Frontera Energy Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 8 speakers on the call.

Operator

Good afternoon. My name is Julie, and I will be your conference call facilitator today. Welcome to Frontera Energy's First Quarter 2024 Operating and Financial Results Conference Call. 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.

Operator

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 may occur in 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. Forward looking information is subject to a number of risks and uncertainties The company's MD and A for the quarter ended March 31, 2024 and the company's annual information form dated March 7, 2020 4 and other documents it files from time to time with securities, regulatory authorities describe 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 I would now like to turn the conference over to Mr.

Operator

Gabriel De Alba, Chairman of the Board of Frontera Energy. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to Frontera's Q1 2024 Earnings Call. Joining me on today's call are Orlando Cabrales, 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 Rovilla, General Counsel Ivana Rlevalo, VP Operations and Ricardo Santiago, VP Thank you for joining us. Frontera is focused on delivering on its strategic objectives and generating value for its stakeholders.

Speaker 1

In the Q1, the company generated $97,200,000 in operating EBITDA, dollars 25,700,000 of adjusted infrastructure EBITDA and maintained a robust balance sheet, finishing the quarter with a total cash balance of $182,000,000 During the quarter, ODL declared a $157,000,000 dividend, dollars 54,900,000 net to Frontera, highlighting the strong cash generation capacity of this strategic infrastructure investment. The company also achieved an agreement in principle with Ecopetrol for the use of the company's reverse osmosis water treatment facility, BARRA, through a 2 year contract. This is a significant ESG and a strategic milestone, which will drive greater produce, water disposal and crude oil production capacity at the Kiva block. So far this year, the company has returned nearly $13,000,000 of capital to our stakeholders, including $7,800,000 in declared dividends, dollars 3,000,000 of common share repurchases and $1,500,000 of buybacks of its 2028 unsecured notes. Moreover, the company with support from Goldman Sachs has launched a strategic alternative process for its standalone and growing Colombian infrastructure business, which may include spin off, a total or partial sale or other business combination.

Speaker 1

With over $1,000,000,000 of capital invested for Entera's infrastructure assets, our unique investment opportunity is one of Colombia's most relevant infrastructure assets. The OBL pipeline connects the most prolific oil reserves areas in Colombia. The Meta and Castaneda departments, which together holds 70% of the national 1P crude oil reserves to the rest of Colombia's midstream network and transports 30% of the total country oil output. ODL has paid over $1,300,000,000 in distributions since inception. Completed in 2015, Fortivaia state of the art liquids and dry cargo port terminal, strategically located in the heart of the Bay of Cartagena.

Speaker 1

Trading under a maritime concession, the port owns over 150 hectares of freehold land, which include 2,400,000 barrels of oil and oil product storage capacity, over 50 hectares of dry cargo storage capacity and an additional 75 hectares of expansion capacity to develop the strategic initiative. The recently announced connection agreement with the Refica refinery plan to come online this year and is expected to drive additional hydrocarbon volume and strengthening Cartagena's role as a regional leader and economic hub for the hydrocarbon space. Looking ahead, the company will 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 will now turn the call over to Orlando Cabrales, Frontera's CEO and our CFO, Rene Burgos, who will share their views on our Q1 results. Orlando?

Speaker 2

Thank you, Gabriel. Good morning, everyone, and thank you for joining us this morning. Frontera's first quarter results were in line with our expectations despite some unforeseen challenges. 1st quarter production declined approximately 3% on a quarter over quarter basis, impacted primarily by light and medium natural declines and expected world failures, partially offset by our resilient heavy oil operations. During the quarter, our heavy crude oil production grew 2% on a quarter over quarter basis, reaching approximately 23,400 barrels per day.

Speaker 2

We also experienced another average daily production record of 7,000 barrels at the C-three-six block. The growth in our heavy oil business came despite several challenges, including the impact of community blockades as well as delays associated with our strategic water disposal initiatives, including Sahara. If these events have not materialized, we would have expected an increase on production of approximately 7.25 barrels per day. We expect activities in Sahara to start up during the Q2 and to continue ramping up during the rest of the year, supporting how our heavy oil production operation in Quifa with the objective of processing more than 250,000 barrels of water per day for the Quifa block once stabilized. Additional activities supporting our growth outlook for our heavy oil also include a new water injector well in Quifa coming online this month expected to provide an additional 100,000 barrels of water per day.

Speaker 2

Also, we continue our efforts to expand our water handling capacity in 66 to continue to capitalize on our production growth. In the end of 2022, we have increased water handling at the CP6 block from 100 and 20,000 barrels per day to 240,000 during 2023 and growing to $360,000 of water per day during this year. Our drilling campaign on these blocks has also started strong and is meeting expectations. Quarter to date, we have drilled 20 development wells in the Kifa and 66 wells. In our light medium operations, we suffered some unanticipated setbacks that resulted in lower levels of production than planned, including some unexpected ore failures.

Speaker 2

We will continue to invest in work order and well service activity in these blocks to recover production. Additionally, we continue to invest in our B1 block, including gas compression facilities that will aid in the reinjection of close to 20000 to 30000 Ncf and is expected to increase production at the Binwan block. On the exploration side, we are excited about spotting the high impact EBITDA-one well on the B1 well scheduled for June of this year. The company completed important civil works activities into its platform and well construction in advance of drilling the well. We reiterate our production and capital guidance for 2024.

Speaker 2

With these activities, along with our drilling program, we expect improved production and profitability throughout the rest of the year as we advance our development portfolio in Colombia and Ecuador. Along with our active pursuit of strategic alternatives for our interest in the quarantine block in Guyana, which is still ongoing and our recently announced historical alternative review for our growing Colombian infrastructure business, the company remains focused on unlocking value from the sum of its parts. I would now like to turn the call over to Rene, Urgo Frontera's CFO.

Speaker 3

Thank you, Orlando. Thank you, everyone, for joining us today. I'd like to take a moment to highlight a few key financial aspects of our Q1 results. For the Q1, the company recorded a net loss of $8,500,000 or $0.10 per share.

Speaker 2

This quarter's net loss follows approximately $44,000,000 in income from operations plus share

Speaker 3

of income from associates, which includes $14,000,000 of share income from ODL, offset by roughly $17,000,000 in finance expenses, CAD 9,000,000 in losses related to risk management contracts and approximately CAD 27,000,000 in income tax expenses, including almost CAD 22,000,000 in deferred income taxes, primarily due to the impact of non deductible expenses and differences related to foreign currency fluctuations. During the quarter, the company assumed an income tax rate of 50% inclusive of the 15% surtax associated to the 2022 Colombian tax reform. Moving to operating EBITDA. Operating EBITDA for the quarter was approximately $97,000,000 During the quarter, we saw weighted average rent sales prices for Frontera of 82.35 dollars and average Sesco in a differential on our export sales of 4.7 dollars Compared to the prior quarter, our EBITDA performance was impacted by lower sales volumes as well as sustained high energy costs and inflationary effects on our operating costs. Taking a closer look at our operating costs, our production, energy and transportation cost per barrel for the quarter totaled $10.21 $5.29 $11.33 respectively.

Speaker 3

This compares with $9.69 $5.06 and $11.02 in the prior quarter. The increase in production cost quarter over quarter was primarily a result of higher well service activity, inflationary pressures on services and wage indexation that typically occurs at the beginning of the year. Regarding energy prices, we continue to see the effect of sustained domestic high energy prices and the impact of FX fluctuations. We saw higher energy costs driven by higher activity in the CPE 6 block and the start up of the additional water handling capacity there. For the Q1, electricity costs accounted for 30% of our energy consumption and 40 6% of our total energy costs.

Speaker 3

Gas generation for the quarter was strong with cash flow from operations totaling $65,600,000 thanks in part to a strong Brent oil price environment, EBITDA working capital related to lower sales volumes, offset partially by lower income tax withheld. It's worth highlighting that during the quarter, Colombian tax authorities reduced the overall tax withholding base on oil export sales from 9.9% to 5.6%. Capital expenditures for the quarter were roughly $70,000,000 including primarily cost associated hooter drilling campaign of 21 development wells, Akipa, Kahua, CFS and the Perico blocks for roughly $35,000,000 On the infrastructure side, adjusted EBITDA in the first quarter was $25,700,000 compared with $27,300,000 in the 3rd quarter. The quarter over quarter change was due to lower general cargo revenues for Berto Valles, lower transported volumes at ODL, lower palm oil sales from AgroGenos as a result of lower palm oil prices and higher operating costs across the segment due to inflationary pressures on services and negative impact from foreign exchange rates. More specifically and with respect to ODL, EBITDA for the Q1 was $7,800,000 down 9% on a quarter over quarter basis due to lower transported volumes and inflationary pressures driving higher operating costs as compared to the prior.

Speaker 3

Additionally, ODL declared $157,000,000 in dividends, including approximately $55,000,000 net to trontera

Speaker 4

and a

Speaker 3

net return of capital close to BRL 23,000,000 or BRL 8,000,000. These capital payments are payable in installments to 2024. In April 2024, the company received the 1st installment equal to 50% of the total capital distributions declared. As of March 31, 2024, the company reported a total cash position of CAD182 1,000,000 including CAD 155 1,000,000 of unrestricted Turning now to risk management. Our current risk management strategy continues to show our hedging discipline supports our operations and planning.

Speaker 3

Conferra uses derivative instruments to manage exposure to oil price and FX volatility. On the oil side during the Q1 of 2024, the company successfully secured a 40% hedging ratio for the April to August 2024 period and entered into new hedges that protect a portion of our expected production for December 2024 protecting us of a potential drop in oil prices at average strike prices of 72 dollars $76 for the 2nd and third quarter, respectively. Competa has also entered into foreign exchange rates totaling $30,000,000 for approximately protecting the peso exposure above $39.70 for the 3rd quarter. Centerra also entered into forwards to protect the ODL capital distribution and the repayment of the Banco Colombia, central denominated working capital loan. These stages provide the company with stability and will help mitigate future fluctuations and all the business to deliver on its targets.

Speaker 3

Finally, I'd like to provide an update on our shareholder value initiatives. Under the company's current NCIB, which commenced on November 21, 2023, the company repurchased approximately 840,000 shares or just over 1% of our total common shares outstanding. For cancellation for approximately $5,800,000 as of March 8, 2024. Frontera is authorized to repurchase up to 3.9 1,000,000 shares as part of this program. With respect to our announced dividend, on April 16, Frontera paid approximately CAD 3,900,000 or 0.6.2 $5 per share and will pay $0.0625 per share to shareholders of record as of July 3, 2024, on or around July 17, 2024.

Speaker 3

I would like to now turn the call back to Orlando.

Speaker 2

Thank you, Rene. Before I wrap up today's call, I would like to highlight that during the quarter, Frontera offset nearly 50% of its CO2 emissions on the production and consumption of energy in our operations through carbon credit purchases. The company also achieved a total recordable EBITDA rate of 0.72 and we used 20% of its water production and 37% of its operating waste. The company also invested $500,000 in social projects and communities near its operations in Colombia, Ecuador and Guyana. On February 22, Frontera was recognized by Episphere as one of the world's most ethical companies for the 4th consecutive year.

Speaker 2

Frontera was also recognized for the 2nd time as one of the 20 best workplaces for women in Colombia by the Great Place TO Work Institute. And finally, a few thoughts on our strategic review processes. The company with support of Bouygues and Lottery continues to actively pursue strategic alternatives for its interest in the quarantine problem dynamic, including a possible turnaround. And as Gabriel mentioned, the company launched a strategic alternative review for its standalone and growing infrastructure business. Frontera's infrastructure business is comprised by the company's 35% equity interest in the ODL pipeline and its 99.97% equity interest in the Portoia Pool.

Speaker 2

Infrastructure business has generated EUR 120,000,000 of adjusted infrastructure EBITDA and $47,300,000 in capital distributions in 2023. Conterra has retained Goldman Sachs as financial advisor and may retain all advisers to assist the Board in evaluating the various strategic business and financial alternatives. These processes are part of the company's effort to streamline the business portfolio and unlock value from the sum of its parts. Frontera believes the value of these assets is not reflected in the current stock price and these processes aim to drive value for shareholders. There can be no guarantee that the strategic review process will result in a transaction.

Speaker 2

With that, I would like to conclude by saying thank you to Gabriel and Rene 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 Anne Mow from Bank of America. Please go ahead.

Speaker 5

Hi, good afternoon. Thank you very much for the call today and thank you for outlining some of your strategic initiatives that you're focusing on. I have two questions. 1 is sort of a broad question and the other is a little bit more specific. The first one has to do with, I guess, the strategy towards your bonds.

Speaker 5

They are one of the cheapest one among the independents in Latin America and in Colombia, which sort of mystifies me because you have a good diversified asset base and you have good cash flow and relatively low leverage. At some point, would you consider doing either more of a buyback or an exchange for something maybe more amortizing or something just so you can be more in line with your peer group. I think that could also eventually help your equity valuation if people are less concerned about the debt and that there might not be any hidden problems. So that's sort of a very generalized question. The second one I think has to do with the initiative that you outlined in your press release, which is for looking at alternatives for your infrastructure assets.

Speaker 5

And just wondering if you have any idea of what the range of multiples are for this type of business in Latin America? Thanks very

Speaker 3

much. Hi, Anne. Thank you very much for your question. I think I'll tackle the first one. First, our bond strategy, I think that we've been and our team was very upfront that we are going to continue to seek out alternatives for us to maximize value to all of our stakeholders.

Speaker 3

Right now, we're very comfortable with our bonds at 20 28 maturity. We're certainly disappointed with the overall trading levels, but we're going to keep an eye and proactively cannot do what's in the best interest of the company, shareholders and also its stakeholders. So as far as this year, we've acquired roughly $1,500,000 in Notional. And looking forward, we will continue to kind of just as our Chairman laid out, seek out opportunities to see where our best dollar is invested to maximize that value. As it relates to the infrastructure initiative, that is a very good question and look and one that we believe touches on what Orlando highlighted in his portion of the call when he said that the value of these assets are not reflected in our stock price today.

Speaker 3

These are assets and perhaps when I compare it to where our companies trade in the oil and gas field, we see oil and gas players trading to cash flow anywhere from 2 to 3 times depending on the oil price cycle. We believe that these are assets that trade much higher than that. And we believe through this exercise, we're going to be able to unlock some of that value. I think that you can probably help me better by giving me some indications as to what you believe the value for us to follow a lot of these market players. But what we can say confidently is that these assets, their predictability related to their cash flows should merit a much higher multiple than what Fintecharib over the last half.

Speaker 2

Yes. And maybe if I may, just to build on what Rene said, and I think Gabriel emphasized this in his remarks, is that looking ahead, we will different shareholder initiatives, including for 2024 and beyond, of course, including potential additional dividends, distributions or bonds buybacks. So the government is well taken. And the other comment we really believe that the infrastructure assets has a significant cash generation and different catalyst for long term growth in those assets. So we are excited about it and ready to start working on this process.

Operator

Okay. Thank you. Your next question comes from Orianna from balance. Please go ahead.

Speaker 6

Hi, thanks for taking my questions. This is Orianna Kowal with balance. I have two questions mainly. The first one is a follow-up on your announcement on this evaluation of strategic opportunities. So we're right about these plans to monetize or spin off these assets and we agree that it seems like a great way to unlock value for shareholders given the different valuation multiples.

Speaker 6

We were just wondering if in the case of a sale of these assets or even a portion of the equity to be spun off the vehicle, does the indenture of your bonds or other debt documents mandate you to use the proceeds to repay debt at least partially? Or would this be something that you'd consider doing voluntarily applying any eventual proceeds to bond buybacks? Thanks.

Speaker 3

Thank you, Orianna. On the bond sorry, on the potential proceeds from a sale of these assets and the ability to repay back bonds, It's a terrific question. I'll remind you that these are unrestricted subsidiaries of our bond. So there is no obligation of the company to use these proceeds to repay the bond. However, as I alluded earlier, we are looking at ways and I think our Chairman said it, our CEO said it, of generating value for all of our stakeholders.

Speaker 3

So certainly, it would be a consideration, but it's certainly not an obligation.

Speaker 6

Perfect. That's completely clear. Thanks, Renee. And just on the quarterly performance, just turning more on the production side of the angle, we noticed that it's running a tad below the low end of guidance. So if you could perhaps share some more color on the catalyst to drive production with the guidance in the upcoming quarters?

Speaker 6

Thanks.

Speaker 2

Yes. Well, as I said in my remarks, we are reiterating today our production and capital guidance. And basically, the additional production that we are seeing coming up in the following months are, as I mentioned, many, many ones. I mean, the first one is the new injector well in Quifa, which is coming online very, very soon in the following days. We are also increasing the water handling capacity of CP6 from 240,000 to 360,000 in the following months as well.

Speaker 2

And as I mentioned, just to reiterate, we are seeing again record productions in CP6. And we are starting we expect to start up the Sahara facility in the second quarter after reaching an agreement in principle with Ecopetrol on a 2 years contract. So that will allow us to increase water handling capacity for Kifa to 250,000 barrels per day. So that is another one. The other one is in V1.

Speaker 2

As I said, we are increasing our gas process compression facilities in V1. So that will that means more liquid production and some gas production. And we are also doing work order and well services activities in our light and medium blocks. So with those periods in mind, we feel comfortable today that we can reiterate our production guidance.

Speaker 6

Perfect. That's completely clear. Thanks very much again guys.

Speaker 3

Thank you.

Operator

Your next question comes from Ronan Rossi from Canaccord Genuity. Please go ahead.

Speaker 4

Good morning, guys, and thanks for taking the questions. I have a couple. So the first one is regarding the wealth failures you mentioned in the closures. Roman,

Speaker 3

sorry to interrupt you. I'm having really trouble hearing you. If you either have to back away from your phone, it sounds muffled or speak louder.

Speaker 4

Okay. Can you hear me better now?

Speaker 3

That's better. Thank you.

Speaker 4

Okay. So regarding the well failures you mentioned in your disclosure, just wanted to get a sense on the quantity of barrels that you lost and if all the production is back online?

Speaker 2

Yes. The production is back online. Those were unexpected failures. And with this additional activity, as I mentioned earlier, workover on well services, we are expected to increase production goals in that asset.

Speaker 4

Okay. And the second is regarding the Reficar connection. When are you expecting to compete? And can you give us a sense on CapEx on a quarterly basis given that you still have like $40,000,000 to deploy during this year?

Speaker 2

Can you repeat that? You asked about the replica connection, but you asked another thing, which I didn't understand.

Speaker 4

The second part is regarding quarterly CapEx as you have EUR 40,000,000 to deploy yet.

Speaker 2

Okay. Let me start with the reticar connection. The reticar connection is going very well. We are still planning to end the construction of the connection by the end of this year, as we have mentioned before. So that is on track, consistent with our plan.

Speaker 2

We have been making progress on different fronts, right of way negotiations, awarding of the UTC contract. So we are on track to finalize the connection by the end of the year.

Speaker 3

On the other question, you usually need to look at the bulk of our CapEx because I think you're focusing on the drilling campaign. And the drilling campaign, as it was alluded to, has been going on strong, but a significant part of our drilling campaign is the associated facilities. And some of those just require that interconnection flow lines etcetera to get everything to properly connect and to produce. So to date, we've invested roughly $54,000,000 out of the $180,000,000 to $210,000,000 of the total program. I don't know if that was your question.

Speaker 3

We can get more clarity if you would like. Thank you.

Operator

Your next question comes from Cameron Ross from Mangrove Partners. Please go ahead.

Speaker 7

Good afternoon. I was hoping you could talk about the tax implications of a spin versus asset sale, the infrastructure asset in light of assets in light of the NOLs at the company?

Speaker 3

That's a very good question. Look, we're exploring the different alternatives. Ultimately, there is a I don't have a set response to you. To be very transparent, that's the reason why we're doing this review today or we're launching this review today. Ultimately, we're capable of distributing buying to our shareholders, one.

Speaker 3

The second part of that answer is that every single asset has a certain tax basis. So it really does depend on the price at which it's struck and the value generated at that and then how that money is mobilized up and distributed. But in the coming quarters, we're hoping to give all of our investors a better picture of how that would look like. What I can say is that to the extent that we do have a cash transaction for any of our assets, we do not see an impediment to be able to deliver value associated to that cash to our investors.

Speaker 7

Okay. Thank you.

Operator

And there are no further questions at this time. Should you have any further questions, please e mail irfronteraenergy.

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Key Takeaways

  • Frontera reported $97.2M in operating EBITDA and $25.7M in adjusted infrastructure EBITDA in Q1 2024, ended with CAD 182 M cash, recorded a net loss of CAD 8.5 M, and received CAD 55 M net from a CAD 157 M dividend declared by ODL.
  • Production fell ~3% QoQ due to natural declines and well failures, while heavy oil output rose 2% to 23,400 bbl/d with a 7,000 bbl/d record at the C36 block, and the Sahara water facility plus new injector wells are expected to boost full-year volumes.
  • Frontera has returned nearly CAD 13 M of capital YTD via CAD 7.8 M in dividends, CAD 3 M in share buybacks and CAD 1.5 M in bond repurchases, and is considering further dividends, distributions or bond buys later in 2024.
  • The company has launched a strategic review of its Colombian infrastructure business (including the ODL pipeline and port terminals) with Goldman Sachs to explore spin-off, sale or combination, and is also pursuing alternatives for its Guyana block.
  • In Q1, Frontera offset ~50% of its CO2 emissions with carbon credits, achieved a 0.72 total recordable incident rate, reused 20% of produced water, invested USD 500 K in local social projects, and earned global ethics and women’s workplace awards.
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Earnings Conference Call
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