Frontera Energy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 8, 2024

There are 4 speakers on the call.

Operator

Good morning. My name is Ludine. I'll be your conference facilitator today. Welcome to Frontera Energy's 4th Quarter and Year End 2023 Operating and Financial Results Conference Call. All lines are currently on mute to prevent any background noise.

Operator

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. Following the speakers' remarks, there will be time for questions. Analysts and investors are reminded that any additional questions can be directed to Frontera following today's call 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 in the future.

Operator

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. Forward looking information is subject to a number of 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 December 31, 2023 and the company's annual information form dated March 7, 2024 and the other documents it files from time to time with securities regulatory authorities describe the risks and 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.

Operator

I would now like to turn the call over to Mr. Gabriel De Alba, Chairman of the Board of Panthera Energy. Mr. De Alba, please go ahead.

Speaker 1

Thank you, operator. Good morning and welcome to Frontera's 4th quarter and year end 2023 earnings call. Joining me on today's call are Orlando Cabrales, Frontera's CEO and the Burgos Diaz, 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 Polliglia, General Counsel Ivana Ravalo, VP Operations and Bernardo Campanaro, VP Marketing, Logistics and Business Sustainability. Thank you for joining us.

Speaker 1

ConTe has successfully achieved its strategic capital and production targets at those 3 core businesses in 2023. In our Colombian Ecuador upstream business, the company delivered average daily production of over 40,900 barrels of oil per day, in line with 2023 production guidance, while it also generated operating EBITDA of $467,000,000 at the higher end of guidance for 2023. Our value center approach resulted in closing the year with a strong balance sheet, low leverage and a solid cash position. In our standalone and growing infrastructure Columbia business, the business segment delivered strong results, generating 2023 full year adjusted infrastructure EBITDA of $120,000,000 and received $47,000,000 in capital distributions from OBL. Expecting breaking ground soon, we remain focused on development of the connection between Refineria de Cartagena, Reficar and Puerto Valles Liquids Terminal, which we expect will importantly increase throughput volumes through our liquid ports and drive economic growth for the Cartagena Bay area.

Speaker 1

Contera's interest in the Odile pipeline and in Puerto Bahia, our unique standalone infrastructure business provides shareholders with significant upside potential. In our Guyana Exploration business, Frontera and its joint venture partner CGX Energy continue its active efforts in pursuing the strategic options, including a potential farm down to develop its interest in the Corentyne block in offshore Guyana, following the announcement of a second oil discovery in the current end block. A data room is open, several management presentations have been completed and other ones are ongoing. Looking ahead, Frontera's significant maturing assets, value centric production, capital plan and some balance sheet position the company to deliver its 2024 objectives and drive value for shareholders from its 3 core separate businesses. Supported by its ongoing NIB program and recently initiated dividend program, Frontera remains committed to enhancing shareholder returns.

Speaker 1

Furthermore, the company will continue to consider future shareholder initiatives in 2024 and beyond, including potential additional dividends, distributions or bond buybacks based on the overall results of our business and the company's strategic goals. I'll now turn the call over to Orlando Cabrales, Frontier's CEO and our CFO, Rene Burgos, who will share with their views on our Q4 and full year results. Orlando?

Speaker 2

Thank you. Thank you, Gabriel. Good morning, everyone. Thank you for taking the time to join us this morning. We are going to present just a few slides to help us facilitate the understanding of our remarks.

Speaker 2

2023 was a strong financial and operational year for Compere as the company continue to take steps to deliver additional value to shareholders. In our Colombia and Ecuador Upstream Onshore business, we deliver average daily production of 40,919 BOE per day, with an increase in our heavy crude oil production of 9% year over year. I'm also pleased with our continued efforts to diligently manage our cost structure. Despite inflationary pressures, we deliver production costs, transportation costs and capital expenditures within our 2023 guidance. In total, we safely and responsible executed $285,000,000 in capital spending across our Colombia and Ecuador upstream onshore business.

Speaker 2

In 2023, we drilled 65 development wells, including 2 injector wells at Tequifa, CT6, Kahua and Cubiro blocks and completed 73 well interventions. We advanced our recommissioning efforts at Saara, our reverse osmosis water treatment facility for Kifa. By the end of 2023, the plant had processed just under 21,000,000 barrels of water as part of the recommissioning program, providing irrigation source water to Frontera's nearby Progoryeano's palm oil plantation. At the beginning of 2024, we successfully completed the pilot phase of the Zara project with Ecopetrol. The company intends to invest in the commissioning of the first phase of the project at utilization phase to reach a minimum of 200 and 50,000 barrels of water per day available for the keypad block, subject to final JV approval and targeting additional net production of up to 3,000 barrels of oil per day once target water levels are reached.

Speaker 2

Additionally, the company invested in the expansion and improvement of development facilities at CPD6, which doubled our water handling capacity to 240,000 barrels of water per day. In 2024, we plan to further expand our water handling capacity for the block to 360,000 barrels of water per day. These efforts will continue to support future production growth at the block. Turning now to our 2023 year end results. Our commitment to value our volumes in our Upstream Colombia and Ecuador business continues to deliver results as we close the year with about $109,000,000 and $164,000,000 BOE in the 1P and 2P gross reserves, respectively.

Speaker 2

We achieved a 3 year average gross reserves replacement ratio of 104% for 1P reserves and 79% for 2P reserves, while maintaining our reserves like index for 7.3 years for the 1P reserves and 11 years for 2P reserves. The net present value of our 2P reserves before tax and discounted at 10% at December 31, 2023, was estimated at $3,000,000,000 before tax or $21.60 per BOE. Notably, the MT-ten per BOE increased by 2% as compared to 2022, driven by operational efficiencies and reduced future development costs and despite a decrease in the forecast oil price. In CP6, we successfully replaced close to 100% of the block's 2P net reserves, while reaching another annual average production record from the block of approximately 6,200 BOE per day. In Ecuador, we increased our 2P reserves by close to 4,000,000 barrels for a total of 4,700,000 BOE.

Speaker 2

We expect to continue building on our recent wins in Ecuador. For 2024, we will invest $35,000,000 to $45,000,000 in exploration opportunities. In Colombia, we expect to drill the high impact Hydra 1 exploration well during the second half of the year. While in Ecuador, we will drill 2 additional wells in the Espero block, our non operated block with our JV partner GeoPark. Additionally, we are also advancing 3 drilling and seismic investment for our BIN 46, Llanos 99 and Llanos 119, which we expect to drill in 2025.

Speaker 2

We believe these near field exploration opportunities will help reload our reserves, setting us up for future growth. In our standalone and growing infrastructure business, ODL transported over 243,000 barrels per day, generating $285,000,000 in 2023 EBITDA and returning over $135,000,000 to its shareholders. Puerto Vallarta generated approximately $20,000,000 in 2023 EBITDA and achieved 2 significant milestones. The successful refinancing of the port's legacy project finance debt and the signing of the commercial agreement with Verdecar. During the Q1, Frontera anticipates breaking grounds on the connection.

Speaker 2

Rotel has secured an additional $30,000,000 in committed funding subject to certain conditions present in connection with these projects from existing group of lenders led by Macquarie Group and expects collection start up by the end of 2024. For the full year, our infrastructure segment generated an adjusted infrastructure EBITDA of $120,000,000 and $54,000,000 in segment cash flows from operations, including $47,000,000 in distributions from ODL, highlighting the strong profitability and cash flow generation capacity of our stand alone and growing infrastructure business. In our potentially transformational Guyana exploration business, We successfully completed way 1, the second well of our 2 well program, where we believe that approximately 500,000,000 to 600,000,000 BOE of P lean on risk gross prospective resources are present in multiple Macquarie and Horizon in the northern portion of the quarantine block. We continue to work with our advisors in exploring potential strategic alternatives, including a potential farm down. Before turning the call over to Rene, I would like to take a moment to discuss Frontera's strong sustainability performance in 2023.

Speaker 2

We achieved 108% of our 2023 ESG goals. We began operations of our 1st solar farm called Ecopia in December, which we expect will reduce CP6 coil power consumption and offset 50% of the blocks scope 1 emissions. With almost 1 quarter of the year in the books, we remain focused on executing our recently announced capital and production targets and continuing to deliver a strong operational and financial results and maximize shareholder returns. I would now like to turn the call over to Rene Urgos, Frontera's CFO. Thank you, Orlando, and thank you, everyone, for joining us today.

Speaker 2

Like to take a moment to highlight a few key financial aspects of our full year results. For the full year, the company recorded net income of $193,000,000 or $2.27 per share. The company's full year net income included operating income of $154,000,000 share income from associates related to our Odeon investment of $57,000,000 gains related to our hedging activities of $90,000,000 partially offset by net financial expenses of $45,000,000 and income tax expense of $4,000,000 During the year, the company benefited from its deferred tax position, helping reduce its overall tax exposure. We will touch base again on this a little bit later. Operating EBITDA for the year was approximately $467,000,000 on the higher end of the guidance range presented for 2023.

Speaker 2

This was primarily as a result of better Brent oil prices as compared to our $80 budget, partially offset by higher differential as well as higher than expected production related energy costs.

Speaker 3

Unknown participant is now exiting.

Speaker 2

Drilling down on our operating costs, our production and transportation costs per barrel for the year totaled $13.25 $11.21 respectively, in line with our guidance. This compares to $12.14 $10.44 in the prior year. The increase in production cost year over year was primarily a result of inflationary pressures, the impact of FX volatility, higher electricity costs and higher fuel consumption. In particular, we have seen a significant increase in our energy costs related to electricity prices, Driven by the drier than expected weather resulted from a near phenomenon, this has actually resulted in 34% increase in this line item. We are seeing particularly sharpest increase in the second half of the year as we see energy prices reaching the $5 per BOE mark.

Speaker 2

Our guidance for 2024 provides additional clarity on energy prices, giving investors better insight into this key input. Today, electricity cost represents about 35% of our total energy cost. We will continue to update the market on developments related to this critical input. But as Apoora referenced, we would like to highlight low energy costs for 2022, a relatively more normal year, which were approximately 3.50 dollars Moving on to cash generation. Cash generation for the year was strong with cash flow through operations totaling $411,000,000 $411,000,000 remaining strong due to the strong wet fall price environment, partially offset by an increase in withholding taxes during the year.

Speaker 2

At year end 2023, however, the company closed with a $128,000,000 income tax receivable associated to receivables and taxes and the company's deferred tax position. The company expects to recover approximately $100,000,000 of these receivables during 2024. Capital expenditures for the year were in line with our guidance at BRL 443 1,000,000 and included BRL 157 1,000,000 in investments related to our potentially transformational Guyana Exploration business. As of December 23, 2023, the company closed the year with a total cash position of $190,000,000 including $160,000,000 of unrestricted cash. Prior to wrapping up, I would like to provide an update on our Cuyana 23 spending, our financing efforts, our risk management strategy and an update on our shareholder initiatives.

Speaker 2

Total costs associated to the WaveOne well were $189,000,000 Cash outflows pending related to WaveOne CapEx as of the end of 2023 are now estimated at under $4,000,000 With well cost now finalized, Frontera has closed its direct working interest for the block at 72.52%, resulting in an indirect working interest of 93.42%. On the financing front and as alluded by both Orlando and Gabriel, the company has successfully secured committed funding from the sector lender group led by Macquarie Capital to support its strategic connection with project construction and goal to have this connection completed this year. We appreciate all of our bank efforts and support. On our current risk management strategy, we continue to show how the impact of our hedging discipline has benefited us and supported our operations and planning. From Theragun's derivative instruments to manage exposure of oil prices and affect volatility.

Speaker 2

On the oil side, the company entered into new put hedges for 2,600,000 barrels with puts averaging 73 $0.36 per barrel. This will help protect approximately 40% of the company's after royalty estimated production through June 2024. Frontera has also entered into foreign exchange rate hedges totaling $120,000,000 or approximately 40% of our estimated peso exposure and above the MXN 4,100 peso rate for the first half of twenty twenty four. These services provide the company with visibility and will help mitigate future fluctuations of the business to deliver on its targets. Finally, on our shareholder value initiative, under the current company's NCIB program, which commenced in November 21, 2023, the company has repurchased approximately 600,000 shares common shares for cancellation for approximately 3,700,000 as of March 7, 2024.

Speaker 2

I would like to remind you that Frontera is authorized to repurchase up to 3,900,000 shares under this program. With respect to our recently announced dividend from Terra WePay, a quarterly dividend of CAD 6.25 per share to shareholders of record as of April 2, 2024 and again payable on or around April 16, 2024. With respect to bond buybacks, the company has repurchased $1,500,000 in notional of its 20 28 senior secured notes. As our Chairman said, Frontera will continue to consider future shareholder value enhancing initiatives in 2024 and beyond, including potential additional dividend, distribution, pipeline buyback based on the overall results of the business and strategic goals. I would like to now turn the call back to Olonbo.

Speaker 2

Thank you, Rene. As you have heard from Teradata, a very busy and successful 2023, and we aim to build on that success in 2024. I want to provide some color to our 2024 capital program. We have a fully funded plan for 2024, delivering approximately $400,000,000 to $450,000,000 in consolidated operating EBITDA at $80 Brent price. Our plan will leverage our advantaged transportation and logistic structure to maximize realized prices, while also investing for future growth through facilities expansion and near field and high impact exploration.

Speaker 2

We expect to generate consolidated free cash flow of approximately $65,000,000 to $105,000,000 from our core business. In our Colombia and Ecuador Upstream business, we are targeting production of approximately 40,000 to 42,000 BOE flat compared to 2023 and generate $400,000,000 to $430,000,000 in upstream operating EBITDA. We will invest between $180,000,000 to $210,000,000 in development activities, a 10% decrease in development spending. We will also invest $35,000,000 to $45,000,000 in exploration activities and $15,000,000 to $25,000,000 in oil investments, mainly in the reactivation of the Sabanero block to be funded primarily from proceeds related to insurance claims. We will focus on our inventory of near field development drilling opportunities at our core heavy oil fields.

Speaker 2

Supplement our drilling activities with our low cost well intervention program as well as invest in development facilities to increase water handling capacity and increase our gas processing at B1. We expect our Upstream business to generate free cash flow between $60,000,000 to $100,000,000 inclusive of $10,000,000 to $20,000,000 in cash tax payments, net of recoveries and debt service of $60,000,000 to $70,000,000 which include $32,000,000 of bond interest and $30,000,000 related to debt service for local bank facilities. For our growing and a standalone infrastructure business, we are targeting an adjusted infrastructure EBITDA of approximately €95,000,000 to €150,000,000 for 2024, including $35,000,000 to $45,000,000 in distribution from ODL. The segment is expected to generate free cash flow approximately $5,000,000 to $10,000,000 inclusive of $30,000,000 of net funding associated with the Air Flexicar Connection project CapEx. Before closing, we have prepared a slide bridging our current production and the buildup of the components supporting our 2024 production targets.

Speaker 2

Our starting point is the company's 4th quarter 2023 average daily production rate of €39,200,000 per day. Assuming an asset decline rate of between 25% to 30%, to sustain production, the company would need to replace an annual average 5 to 6000 BOE per day or a rolling 2% to 3% of production per month. The Frontera development CapEx program was designed to fully replace our declining barrels via combination of new wells as well as low cost decline management well interventions and a strategic investment in facilities. Our 2024 new well CapEx program seeks to replace between 80% to 85% of expected decline, investing €105,000,000 to 130,000,000 in 60,000,000 to 65 new wells, focused primarily on our heavy oil assets. On average, each new well carries an estimated cost of approximately $1,500,000 to $2,000,000 and targets an annualized production rate between 100,000,000 120 BOE per day.

Speaker 2

These wells have an average sorry, wells have on average and attractive under 1 year payback period and capital efficiency metric of $16,000 to $18,000 per foot flowing barrel. Under our locals decline management well intervention program, the company invests in well interventions, work orders, overhauls and new technologies to reduce the impact of the natural decline and optimize the portfolio production rates. For 2024, the company expects to invest approximately $15,000,000 to $20,000,000 in decline management activities with average investment per intervention ranging between $200,000 $500,000 per well and generating an additional 30 BOE to 40 BOE of annualized production. Finally, we plan to invest EUR 45,000,000 in strategic projects, including Tarrar, our reserve osmosis water treatment facility, commissioning the first phase of the project, which will enable the company to process a minimum of 250,000 barrels of water from the Quifa block, subject to final JV approval. Increasing water processing at C56, continue our strong growth trend in the block and initiating Phase 1 expansion of La Breaia facilities and flow lines to increase gas processing capacity from 20,000 to 13,000,000 cubic feet per day.

Speaker 2

These extraordinary capital expenditures will not only increase production in 2024, but set the foundation for further growth and expansion of these key assets for years to come. Overall, these capital projects do allow us to maintain production from last year at around 40,000 TO 42,000 BOE per day with 10% less CapEx. We will advance our exciting exploration portfolio in Colombia and Angola, including investing $35,000,000 to $45,000,000 in exploration opportunities, including drilling the high impact Tierra 1 well in the Tierra 1 block and 2 wells in Ecuador. We will mature our self sustaining and growing infrastructure business including the reticar connection with Porto A. In summary, in 2023, we continue to deliver on our operating and financial targets.

Speaker 2

I expect to continue a trend in 2024. We have a solid outlook, a strong balance sheet and exit Amex 2017. With that, I would like to conclude by saying thank you to Gabriel and Reyna for your comments and thank you everyone for attending our call. I will now turn the call back to our operator.

Operator

Thank you. Your first question comes from the line of Ariana Kobal from balance. Your line is open.

Speaker 3

Hi, thanks for taking my questions. Hi, to our team. I just had 3 brief questions. If we get if we may go 1 by 1, that would be great. The first one is related with quality discounts to brands, especially looking at the average numbers for 2023 was well above what we are normally seeing.

Speaker 3

So just how are these quality discounts evolving thus far in the year? And what are your expectations for 2024?

Speaker 2

Odena, hi. Thank you for the question. Our discount our target discount last year was roughly $5 We realized it was $5.60 That was 2020 to 2030. In our guidance for 2024, we're seeing we set up the year better than we did last year. So we're expecting our guidance with $4.50 differential.

Speaker 3

Okay. Maybe more on the Guyana side of the story. I just want was wondering if there's any updates or additional color that you could provide in terms of how is this process with Holden Lucky moving forward and estimated next step and or estimate time frame to hear more on this process?

Speaker 2

Like as we told investors, this is a 2024 event. We have and like our Chairman said, we've had multiple events presentations, a BDR open and as soon as we have any news, we will look to very steadily share with them today.

Speaker 3

Got it. And just one final one. You mentioned that you bought back in that you've carried bond buyback for $1,500,000 in national value. So just with bonds that continue to trade at such discount, we have 2 tiers in the area, have you considered moving more aggressively in this respect in terms of returning value to different stakeholders?

Speaker 2

Ultimately, capital efficiency is a description of the Board. I think that our shares are even more discounted that our bond size that our current bond prices. However, we believe it's important to create value for our shareholders on multiple fronts. So we were very happy that we're successful in acquiring $1,500,000 of promotional this quarter.

Speaker 3

Got it. Well, that would be it from my side. Thank you, guys.

Operator

Further questions, please email irfronteraenergy. Ca. This concludes the call. Thank you all for participating. You may now disconnect.

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Key Takeaways

  • In 2023 Frontera’s Colombia‐Ecuador upstream segment averaged 40,919 BOE/d and generated $467 million of operating EBITDA, both at the higher end of guidance.
  • The standalone infrastructure business delivered $120 million of adjusted EBITDA, received $47 million in distributions from ODL, and is advancing the Reficar–Puerto Valles connection to boost throughput.
  • In Guyana Frontera and CGX completed the first well on the Corentyne block, identifying 500–600 MMBOE prospective resources, and have opened a data room for a potential farm‐down in 2024.
  • The 2024 plan targets 40,000–42,000 BOE/d at $400–430 million upstream EBITDA, with $180–210 million in development spend, $35–45 million in exploration and a 10% reduced CapEx budget.
  • Frontera closed 2023 with $190 million in cash, $411 million of operating cash flow, reported net income of $193 million (CAD 2.27/share), and launched quarterly dividends plus share and bond buybacks.
A.I. generated. May contain errors.
Earnings Conference Call
Frontera Energy Q4 2023
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