Gran Tierra Energy Inc. Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's call for the Fourth Quarter and Year Ended 2024 Results. 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, Monday, February 24, 2025, at 11:00 AM 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 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 year end 2024 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 2024 results. In addition, Gran Tierra Energy's 2024 annual report on Form 10K 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 some of our financial results.

Good morning, everyone. We closed 2024 with record highs across all reserve categories and delivered our highest ever quarterly production in Q4, setting a solid foundation for future growth. While 2024 was dedicated to investing in resource capture, in 2025 and beyond we will focus on execution, in particular unlocking the full potential of our extensive oil-weighted portfolio, which holds over 293 million BOE of 2P reserves. We're also pleased to confirm that Gran Tierra successfully met its average production guidance target for 2024. In 2024, Gran Tierra demonstrated its confidence in the company's future prospects by repurchasing 6.7% of our outstanding shares through our normal course issuer bid program, showing our dedication to long-term shareholder value creation. Compared to our current 1P net asset value of $35.23 per share, repurchases remain a strategic and efficient way to return capital to our shareholders while reinforcing our commitment to long-term value creation. In terms of production, Gran Tierra achieved a 2024 average working interest production of 34,710 BOE per day, representing a 6% increase from 2023. This was due to positive exploration results in Ecuador and two months of production from our recently acquired Canadian operations, which was partially offset by lower production in the Acordionero field caused by downtime related to workovers and deferred production from blockades in Suroriente during the quarter. Building on the company's successful development drilling in 2024 and integrating our recently acquired Canadian assets, we expect 2025 production of 47,000 to 53,000 BOE per day. This projected 2025 production increase is expected to result from our 2025 development drilling program of five to seven gross wells in Suroriente, two to three appraisal wells in Ecuador, and six gross development wells in Canada. Turning to exploration, we plan to allocate roughly 25% of our total capital program to exploration, equating to six to eight exploration wells in 2025. With four of those wells being allocated to Ecuador, we expect to fully meet our Ecuador exploration commitments before the end of the year. During 2024, Gran Tierra realized net income of $3 million or $0.10 per share compared to a net loss of $6.3 million per share in 2023. Gran Tierra's capital expenditures increased slightly by $7.7 million or 3% to $234 million compared to 2023 due to a higher number of wells drilled during the year, which was fully funded by the company's 2024 net cash provided by operating activities of $239 million. The company realized adjusted EBITDA of $367 million, a decrease of 8% from $399 million in 2023. 2024 funds from operations were $223 million or $7.02 per share compared to $277 million in 2023. Both of these decreases were commensurate with a decrease in Brent prices. The company had $103 million in cash and cash equivalents as of December 31, 2024, an increase compared to a cash balance of $62 million at the end of 2023. Looking forward, Gran Tierra is targeting $600 million gross debt by the end of 2026 and $500 million by the end of 2027, resulting in a target net debt to EBITDA of less than one times. We recently paid the remaining 2025 bonds outstanding and plan to pay the 2026 amortization through cash on hand and available credit facilities. Gran Tierra's net oil sales for the year were $622 million, a slight decrease of 2% compared to 2023. Total 2024 operating costs were $202 million compared to $187 million in 2023, representing an 8% increase while operating expenses per BOE were $16.14, 2% higher when compared to 2023. The increase in 2024 was primarily a result of higher workovers, removal of diesel subsidies in Colombia, and higher natural gas and electricity costs in 2024. Despite higher operating expenses in 2024, Gran Tierra effectively managed inflationary pressures, showing resilience in cost control and maintenance activities. 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 will briefly cover a few operational highlights from the press release, as well as discuss the highlights from our 2024 year-end reserves. Operationally, we are building off a successful year in 2024 to start off 2025 on a strong note. As Ryan mentioned, 2024 was focused on resource capture and 2025 and beyond will be focused on production growth while paying off debt. The capital program and its allocation has been formulated with that in mind. We are excited to have commenced drilling in Colombia at the Suroriente block, with the first well on the Cohembi North pad spudding on February 10. Production is expected by the end of the first quarter of 2025. In Ecuador, we are currently drilling the first exploration well of our six to eight well program with the Iguana SUR B1 exploration well, which spud on February 4. In Canada, the development plan with our new joint venture partner, Logan Energy, has commenced with the first two horizontal wells being drilled at Simonette. Both wells are currently being stimulated and expected to be on stream by the end of the first half of 2025. In Q4 of 2024, we drilled five new wells in the Clearwater at East Dawson and Walrus, which has confirmed the quality of our acreage in the Clearwater play. All of the wells are now on stream and cleaning up. In addition, we're currently participating in a waterflood pilot at Martin Hills with the drilling of a four-lead multilateral injector, which spud on February 13 and is expected to be online in the first half of 2025. Moving on to our year-end reserves, on January 23, 2025, we are pleased to release our 2024-year end reserve report, as evaluated by McDaniel. 2024 saw the highest year-end reserves in our company's history: 167 million barrel oil equivalent 1P, 293 million barrel oil equivalent 2P, and 385 million barrel oil equivalent 3P. We achieved excellent reserves replacement results of 702% for 1P, 1250% for 2P, and 1500% for 3P. This also represented the sixth consecutive year that we achieved 1P reserve growth. These results are underpinned by multiple exploration discoveries in Ecuador, continued success in managing our low decline Colombian assets, and our new country entry into Canada. The organic and inorganic portfolio growth creates a future runway of highly economic development opportunities and proven plays with access to infrastructure. Furthermore, with the addition of Canada, Gran Tierra is well positioned for long-term commodity cycles with approximately 20% of its production, 23% 1P reserves, and 26% 2P reserves now attributed to natural gas. Canada now represents 46% of 1P and 51% of 2P reserves compared to Gran Tierra's total reserves. We also achieved a year-end 2024 NAV per share of $35.23 before tax and $19.51 after tax 1P, and $71.14 before tax and $41.03 after tax of 2P. Looking at where Gran Tierra's current share price trades, this is a significant discount across all of the company's NAVs per share categories and why we are focused on share buybacks as a key pillar of shareholder returns. To close, I would like to point out that with a robust and diverse portfolio of assets with 227 1P and 441 2P identified undeveloped well locations, Gran Tierra is poised to capitalize on emerging opportunities and deliver value to all our stakeholders. As we continue to profitably advance our operational and financial goals, we remain deeply committed to the well-being of our employees and the communities where we operate, recognizing their essential role in our success. We are looking forward to 2025 and how it sets Gran Tierra up for success for years to come. I will now turn the call back to the operator, and Gary, Ryan, and I will be happy to take questions. Operator, please go ahead.

Our first question comes from Anne Milne with Bank of America. Your line is now open.

Hi, good morning, Gary, Ryan, everyone else in the team. Thank you for the call. I have three very different questions. The first one has to do with your higher cost of sales in 2024. Maybe you could give us an idea of going forward if you think that will go back down to previous levels in 2025? And also incorporating, I guess, the Ecuadorian and the Canadian costs as well? That's the first question. Second question is, if you were to look forward including these assets for ‘26 and ‘27, where do you think you might see production at that point in time? Obviously, your reserve levels are really strong, and you do have a development program, but just looking forward a little bit more. And then the third question is, I think I've asked you this before, but maybe you could just remind me about the sale of production from all three of your regions, more from Canada. I think most of it is domestic, but maybe you could say about that which is not domestic, where it goes? Same question on Ecuador and Colombia, obviously having in the back of my mind the impact of potentially higher tariffs? Thank you.

Hey, Anne, thanks for the questions. Yeah, with respect to the higher costs in 2024, we do expect those to trend down in 2025. We got hit with a number of issues in 2024. Part of it was the removal of the diesel subsidies in Colombia, but also the increase of natural gas because we're buyers of natural gas to generate power. Additionally, there were higher electricity costs in general just across the country. So, that impacted us because approximately 75% of our costs are fixed. As we ramp up production, especially in Ecuador, which are currently all satellite fields and we don't have many wells drilled there yet, but as we move to more permanent facilities and we begin generating gas power in Ecuador as well, we would expect those unit costs in Ecuador to decrease, likely leading to lower operating costs there. Looking out to 2026, we have guidance this year for 47,000 to 53,000 barrels. We're comfortable that we can grow 5% to 10% with this asset base. Much of that depends on capital allocation. We strive to achieve the right balance between reinvestment in our portfolio and portfolio longevity while also aiming for production growth. You mentioned our 293 BOE of 2P reserves, which is a strong indicator of the resource potential and production profile growth in the company. Additionally, with 25% of that being natural gas, much will depend on natural gas prices, which we expect to rise in 2026 and beyond. Regarding where we sell our production, most of our production in Canada is sold domestically. Concerning the tariff discussions, particularly in Colombia and Canada, we're relatively insulated. Our oil in Canada is light oil, which is consumed domestically, much of it being diluent. The tariff discussions have widened the spreads for heavy oil or light oil in Canada, but in South America, differentials are tightening, benefiting us as we produce significantly more in South America than in Canada. This diversification helps us, and we actually see potential net benefits from tariffs if they are implemented.

Okay, so the higher, let's say price because of the lower differentials would more than offset the potential tariff increase?

Exactly. Additionally, in Canada, if tariffs were introduced, we expect WTI to widen, which would offset some of this. Moreover, we think it would negatively impact the Canadian dollar, which is already at $0.70 right now. We get paid in Canadian dollars while our costs here are also in Canadian dollars.

Okay. And where do you sell the natural gas in Canada?

Natural gas is sold domestically and we send it to BP.

Okay, so if you were to take it all together, you expect minimal impact from tariffs if they were to be implemented?

Correct. To be honest, we see it as a net positive for the company. Not necessarily good for the country, but positive for Gran Tierra.

Thank you. Our next question comes from the line of Harrison Lock with Stifel. Your line is now open.

Hi, thanks for taking my question today. Just a couple from me. Firstly, I'm interested in the capital structure. And looking forward ahead of this year, can we expect any changes here? Secondly, how has the integration gone with the I3 asset package? Has there been any surprises here for you guys? And do you see any scope for realizing synergies over time with this? Appreciate it's a different asset base, but with the corporate stuff, if we can have some color around that, please?

Yes, I'll take the first question. Gary will address the second question. When examining our current capital structure, we see that in 2026, we have $186 million maturing. We expect to fund that through cash on hand and potentially some of our available credit facilities if needed. However, by keeping the enterprise value constant, we should see that value transition to equity holders. Therefore, that is our target, along with reduction of total net debt. We are focused on this strategy, and we believe we have a solid free cash flow business to facilitate these changes organically.

And then regarding the integration with I3, we're very pleased that essentially all of the team came across from I3. We have fully integrated the Canadian asset team throughout the company. The substantial benefit we see is technology transfer: applying what is happening in the Western Canadian Basin to Colombia, Ecuador, and vice versa, allowing our teams from Colombia and Ecuador to train in Canada. We regard this as a significant advantage and a positive step for the company, and I can confirm that integration has gone exceedingly well.

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

I just had two questions. First, I wanted to ask, if we were to separate the Colombia business versus the others, could you talk a little bit about discounts in Colombia specifically? And then, I know you've discussed in the past the possibility of additional committed lines. I just wanted to see where you are in that process of negotiating an additional line? Thanks.

Yeah, thanks for the questions. Concerning Colombia, the Vasconia discount last year was around $5 but it has narrowed to $2, while Castilla has gone from $8 or $9 to between $5 and $6. Thus, we have observed a significant tightening of these discounts. This change can be attributed not only to tariff discussions currently in play in Canada and Mexico but also to a reduction in production from Mexico. There are multiple ways to transport crude to tidewater, which provides a natural counterparty to offset some of the production shortfalls seen globally in heavier crudes. Regarding additional lines, we are still actively working on that. We have an undrawn facility in Canada for $50 million, currently capped in our choice in order to minimize our standby cost. The potential borrowing base is considerably higher. We're also seeking to add a working line for Colombia, which we expect to finalize either this quarter or early next.

Our next question comes from the line of Rob Mann with RBC Capital Markets. Your line is now open.

Hey, good morning, team. Thanks for taking my questions. Just two quick ones for me here. The first being, is there any additional information on the Iguana exploration well that you can share at this time? And secondly, although natural gas is a relatively small portion of your portfolio, I know you touched on it a bit there, Ryan, but just curious if you could give us your expectations for the impact of LNG Canada Phase one coming online this year?

Great, Rob. I'll take the first one on Iguana. We've got the well cased and we're just into the completion program now. So, in the coming weeks, we will begin testing.

With respect to natural gas, we still see prices being somewhat volatile this year. When we acquired I3, we were taking a long-term view on natural gas. This year's budget is based on CAD 2.5 of AECO pricing, and we have a fairly large hedge position, which secures us above that level. Long term, we remain very bullish on natural gas, but in the short term, we expect 2025 to experience some choppiness. Shell LNG will obviously have a significant effect, removing about 10% of domestic production from export markets.

Our next question comes from the line of Joseph Schachter with SER. Your line is now open.

Good morning, Gary, Ryan, and Sebastien. First question for Ryan. Thank you for the guidance on the debt goal, net debt of $600 million at the end of 2025. If there is free cash flow above that, if prices improve, what is the goal to reduce the debt faster or narrow the discount given the cheapness on the NAV? Do you see more NCIB or more debt reductions, or a balance between the two?

Yes, that's a great question. We aim for a balance between the two. We plan to allocate 50% of any additional free cash flow to debt reduction and 50% for share repurchases.

One for Gary. I gather there's an election in Ecuador coming up. Are we looking at issues there between the right and left politics impacting the oil patch? Or is it a government that will continue along the same path, which has worked out well for you in terms of building a business there?

Yeah. I think the first round just occurred a couple of weeks ago. President Naboa did better than expected in the first round, achieving a higher percentage of the vote. It's going to the second round, and we fully expect him to win the election going forward. Therefore, we anticipate a continuation of the conservative approach and business-friendly policies in the country.

A question for Sebastien. In the supporting material for the annual report, you break down the reserves there by country. At the end of 2023, just under 70 million for Colombia, with technical revisions and production number at 64 million at the end of the year. Is the program that you have this year capable of stabilizing that, or should we be modeling in declines there while anticipating increases in Ecuador and Canada?

No, I think you should be able to model that and maintain essentially because we've got our whole reserve replacement plan outlined for the year. I feel quite comfortable with maintaining those levels.

Last one, again, this one for Gary. The market's not being very nice today to the stock. Any thoughts there on actions that can be taken, like selling non-core assets? The stock was down below $7.39 now. Any thoughts on the market reaction and what you can do to get more shareholder support?

Yeah. I think what Ryan just mentioned, we're going to continue buying back our stock, particularly since it trades at a significant discount to PDP. We always evaluate non-core assets to strengthen our balance sheet, but also look to consolidate in certain areas in Western Canada. We are doing quite well with drilling in Colombia and Ecuador, and will continue on that path. But primarily, I believe our main tool to address your question is to continue buying back shares.

Thanks for the answer. Thanks very much, guys. Have a good day.

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

I would like to once again thank everyone for joining us today. I would also like to take this opportunity to thank the Gran Tierra team for their commitment and all of the hard work during 2024, and thank our shareholders for their continued support. We look forward to speaking with you in the next quarter and updating you on our ongoing progress. Thank you.

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