Gran Tierra Energy Inc (GTE) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gran Tierra Energy's Results Conference Call for the Third Quarter 2020. My name is Victor, and I will be your coordinator for today. (Operator Instructions) I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, November 3, 2020, at 11 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 an important disclaimer with regards to the information and reconciliation of any non-GAAP measures discussed in today's call.

Per barrel of oil equivalent, or BOE amounts 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'll 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, and good morning to everyone. You'll find our quarterly results on our website at grantierra.com.

With me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer. Ryan will be giving an overview of the quarter and the path that we're on. Tony Berthelet, our Chief Operating Officer, will give a summary of the operating activities, and then we'll open the line to questions.

Over to you, Ryan.

Good morning, everyone. On our last call, we outlined aggressive actions we undertook to protect our balance sheet and cash flows given the recent volatility faced by the oil and gas industry. We have achieved significant reductions in operating and G&A costs, and we're well positioned for 2021 and beyond. We also discussed how we have initiated the required activities to safely resume several operations throughout our Colombian portfolio in strict accordance with our COVID-19 protocols.

Production is now beginning to ramp up and development and workover activities are underway. We are pleased with the progress that Gran Tierra has achieved with a safe restart of operations The safety of our staff, contractors and local communities where we operate is paramount. We commend the teams for their excellent work during the many challenges of 2020 and their diligent management of COVID-19 safety protocols which has allowed an earlier restart of development activities than we originally forecast.

One of our key objectives is to finish 2020 strong in order to set up for a constructive 2021. We believe we are well positioned to withstand the current volatile environment and -- with our low base decline, conventional oil asset base and the operational control for capital allocation and timing, while maintaining the low cost structure, ensuring the safety of our people.

Now I'll discuss some of the production and financial highlights. Our oil production in the third quarter was 18,944 barrels per day, down 6% from Q2. Current production is approximately 22,000 barrels per day.

Through both direct refunds from the Colombian government and VAT on our oil sales, Gran Tierra's collected a total VAT and income tax receivable of approximately $97 million during 2020. By the end of the third quarter, Gran Tierra had also paid down its credit facility balance to $200 million compared to $200 million at the end of and had $21 million of cash and cash equivalents.

During Q3, GTE's combined operating workover and transportation expenses of $12.63 per barrel were down 31% relative to the first quarter of 2020. G&A costs were down 8% on a per barrel basis over the same time frame. On an aggregate basis, these expenses decreased from $56 million in Q1 of this year to $27 million in Q3, a 53% reduction. The majority of these cost reductions represent structural improvements in operations, which are expected to be maintained in a rising oil price environment.

As a result of ongoing cost-saving initiatives, we also expect future per well drilling and completion costs to be reduced by approximately 30% in Acordionero and 20% in Costayaco compared to 2019.

With the significant oil price volatility and logistical challenges due to COVID-19, Gran Tierra like to keep Q3 capital expenditures at a relatively low $7 million. Our Q3 net loss was $108 million, including a noncash ceiling test impairment of $105 million. These results are improvement relative to Q2's net loss of $371 million, which included noncash ceiling test impairment of $398 million. These noncash impairments result from significantly lower oil prices that occurred in the respective rolling trailing 12-month period.

Q3 adjusted EBITDA was $22 million, up from Q2's $18 million. Q3's funds from operations was $8 million, up from Q2's $6 million, were in excess of Q3's capital expenditures.

During the quarter, we entered into additional oil price hedges to further downside protection against near-term low-price environment by securing 3-way Brent collars, a total of 11,000 barrels per day is hedged for the fourth quarter of 2020 and 9,000 barrels per day for the first half of 2021.

In summary, we have taken aggressive actions to protect our balance sheet and cash flows given the recent volatility facing the industry. We have achieved significant reductions in operating and G&A costs, and we are well positioned for 2021.

I'll now turn the call over to Tony, Chief Operating Officer, to discuss our operational highlights.

Thanks, Ryan, and good morning, everyone. At Acordionero, the first workover rig restarted operations on September 1 and is currently on its fourth workover. This first workover rig is forecast to continue operations in the field through the end of 2020 and into the first quarter of 2021.

A second workover rig is now starting up at Acordionero to accelerate workover activity. These workover rigs are expected to return production by 2020 year-end on a total of 8 to 10 wells, which went off-line during the first half of 2020. The total combined productive capacity of the 10 highest priority wells for workover is estimated to be approximately 3,500 barrels of oil per day. We also expect to restart development drilling at Acordionero during the fourth quarter. We plan to drill 1 to 2 wells -- new oil wells by 2020 year-end.

These new wells are expected to begin production during the first quarter of 2021. The drilling rig is then forecast to continue drilling new development oil wells at Acordionero throughout 2021. The next 10 planned wells, 8 oil producers and 2 water injectors, are scheduled to be drilled from the newly constructed southwest pad. Each of these new wells is expected to have an initial oil production rate of approximately 550 barrels of oil per day.

Moving to the Putumayo, We are pleased that the Cohembi Field commenced production on August 28 after a previous shut-in due to local farmer blockades. Prior to the blockades in late February 2020, activities were underway to expand the Cohembi water treatment injection and processing facilities under a 2-phased expansion program. The combined phased expansion would be expected to significantly boost gross water injection capacity to potentially increase ultimate oil recovery.

Lastly, at Moqueta, Gran Tierra continued to optimize the water flood during the quarter, and oil production and water injection were in line with expectations.

In summary, we are pleased that we have been able to safely resume operations in strict accordance with COVID-19 safety protocols that we have put in place.

I'll now turn the call back to the operator, and we'll be happy to answer any questions. Operator, please go ahead.

(Operator Instructions) And our first question will come from the line of Werner Riding from Peel Hunt.

So in spite of production having restarted and Brent back at $40, your equity has obviously remained stubbornly low because of concerns around your debt position. So I don't have a specific question per se, but I'd be more interested to hear your plans on how you're going to meaningfully reduce your debt so that equity holders can see some transfer of value to that part of the capital structure?

Yes. I'll take a stab at that. I think when you look out to -- we will start with Q4 here. Obviously, the objective, as Tony mentioned, is to continue workover program in Acordionero as well as Costayaco and development drilling in Acordionero. And so the company looks a lot different at 28,000 to 30,000 barrels a day that does at 22,000 barrels a day from a free cash flow perspective. So ultimately, there's been nothing changed at the asset base as far as original oil in place, et cetera. This is really just a timing issue due to a very challenging 2020 with a pandemic and the price war. So I think the underlying asset quality is there. And in a rising oil price environment, we do expect to generate more free cash flow, which ultimately we use to reduce our debt.

Our next question will come from the line of Leo Han from Eight Capital.

It's not really related to the quarter. Just wondering, we're seeing a lot of industry consolidation here in North America, whether it's in Permian or here in Canada with Cenovus-Husky. Just wondering if you could sort of comment on the outlook on the consolidation trend in Latin America? And how do you see Gran Tierra play a role in this?

Sure. I think across the industry, you're starting to see consolidation. It's not just the Permian. It's not just Western Canada. You've seen Occidental Petroleum sell over $700 million worth of assets to a private equity firm -- backed firm in Colombia. And we fully expect the consolidation in the industry to continue. It's been a tough year for the entire industry, but it don't let that mask the overarching -- the overarching climate change, the transition of energies.

And to do that, I think the industry are facing unprecedented obstacles. I guess, obstacles is the best word or headwinds for capital in the market. And so the consolidation in the Permian is certainly welcomed by the industry. It's hopefully going to end up in a better managed portfolio and different reasons for different consolidation globally. And we don't expect Latin America in general to be any different. It's a matter of sustainability long term.

Yes. Just a quick follow-up. I think last time when we talked about this, the bid-ask spreads in the market from buyers and sellers are pretty high. Do you still see that as a case today? Or do you see that spread kind of starts to narrow down now?

I think the bid-ask spread is always -- it's tough to pin that down, especially when prices have been so volatile. But I think what you've seen is to get around that challenge, is companies essentially merging with 0 premiums. And I think that's -- I think we'd expect to see little to no premiums going forward.

Our next question comes from the line of David Round from BMO Capital Markets.

Just one on the debt. I think you've got the next redetermination this month. So I was wondering if you can say anything about expectations there and whether because you were quite late in agreeing the last redetermination, whether you've already suffered the borrowing base reduction given the prices we've seen this year. And then there was also a talk in the last set of results of possibly prepayment facilities. Is there any update around those, please?

Yes. Thanks, David. On the borrowing base, part of -- the objective is to have the borrowing base done by the end of November. So we've just started that process. It's a good reminder, however, I think it's relative. If you look at last time when we started the redetermination process, Brent was $18 in April. So prices are more constructive, but it's a challenging time for not just the sector, but for the banks as well with their exposure to energy.

So as we have more information on that, we'll certainly release it. We're always looking at other sources of liquidity. You mentioned prepays, that's one source. There's also potential of farm-outs, asset sales, et cetera. Right now, we're looking at all sources of liquidity to strengthen the balance sheet for the benefit of all stakeholders.

Okay. That's great. And can I just maybe just ask one on Acordionero, and apologies if I've missed it. But are you able to just say how you expect to see production ramp up there over at least the next couple of months?

Yes, you bet. It's Tony here. So as we mentioned in our press release, we're targeting 8 to 10 high productivity wells that basically during this first and second quarter, late first quarter and through the second quarter, as those wells went down, we chose not to repair those.

So really, it's about continuing base water flood optimization and then layering in that shut-in production. And as I mentioned, we're in our fourth workover, and we'll look to continue that activity through the remainder of the quarter to build that production gap.

Our next question will come from the line of Al Stanton from RBC.

I just want to go back to some of the guidance you gave earlier in the year for second half spending. It was things like CapEx of $25 million to $35 million. I suppose, based on what you spent in Q3, those numbers are now sort of $18 million to $28 million. I was wondering if that is still reasonable guidance.

And then also, with respect to money coming in, there was commentary about tax rebates. I was wondering if they were flowing in Q4, as you had previously anticipated. And then tying that all together, I appreciate you've had your covenants relaxed, but there is the one outstanding one, which I think is EBITDA to interest, which has to be 2x. I was wondering if that has any concern for you in the fourth quarter.

Yes. I'll touch on that. With respect to the guidance, there's no changes to our previous issued guidance. With respect to the -- with respect to capital, with respect to the EBITDA, if you look at our financial statements, I think we have fairly robust disclosure in there. Based on our current forecast, we expect to be in compliance.

But as you know, with the challenges in the market right now, things are volatile. So I would encourage you to take a look at our financial statements and disclosure in there. And then the last question -- so what was the last question, Al?

Tax, the tax...

Yes, that's actually been -- thankfully, it's been coming in as we anticipated. And right now, most of the lumpy amounts have come in during this quarter. And going forward on all of our sales, we do have VAT charge on our sales. So that really is we get that monthly from our customers.

And if I may, can I just ask one last question. I've seen the costs coming down on transportation, and that's not reflected in a lower realization. So I was wondering how the dynamics of the local oil market are, whether you're happy with wellhead prices, I suppose, effectively.

We are. We actually improved our netback at both Acordionero and in Suroriente during the quarter. In Acordionero, it started in July; and in Suroriente, it started in September. So we're quite happy with the current arrangements that we have and also have been very pleased with the current differentials, both as you know, with the shortage of heavies worldwide, differentials have continued to tighten. They were fairly tight in the quarter, and they've even tightened more in the last week or so.

Our next question will come from the line of Josef Schachter from Schachter Energy.

Gary, 2 questions. Right now, what is the situation with COVID in Colombia? And are they facing the same kind of issues where we're getting like in Europe where there's more caseloads and they're going into quarantine again. And if such a thing was happening, what would that do to impact your activity plans in Q4 and going forward, if there was an acceleration of the caseload and more of a quarantine situation?

Okay. Thanks, Josef. No, Colombia is not seeing the significant spike that is occurring in Europe. I think the country has done a good job of the way they've managed COVID in the country. We operated throughout. Tony and the team have made crew changes from the very beginning by putting protocols in place. And so our view is we are gradually bringing our staff in Bogota back into the office.

But throughout all of the COVID outbreak, we continue to operate our fields that were economic. And so we're very comfortable with our teams' protocols that are in place to move people and logistically around the country to ship oil throughout the country. And we monitor it closely. But the answer to your first question is no, not seeing the same thing that's happening in Europe and the second is we don't anticipate any impact with what we have in place.

Okay. Super. My next area I wanted to cover is if we have -- the questions were about the debt, if we see Brent at $45, $50, the extra capital would not go into more activity would go to pay down debt. And then on the other side of the coin, if we saw Brent go to $35 or $30 because of all the issues of maybe more COVID and less demand, would you restrain your spending? And when you cut back and what price point would we should be watching for the activity level to be pulled back?

Yes. I think the answer to that, Josef, is back in August, September, as things started stabilizing, we had hedges in place. We put more hedges in place before we started reactivating fields. And the anticipation was through the middle of next year.

We're comfortable that we have hedges in place to reactivate fields and start ramping production. Naturally, we, like the rest of the industry, watch it. Our pressure point is $25 to $30 a barrel where we have to reverse that. And we watch that closely because it cost us money to shut-in fields.

And the first part of your question is that that's at what is our pressure point on the downside. We're comfortable even with today's volatility that we have the financial instruments in place.

The second -- the first part of your question is at $45 to $50, the beauty of our portfolio is we effectively operate everything. And so we have the ability to allocate capital. And you're exactly right. At $45 to $50 a barrel, we will manage our development and our operation going forward into next year as well. And that's really what Tony and the team watch.

Our next question will come from the line of Miguel Ospina from Compass.

I have 3 questions. The first one is if you can give us some color on OpEx going forward. You have been spending between $20 million to $25 million per quarter. So my question here is what is a more sustainable level going forward?

The second question is, if you have any exit production target with all the development plans that you have? And third question is if you can confirm that your respective CapEx for the fourth quarter will be between $25 million to $30 million, is that right?

I'll take the -- it's Tony here. I'll take the OpEx question. I'll start off with that. So yes. As we come into the fourth quarter, clearly, we're going to continue with some of the minor field reactivations. So looking at a lifting cost forecast coming into the quarter, I would expect us to be in that $20 million range to $22 million, somewhere in that range.

On the workover cost, obviously, we're going to continue to accelerate the workover activity on those suspended wells. So some of that cost will increase as we continue that workover. That's a split between capital and OpEx for that activity. So in the fourth quarter, yes, we will see some incremental costs, but there will be barrels coming with that. So on a per BOE basis, we look to stay relatively flat. So that's guidance on OpEx.

And then in terms of exit targets, much will depend on how things go with COVID, managing COVID and continuing that activity. But -- so on that, we'll provide more formal guidance coming up. But yes, we are at 22,000 barrels now, and we look to continue to add production, both through minor fields and some of the workover activities.

And then on that, as Tony mentioned, we do have a fairly significant amount of fixed cost, 70% of our costs are fixed. So as we ramp up production, we would expect to get the benefit into the end of this year and into next year. And our capital guidance was $25 million to $35 million.

Our next question will come from the line of Ivan Fernandez from Pictet.

A couple of questions. On VAT refunds, could you tell us exactly what was the total collected during only the third quarter. I guess the language is a little bit -- I guess, it could have included October and early November in the language you put in the press release.

Yes. We only included in here just for the year-to-date, and that year-to-date was as of September 30.

Okay. All right. So what was the total for the third quarter?

That is a good question.

Just because I was reading the language on the second quarter, and it doesn't quite make it easy to calculate the total up to that point.

You want to come back to that one, Ryan?

Yes. I'll come back to that one.

Sure. Okay. Sure. The second question is on the recalculation of the lending base for the revolver. I joined the call little late, so I'm not sure you already commented on this, but could you tell us how those conversations are going? I think the next calculation is now in November, correct?

Yes. And we just kicked off the process. So as we have more news, we'll update the market.

So you can't give us any feeling to how the reaction has been so far or what conversations you might have had...

Literally, the process has just started. But I think you -- to put in context of the last redetermination, prices are up quite a bit higher. Our costs are down, and we're comfortable with our reserve base.

Okay. Great. So again, I don't want to hold up the call. So if you guys would like maybe to e-mail me the answer for the VAT for the third quarter, that will be fine.

Yes. No, actually, the amount collected just during the third quarter was $50 million. And that's a combination of revenue as well as direct refunds.

Okay. And do you have any kind of expectations for the fourth quarter of VATs?

The big -- yes, for Q4 most of it, I'd mentioned earlier, most of it is coming through the revenue side of things. And depending on pricing, we would expect between $10 million and $15 million.

(Operator Instructions) Our next question will come from the line of [Akbar Kausar from InVent].

Just a few questions for me. The first one is, I was just looking through the cash flow statement. Working capital, especially the accounts payable line item has been quite a large drag for the year-to-date period. Specifically, there's a line item under cash flow from investing activities, I think, for $69 million for the year-to-date period. Can you explain what that is?

Yes. That really is -- I think if you look at Q4 of last year, there's a very heavy spend. And in Q1 of this year was fairly heavy spend relative to our funds flow. We're expecting to have more of a balanced quarter, but then prices fell out at the end of February. So really, that's just the unwinding of the payables. So now we've gotten all of our vendors current.

So these are payables related to CapEx spend that was done last year?

Exactly. CapEx and OpEx, but the majority would be CapEx.

Okay. So there's not a concern here of your suppliers wanting to collect faster because there's concern on the company.

No, no, no. It was just us getting all those payables current. And there was a little more -- the entire industry, including our suppliers, felt a lot of stress in the dark days of April, May and June. So I think the -- everyone is fueling some stress during that period. Now our suppliers are in good shape, and we have everyone caught up.

Okay. The next question I had was you had mentioned earlier that you have certain levers for liquidity, farm-outs and asset sales being a couple of them. And I guess you just mentioned them, but can you give maybe just some numbers around -- or just some details on what the options are? How fast could you execute on those plans? And on the farm-out point, I mean, obviously, you've got the capital plan quite a bit. Does it make sense to maybe farm-out just so that someone else can carry the CapEx and you're not maybe harming some of the assets by underinvesting in them?

Yes. Akbar, thanks for the question. As far as timing, like I said, the market is quite volatile. But we're continuing to look at those options. And one of them could be either sale of some reserves or farm-out or farm-in into some of our exploration lands. I think we'd look at both of those options.

I think from our core assets, from a development standpoint, I think we're very comfortable that we're maintaining proper reservoir management on Acordionero, Costayaco, Moqueta and Suroriente. So to the extent that we could accelerate some of the exploration with someone else's money, absolutely something that we would do.

But what would be the trigger for that decision? I mean, things are pretty tough right now. So why not do it now?

Yes. Yes. Like I said, we are looking at that process. And as we have any updates on that, we'll certainly let the market know.

Okay. And just a couple of more questions. Is there a way for you to hedge the Vasconia discount? If that widens out in another sell-off that can kind of protect yourself?

Yes. One of the challenges -- we do all of our hedges with our syndicate. And right now, our syndicate doesn't have the capacity to hedge Vasconia, but it is something that we'll continue to look at.

Okay. And then the last question, I also joined a few minutes late. I'm not sure if you touched on this. But pro forma for all these workover programs, what is your production going to be?

Yes, it's Tony here. So we've talked about adding roughly 3,500 barrels of production, some of which we already added to get to that 22,000 barrel production rate today. So that's kind of the target that we're looking at with the 8 to 10 highest producer wells that are currently shut-in.

And then that (inaudible) of the new drilling or anything. That's correct.

That's correct. So how do I -- how do I reconcile that 22,000 with the 30-plus that you were doing a year ago?

Well, I think the big part is we stopped drilling. We stopped our development drilling and Acordionero and some other things we're planning. And so that's really just deferred production that will catch up once we start drilling. Tony and the team are working on that now. And we expect to resume production before the end of the year.

And we do have other production behind pipe that we will work over in Q4, Q1 of next year as well as some other fuels we'll bring on in a more constructive environment.

Constructive environment being what?

Better price.

Better price, yes.

And all right, gentlemen, there are no further questions at this time. Please continue.

Okay. Thank you, operator, and thanks everyone for participating in today's conference call. It's been a very unusual year. We thank you for your patience and your support, and we look forward to talking to you after the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.