Gran Tierra Energy Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the First Quarter 2024. My name is Shannon, and I will be your coordinator for today. I would like to remind everyone that this conference call is being webcast and recorded today, Thursday, May 2, 2024 at 11:00 a.m. Eastern Time. Today's discussion may include certain forward-looking information as well as our 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 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 thanks for joining Gran Tierra's First Quarter 2024 Results Conference Call. My name is Gary Guidry, President and Chief Executive Officer. And with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer; and Sebastien Morin, our Chief Operating Officer. On Wednesday, May 1, 2024, we issued three press releases that included detailed information about our first quarter 2024 results, which are available on our website. Ryan and Sebastian will now make a few brief comments, and we'll open the line for questions immediately following this earnings call. At 10 a.m. Mountain time, noon Eastern Time, we will be holding our Annual General Meeting of shareholders. During that meeting, I will give a brief overview of Gran Tierra and where the company is heading. I invite you to join us for this call. Dial-in instructions can be found on our website. I'll now turn the call over to Ryan to discuss key financial highlights from our first quarter results.

Thank you, Gary. Good morning, everyone. Gran Tierra had a great start to 2024. During the first quarter, we completed a substantial portion of our development plan and are now focused on our 2024 exploration campaign, along with the development of Suroriente Block. During the quarter, Gran Tierra delivered $74 million of funds flow, up 24% from the first quarter of 2023, which resulted in $2.34 of funds flow per share. After incurring approximately $55 million in capital expenditures, the company generated free cash flow of approximately $19 million. Adjusted EBITDA was $95 million for the quarter, up from $93 million in the prior quarter. As of March 31, 2024, the company had a cash balance of $127 million and net debt of $510 million. The 12-month trailing net debt to adjusted EBITDA was 1.3x and is expected to be less than 1x by year-end due to a combination of increased adjusted EBITDA and lower net debt. During the quarter, the company issued an additional $100 million of 9.5% senior notes and received cash proceeds of $88 million. With a portion of the funds, we fully repaid the outstanding balance on the company's credit facility of $36 million, and the facility was terminated. Gran Tierra generated oil sales of $158 million, up 9% from the first quarter of 2023 due to higher sales volumes and lower Castilla, Vasconia, and Oriente differentials. Looking at pricing during the quarter, Brent averaged $81.76 per barrel, up 1% from the prior quarter. The company's quality and transportation discounts per barrel during the quarter were $15.36, which significantly narrowed from $18.45 in the first quarter of 2023. Gran Tierra has repurchased approximately 1 million shares during the quarter. Since January 1, 2023, the company has repurchased approximately 3.3 million shares or 10% of the shares issued outstanding as of January 1, 2023, from free cash flow. We are very pleased with how we have started 2024, and we are seeing excellent results in our core assets under waterflood. The balance sheet is in excellent shape, and we're very excited about the Arawana exploration well, which Sebastian will highlight. I'll now turn the call over to Sebastian to discuss our operational highlights from our first quarter results.

Thanks, Ryan. Good morning, everyone. As Ryan mentioned, capital expenditures of $55 million were higher than the prior quarter at $39 million and down from $71 million compared to the first quarter of 2023. During the quarter, we completed our Acordionero drilling program and the majority of our Costayaco program, achieving approximately a 16% reduction in drilling costs, a savings of approximately $3.8 million between both programs. Total average working interest production during the quarter was 32,242 barrels of oil per day, an increase of 3% over the prior quarter despite deferred production of approximately 1,000 barrels of oil per day as a result of social disruptions at the Acordionero field. Post-disruption, the field was rapidly ramped back up without issue and is now back producing over 17,000 barrels of oil per day as expected. In particular, we are very pleased about the successful drilling program in Costayaco that confirmed the company's reservoir interpretation and significantly extended the field to the north and south. The four wells drilled in the north had a combined initial 30-day production rate of 5,707 barrels of oil per day, unstimulated and on jet pump. Currently, work has commenced to install the final selected completions, conduct zonal testing and stimulation, as well as install the final optimized artificial lift, which we expect will increase production further. It's important to note that Costayaco was originally discovered in 2007. Our 2024 program has increased production to the highest level since 2017. As highlighted in the press release, we initiated our high-impact exploration program with the Arawana-1 well, which was spud on the Chanangue block in early April. We are very excited about the initial open hole logging results of the well, which is drilling to a bottom hole location 1.5 kilometers away across the fault from the Bocachico-1 well. Bocachico-1 had an initial 90-day production rate in the Basal Tena of greater than 1,100 barrels of oil per day and continues to produce at approximately 850 barrels of oil per day, 20-degree API oil at less than 1% water cut and has recovered over 330,000 barrels of oil since June 2023. The Basal Tena is the geologic equivalent to the N-Sand and Cohembi located 20 kilometers to the north. Our mapped area of closure and rock properties observed in Arawana-1 compares well to the Cohembi field. At the end of 2023, the Cohembi field has produced 28 million barrels of oil and has remaining reserves of 25 million 1P, 54 million 2P, and 95 million 3P. Given these observations, we are very excited to finalize drilling operations at Arawana-1, run casing, and start testing in the next few weeks. Looking at financial metrics, Gran Tierra's operating expenses increased by 2% to $48 million compared to the prior quarter, primarily due to higher workovers, offset by lower lifting costs primarily related to power generation optimizations in Costayaco, Acordionero, and Cohembi fields. The company's transportation expenses increased by 16% to $4.6 million compared to the prior quarter. During the quarter, Gran Tierra utilized longer distance delivery points due to low river levels in Colombia caused by dry El Nino conditions resulting in higher transportation costs. Today, we are excited to also announce the release of our 2023 sustainability report. I will go through some key highlights below. However, I invite you to visit our website and review the report in its entirety. 2023 was the safest year in company history with over 17 million work hours without any incidents causing lost time since June 9, 2022. Gran Tierra's reforestation efforts have led to the planting of over 1.6 million trees, and the company has preserved or reforested approximately 4,500 hectares of land since 2018. This is equivalent to sequestering 20 years of our current greenhouse gas emissions. Gran Tierra is reducing greenhouse gas emissions at its facilities through gas-to-power projects that can utilize excess natural gas that would otherwise be flared, using the gas instead for power generation. In 2023, Gran Tierra's gas power projects generated approximately 70% of the total energy used in all of the company's operations. Gran Tierra has started 2024 on a strong footing, and we look forward to continuing to ramp production through our ongoing waterflood optimization initiatives, new well completions, and exciting near-field exploration programs. I'll now turn the call back to the operator, and we will be happy to answer any questions. Operator, please go ahead.

Our first question is from the line of Anne Milne with Bank of America.

Congratulations on your good first quarter. My questions have to do with your outlook for the rest of 2024 in terms of your OpEx expenses and transportation expenses, and possibly some information on the social disruptions that you mentioned at Acordionero. Do you think that's just a one-time event? Is it something that could come back? Just to have a little bit of a sense of what we could expect for the rest of the year.

So I'll start from the bottom up in response. So at Acordionero, there were a lot of changes in Colombia. We don't expect this to come back because the way that the social disruption was handled has actually created relationships, and I think we're back on track on that side of things at Acordionero. From a workovers perspective, that's what impacted our OpEx the most, and as we progress through the year, those will reduce. So we are looking forward to that. Regarding transportation costs, our power generation costs are coming down as we implement these optimization projects, so we should see an improving trend there as well.

Our next question comes from the line of Phil Skolnick with Eight Capital.

Just on the Arawana discovery. How should we think about it in terms of size? It looks similar to Cohembi, but can you provide details on the number of wells, timelines, ultimate productivity potential, and costs as we think about the development?

Yes. Phil, the reason we're so excited is that it is a direct analog to Cohembi. In terms of closure size, fault trapping, and deposition. The thickness of this reservoir is very similar to what we see at Cohembi, with very prolific wells. As Sebastian mentioned, kilometers away, we have a producing well in the same formation yielding 1,000 barrels a day that's still producing 850 barrels a day and has recovered almost 400,000 barrels. The closure on this structure, as we talked about pre-drill, is about 11,000 acres, very similar to Cohembi. This is why we're excited. The volumes we would expect from waterflooding are based on very similar geology. You would likely see a 50-well type development, with recoveries in the range of 50 million to 100 million barrels, similar to Cohembi’s reserve basis. And it's near infrastructure, which means we can rapidly begin appraising this field and go into production concurrently. So, it's very exciting.

Regarding the 50 wells, how many of those would be used for water injection?

I think you would have a similar pattern of wells. This is a reservoir that is 20 to 30 feet thick and very continuous. As we're noticing at Cohembi, we're getting quick reservoir response from our injection. One area we are exploring closely is the use of horizontal wells in this reservoir, which could potentially reduce the number of wells needed. However, with 11,000 acres, a 50-well development would imply spacing of about 160 to 200 acres per well. The viscosity we observe at Bocachico-1 is better than at Cohembi, which adds to the excitement. We're eager to move forward with testing.

Our next question comes from the line of Oriana Covault with Balanz.

This is with Balanz. I have two questions, if we may go one by one. The first one is that you mentioned you plan to reduce net leverage on the back of increased adjusted EBITDA and lower net debt. Could you remind us what targets you have for net debt and how you expect to reduce it from current levels?

On the net debt, we expect that with free cash flow generation throughout the year, our cash balance will build. We would anticipate our cash balance to increase by an additional $50 million from our current position, alongside rising adjusted EBITDA. This should position us around that 1x net debt-to-EBITDA ratio.

Perfect. Just picking up on that last note about the higher cash position and increased free cash flow generation, particularly with a favorable pricing backdrop. Any update on M&A activity in Canada? Where do you plan to allocate this incremental cash?

We continue to evaluate capital allocation opportunities, including buybacks, debt reduction, and M&A. We assess all these options, and as circumstances evolve, we'll determine the best path for capital allocation. We prefer to ensure we have the cash available before committing to expenditures. Once we have the funds secured, we'll discuss potential strategies.

Our next question comes from the line of Roman Rossi with Canaccord Genuity.

Congratulations on this great quarter. My first question is regarding share buybacks. What are your expectations for the coming quarters, considering your shares have appreciated significantly? Do you have a specific price point at which you would stop buying back shares?

The share price has performed well, but it started from a low point. We have moved from trading at 50% of PDP up to 70% to 80%. We still believe it presents a great value to continue buying back stock.

Okay. Sounds good. My second question is regarding taxes. I believe you will be paying the taxes from 2023 next quarter. Can you give us a sense of what you are expecting in terms of cash outflow?

As for cash outflow, remember that we prepay a lot of tax just through withholding tax. So, the tax outflow will be around $20 million.

Our next question comes from the line of Alejandra Andrade Carrillo with JPMorgan.

I have two questions. First, regarding power generation costs, could you clarify that 70% is now coming from your own gas? What is the breakdown?

The remaining 30% of power generation comes from either diesel generators at our facilities or from the power grids in Colombia. We are actively working to displace the diesel from our power generation facilities.

We have about 500 Mcf of gas for CNG supplementation, so most of our operations do not have exposure to spot pricing.

Great. Regarding M&A drilling, you've mentioned interests in Canada and Colombia. Is Argentina also on your radar?

Argentina is not on our radar right now.

Our next question comes from an analyst with Bloomberg Intelligence.

Could you talk about the protests, specifically the timeline? How long did they last?

The blockade lasted around 10 days.

That was in March, right?

Correct.

Perfect. Another one is on your water optimization program. Are you in any way impacted by the drought currently in Colombia?

No, because we take the majority of our makeup water from deep sources. We produce water from different reservoirs and bring it into our water-floodable reservoirs.

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

I would again like to thank everyone for joining us today. We look forward to speaking with you next quarter for an update. If you're able, please call in for our Annual General Meeting at 10 a.m. Mountain Time. Thank you.

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