Gran Tierra Energy Inc (GTE) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gran Tierra Energy Results Conference Call for the Second Quarter 2021. My name is Angie, and I will be your coordinator for today. (Operator Instructions) I would now like to remind everyone that this conference call is being recorded and webcast for today, Wednesday, August 4, 2021, 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 reconciliation of any non-GAAP measures discussed on today's call. Per barrel of oil equivalent, or BOE, amounts are based on the working interest sales before royalties. Finally, this earnings call is property of Gran Tierra Energy, Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra.

I would now like to turn the conference over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Thank you, Angie. Good morning, and thanks for joining us for Gran Tierra's Second Quarter 2021 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.

Yesterday, we issued a press release that included detailed information on our second quarter 2021 results, which are available on our website. Ryan and Rob will make a few brief comments, and then we will open the line for questions. I will now turn the call over to Ryan to discuss some of the highlights from our second quarter results.

Thank you, Gary. Good morning, everyone. In our last few press releases, we discussed how a number of protests and blockades across Colombia impacted several key transportation routes throughout the country during the second quarter, resulting in a temporary shut-in of some of our wells and oil fields. As a result of these blockades, just under 600,000 barrels of oil production were deferred during the second quarter. I would like to point out that these barrels have not been lost, they're simply being deferred. We also do not expect any negative impact on the company's reserves as a result of the blockades.

As announced in mid-July, the Colombian government successfully negotiated the end of the blockades in the areas that were affecting Gran Tierra's operations. And we've been able to start restoring production throughout our entire portfolio. Our oil production in the second quarter was 23,035 barrels per day, down 6% from the first quarter. This drop is solely due to the temporary impact of the blockades during the quarter.

Gran Tierra is on track for a strong second half in 2021 as we are forecasting second half 2021 total production averaged 30,000 to 32,000 BOE per day. We're also reaffirming our 2021 full production guidance of 27,500 to 28,500 BOE per day. By the end of the second quarter, Gran Tierra had further paid down its credit facility balance to $175 million and had $20 million of cash and cash equivalents.

During Q2, Gran Tierra achieved a significant reduction in operating expenses. GT's operating expenses of $12.46 per barrel were down 9% relative to the first quarter of 2021, despite a reduction in the company's production. This decrease in operating expenses achieved mainly by lower power generation costs in the Acordionero field.

I'd also like to discuss a few increases in other expenses incurred during the quarter. Due to the temporary impact of blockades during the quarter, Gran Tierra rerouted some of its production to higher-cost transportation alternatives. As a result of these temporary alternative marketing arrangements with higher costs, the quality and transportation discount was up $2.56 per barrel during the quarter to $11.54 per barrel relative to the prior quarter. Transportation expenses were also up $0.28 during the quarter to $1.43 compared to the prior quarter.

With the resolution of the blockades, we have restored our normal lower-cost transportation routes and reaffirm our 2021 full year forecast for quality and transportation discount of $8 to $10 and transportation expenses of $0.90 to $1.10. G&A expenses before stock-based compensation increased by $0.77 per barrel during the quarter compared to the prior quarter due to the timing of certain corporate costs and lower production. We are still affirming our -- reaffirming our 2021 full year forecast for G&A expenses of $1.50 to $2.50 per barrel.

Second quarter CapEx of $37 million was flat quarter-on-quarter as we press ahead with our development drilling operations, completion workovers of the Acordionero, Costayaco oilfields. We expect approximately 50% to 60% of our 2021 capital program of $130 million to $150 million has been spent during the first half of 2021. Our Q2 net loss significantly narrowed by 53% quarter-over-quarter to $18 million, and our EBITDA substantially improved $34 million, up from $60 million in the prior quarter.

Q2 funds from operations was $23 million, down from Q1's $29 million due to the blockade-driven drop in production and temporary increase in expenses. In terms of hedges for the second half of the year, we have hedges in place for 10,000 barrels of oil per day with a weighted average floor of $57 per barrel and a weighted average ceiling price of $65.29. During the quarter, we realized hedging loss of $24 million, but first half hedges have now rolled off as of July 1 and have been replaced with much higher floor and ceiling prices.

In normal course, Gran Tierra has also filed a new shelf Form S-3 as our existing shelf filed on September 5, 2018, was set to expire. In summary, we are on track to achieve our 2021 guidance and our forecast significant free cash flow of $100 million to $120 million for the second half of the year. We continue to prioritize debt repayment, and we have safely and diligently ramped backup operations through our portfolio. With a constructive oil price environment, a successful first half 2021 drilling program and the expiry of our first half 2021 oil price hedges, we are very excited about the second half of 2021 and 2022.

I'll now turn the call over to Rob Will, VP Asset Management to discuss our operational highlights.

Thank you, Ryan, and good morning, everyone. At Acordionero, we completed a total of 13 workovers during the quarter to restore wells that had gone offline. During the current workover campaign, the average electric submersible pump replacement cost has decreased 57% from fourth quarter 2019. Also, at Acordionero, the development drilling rate was active from the end of November 2020 to mid-May of this year, drilling both producers and water injectors. We're pleased that the average cost per well has decreased 38% since 2019 and the defined wells drilled from PADD 6 resulted in a pace at a well from spot to on production of 10.9 days at a total cost of $1.9 million.

We continue to believe that our prudent reservoir management of Acordionero's water flood has allowed us to restore the field's production to a level last achieved 20 months ago, which strongly demonstrates the effectiveness of the water flood.

Moving to the Putumayo. A quick update on our infill development joint campaign of 3 oil producers at Costayaco. The Costayaco-43 well is currently on production and the Costayaco-42 and Costayaco-44 wells are both expected to start production during August 2021. At Moqueta, we commenced a 6-well workover program during the quarter. One stimulation and one injector conversion were completed. Two remaining objective conversions and 2 producer workovers are expected to be completed by early September.

Lastly, at Suroriente, our facility expansion program is progressing as planned, which is expected to allow additional production to be brought online in the second half 2021. The workover rate is also currently running larger pumps in 4 oil wells. The pump upsizing program is being done in conjunction with the facility expansion program.

In summary, we are pleased that we've been able to safely resume operations after the blockades across our coming portfolio.

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) Your first question comes from the line of Josef Schachter with Schachter Energy.

A couple of questions for me. Number 1, I'm not sure, this is probably for -- potentially for Ryan or Rob. The asset impairment that you took a year ago, $398 million, a lot of Canadian companies domestics have been reversing that. Some part of that is probably gone because of your production. But what is the stance in terms of reversing the impairments? And what -- if there's any conditions, what are those conditions before you'll reverse that to the balance sheet?

Yes, because we follow U.S. GAAP, under U.S. GAAP, once the write-off happens, it's gone, whereas under IFRS, you have to write that back up. If we were following IFRS, we would be writing that back up for sure.

Okay. So that's not going to occur in the future. Second, the big increase you're looking for in terms of production for the second half of 30,000 to 32,000 and the number of 23,000 now, where is production in August just to get a feel that the ramp-up is occurring. Where are you now in terms of your overall production?

Yes. We're at 29,000 barrels a day now. We've resumed production after the blockades were lifted. And the remainder to get us above 30,000 comes from bringing on wells that we've drilled and workovers and the pump upsizing that Rob mentioned.

Okay. Lastly, if I can. In the commerce magazine, they're talking about teacher strikes there and that they're pretty powerful union. Is that affecting the recovery of the Colombian economy? And do you see any impact on your company if this drags on for many more months?

Yes. It's now moved from blockading and protest to government discussions with the protesters and the protest committee. We're back to normal operations, both in the Middle Magdalena and the Putumayo. But we are also actively involved with our community programs assisting the government everywhere we can. And so I think, Josef, the bottom line is, it did hurt the economy of Colombia. No question about that. And the governments are taking it quite serious, to try to resolve some of the issues that have come up over the last 18 months with -- especially with COVID and the economic downturn for -- they caused a lot of these protests. And so it is a serious -- the government is taking it seriously, but we see that we're back to normal operations and back to an assist mode.

Super. Well, I'm glad to see the big pickup in production, and we'll look forward to much better quarters going forward.

You bet.

Your next question comes from the line of Al Stanton with RBC.

A couple of questions, if I may. I'll just do them sequentially. On taxation, I see there's a receivable on the balance sheet, but I was wondering what guidance you can give us for the outlook maybe for the end of the year or the start of next year as revenues are starting to go up and spending is not, is the tax man going to wake up and take a bigger slice early in 2022? That's the first question.

Yes. I'll touch on that one. Yes, with the taxes, we still have the receivable position. And given our -- and so at the end of last year, we had approximately $90 million. We expect that ending balance to be around $40 million this year just with prices where it's at. So really a net cash inflow of $50 million. You'll notice in our notes in our 10-Q you'll see that we put a reconciliation from beginning balances to ending balance. We do pay VAT on goods, as you point out, both on some of the OpEx and CapEx, and there is also withholding tax on some of the revenue, which increases that income tax receivable.

But we factor that all in, so it's $50 million cash inflow in 2021. Looking out to 2022, with our existing tax pools and losses, we still expect to have minimal taxes in 2022 and then gradually increase from there, depending on spending after -- during 2022.

Okay. And you mentioned spending and also earlier on you mentioned your shelf filing, which looks to have spooked the market. I was wondering you gave the impression just now on the call that it was just paperwork or something you would have done with the expiry of the previous shelf. Is there anything more than that? Should we be expecting something imminent?

Yes. No, historically, we've always had -- like most companies have the shelf in place, ours was set to expire in September and just due -- it's always easy to do it just when you get the quarter out. So we did it a month earlier than we normally would have. So I would just put it in the normal course category.

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

How are you thinking about next year with free cash flow and debt reduction, and you have an exploration program also that you're going to be commencing? So kind of I guess that and how -- then how you kind of get to that path to 40,000 plus barrels a day that your reserve report kind of outlined you're capable of getting to?

Yes. We are continuing on the exploration side with the permitting, trying to compress that time line and getting ready for exploration in both in Ecuador. We have some quite exciting exploration just across the border with some, as you know, a discovery just across the border that we look to appraise and across the rest of our portfolio, the Tajinos, the Middle Magdalena and the Putumayo. And so I think the answer to your question, Phil, is next year, as you can see from our financial outlook, it's a totally different world than it was a year ago with quite a bit of our debt paid off. Free cash flow at current prices at strip prices, we will be directing some of that to our exploration portfolio, and it's quite exciting. We're ready to go. But there are things that we're doing this year to get ready for next year.

Your next question comes from the line of David Herzberg with Stifel.

I was wondering if you could tell us if you have any hedges in place for the first half of '22? And if not, perhaps some color as to your thinking about that in terms of hedging some production in terms of timing and perhaps what pricing might be looking to achieve?

Yes. I think the answer to that is we don't have any hedges in 2022. We'll look at that towards the end of this year. We hedged the first half of this year to bring production back on, which we successfully did. And a modest hedge for the second half. We don't have any plans at the moment for 2022 as we look at our long-range plan, our 5-year plan, we'll be discussing that over the next couple of months and address it then.

Your next question comes from the line of Patrick O'Connell with Alliance Bernstein.

Could I ask a little bit about the cost side of the equation that this quarter was still definitely a little bit elevated on lower production and some of the onetime items. Can you talk about the confidence of getting into those ranges that you had laid out in the updated budget, I think the OpEx came up just a tad, but everything else is kind of in line. So how confident are you that you'll be able to bring those costs down for the second half of the year?

Yes. Thanks, Patrick. Yes, we're very confident. I think about 70% -- 65% to 70% of our operating costs are fixed. And so we got hit in this quarter just with the lower production of blockades. The team did do a very good job suspending contracts to try to minimize the cost burn during the quarter, but if you're going to move so quick in a situation like that. And then if you look at our transportation costs, we did have to move some of our barrels through different routes that have both a higher quality discount as well as higher transportation costs. And that was just to keep the barrels moving.

Obviously, with oil prices where they're at, they were still high-margin barrels to sell at that level, but it was quite painful using some of those routes. We're back to normal course operations using all the routes that we normally have used in the past.

Your next question comes from the line of Al Chang with Citi.

Just a few questions from my end. I know at some point you were evaluating alternatives for your remaining PetroTal stake. Just wondering, is that something still being discussed? Or has there been any movement on that front?

The answer to that is we always look at all of our portfolio, and we have no immediate plans, but we, on a continuous basis, look at that position. Long-term, it's not something that we will keep for the next 5 years. But we also are very happy and pleased with the management team at PetroTal are doing, and they're doing a great job. Good assets. But long-term, we'll continue to evaluate.

Okay. Got it. That's very helpful. And on the covenant release period, when is the first testing date after that expires? Is that as of October 1 or the end of fourth quarter?

Yes, good question. At the end of -- as of October 1. So really, the first test will be in February. So based on where things look right now, we're very comfortable we'll be able to (inaudible) early, effective October 1.

Okay. Understood. And I just want to clarify, given the balance on the credit facility is currently $175 million, are you still expecting to close out the year in the $60 million to $70 million range?

Correct. Yes.

Your next question comes from the line of [Roman Rosaleres with Valens Capital].

This is Roman from Valens Capital. So just to clarify on the production guidance. It seems that to achieve the midpoint guidance, you need to sustain like 32,000 barrels per day. Can you confirm this? For the second half, I mean.

That's correct. We confirm that. Yes. Our guidance for the second half of the year is 30,000 to 32,000 for the second half. Yes.

Okay. Awesome. And a follow-up maybe on royalties. We understand that this quarter it was higher due to HBR. So what can we expect if Brent stays above $75 per barrel?

Yes. A reasonable effective royalty rate is around 16% to 18% at that level.

Even if Brent stays above $75 per barrel?

Correct. Yes.

Ladies and gentlemen, we've reached the allotted time for questions. I would now like to turn the floor back to management for any additional or closing remarks.

Thank you, Angie. I would like to thank everyone for joining us today, and we look forward to speaking with you over the next quarter and update as we have progress. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.