Gran Tierra Energy Inc (GTE) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the Second Quarter 2022. My name is Justin, 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, August 9, 2022, 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 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. Per barrel of oil equivalent or BOE amounts are based on a working interest sales before royalties.

Finally, this earnings call is property of Gran Tierra Energy, Inc. Any copy or rebroadcasting on this call is expressly forbidden within the written consent of Gran Tierra Energy.

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

Thank you, Justin. Good morning, and thanks for joining us for Gran Tierra's Second Quarter 2022 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 Paul Baker, our Director of Asset Management for the Northern Putumayo region in Colombia.

Yesterday, we press released -- our press release included detailed information about our second quarter 2022 results, which is available on our website. Ryan and Paul will make a few brief comments, and then we will open the line for questions. Ryan, please go ahead.

Thanks, Gary. Good morning, everyone. Gran Tierra has had another strong quarter where we were able to deliver on our development campaigns in both the Acordionero and Costayaco fields, while continuing to progress on work required before drilling our exploration wells in both Ecuador and Colombia.

During Q2, Gran Tierra generated net income of $53 million, up 275% from the prior quarter and versus a net loss of $18 million in the second quarter of 2021. This resulted in earnings of $0.14 per share, which is up from $0.04 in the prior quarter. We achieved material production growth with our second quarter 2022 oil production averaging 30,607 barrels per day, up 4% from the prior quarter and up 33% year-on-year. This is the highest quarterly production that Gran Tierra has achieved since the fourth quarter of 2019.

The company's operating netback of $59.62 per barrel was the highest since the third quarter of 2014, which was up 14% from the prior quarter and up 81% year-on-year. This strong annual increase was driven by Gran Tierra's 33% increase in quarterly oil production year-on-year and strong growth in the Brent world oil price.

Q2 2022 funds flow from operations increased by 345% to $104 million compared to a year ago and was up 19% from the prior quarter, again, due to higher oil production volumes and strong Brent pricing. Our Q2 funds flow was the highest achieved since the first quarter of 2013. On the diluted per share basis, funds flow from operations was $0.28 per share, which is up from $0.06 per share in the second quarter of 2021 and up from $0.23 per share in the prior quarter.

In terms of capital expenditures, approximately 65% was incurred during Q2, which was -- $65 million was incurred during Q2, which was higher than the prior quarter's level of $41 million. This was a result of the majority of Gran Tierra's capital development programs in both Costayaco in the Putumayo being completed during the second quarter.

Gran Tierra has fully repaid its credit facility. In only 2 years Gran Tierra paid down its credit facility balance from $207 million to 0, which clearly demonstrated our commitment to rapidly reduce debt with the company's free cash flow.

As of June 30, 2022, the company had a cash balance of $109 million and net debt of $491 million. Our annualized Q2 net debt-to-EBITDA ratio was below 1x. And over the long term, we are targeting a net debt-to-EBITDA ratio of under 1x and assume $60 per barrel Brent case.

With our credit facility now fully paid off, we plan to maintain a cash balance of $75 million to $100 million in order to maintain liquidity. We plan to deploy excess cash over and above our targeted cash balance to strengthen our balance sheet, buy back shares and accretive opportunities to continue to strengthen our portfolio.

I'll now turn the call over to Paul to discuss some of the operational highlights from our second quarter results.

Thanks, Ryan. Good morning, everyone. Gran Tierra continues to drive efficiencies at its major fields. In Acordionero, a new pacesetter well was delivered in the quarter, which took only 3.9 days to drill. The time to drill a development well in the Acordionero has decreased by a further 10% with the average drilling time reduced from 5 days to 4.5 days. As a result of this reduction, the average per well drilling costs have decreased to $1.2 million, which is 9% lower than originally budgeted.

We continue to deliver on our outline development programs in the Acordionero with the delivery of the 16th well in the 2022 program. In the Putumayo, our Costayaco development program has been completed under budget because of cost reductions through optimization and the successful application of techniques utilized in our Acordionero development programs. All 5 Costayaco wells were completed during the first half of the year.

Finally, our exploration programs continue to progress. In Ecuador, we are in the final stages of well site construction for the planned Bocachico-1 exploration well in the Chanangue block in Ecuador's Oriente Basin. We expect to start drilling this well in the third quarter of 2022.

In Colombia, in the Putumayo Basin, we continue progressing our exploration activities. The well site construction has started for the Rose-1 exploration well in the ALEA-1848A block, which has a planned spud date in the third quarter of 2022.

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) Our first question comes from [Oriana Covell].

I had a couple of questions. But I think that the main one would go related to the proposed tax reform that was submitted by Petro's government yesterday. So just trying to understand from the royalty tax extension and the proposed new price scheme, what would -- how do you see the estimated EBITDA impact of this fiscal reform proposal at current price levels? And specifically how do you see potential changes in your effective tax rate playing out?

Yes. It's a good question. We're still working through the tax reform and the implications. But as I'm sure you're aware, the tax reform is just a proposal. It still needs to go, 2 debates in the lower chamber, 2 in the upper chamber before it's actually signed into law. So we're currently assessing the impact.

I understand that might be too soon, but if there are any thoughts more precisely, perhaps trying to understand how do the current tax expedition on royalties work? Does it flow through your net revenues? And how could it impact in your bottom line? That would be perhaps your first thoughts on that. And just following up with that, given that it has to go through Congress and Senate, are there any chances that E&Ps or some legal recourses that could prevent from it to go through the way that it's been proposed?

Yes. I think if you -- I'll touch on the second question first. I think if you look at past tax bills that were put forward, very similar to what you just saw in the U.S., the time it gets to the final bill, a lot of times looks quite different than what was originally proposed. So that's why we're in a wait-and-see mode to see what the impacts are. But we expect to be some changes. But obviously there's no guarantee on that.

And with respect to the royalties, our take is a lot of the royalties we pay to the government in kind, they pick up the barrels. So we actually don't even deduct those barrels. They're taking those barrels right from the wellhead. So we don't see that as a major impact to Gran Tierra at this moment. But again, we're still assessing that impact.

Perfect. That's very helpful. And maybe just one last one from your quarterly results. We noticed that there was still a jump in lifting cost over to wells workovers. So just understanding and framing your full year guidance, what should we expect for the next couple of quarters given that you seem to be above the $11 to $13 per barrel that was targeted for the full year?

Yes. We expect that as we increase our volumes in the second half of the year, we expect that per barrel metric to go down and we still are planning on being in the range.

Our next question comes from Adam Gill from Paradigm Capital.

Just in terms of Ecuador, should you have some success on the exploration program later this year, how aggressive could you be in capital allocation to that country in 2023?

Yes. We're watching very closely Ecuador and watching very closely what President Petro will be doing in Colombia. As you know, we have a big portfolio in Colombia for exploration, but we also are very keen on Ecuador. And so the answer to your question is, if things do slow down in terms of regulatory, in terms of being able to execute program in years 2 through 4 of President Petro's term, we would reallocate certainly to Ecuador. We have very prospective blocks and we have commitments. We're currently progressing those in the country. And so for us, it really is a portfolio, the Putumayo into the Oriente and Ecuador, and we'll play that one by ear.

But as far as regulatory requirements, we have the EIAs on the entire block. So we could, as Gary mentioned, be [at Ecuador].

And our next question comes from Josef Schachter of Schachter Energy Research Service.

Ryan, for you first, on the debt load, you mentioned $491 million net debt, and then you want to be down at a $60 debt level. Are we looking at another $100 million, $150 million? And then how do the levers work between once you get down to that debt level in terms of more spending on growth versus NCIB or other ways to return money to shareholders? How are you guys looking at that whole metric given the strong cash flows you'll be generating over the coming quarters?

Yes. I think on the first part of the question is, yes, we think by the end of the year, if you look at our targeted net debt by the end of the year around $400 million. We would be very comfortable at those levels. And I think that is -- to your second question, so we will get there by the end of the year, really by Q4.

And then second part of the question is it really comes down to capital allocation. As you correctly point out, is we have a great portfolio in Colombia, both development and exploration, also exploration Ecuador. And so it's just getting that right balance of strengthening the balance sheet, growth capital. And really when we look at growth cap, we're always looking at how do we optimize the NPV of our existing assets. And then also share buybacks. If you look at where we're trading at right now, if you look at the NAV per share, especially if you look at strip pricing, we're obviously trying to -- like most of the industries a substantial discount to 1P and even PDP.

So again, that's a pretty use of proceeds. And then also, when you look at our bonds, our bonds are trading at $0.85 right now. So that could be another potential use. So it's really just getting the right mix of the capital allocation.

Okay. And then one for Gary. With -- there's been some articles in the Economist about some disruptions with indigenous people in Ecuador and some issues with the government. Does that have any ability to disrupt your program in Ecuador? Are you in the same area? Or is it a different area where then -- how is the relationship with the local indigenous people and then people living in the area where you want to work?

Yes. I think the answer to that, Josef, is the entire oil region has -- is prone to disruption, but we've spent a lot of time, both before COVID, during COVID and after COVID with our community relations, working with the folks in the area where we have operations. And so we do believe that we have the relationships with the indigenous community that we can progress with what we're doing. So we're comfortable with our operating ability in Ecuador.

And our next question comes from Roman Rossi from Canaccord Genuity.

So congratulations on the excellent results. So I have a couple. Let's ask sequentially. So first, so looking at the CapEx breakdown, you booked $10 million of exploration CapEx. So I was wondering, this was related to the dry exploration well you drill and where was that well drilled?

The CapEx, we did -- in our last press release, we did -- as we mentioned, the Churuco well, unfortunately, was dry. So we released that. And the $10 million in CapEx, I think it's a lot of the -- that's why we give a range on our CapEx. And some of it is just reallocating from development to exploration, exploration back to development. That's what we try to focus on just the total capital program.

And the location of Churuco is in the region of Costayaco, Moqueta of the producing fields.

Okay. Perfect. And so regarding Ecuador, as you mentioned, you are progressing with the drilling there. So I assume that you have quite long testing period there. So when could we expect that you will start selling production?

Yes. We don't forecast any production from exploration, but what I can tell you, very similar to the Putumayo, that the infrastructure is there for -- when we do tests, we collect that testing volume and we take it to sales. So that allows us to have long-term testing to get the information that we need, but also generate revenue effectively immediately. And so if we have success, we -- our long-term test will be sales volumes.

And just one last question. So regarding hedging, you currently don't have any hedges in place. I know oil prices are high, but do you have any -- in particularly thinking going forward, as we are seeing some downside pressures, are you expecting to hedge anything during the second quarter?

Yes. We're currently working with some of our offtake providers about what sort of hedging arrangements we can put in place. It was a challenged before when the curve was $12 in backwardation. So we're currently assessing that and working with optimal structure with our -- some of our partners.

And our next question comes from Jose Correia da Silva from BTG Pactual.

Congrats for the good results. And I have a couple of questions and just picking up on the last one regarding hedges. Could you quantify what was the impact or if there was still any impact from hedges that you had in place during this -- in the second quarter? That's my first question.

Yes. Our hedging losses in the first half of the year were around $26 million, $27 million. And so there was some impact in the second quarter.

And the second one is if you can give me some guidance, let's say, you guide for production of the year. But can you guide on what's the exit production that you are hoping to finish 2022 with in terms of total exit production?

Yes. It will be in the low 30,000s. We're currently focusing on developing the water-floods that we have. So in the 32,000, 33,000 barrels per day, we fully expect to deploy capital to raise that plateau over the coming years. We have very high-quality probable and possible reserves. We talked about in all of our disclosure, the polymer floods that were pilot-testing in the Acordionero. Those will change what our targets are over the next 2 to 5-years. But the answer to your question is, in the 32,000 to 34,000 barrels a day exit rate.

My last question is the following: regarding your excess cash or excess liquidity, when you guys look at your bonds trading in the $80s, which seems very discounted, especially given the very good results that you guys are having generating free cash flow, also lowering your leverage considerably. So are you guys thinking about the possibility of using cash to purchase some of your bond on the secondary market, given they look for discounted?

Yes. It definitely is one of the considerations. I think in the release, we mentioned strength in the balance sheet, share buybacks and potential accretive acquisitions or M&A opportunities and to strengthen the balance sheet, any bond repurchase would be encapsulated within that statement. So it is definitely something that we're looking at. So we agree that we think they're undervalued.

And our next question comes from David Herzberg from Stifel.

I guess I have 2 this morning. The first is in July in your operations and financial update, you had mentioned that you were looking to replace your credit facility with a smaller one. I was wondering if you had any developments or color on that and what we might expect in terms of the size? And then the second question would be with respect to CapEx, if you're still guiding towards a $220 million to $240 million full year 2022 CapEx?

Yes. No, it's great. On the first one, yes, we continue to advance a number of initiatives -- so as we finalize something and to the extent that we do finalize something that then we'll announce at that time. I think the range we're looking at is in the $75 million to $125 million replacement facility. And on the second question on the CapEx, yes, we're so comfortable with that $220 million to $240 million range.

And our next question comes from [Madar Al Madiwako] from Barclays.

Congratulations on these great 2Q earnings. I have 2 quick questions, especially related to the 2025 bonds maturing obviously in 2025. My first one is trying to understand what's the logic behind the consent solicitation? And basically now that the content has failed, what your approach is going to be for 2025? And the follow-up question is, are you guys thinking about using down the line free cash flow? Or are you trying to think about the refi of these 2025? I appreciate you already mentioned some of the key pillars that we're going to focus on for Gran Tierra as in debt buyback or equity. So just curious to see how are you thinking about this 2025?

Yes. I think a lot of it -- thanks for the question. I think a lot of it obviously is depending on market conditions. But I think if you look at the last 2 years and where we did have -- we did suffer quite a few hedging losses, and we were just ramping up production, we were able to repay $207 million off the credit facility as well as significantly reduce our -- or increase our cash balance. We substantially reduced our net debt balance during that period. And so I think we're comfortable with the free cash flow nature of the assets to the extent that the market wasn't available, we'd be in a good position to repay the bonds in full in 2025.

And then with regards to the consent solicitation, if you can give us just some details of why did you think -- why did you guys do it? And what's your strategy now? Should we expect another potential -- some sort of LME in the same way or not really?

Yes. I think again, a lot depends on the market, on the consent solicitation and really the exchange, the intent of that was to provide a more liquid bond for holders. We thought it was a fair offer and we didn't get to the point where we wanted to and then the offer expired. And so I guess we'll see where we end up on market conditions going forward. But then we're very comfortable with our free cash flow and assets that we're in a great position regardless of market conditions.

Our next question comes from Luke Davis from RBC.

You guys are ramping up some exploration drilling in the back half. Just wondering if you could provide some individual detail on expectations for each of those 6 or 7 wells and potential timing on when we see results from them.

Yes. The expectations, I think we have published, but we certainly can make that available. On average, our targets range anywhere from 8 to as high as 30 million barrels of potential on those exploration targets. In terms of timing, we're drilling now. We're testing the -- we've cased and we're testing the guide as well. We don't have any results on that yet, but we certainly will update shareholders through the year as we do have results on those exploration prospects. I can tell you that we're quite excited on the quality of what we're drilling and being in a position after the long period with COVID, not having any exploration activity, we're drilling some of our best prospects.

Got you. So is it fair to say we'll see some results kind of Q4 through early 2023 then on the balance of the program?

Yes. I think we should see some results in Q3 and Q4.

And our next question comes from [Garrett Fellow] from [JH Lane Partners].

My question is actually answered.

And there are no further questions. I would now like to go ahead and turn the call over to Gary Guidry for closing remarks.

Thank you, Justin. I'd like to thank everyone once again for joining us today. We look forward to speaking with all of you next quarter and we will certainly update you as we do have progress throughout the quarter. Thank you very much.

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