Gran Tierra Energy Inc. Q4 FY2023 Earnings Call

Good morning, ladies and gentlemen. Welcome to Gran Tierra Energy’s Conference Call for Fourth Quarter and Year-End 2023 Results. My name is Olivia, and I’ll be your coordinator for today. At this time, all participants are on a listen-only mode. Following the initial remarks, we will conduct a question-and-answer session for securities analysts and institutions. Instructions will be provided at that time for you to queue for your questions. I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, February 20, 2024, at 11:00 a.m. Eastern Time. Today’s discussion may include certain forward-looking information, oil and gas information and non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important advisories and disclaimers with regard to this information and for reconciliations of any non-GAAP measures discussed on today’s call. 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.

Thank you, operator. Good morning and welcome to Gran Tierra’s fourth quarter and year-end 2023 results conference call. My name is Gary Guidry, Gran Tierra’s 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. This morning, we issued a press release that included detailed information about our fourth quarter and year-end 2023 results. In addition, Gran Tierra’s 2023 annual report on Form 10-K has been filed on EDGAR and is available on our website. Ryan and Sebastien will 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 our financial results. Ryan, please go ahead.

Good morning, everyone. We are delighted to announce that Gran Tierra successfully achieved its targets for 2023 in terms of production, funds flow from operations and free cash flow. These milestones underscore the quality of our assets and our unwavering commitment to operational excellence. Our focused efforts on asset development have yielded strong performance across various key metrics. Additionally, in 2023, we showcased our confidence in Gran Tierra’s future prospects by purchasing 6.8% of our outstanding shares through our normal course issuer bid or NCIB program, demonstrating our dedication to creating long-term shareholder value. We’re currently trading at a discount to our proved developed producing or PDP net asset value per share by about 46%. Our average cost per each share purchase was $7 per share. Our many achievements during the year result in year-over-year production growth of 6%, strong reserves replacement ratios well above 100%, and the highest 1P, 2P and 3P year-end reserves in the company’s history. In another major milestone in 2023, Gran Tierra issued $488 million of new 9.5% senior secured amortizing notes due 2029 in exchange for its existing notes to improve our balance sheet, reduce overall leverage and provide additional financial flexibility by extending the maturity schedule to better align with expected future cash flows. Approximately 92% of holders’ bonds were exchanged, highlighting the support from bondholders. Subsequent to year-end, Gran Tierra issued an additional $100 million of 9.5% senior secured amortizing notes due 2029. The company used a portion of these proceeds to repay $50 million of borrowings outstanding under our credit facility, which subsequently was terminated. Despite a net loss of $6 million in 2023, Gran Tierra achieved return on average capital employed of 15%, showcasing solid performance in capital utilization. Gran Tierra’s capital expenditures were at the low end of our guidance at $219 million, fully funded by funds flow from operations of $277 million or $8.27 per share, resulting in free cash flow of $58 million or $1.73 per share, demonstrating effective financial management and positive cash generation. Although 2023 adjusted EBITDA decreased by 17%, the company realized adjusted EBITDA of close to $400 million, indicating substantial operational resilience amid challenges with volatile oil prices. Gran Tierra’s net sales for the year were $637 million compared to $711 million in 2022. This decrease was primarily driven by a 17% decrease in Brent price at higher Castilla and Vasconia differentials, partially offset by 7% higher sales volumes and lower transportation discounts in 2023. Despite higher operating expenses in 2023, Gran Tierra effectively managed inflationary pressures, showcasing resilience in cost control and maintenance activities. One final item I would like to highlight was the successful completion of the Suroriente continuation agreement. By securing the continuation, Gran Tierra is committed to long-term capital projects and development programs with plans of optimizing oil recovery and value for the Suroriente Block. We believe the combination of Gran Tierra’s robust operational expertise in the Putumayo Basin and Ecopetrol’s technical knowledge will continue our joint success in the development of our Suroriente Block. I’ll now turn the call over to Sebastien Morin to discuss some of the highlights of our current operations.

Thanks, Ryan. Good morning, everyone. I’ll briefly cover a few operational highlights from today’s press release as well as our recent press release regarding 2023 year-end reserves. Operationally, we are building off a successful year in 2023 to start off 2024 on a strong note. Since December 2023, Gran Tierra has drilled 4 oil wells in the Costayaco field in which we are seeing excellent initial production results. The first well Costayaco-56 has been on production since early January and has been producing a stable average rate of around 1,900 barrels of oil per day and a 2% water cut. A second well, Costayaco-57 was spud on January 6th and brought on production in late January. It has been producing at a stable average rate of around 1,100 barrels of oil per day and a 10% water cut. The third well is being drilled and will be followed by the final well, Acordionero-128. All wells from this development program are expected to be drilled, completed and on production before the end of the first quarter of the year. Back down in the Southern Putumayo Basin, Gran Tierra intends to commence development drilling in the Cohembi oil field located in the Suroriente Block during the later half of the year. We plan to expand the block’s production facilities, increase gas power generation, construct new development well pads and make social investments in the area, all with the goal of substantial production growth in 2025 and 2026. From an exploration perspective, around 40% to 45% of Gran Tierra’s 2024 capital program will target high-impact, near-field and low-risk exploration activities, including the drilling of six to nine exploration wells in Colombia and Ecuador, signifying our dedication to unlocking potential new reserves and fostering sustainable production growth. Building on promising results from the 2022 exploration program, we plan to focus on short cycle time prospects in proven basins with established transportation infrastructure. In addition, as part of our 2024 capital program, we are currently in the early phases of execution to acquire 238 square kilometers of 3D seismic over the Charapa block in Ecuador and to pre-invest in advancing drilling licenses and building pads for the 2025 exploration program in Colombia and Ecuador, which will set the stage for future growth opportunities for the company. On January 23rd, 2024, we were pleased to release our 2023 year-end reserve report as evaluated by McDaniel. 2023 saw the highest year-end reserves in our company’s history: 90 million barrels of oil equivalent 1P, 147 million barrels of oil equivalent 2P, and 207 million barrels of oil equivalent 3P, and we achieved excellent reserve replacement of 154% 1P, 242% 2P, and 303% 3P. This also represented the fifth consecutive year that we achieved 1P reserve growth. These results were driven by success with development drilling and waterflooding results in the Chaza Block, which contains the Costayaco and Moqueta fields and the Suroriente continuation agreement as outlined by Ryan. During 2023, a combination of our strong reserves growth, ongoing reductions in debt and share buybacks allowed Gran Tierra to achieve net asset values per share before tax of $44.48 1P, up 288% from 2020, and $79.13 2P, up 144% from 2020. With this significant growth in our net asset values per share over the last three years, we believe Gran Tierra is well positioned to offer exceptional long-term stakeholder value. The success we achieved in 2023 also reflects our ongoing conversion of reserves from the probable approved category. With 147 booked, proved plus probable undeveloped future drilling locations, Gran Tierra is well positioned to continue to grow the company’s production and reserves in 2024 and beyond. I will now turn the call back to the operator, and Gary and Ryan and I will be happy to take questions.

Ladies and gentlemen, pardon the interruption, speaker has been disconnected. Please hold while we reconnect the speaker.

Good morning. And thanks for taking my questions. I have a couple, if I can go one by one. The first one is regarding the quality and transportation discounts in the fourth quarter. So we saw a 30% in the quarter-over-quarter. I just wanted to know what’s the reason behind its increase and where do you see it going for 2024?

Yeah. I think you can hear me okay?

Yep.

Do you hear me now?

I can hear you, but there is a bit of an echo.

Okay. Yeah, with the quality differentials that mostly is just from the quality Vasconia and Castilla did widen during the fourth quarter. And so we have seen that fairly consistent into Q1. There hasn’t been a substantial change from Q1 to Q4. Currently, the Castilla differential is around $9, and Vasconia is around $5, which is effectively what we’ve budgeted for this year.

Okay. And do you think that the widening was related to the entry of Venezuela into the market? And do you think that’s a change even in April?

Sorry, Roman, can you hear me? I believe the question was whether this is a result of Venezuela. Yes, that's part of it. There are actually three issues: Venezuela, the potential for more crude coming from Venezuela, and OPEC beginning to lift some of their cuts. We anticipate an increase in heavy sour crude availability, along with the startup of the TMX line in Canada, which will allow more Canadian heavy crude into the market. So, it's a combination of these three factors. However, this isn't surprising to us, and it aligns with our budget numbers.

Okay, thank you. And one last question regarding OpEx, there was a target increase that because of the lower production in the quarter or were there additional inflationary pressures?

Yes, it was just driven by the lower production. And so we expect our gross operating cost will be flat to come down slightly in 2024, coupled with increased production. So we expect the per unit cost to drop.

Okay. Thank you very much, Ryan.

Thank you.

Hi, this is Oriana Covault with Balanz. I believe that there’s a bit of an echo there, but I’m going to try. I have two questions. So the first one is regarding your hedging, what would it take for it to be effective this year?

Yes. In terms of hedging, we currently have 15,000 barrels hedged with a floor, and we will maintain this position until the end of Q1. Specifically, we have 15,000 barrels hedged at a floor price of $80, with put premiums around $3, which is part of our physical contract with the offtake. We are considering adding more puts for the rest of the year and are in the process of doing that now.

Excellent. So that would take how are you thinking in terms of production?

Yeah. Sorry, I missed the question. It broke up a little bit on the side.

Yeah. Like in sum, what are your production hedged for the year?

We would like to have 30% to 50% hedged for the next six to nine months. After that period, we aim to maintain 25% hedged on a rolling basis, utilizing puts to secure downside protection. Additionally, we have a strong operational hedge since we manage all of our production, which provides us flexibility in our capital expenditures. If prices were to fall significantly, we can quickly reduce our capital program as another measure to safeguard the business.

Got it. Well, just one last one from my side. Can you comment on your net debt target or your minimum cash value for 2024?

Yeah, I think our guidance out there, we’re targeting year-end net debt-to-EBITDA of 0.8 to 1.2 times. So if we take the one-time, which is fairly consistent with what we’ve had in the past as a target. We continue to target that. And we’d like to have cash on the balance sheet of anywhere between $50 million and $100 million. And that will fluctuate throughout the year, just with payments to governments, capital program, et cetera. But over the course of the year, we expect to average in that $50 million to $100 million range.

Got it. Thank you very much.

Thank you.

Good morning, everyone. This call may be difficult, so Ryan, feel free to contact me later if there are any issues.

Absolutely.

First question. You have in your guidance, and you had a very good success in Q1. Are you expecting depletion through the year no matter what?

Yeah, on that, I think the production is, the cost accruals have exceeded our expectations. And that’s one of the reasons why we give a range. And so it’s still early days on the wells. So we’ll see how these wells progress over the next couple of quarters before providing additional guidance. But we’re still comfortable with the range right now.

Okay. How many locations do you still have available for drilling?

Sorry, just to clarify that question, in which area?

We’re talking about Putumayo and the CYC discovery.

Yeah. So out of the 147 2P locations that we have, there are still 26 locations identified for Costayaco, Moqueta, for example. And then at Suroriente, we’ve got an additional 30.

Okay. That’s good to know.

One other thing, Josef. Sebastien and the team are examining Costayaco, where we’ve achieved some impressive results with our reservoir modeling and identifying unswept areas. This is what is driving our success at Costayaco in the north. There’s another area in the southern part of the reservoir that we plan to focus on this year. That’s why we’re excited about Costayaco.

Okay, good. One last one for me. Given the flow in the moderate environment in the past, you’ve talked about the possibility of new areas in Minot. Have you had any thought for that, or do you have other new opportunities on the horizon?

Yeah. The answer to that is that we are always looking for opportunities. We don’t see anything specific at the moment, but our business development initiatives are all long-term. And so we’re looking always for ways to increase the value of the company, but we don’t have anything specific on the horizon.

Okay. That’s it for me. Thanks very much and congratulations with the success in the drilling.

Thank you.

Hi, thanks for taking my question. So you mentioned that $36 million of the $100 million was used for the credit facility. Where will the balance be used?

Yeah. So out of the $100 million, the net proceeds were around $88 million, $35 million went to repay the facility, as you pointed out. And the remainder would be cash on the balance sheet right now.

Okay, thank you.

Thank you.

Hi, thanks for taking the question. Just a quick one from me, confirming that after you repaid the committed line, you don’t have any available lines at the moment, correct?

Correct. Correct. We repaid it and then terminated. We are looking at a working capital facility which coincided better with the business and some of the ebbs and flows of our cash outflows and inflows. But right now, we have nothing in place and we’re comfortable just with our free cash flow and cash on the balance sheet.

Great. Thank you.

Thank you.

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

Thank you, everyone, for joining us today. We look forward to speaking with you over the next quarter and update you on our ongoing progress. I would like to thank the entire Gran Tierra team for their hard work in 2023, and the fantastic results and our shareholders for their continued support. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.