Gran Tierra Energy Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 4, 2024

Key Takeaways

  • Completed acquisition of I3 Energy on October 31, 2024, adding 253 net drilling locations in Canada and boosting 1P reserves by 96% and 2P reserves by 119%, diversifying the company’s asset base.
  • Generated $60 million of funds flow from operations in Q3, up 31% quarter-over-quarter, with net income of $1 million, cash of $278 million and net debt of $509 million as of September 30, 2024.
  • Reported an operating netback of $34.18 per barrel in Q3, down 12% quarter-over-quarter due to a 7% drop in Brent pricing and wider quality and transportation differentials.
  • Achieved a sixth consecutive discovery in Ecuador with the Tarapa B7 well delivering a 30-day initial rate of 2,043 BOPD and less than 1% water cut.
  • Renewed its TSX normal course issuer bid and plans to continue opportunistic share buybacks funded by free cash flow when trading at a discount to PDP value.
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Earnings Conference Call
Gran Tierra Energy Q3 2024
00:00 / 00:00

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Operator

Good morning, ladies and gentlemen, and welcome to the Gran Tierra Energy Results Conference Call for the third quarter of 2024. My name is Shannon, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the initial remarks, we will conduct a question-and-answer session for security analysts and institutions. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being webcast and recorded today, Monday, November 4th, 2024, at 11:00 A.M. Eastern Time. Today's discussion may include certain forward-looking information as well as certain non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important disclaimers with regard to forward-looking information and reconciliations of any non-GAAP measures discussed on today's call.

Operator

Any production volumes are based on working interest sales before royalties. Finally, this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy. I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Gary Guidry
Gary Guidry
CEO at Gran Tierra Energy Inc

Thank you, Operator. Good morning, and thanks for joining Gran Tierra's third quarter 2024 results conference call. My name is Gary Guidry, President and Chief Executive Officer, and with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer, and Sebastien Morin, our Chief Operating Officer. On Monday, November 4th, 2024, we issued a press release that included detailed information about our third quarter 2024 results, which is available on our website. Ryan and Sebastien will now make a few brief comments, and then we will open the line for questions. I'll now turn the call over to Ryan to discuss some of the key financial highlights from our third quarter results. Ryan?

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Thanks, Gary. Good morning, everyone. I want to start off by saying how excited we are that on October 31st, 2024, Gran Tierra completed its acquisition of i3 Energy. We believe the purchase of i3 Energy uniquely positions Gran Tierra as a premier diversified oil and gas company with assets in Canada, Colombia, and Ecuador. The i3 acquisition has diversified Gran Tierra into Canada while adding 253 net booked drilling locations, with an average 77% operatorship and production totaling 18,000 barrels of oil equivalent per day. Canadian land holdings equal almost 1.2 million gross acres and include 53 gross sections in the Montney and 144 gross sections in the Clearwater, two of the most prolific plays in North America.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

The i3 acquisition has increased Gran Tierra's PDP reserves by 42 million barrels of oil equivalent, or 96%, 1P by 88 million barrels of oil equivalent, an increase of 97%, and 2P by 174 barrels of oil equivalent, an increase of 119%. Gran Tierra now has approximately 178 million BOE of 1P and 322 million BOE of 2P reserves, with a 1P reserve life index of 10 years and a 2P reserve index of 18 years. We believe the currently depressed natural gas price that we see in Western Canada will be alleviated as major LNG projects, including LNG Canada, are brought online, along with increased electricity demand in North America. In the short term, Gran Tierra will focus on developing the significant oil-weighted opportunities in its Canadian portfolio while still developing and appraising our high-impact oil opportunities in South America.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

We look forward to the integration of our teams and are confident the combined company will have top-tier technical and operational skill sets. Now on to the quarterly results. Gran Tierra generated $60 million of Funds Flow from Operations or $1.96 per share, which was up 31% from the prior quarter, mainly as a result of the one-time tax adjustment that impacted the prior quarter. Adjusted EBITDA was $93 million compared to $103 million in the prior quarter, and during the quarter, Gran Tierra generated net income of $1 million. As of September 30th, 2024, the company had a cash balance of $278 million and net debt of $509 million. We do expect the cash balance to come down by approximately $170 million as a result of funding the i3 acquisition. We continue to have a long-term net debt EBITDA target of one times or less.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Gran Tierra generated oil sales of $151 million, down 9% from the prior quarter due to lower price and wider oil differentials. Speaking of pricing, during the quarter, Brent averaged $78.71 per barrel, down 7% from the prior quarter. The company's quality and transportation discounts per barrel during the quarter were $14.10, which were higher than the $12.79 in the prior quarter. This is a result of the widening differentials from all three of our benchmarks, Vasconia, Castilla, and Oriente. Finally, the company's operating netback was $34.18 per barrel, down 12% from the prior quarter, as mentioned previously due to the combined lower Brent pricing and higher differentials. As a result of the i3 acquisition announced on August 19th, 2024, Gran Tierra was required to pause its share buyback program, resulting in only 370,000 shares repurchased during the quarter.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

From January 1st, 2023, to September 30th, 2024, the company repurchased approximately four million shares, or 12% of the shares issued and outstanding at January 1st, 2023, from free cash flow. As some of you may have seen this morning, along with the results announcements, Gran Tierra also announced the TSX approval of the renewal of its Normal Course Issuer Bid. The renewal reinforces Gran Tierra's commitment to continue to focus on share buybacks as a key component of our shareholders' returns. I'll now turn the call over to Sebastien to discuss our operational highlights from our third quarter results.

Sebastien Morin
Sebastien Morin
COO at Gran Tierra Energy Inc

Good morning, everyone, and thank you, Ryan. From a capital perspective, during the quarter, we incurred capital expenditures of $53 million, which were lower than the $61 million when compared to the prior quarter. This was primarily due to timing of our rig program, where we only operated one drilling rig during the quarter compared to two in the prior quarter. Total average working interest production during the quarter was 32,764 barrels of oil per day, which was consistent with the prior quarter. During the quarter, the company had lower volumes in the Acordionero field, which were caused by increased downtime related to workovers. The decrease was partially offset by higher production in the Costayaco field in Colombia and increased production from the Chenangue and Charapa blocks in Ecuador as a result of a successful exploration drilling campaign, which I will touch upon later.

Sebastien Morin
Sebastien Morin
COO at Gran Tierra Energy Inc

Gran Tierra's operating expenses decreased by 2% to $46 million compared to the prior quarter, primarily as a result of lower overall workover costs, which were offset by higher lifting costs primarily associated with inventory fluctuations in Ecuador. The company's transportation expenses decreased by 31% to $3.9 million compared to the prior quarter of $5.7 million due to the utilization of shorter distance delivery points. As reported in Q2, barging restrictions on the Magdalena River have now been resolved with increased water levels, which have returned to sufficient levels for barging operations. Operationally, we continue to progress the Cohembi Field Development Plan in the Suroriente block, with civil works and facility construction progressing smoothly in preparation to commence our drilling program in the later part of the fourth quarter 2024.

Sebastien Morin
Sebastien Morin
COO at Gran Tierra Energy Inc

We are also currently working on increasing our fluid handling capacity at Acordionero Field, with the water treatment facility's expansion project expected to be completed in mid-December. The expansion will result in an addition of 21,500 barrels of water handling per day, which represents a 35% increase in water treatment capacity. This is consistent with our long-term approach to optimizing our waterflood performance. Gran Tierra has steadily increased total fluid production and water injection at Acordionero by 18% per year to continue growing and maintaining oil production while improving sweep efficiencies and recoveries. Looking to exploration, the Charapa B7 well marks our sixth consecutive discovery in Ecuador.

Sebastien Morin
Sebastien Morin
COO at Gran Tierra Energy Inc

Spud on August 30th, 2024, the Charapa B7 well had an impressive initial 30-day production rate of 2,043 barrels of oil per day, the highest of any of our Ecuador wells to date, with less than 1% water cut and 25 API oil from the Basal Tena. All the exploration success we have had in Ecuador has allowed us to achieve a major milestone of over 1 million barrels of cumulative oil production, and this is only the beginning. The drilling rig has now been moved from the Charapa block and mobilized to the Chenangue block to drill two wells, the Zabaleta K1 and Zabaleta Oeste K1 exploration wells. The Zabaleta K1 well is located 4 km to the east of Arawana J1 well drilled earlier this year and is 200 ft up structure.

Sebastien Morin
Sebastien Morin
COO at Gran Tierra Energy Inc

Both wells will target the Basal Tena formation as well as assess potential in the T-Sand, U-Sand, and B-Limestone. We have also now completed the initial processing of our newly acquired seismic data over the Charapa block, which is currently being interpreted. Preliminary interpretations of the high-quality 3D data confirm potential prospectivity and additional areas of interest, including better definition over the Charapa structure. The 3D data will further delineate reserves, underpin future drilling locations scheduled for 2025, and further support future development planning. Switching gears to Canada, the team is currently managing an active drilling and completion campaign in its core areas, including the Clearwater, where there are only two locations currently booked. The expectation is with further delineation drilling, we will continue to book drilling locations and increase reserves. Other areas of drilling include the Simonette Dunvegan, the Rimbey Nisku, the Lodgepole Cardium, and Wapiti Cardium plays.

Sebastien Morin
Sebastien Morin
COO at Gran Tierra Energy Inc

Overall, the company is following through on its goal on driving long-term value with a diversified portfolio of high-quality assets, and we look forward to finishing 2024 on a high note. With the newly acquired assets in Canada, exploration successes in Ecuador, waterflood optimization, and expansions in our core Colombian fields, we are well positioned for growth in 2025 and beyond. I'll now turn the call back to the operator, and we will be happy to answer any questions. Operator, please go ahead.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session for security analysts. If you have a question, please press the star key followed by 11 on your touch-tone phone. You will then hear an automated message advising your hand is raised. Your questions will be polled in the order they are received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment, please, for your first question. Our first question comes from the line of Greg Pardy with RBC Capital Markets. Your line is now open.

Greg Pardy
Greg Pardy
Head of Global Energy Research, Canadian Senior E&P and Integrated Oil Analyst at RBC Capital Markets

Thanks. Good morning, and thanks for the rundown. Really, I had a couple of different sets of types of questions, but the first part is cash tax. I mean, cash tax came in higher than we were expecting. Now, with the acquisition under your belt, I'm just wondering what your tax position will look like, particularly as you head into 2025.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah, thanks, Greg. Yeah, I think the cash taxes came in just as the oil prices continue in Colombia still continue to hover above the threshold of the 15% surtax. So with oil prices currently where that, we'd expect that to come down in the fourth quarter. Actually, we think we'll move down to 10% surtax. And looking at Canada, you know, Canada actually has. Alberta in particular has a very favorable tax regime with only 23%. And so we would expect that to continue to decrease on an overall basis. We would expect our tax rate to be lower in 2025 than in 2024.

Greg Pardy
Greg Pardy
Head of Global Energy Research, Canadian Senior E&P and Integrated Oil Analyst at RBC Capital Markets

Okay, that's helpful. And then just related to the buyback, yeah, I did see that you reviewed the NCIB. Is that, Ryan, how is that connected to the company? I mean, is that a function of free cash flow generation opportunistic? How should we think about the buyback?

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah, I think on the buyback, we did put an automatic share purchase plan in, so we'll continue to buy back stocks. So even if we are in blackout, we can continue to buy. But I think if you look at since 2023, we really have funded that buyback through free cash flow. And so we'd expect that to continue in the future. For us, when we're trading at a discount to PDP, we think it's a great way to return capital to shareholders and increase long-term net asset value.

Greg Pardy
Greg Pardy
Head of Global Energy Research, Canadian Senior E&P and Integrated Oil Analyst at RBC Capital Markets

Okay, thanks. And this all obliges me just with the last one. Really comes back to the motivation and outlook for the company now with i3 under your belt. Can you just remind us your thinking going into consummating that deal, maybe from a reserves, reserve life perspective, diversification? Really just want to understand what drove you to do it, number one. And then number two is how we should maybe think even about an allocation of capital or focus as you go through 25 and beyond. Thanks very much.

Gary Guidry
Gary Guidry
CEO at Gran Tierra Energy Inc

Yeah, thanks. I think the overall strategy of the company. We've been trying to find the right set of assets to enter Canada for a couple of years. i3 provided that for us, the platform as well as the team. And we really entered Western Canada to continue growing in the basin. It really should be considered an entry into the basin. We see lots of opportunity on conventional and unconventional assets, but with a real emphasis on conventional for ourselves as a company. We also see a diversification of both oil and gas. And that's one of the attractions that we see for this particular set of assets. In terms of capital allocation, we're in a very unique position.

Gary Guidry
Gary Guidry
CEO at Gran Tierra Energy Inc

We have some recent discoveries, which we think are material in Ecuador, as well as some underdeveloped assets here in both the Clearwater, the Montney, the Simonette Montney, and several other areas within the Canadian portfolio, and so what you'll see from us in 2025 is allocating to the new oil discoveries in Ecuador, continued development of our mature water floods in Colombia, as well as some very interesting things here, oil opportunities here in Western Canada. That would be our allocation near term, but we're quite excited. As Ryan mentioned, we're quite excited about the underdevelopment of the assets here in Western Canada, and we'll be pursuing those quite vigorously.

Greg Pardy
Greg Pardy
Head of Global Energy Research, Canadian Senior E&P and Integrated Oil Analyst at RBC Capital Markets

Understood. Thanks very much.

Operator

Thank you. Our next question comes from the line of Anne Milne of Bank of America. Your line is now open.

Anne Milne
Anne Milne
Managing Director of Emerging Markets Corporate Research at Bank of America

Good morning and congratulations on the closing of the i3 acquisition. I have a couple of questions this morning. One, on your 2024 guidance, it looks like you right now are on the EBITDA level anyway, right? Sort of in the middle, maybe slightly on the lower end for EBITDA for the year on a last 12-month basis. You think you'll end up in the middle of your sort of lower-case guidance for 2024? And then just when will you have any indications for a 2025 guidance? I assume that's maybe towards the beginning of the year. That would be my first question.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Great. Thanks, Anne. Yeah, we're comfortable that we'll end up with it within the guidance. Obviously, oil prices have been a little choppy the last little while, so that will have an impact in the last couple of months of the year. But we're quite comfortable we'll be in that range. And then we expect to come out with 2025 guidance in early January.

Anne Milne
Anne Milne
Managing Director of Emerging Markets Corporate Research at Bank of America

Okay. And could you talk to us a little bit about how your CapEx plan will change for 2025? I assume you'll be increasing because of the Canada acquisition. How much higher do you think you'll be for the year?

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah, I think we're still working through our five-year plan right now. But I think the way to look at Canada is, Gary mentioned, there's lots of opportunities in the Canadian assets. And the beauty of Canada, which is different than Colombia and Ecuador, a lot of it's half-cycle economics. Most of the capital is drilling wells. And so as we allocate capital, we expect to see commensurate increase in production. As Gary mentioned, we're targeting the oil-weighted assets in 2025. So I would expect Canada to be essentially cash flow neutral as far as CapEx and cash flow.

Anne Milne
Anne Milne
Managing Director of Emerging Markets Corporate Research at Bank of America

Okay. Thank you. Also, for this quarter, you had a slightly higher discount rate to Brent. Do you expect that to continue? Is there anything that could change that in the fourth quarter of the year?

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah, and that discount is really just Vasconia, Castilla, and Oriente all widened a little bit. Part of the widening of differentials actually is because of the Trans Mountain Pipeline in Canada, which is somewhat ironic, but that's one of the drivers of that, an extra 580,000 barrels of crude coming on the market, which is a natural competitor for the Colombian Ecuadorian crudes.

Anne Milne
Anne Milne
Managing Director of Emerging Markets Corporate Research at Bank of America

That's interesting, huh? Something so far away. Yeah, and then my last question, I know it's sort of really big picture, but given the attractive fields that you've acquired in Canada and the strong reserve base, do you have any idea of down the road how you see a breakdown between, let's say, production and cash flow in Canada versus South America? I mean, right now it's still going to be relatively small on the EBITDA level, but I imagine that proportion will increase over time.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah. I guess there's two conflicting things there in the sense that we expect, with all the discoveries that we've had in Ecuador, we expect Ecuador to grow quite a bit as well. And with the oil weighting in there, I would still expect South America to make up the majority of our Adjusted EBITDA. We kind of continue to grow, especially in the future in a more robust gas price environment. So I think that will evolve. But it's important for everyone to remember is that we're not going to stop developing in South America. Ecuador and Colombia are still core areas for us, and we expect them to continue to grow as well.

Anne Milne
Anne Milne
Managing Director of Emerging Markets Corporate Research at Bank of America

Okay. And so South America will continue to be a majority going forward for the time being?

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah. For the time being, yeah. Definitely.

Anne Milne
Anne Milne
Managing Director of Emerging Markets Corporate Research at Bank of America

Okay. Great. Thank you very much.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Thank you.

Operator

Our next question comes from the line of Peter Bowley with Jefferies LLC. Your line is now open.

Peter Bowley
Peter Bowley
Senior Vice President of Emerging Markets Corporate Credit Desk Analyst at Jefferies

Thank you for the call. Thank you for taking my questions. First, in the context of low 70s Brent in 2025, do you still expect to pay your bond amortization in 2026 from free cash flow, and second, regarding capital allocation, how are you thinking about with your 2029 bonds trading above the 12% yield, how are you thinking about capital allocation, and would bond buybacks ever be considered as part of your plan? Thank you.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Yeah. I think on the 2026 amortization, we're quite comfortable between cash on hand that will exit this year and then free cash flow in 2025 and 2026. Remember, the amortization is until the end of October. We're quite comfortable with that amortization, so we don't have a concern there. And then on the capital allocation, we think right now we'll continue to focus on longevity of the assets and invest in the ground. And then we do have, obviously, the $25 million maturing in February of this year, which obviously we will pay, and then also the maturing in 2026, and then the slight $25 million in 2027. And we expect to fund all three of those with just cash on hand and free cash flow.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Keep in mind, remember, we do have a lot of flexibility on our capital allocation, given that in South America, we have all of our assets. We operate all of our assets. And in fact, all of our blocks, with the exception of one, we have 100%. So that gives us a lot of flexibility. And then Canada, we operate with 78%, 77%. So again, still have some flexibility on capital allocation in Canada.

Peter Bowley
Peter Bowley
Senior Vice President of Emerging Markets Corporate Credit Desk Analyst at Jefferies

Great. Thank you.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Thank you.

Operator

Our next question comes from the line of Alejandra Andrade with JPM. Your line is now open.

Alejandra Andrade
Alejandra Andrade
Executive Director - Latam Corporates Research at JPMorgan

Hi. Thanks so much for the call. I just had two quick questions. First, I mean, I saw that you changed a little bit the terms of the committed facility in Canada, $74 million maturing next year. I was wondering if there's any expectation to do something in Colombia as well in terms of committed lines. And then also, how are you thinking about your hedging program for next year? That's it. Thanks.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

Great. Thanks. Yeah. And the reason why we reduced the Canadian facility, the borrowing-based support is quite a bit higher. We just don't have really a use of proceeds for those funds right now. So we're treating it as more of a working capital facility. Instead of paying additional standby fees, we reduced the committed amount. So that was a conscious decision by Gran Tierra. And we will continue to look at putting a similar facility on the Colombian assets as well. And stay tuned for that. And then our hedging program, we are looking at, as we finalize our five-year plan and capital allocation, we are looking at increasing our hedging program. You'll see we do have a new corporate deck on our website that outlines the hedges that we acquired with i3. In particular, the gas hedges that they had in place are quite interesting for 2025.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

We'll continue looking at hedging 30%-50% for the next six months and then 20%-30% for the following six months on more of a systematic basis.

Alejandra Andrade
Alejandra Andrade
Executive Director - Latam Corporates Research at JPMorgan

Great. Thank you.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

You're welcome.

Operator

Gentlemen, there are no further questions at this time. Please continue.

Ryan Ellson
Ryan Ellson
EVP and CFO at Gran Tierra Energy Inc

I would like to thank everyone for joining us today. We look forward to speaking with you next quarter and update you on our ongoing progress. Thank you very much.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

Executives
    • Sebastien Morin
      Sebastien Morin
      COO
    • Ryan Ellson
      Ryan Ellson
      EVP and CFO
    • Gary Guidry
      Gary Guidry
      CEO
Analysts
    • Alejandra Andrade
      Executive Director - Latam Corporates Research at JPMorgan
    • Anne Milne
      Managing Director of Emerging Markets Corporate Research at Bank of America
    • Greg Pardy
      Head of Global Energy Research, Canadian Senior E&P and Integrated Oil Analyst at RBC Capital Markets
    • Peter Bowley
      Senior Vice President of Emerging Markets Corporate Credit Desk Analyst at Jefferies
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