Gran Tierra Energy Inc. Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the First Quarter 2023. 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 securities analysts and institutions. I would like to remind everyone that this conference call is being webcast and recorded today, Wednesday, May 3, 2023, 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 this information and reconciliations of any non-GAAP measures discussed on today's call. 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 would now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Thank you, Shannon. Good morning, and thanks for joining Gran Tierra's First Quarter 2023 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 Rob Will, our Vice President of Asset Management. On Tuesday, May 2, 2023 we issued a press release that included detailed information on our first quarter 2023 results which is available on our website. Ryan and Rob will make a few brief comments, and then we will open the line for questions. Immediately following this earnings call at 10 a.m. Mountain Time, and 12 noon Eastern Time, we will be holding our Annual General Meeting of Stockholders. During the meeting, I will give an overview of Gran Tierra and where the company is heading. We invite you to join us after this call, dial-in instructions can be found on our website. I'll now turn the call over to Ryan.

Thank you, Gary. Good morning everyone. Gran Tierra achieved a strong quarter by delivering $60 million of funds flow while executing on our front-end loaded development program. We saw the drilling of 14 development wells out of the total 2023 budget plan for 18 to 23 development wells. Given the increased activity during the quarter, Gran Tierra spent $71 million on capital expenditures, which exceeded funds flow slightly by $11 million. By completing the majority of our development program in the first three months of 2023, we expect to benefit from higher oil production rates for the remainder of the year with the goal of maximizing our production and cash flow in 2023. Over the last 12 months, we generated net income of $115 million, adjusted EBITDA of $459 million, funds flow of $339 million and free cash flow of $73 million. This free cash flow allowed us to execute on our share buyback plan and strengthen our balance sheet via bond buybacks. During the quarter, Gran Tierra purchased approximately 13.1 million shares for a total purchase price of $10.7 million at an average price of approximately $0.80 per share. We also exited the year with a healthy net debt-to-adjusted EBITDA ratio of one times. In terms of Gran Tierra's ongoing commitments to reduce its net debt during the quarter, the company bought back $8 million in face value of Gran Tierra's 6.25% senior notes. The cost of the 2025 bond buyback was approximately $6.8 million, representing a discount of 15% to the face value of the 2025 bonds. The company exited the quarter with $106 million of cash on the balance sheet and net debt of $466 million, with the credit facility remaining completely undrawn. During Q1, the Brent price averaged $82 per barrel, down 16% from one year ago and down 10% from the prior quarter. The government policy and transportation discounts narrowed to $18.45 per barrel, down from $19.74 per barrel in the prior quarter and up from $12.56 per barrel one year ago. The Castilla oil differential increased to $15.17 from $6.38 per barrel in the corresponding period in 2022. The Vasconia differential increased to $7.87 from $3.60 in the corresponding period of 2022. The good news is that differentials narrowed in March this year and continued to narrow in April. The current Vasconia differential is down to approximately $6.50 per barrel, and the Castilla differential is down to approximately $11.50. Even more encouraging is that in the last couple of days, differentials have narrowed to $10.50 and $5.50 for Castilla and Vasconia respectively. Oil prices are continuing to remain volatile, and Brent has sold off in the last couple of weeks. While Brent averaged $82 in Q1, it hit a low of $73 and a high of $87. So the recent volatility is nothing new. Gran Tierra's total production for the quarter was 31,611 BOE per day, up 8% from one year ago and decreased 3% compared to the prior quarter. The company's second quarter production to date in 2023 is approximately 32,400 BOPD, and we are on track with our targets this year. The company's operating netback was $35.18 per barrel, down 33% from one year ago and down 9% from the prior quarter. Changes in funds flow and operating netback were largely driven by the decrease in oil Brent price and the widening of the policy and transportation discounts over the same time period. We're very pleased with our recently announced agreement with Ecopetrol, the National Oil Company of Colombia, where Gran Tierra and Ecopetrol renegotiated the agreement for the Suroriente Block in the Putumayo Basin, which was scheduled to end in mid-2024. Gran Tierra will continue to be the operator in the Suroriente Block and is committing to a capital investment program of $123 million over a three-year period from the agreement's effective date. It is expected to be funded by Gran Tierra's internal cash flows. The agreement provides an opportunity to add significant value and extend the economic life of Suroriente by continuous duration for 20 years. The additional term of the agreement allows for long-term investment in infrastructure and work programs to enhance oil recovery efficiency in existing fields and appraisal drillings to extend the life of the fields. Lastly, we're happy to report that Gran Tierra has issued its 2022 sustainability report, creating long-term value and delivering on our environmental, social, and governance commitments, which can be found on the company's website.

Thanks, Ryan. Good morning, everyone. During the quarter, Gran Tierra completed a significant portion of its 2023 development campaign with the drilling of 14 development wells in three of our major fields, which have been producing oil at rates that are in line with our expectations. In the Acordionero Field, development drilling resumed in January 2023 with a 10-well program. The wells were drilled by the end of the quarter, as a result of the program and continued good performance of the fields. Enhanced oil recovery via waterflood, Acordionero has averaged approximately 19,200 barrels of oil per day during the second quarter to date in 2023, which is the highest level since May 2019. During the quarter, Gran Tierra achieved a new water injection record of approximately 65,000 barrels of water injected per day, up from 59,890 barrels of water injected per day in the first quarter of 2022. The polymer flood pilot continues to progress and was expanded with the startup of a second polymer injection well. During the quarter, we plan to follow up with a third polymer injection well planned for the second quarter of 2023. We are excited about the early results and expect Acordionero's polymer flood pilot to increase the field's ultimate oil recovery. Our Costayaco development campaign saw four wells drilled during the quarter. Two producers are currently being completed, with timing expected in early May 2023, and two water injection wells are completed and expected to begin injection during the second quarter of 2023. Two additional producers and one additional injector remain to be drilled as part of the Costayaco development plan for 2023. Completion and stimulation of the producing wells and waterflood optimization through additional injection are expected to continue to grow production in Costayaco throughout the year. In Moqueta, two wells were drilled during the quarter, and both are on production and awaiting stimulation. Two additional development wells are planned in 2023, along with two conversions of existing wells into injectors that are expected to grow production and optimize the waterflood in Moqueta. The drilling of all these wells is a testament to our team's commitment to operational excellence and their ability to execute our capital program efficiently. We're also excited about our plans to recommence exploration drilling during the second half of 2023, with the drilling of four wells in Ecuador, three in the Charapa Block to appraise the discovery of the Hollin Formation, and one in the Chanangue Block. Gran Tierra has completed the selection process and secured a drilling rig, which the company plans to mobilize from Colombia to Ecuador. Gran Tierra expects to drill between four to six exploration wells in 2023 in Colombia and Ecuador combined. Finally, we continue to see positive results from our ongoing waterfloods across our operations, primarily in Suroriente and Acordionero, and are beginning to see positive results from our polymer flood in Acordionero.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session for securities analysts. Our first question comes from the line of Josef Schachter with SERSI. Your line is now open.

Good morning, Gary, Ryan, and Rob. I have two questions. On Slide 35 in your presentation, you highlight three of the exploration wells: Rose 1, Bocachico, and Charapa. Could you guys go into a little bit of detail about what the price is in terms of the size potential production of the wells? And what timeline, if you're successful with those volumes, would they be in '23 or later, or more into 2024? That's the first question.

Okay, yes. For the first question, we're going through to issue a mid-year reserve update on everything that we're doing, Josef. But the answer to your question is the pre-drill estimates on Bocachico and Rose were in the five to 15 million barrel type reserve range. We haven't seen anything that deters us from that original pre-drill estimate. On Charapa Norte, we're quite excited about that discovery. It was a very prolific producer, and it's the target of some of our appraisal and exploration work this year. But it could be in our internally unaudited estimate by McDaniel in the 10 million to 30 million barrel range.

If you are successful with those wells, could they impact your volumes in Q4 of '23?

Yes, they could.

Okay, last one for me is the 10 for 1 reverse split. When do you see that happening after getting TSX approval? Do you have a date in mind?

Yes, it will, assuming shareholders approve it in our AGM later this morning, occur early to mid-next week.

Okay, super. That's it for me. Thanks very much for answering our questions.

Thank you. Our next question comes from the line of Phil Skolnick with Eight Capital. Your line is now open.

Yes, thanks. Good morning. Regarding Suroriente, could you explain how we should consider that $123 million over the next three years and its effect on your growth profile?

Yes, I think that's a good question. I think we're excited about that block. As you know, we haven't drilled any wells in that block since 2018. And even without drilling a well on that block, and just with a successful wrap-up of the water injection, we've had the highest rate since 2015. So it's a great field, as you know. So I think for us, we're very comfortable that we'll start drilling next year. And it'll be a disciplined program focused on development drilling at first. We have a lot of facility expansions done, so we'll start drilling next year, and we expect to get the field up to net production for Gran Tierra in that 7,000 to 10,000 barrel per day range.

Perfect. Thank you.

Over the coming years.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of Roman Rossi with Canaccord Genuity. Your line is now open.

Good morning, everyone. Thank you for taking my question. I would like to inquire about the increase in general and administrative expenses. You mentioned that this increase was due to higher costs that were previously associated with something not clear. Could you clarify that and what we can expect for the remainder of the year?

Certainly. It was breaking up a little bit on this side. It was a question with respect to was it DD&A?

Increasing G&A?

G&A. Yes. That was some one-time cost coming through in the first quarter. So we would expect that to trend down throughout the year.

So we should expect something similar to what we saw last year?

Correct. In an upper barrel basis, we expect it to be lower, just with the increased volumes.

Okay, awesome. Thank you very much, Ryan.

Thank you.

Thank you. Our next question comes from the line of Adam Gill with Paradigm Capital. Your line is now open.

Thank you. Good morning, gentlemen. Just back to the Ecuador exploration. Can you just give us a quick rundown of the timing of spud and when you expect results on the exploration program this year?

Yes, as soon as spud, it will be later in the summer in Ecuador, and we should have results continuing to roll in through the end of the year.

And is this two to four well exploration program just going to be one rig?

One rig. Yes.

And then just last one on that, how many potential zones did you see in the two blocks on the first two exploration wells for completion?

Yes, we saw three in the Boca Chica well and two to three in Charapa Norte. We still have hopes for the carbonates. We've yet to test those, and it's going to take some more appraisal and exploration drilling in both of those blocks. But two to three in each of the wells.

Okay, great. That's my question. Thank you.

Thank you.

Thank you. Our next question comes from the line of Oriana Covault with Balanz. Your line is now open.

Hi, thanks for taking my question. This is Oriana Covault with Balanz. I had a couple of questions. First, if you could share more insights into the kickoff of sales coming from Ecuador and operations in general and the production-wise pricing and costs. How is the operation coming along vis-à-vis your expectations?

Yes, I think on expectations, we're right on target with our expectations on the development in Ecuador and production costs. As you know, your costs always look a little bit high, we just have one well producing. We have a fairly large pad that we're going to drill two more wells off of and only use to share a facility. So as we drill additional wells, we expect our costs to come down dramatically. But overall, as I mentioned, we're really excited about the prospectivity and our results to date. The well continues to be a strong performer with light oil, close to the infrastructure. So we're very, very excited about Ecuador. And that's why we're coming to drill four wells in the second half of the year this year.

Awesome. And maybe just following up on mostly seeing recent price volatility internationally and wider discounts, although slightly compressing in the last month. Are you thinking of entering any type of hedging contract or making any changes in that area?

Yes, pricing has taken quite a bit of differentials out. As I mentioned, Brent has been very volatile, seeing in Q1 it experienced a low of $73, which we're testing right now, and as of today, a high of $87. So we expect Brent to remain volatile in the quarter and we are looking at placing some hedges for the second half of the year.

Perfect. And just one last one. We've heard about some exploration licenses being relinquished in the country. Do you see this as some type of assets that you'd be interested in? How is that agenda in terms of opportunities moving along for Gran Tierra?

I think you probably saw Exxon exiting some of their acreage in the Magdalena Valley. It's a continuous process in Colombia; under the current regulations, you're able to relinquish land that's non-prospective or transfer those commitments to other blocks. For us, it's a continuous process. I would say that we have the lands that we want for the next few years. We just started last year the process of exploring those lands, and we're having very good success. So we're very happy with our exploration position where we sit today. Nothing unusual going on. It's business as usual in Colombia, in terms of us executing the programs that we've had underway for the last several years.

Perfect. Thank you very much.

Thank you.

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

Hi, good morning. Thank you so much for taking my question. My question was related to capital allocation going forward. We saw some bond buybacks in a small amount in the first quarter, in addition to some share buybacks. Just wondering what the priorities are going forward in the year and how do you envision those two programs?

Yes, good question. In terms of allocation, if you look at the restrictions we have under a normal course issuer bid, we've essentially maxed out the amount of shares we can buy back under the normal course issuer bid, which can't be renewed until August. So really, the focus will be continued strength on the balance sheet through the repurchase of bonds.

Great, thanks. Thank you.

Thank you. Our next question comes from the line of an unidentified analyst. Your line is now open.

Yes, thank you very much. Good morning, guys. Just one clarification question, please. In your previous operational update on the 4th of April, you indicated that production today for the second quarter was running at 33,700 barrels a day. However, now you're indicating that that's around 32,400. Trying to understand what caused those volumes to drop, because everything seems to be going well. Could you clarify that difference?

Yes, it's Rob here. If you look at our production, we've wrapped up our Acordionero drilling program of this year with six producers and four injectors. We were extremely pleased with the results of our Acordionero drilling program. We averaged well above type curve. The Acordionero drilled some great wells in the north part of the pool there in the largely unspent parts of the reservoir. Those new wells tend to come on really strong and do fall off a bit before stabilizing. There was some flush production from those new wells, and those volumes you saw may have been affected by that flush falling. So it's come off a little bit, but right now, we're in the process of completing and stimulating our Costayaco drilling program wells. We're extremely pleased with the rates we're seeing from Costayaco. As we get those wells tested and stimulated using ESP pumps, we expect to see another boost in our production over the next few months. Overall, we're extremely pleased with our drilling programs this year, both at Acordionero and Costayaco. You will see production rates fluctuate as the new wells come on, but overall, we're beating our type curves and are very pleased with our joint programs.

We're very comfortable with the guidance we have out in the market. As Rob said, drilling results have been great. Average production fluctuates daily by a couple thousand barrels. So that’s just the reality of it, but we're very comfortable with our average annual guidance.

So just to be clear, those five wells that you have put on production in Acordionero have stabilized after that initial surge?

Yes, they're definitely stabilizing now. We drilled six producing wells in Acordionero, and there were four injectors. They're stabilizing, and we're now seeing strong results. There is a lot of fluctuations, but we are pleased with how it's going overall.

We still have the wells to bring on in Costayaco and also in Moqueta.

Okay, that's great. Thank you.

Thank you. Our next question comes from the line of an unidentified analyst with Aquila Asset Management AG. Your line is now open.

Yes, thank you for taking my question. I just would like to ask, given the recent volatility regarding Brent pricing, is there a chance that the guidance you gave for 2023 may be revised downward a bit, at least in terms of free cash flow, because we've seen the discounts apply and prices going down?

Yes, we think it's premature to consider that. Again, we go back to the first quarter where Brent averaged $82, which was our budgeted figure. Differentials were a little tighter than we had budgeted. But again, during Q1, Brent was as low as $73 and hit a high of $87. We see volatility continuing, but we are still bullish on supply and demand fundamentals and think the second half of the year will be strong.

Okay. Thank you so much.

Thank you.

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

Thank you, everyone, for joining us today. We hope to see everyone shortly for our annual general meeting of stockholders and look forward to speaking with all of you next quarter and updating you on our ongoing progress. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.