and improved differentials during the quarter, and partially offset by higher production and transportation costs. Drilling down on our operating costs, Our operating and transportation costs per barrel during the quarter totaled $13.86 and $11.73 respectively. This compares with $11.20 $10.70 in the 3rd quarter. Year to date, our production and transportation costs per barrel totaled $12.77 $11.27 respectively.

Speaker 3

This compares with $12.34 $10.40 in the prior period. The increase in production costs year over year was primarily a result of inflationary pressures, the impact of FX volatility, higher electricity costs, higher fuel consumption, partially offset by lower oil service activity. On the transportation side, we have experienced higher costs associated with the annual increase in transportation tariffs, the impact of FX volatility and higher transported volumes resulting from the company's sales mix. This quarter, we have presented production and transportation indicators to capture the impact of our FX hedging activities, which are a critical component of our Honey Acuvreux. Our FX hedging positions have contributed to an $0.80 per barrel and $0.20 per barrel benefit on our production and transportation costs, respectively.

Speaker 3

I will provide more information on our hedging activities in a minute. Adding to Achimed's comments and consistent with our restructuring plan, we remain committed to driving down costs part of our business. On the operating cost front, we have a top down focus on cost control and contingency review for the period addition of activity and enacting cost of inhibitors. Moving on, cash generation for the quarter was strong, with cash flows from operations totaling $154,000,000 compared with $184,000,000 in the prior quarter. Cash generation from operating activities remained strong due to stronger quarter over quarter Brent oil prices as well as $64,000,000 in income tax and VAT recoveries.

Speaker 3

As of the Q3, the company reported total cash position of $221,000,000 including $109,000,000 of unrestricted cash, up 3.5% compared to $214,000,000 as of the Q2 of 2023. Prior to wrapping up, I I would like to provide an update on our CAGENNA 2023 spending, our financing efforts, our risk management strategy and our proposed NTB program. Confidenting Orlando's comments, costs associated for the Wave 1 well are now estimated to be within $185,000,000 $180,000,000 Please follow the successful implementation of several cost reduction initiatives. Cash outflows remaining to our Bouyguesnel Exploration Program as of the end of the 3rd quarter are expected around $15,000,000 to $20,000,000 Additionally, Frontera expects its indirect working interest will vary between 93.3% 93.4%, with final working interest calculations to be determined in December 2023 as we close out We continue our efforts to grow our liquidity and funding alternatives. During the quarter, the company borrowed $18,000,000 on their new 1 year working capital loan facility with Banco Colombia.

Speaker 3

The company concurrently repaid in full its outstanding $12,000,000 balance under the Finbagged working capital loan announced in June of this year. Additionally and subsequent to the quarter, the company signed the subsidiaries an LOI with Macquarie Bank to fund a $30,000,000 accordion in relation to the Puerto quarter. We greatly appreciate all of our bank's efforts and support. Onto our current risk management strategy, Our strategy continues to show how our hedging discipline is supporting our operations and planning. Frontera uses derivative instruments to manage its purchase of oil price and FX volatility.

Speaker 3

On the oil side, the company entered into new puts for approximately 1,500,000 barrels with puts averaging $79 per barrel, with this helping protect approximately 40% of the company after royalties estimated production through December and approximately 20% through January. Frontera has also entered into foreign exchange rate hedges totaling $180,000,000 of approximately 40% of our estimated fiscal exposure for the Q4 and through the first half of 2024. We said this provides the company with disability and will help mitigate future fluctuations and all the business delivered on its target. Lastly, from a shareholder interest standpoint, Frontera intends to implement a normal close issuer bid to permit the purchase of up to 10% of the public float or approximately 3,200,000 shares for the next year, as mentioned by Gabriel. It is subject to the approval of the CSX.

Speaker 3

Quarter. And with that, I think my part is completed. I will turn it now to Orlando Forrizapa.

Speaker 2

Thank you, Rene. Before I wrap up today's call, I would like to highlight that during the quarter, we achieved a total recordable ECN rate of 0.49, which is the best safety performance in company history and with Our objective for the year of 0.74. Also during the quarter, protected and preserved 1367 hectares of land in the Ceramillo of Manacacias Park in Tre Rios. When combined with reforestation, plantings and sustainable use projects, the company has exceeded its goal of 1,000 hectares for the year and totaling close to 6,000 hectares per share. The company also recycled 41.4 percent of water use in its operations and has offset 33% of its Colombian emissions through the purchase of carbon credits.

Speaker 2

I'm incredibly proud of the entire Frontera team for the dedication to safe and responsible operations. With that, I would like to conclude by saying thank you to Javiera Renee for the comments and thank you everyone for attending our call.

Operator

You will hear a 3 tone prompt acknowledging your request. And if you are using a speakerphone, you will need to lift the handset before pressing any if you have any questions. And your first question will be from Sarah Constantine at BoomTown. Please go ahead.

Speaker 4

Good morning. Yes, I have 5 questions for you. I'm trying to give them to you all upfront and then you can provide the order you guys want to answer them in. So I think the first one I think that everyone is asking is in terms of the press release that was filed.

Speaker 3

Hey, Sarah, sorry. Could you please get perfect to your phone? We're having trouble hearing it. Insurance becomes clear.

Speaker 4

Okay. Is this better?

Speaker 3

Monica.

Speaker 4

Okay. Very good. Thank you. Yes, so the first question I think is everyone is asking at the moment is quarter. What happened in terms of the Santonian assessment between the June press release when we were saying there were 210 feet of hydrocarbon bearing sands in the San Antonio.

Speaker 4

And now we're seeing 40 in way. So that's the first question. And I guess quarter. The next couple of questions are more related to the process you all will be running, such as what types of entities have been reaching out for farm ins? What is your plan if Houlihan is unsuccessful?

Speaker 4

And I guess another question is in terms of Blufin and Haimaro, If those are successful results, what do you expect that will do for your plans? And then I guess the last question is, In terms of the NCIB, the reason why we chose to do an NCIB versus a modified Dutch auction, I know you all did that in the previous year or 2. Those are my questions.

Speaker 2

So I got 3 questions. So,

Speaker 5

So, basically, the first question that you were asking is about the 200 feet of pay that we So the hydrocarbon bearing plans that we published in the previous press release and then what we are releasing right now. So as probably you know, when we mentioned hydrocarbon very intense, that's basically a total What that you see in the well, when you know the well, when you go through the well and analyze all the data. And what you do after that, and it's customary in the industry, it's nothing new, is you actually incorporate A net pay calculation which is based on some broad properties and cutoffs that you use, which is basically the porosity and the term ability cutoffs that are used Based on the type of work that you have, the analysis that you have and consistent with the evaluation of the 2 wells, the Carwa well and the way well in the campaign and in the restriction. So what we did was we took all of that volume and

Speaker 2

then we said, okay, out of all of that volume, which you have had of

Speaker 5

terrible very tense With the cutoffs that we used and confirming the information that we got through the call, which is the reason why we did not release the number at the time, because we were analyzing the core data, When we looked at that and that was the result that came out. So it's basically the next level of detail that you get Any kind of analysis of this time in the West. Actually, you go from worse or the volume that is potential with hydrocarbon very fast and then you go into a more

Speaker 2

Yes. And on your question about Well, we are thinking in terms of the Ulan and large engagement. I think the first thing I would reiterate is that We remain very excited about the results. As I said in my remarks, Shale oil, we saw a development in the block. So we remain very excited about that.

Speaker 2

And the fact We engaged Fujian Lockey, which is a leading investment bank We look forward to the functions including a potential fund down is indicative of that excitement based on the results that we have. We are getting ready in preparations for launching

Speaker 3

We have the next question was on the NCIB versus modified our top half of our traction. I would say an NKB program is very straightforward and weak and if you want to implement it, we're excited about launching that program. It would also help liquidity for the stock and that does not exclude any other future activities that we could do upon discussion with the Board,

Speaker 4

Okay. Yes, I appreciate you responding to that. I guess one more question kind of in relation to all that. Is there going to be an updated resource report using all the information you now have regarding what you think the potential is of all of the targets or I guess potential targets?

Speaker 3

We will deliver a recent report for our Colombian operations, that's difficult. That will be delivered probably in February. We'll probably announce the market back. As it relates to our efforting within, I think that we've been very clear. We are launching our from the process and we're very excited and encouraged and appreciate the help with Mohan and Lokey and we're delivering these additional available to our investors.

Speaker 2

We actually, we never I mean, we never intended to have a resource report at this point Okay. As you know, in Canadian, regulations are very strict in terms of disclosing any numbers, We have to be validated by a third party through our specific methodology. So we never intended to do that. I mean, what we have been doing It's analyzing all the data that we have, which was a significant amount of data. So it has taken longer than what we expected.

Speaker 2

Again, I'm very excited about what we found and look forward for the next step in this in the journey.

Speaker 3

Operator, any

Operator

At this time, we have no other questions. Please proceed. We have no other questions. You may proceed with any closing comments.

Speaker 2

Thank you, operator. Thank you for organizing the call. Thank you everyone for attending the call.

Operator

Quarter. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.

Operator

Have a good weekend.

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Key Takeaways

  • Frontera’s Colombia & Ecuador upstream business averaged 41,477 BOE/d YTD, drove a 15 % increase in heavy oil and 100 % growth in NGLs, and remains on track with production and cost guidance.
  • In Guyana, the joint venture confirmed 342 feet of net pay at North Carrington, demonstrating high-quality methane and light oil reservoirs, and is pursuing farm-down and strategic options to unlock value.
  • The Colombian midstream unit grew income 14 % QoQ, saw throughput volumes rise 17 %, achieved a Q3 adjusted EBITDA of $29.9 million, and began pre-construction on a 6.8 km bi-directional line to the Cartagena refinery (34,000 bpd capacity).
  • The company cut G&A by 4 %, ended Q3 with total cash of $221 million, delivered $138 million in operating EBITDA (up 18 % QoQ), and announced a normal course issuer bid to repurchase up to 10 % of its float.
  • Frontera approved a performance improvement plan to streamline operations, hit a record safety TRIR of 0.49, protected over 1,000 hectares of land, recycled 41 % of water use, and offset 33 % of Colombian emissions.
A.I. generated. May contain errors.
Earnings Conference Call
Frontera Energy Q3 2023
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