Gran Tierra Energy Inc (GTE) 2023 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the First Quarter 2023. My name is Shannon, 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, Wednesday, May 3, 2023, 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 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, Shannon. Good morning, and thanks for joining Gran Tierra's First Quarter 2023 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.

On Tuesday, May 2, 2023, we issued a press release that included detailed information on our first quarter 2023 results, which is available on our website. Ryan and Rob will make a few brief comments, and then we will open the line for questions. Immediately following this earnings call at 10:00 a.m. Mountain Time and 12 noon Eastern Time, we will be holding our Annual General Meeting of Stockholders. During the meeting, I will give an overview of Gran Tierra and where the company is heading. We invite you to join us after this call. Dial-in instructions can be found on our website.

I'll now turn the call over to Ryan.

Thank you, Gary. Good morning, everyone. Gran Tierra achieved a strong quarter by delivering $60 million of funds flow while delivering on our front-end loaded development program, which saw the drilling of 14 development wells over the total 2023 budget plan for 18 to 23 development wells. Given the increased activity during the quarter, Gran Tierra spent $71 million on capital expenditures, which exceeded funds fell slightly by $11 million.

By completing the majority of our development program in the first 3 months of 2023, we expect to benefit from higher oil production rates for the remainder of the year and with the goal of maximizing our production and cash flow in 2023. Over the last 12 months, we generated net income of $115 million, adjusted EBITDA of $459 million, funds flow of $339 million and free cash flow of $73 million. This free cash flow allowed us to execute on our share buyback plan and strengthen our balance sheet via bond buybacks. During the quarter, Gran Tierra purchased approximately 13.1 million shares for a total purchase price of $10.7 million, an average price of approximately $0.82 per share.

We also exited the year with a healthy net debt to adjusted EBITDA ratio of 1x. As part as Gran Tierra's ongoing commitment to reduce its net debt during the quarter, the company bought back $8 million in face value Gran Tierra 6.25% senior notes. The cost of the 2025 bond buyback was approximately $6.8 million, representing a discount total of 15% to the face value of the 2025 bonds.

The company exited the quarter with $106 million of cash on the balance sheet and net debt of $466 million with our credit facility remaining completely undrawn. During Q1, the (inaudible) price averaged $82 per barrel, down 16% from 1 year ago and down 7% from the prior quarter. The company's policy and transportation discounts narrowed to $18.45 per barrel, down from $19.74 per barrel in the prior quarter and up from $12.56 per barrel 1 year ago.

The Castilla oil differential increased to $15.17 from $6.38 per barrel in the corresponding period in 2022. Castilla is the benchmark for our Acordionero production. The Vasconia differential increased to $7.87 from $3.60 in the corresponding period of 2022. Vasconia is a benchmark for our Putumayo production. The good news is that differentials narrowed in March this year and continue to narrow in April.

The current Vasconia differential is down to approximately $6.50 per barrel, and the Castilla differential is down to approximately $11.50. Even more encouraging is in the last couple of days, differentials have narrowed to $10.50 and $5.50 for Castilla and Vasconia, respectively. Oil prices continue to remain volatile, and Brent has sold off the last couple of weeks. While Brent averaging $2 in Q1, it had a low of $73 and a high of $87. So the recent volatility is nothing new.

Gran Tierra's total production for the quarter was 31,611 BOE per day, up 8% from 1 year ago and decreased 3% compared to the prior quarter. The company's second quarter production to date 2023 is approximately 32,400 BOPD, and we're on track on our targets this year.

The company's operating netback was $35.18 per barrel, down 33% from 1 year ago and down 9% from the prior quarter. Changes in funds flow when operating (inaudible) were largely driven by the decrease in Brent oil price and the widening of the quality and transportation discounts over the same time period.

We are very pleased with our recent announced agreement with Ecopetrol, the National Oil Company of Colombia, by which Gran Tierra and Ecopetrol, renegotiated agreement for the Suroriente block in the Putumayo basin, which was scheduled to end in mid-2024. Grand Tierra will continue to be the operator of the Suroriente block and is committing to a capital investment program of $123 million over a 3-year period from the agreements effectively expected to be funded by Gran Tierra internal cash flows. The agreement provides an opportunity to add significant value as well as economic life to Suroriente by continued duration for 20 years.

The additional term of the agreement allows long-term investments in infrastructure and work programs to enhance oil recovery efficiency in existing fields and appraisal drilling to extend the life of the fields. Lastly, we are happy to report that Gran Tierra has issued the company's 2022 sustainability report, creating long-term value and delivering on our environmental, social and government commitments, which can be found on the company's website at www.grantierra.com/esg.

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

Thanks, Ryan. Good morning, everyone. During the quarter, Gran Tierra has completed a significant portion of its 2023 development campaign with the drilling of 14 development wells in 3 of our major fields, which have been producing oil at rates that are in line with our expectations. In our Acordionero field, development drilling resumed in January 2023 with a 10-well program.

Eight of the wells were drilled by the end of the quarter as a result of the program and continued good performance at a field's enhanced oil recovery via waterflood, Acordionero has averaged approximately 19,200 barrels of oil per day during second quarter-to-date 2023, which is the highest level since May 2019. During the quarter, Gran Tierra achieved a new water injection record of approximately 65,000 barrels of water injected per day, up from 59,895 barrels of water injected per day in first quarter 2022.

The polymer flood pilot continues to progress and was expanded with the startup of a second polymer injection well during the quarter. We plan to follow up with a third polymer injection well planned for second quarter 2023. We are excited about the early results and expect Acordionero's polymer flood pilot to increase the field's ultimate oil recovery.

Our Costayaco development campaign saw 4 wells drilled during the quarter. 2 producers are currently being completed with time expected in early May 2023 and 2 water injection wells are completed and expected to begin injection during second quarter 2023. Two additional producers and one additional injector remain to be drilled as part of the Costayaco development plan for 2023, completion and stimulation of the producing wells and water flood optimization through additional injection are expected to continue to grow production in Costayaco throughout the year. In Moqueta, 2 wells were drilled during the quarter and both are on production and awaiting stimulation.

Two additional development wells are planned in 2023, along with 2 conversions of existing wells into injectors that are expected to grow production and optimize the water flood in Moqueta. The drilling of all these wells is a testament to our team's commitment to operational excellence and their ability to execute our capital program efficiently. We are also excited with our plans to recommence exploration drilling during second half 2023, with the drilling of 4 wells in Ecuador, 3 in the Charapa block to appraise the discovery of the Hollin formation and 1 in the Chanangue block.

Gran Tierra has completed the selection process and secured a drilling rig, which the company plans to mobilize from Colombia to Ecuador. Gran Tierra expects to drill between 4 to 6 exploration wells in 2023 in Colombia and Ecuador combined. Finally, we continue to see positive results from our ongoing waterfloods across our operations, primarily in Suroriente and Acordionero and are beginning to see positive results in our polymer flood in Acordionero.

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 the line of Josef Schachter with SERSI.

Ryan and Rob, I have 2 questions. On Slide 35 of your new presentation, you highlight 3 of the exploration wells, Rose-1, Bocachico and Charapa. Could you guys go into a little bit of detail of what the prize is in terms of the size, potential production of the wells? And what time line if you're successful with those volumes come on, would they be in '23 or later or more or into 2024 -- that's the first question.

Okay. Yes, the first question, we're going through to issue a midyear reserve update on everything that we're doing, goes. But the answer to your question is the predrill estimates on Bocachico and Rose were the 5 million to 15 million barrel type reserve range. We haven't seen anything that deters us from that original predrill estimate. On Charapa Norte, we're quite excited about that discovery. It was a very prolific producer, and it's the target of some of our appraisal and exploration work this year, but it could be in our estimate, internally, unaudited by McDaniel in the 10 million to 30 million barrel range.

If you are successful with those wells, could they impact your volumes in Q4 of '23?

Yes, they could.

Okay. Last one for me is the 10 for 1 reverse split. When do you see that happening after getting TSX approval? Do you have a date in mind?

Yes. It will -- assuming shareholders approve it in our AGM later this morning, and we -- it will occur early to mid next week.

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

Just on Suroriente, can you -- how should we think about that $123 million over the next 3 years and the impact on your growth profile?

Yes, I think -- it's a good question. I think we're excited about that block. As you know, we haven't drilled a well in that block since 2018. And even without drilling the well on that block, just with the successful ramp-up of the water injection, we hit the highest rate since 2015. So it's a great field, as you know. And so I think for us, we're very comfortable that we'll start drilling next year, and it will be a disciplined program that really focused on development drilling up first. We have a lot of facility expansions done. So we'll start drilling next year. And we expect to get the field up to net to Grand Tierra in that 7,000 to 10,000 barrel a day range. Over the next coming years.

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

I have a question regarding the increase in G&A. You mentioned you're finding that the increase was due to higher costs due to optimization projects and (inaudible) expense. So can you give us more color on that? And what should we expect for the rest of the year?

So it was breaking up a little bit on this side, but it was the question with respect to -- was it DD&A? Oh G&A. Yes, that was some onetime costs coming through in the first quarter. So we would expect that to trend down throughout the year.

So we should expect something similar to what we saw last year?

Correct, correct. On a per barrel basis, we expect it to be lower just with the increased volumes.

Our next question comes from the line of Adam Gill with Paradigm Capital.

Just back to the Ecuador exploration. Can you just give us a quick rundown of the timing of spud and when you expect results on the exploration program this year?

Yes, spud will be later in the summer in Ecuador, and we should have results -- continuing results through the end of the year.

And is this a 2 to 4 well exploration program is going to be 1 rig?

One rig, yes.

Okay. And then just last one on Sorry. I was just going to ask how many potential zones did you see in the 2 blocks on the first 2 exploration wells for completion?

Yes. We sell 3 in the Bocachico well and 2 to 3 and Charapa Norte. We still have hopes for the carbonates. We've yet to test those, and it's going to take some more appraisal and exploration drilling in both of those blocks, but 2 to 3 in each of the wells.

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

This is Oriana Covault with Balanz. I had a couple of questions. First, if you could share more insights into the kickoff of sales coming from Ecuador and operations in general, maybe production-wise, pricing and costs, how is the operation coming along vis-a-vis your expectations?

Yes, I think on the expectations, we're right on target for our expectations on the development in Ecuador and production costs. As you know, costs always look a little bit higher. We just have 1 well producing. We have a fairly large pad that we're going to drill 2 more wells off of and we use the shared facilities. So as we drill additional wells, we expect our costs to come down dramatically. But overall, as Gary mentioned, we're really excited about the prospectivity and our results to date. The Charapa Norte well continues to be a strong performer, light oil close to infrastructure. So we're very, very excited with Ecuador and that's why we're coming to drill 4 wells in the second half of the year this year.

Awesome. Maybe just following up on -- and mostly seen like recent price volatility international and wider discounts although slightly compressing in the last months and for the (inaudible). Are you thinking of entering any type of hedging contract or doing any changes in that area?

Yes. pricing has tightened quite a bit. The differentials out. Like I mentioned, Brent has been, as you know, very volatile. I think in Q1, it was a low of 73%, which we're testing right now as of today and a high of 87%. So we expect that to remain -- Brent to remain volatile in the quarter. And we're looking at placing some hedges in for the second half of the year.

Perfect. And just one last one. Just we've heard about some exploration license being relinquished in the country and taking into account perhaps the focus on continued looking opportunities across either Colombia or elsewhere. Do you see this could be some type of assets that you would be interested in? Or how is that agenda in terms of opportunities moving along for Gran Tierra?

Yes. I think you probably saw Exxon exiting some of their acreage in the Magdalena Valley. It's a continuous process in Colombia under the current regulations, you're able to relinquish land that's not prospective or transfer those commitments to other blocks. And for us, it's a continuous basis. I would say that we have the lands that we want for the next few years. We're in the process just started last year the process of exploring those and we're having very good success. And so we're very happy with our exploration position where we sit today. And so nothing unusual going on. It's business as usual in Colombia in terms of us executing the programs that we've been -- had underway for the last several years.

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

My question was related to capital allocation going forward. We saw some on buybacks in a small amount in the first quarter in addition to some share buybacks. Just wondering kind of how -- what the priorities are going forward in the year and how you envision those 2 programs?

Yes, good question. I think on the allocation, I think if you look at the restrictions that we have under our normal course issuer bid, we've essential maxed out the amount of shares that we can buy back under the normal course issuer bid, which can be renewed until August. So really, the focus will be continued strength on the balance sheet through the repurchase of bonds.

Our next question comes from the line of Alejandro Demichelis with Nau Securities.

Just one clarification question, please. In your previous update, operational update on the 4th of April, you were indicating that production today for the second quarter was running at 33,700 barrels a day. But now with the update yesterday, you're indicating that that's around 32,400. So trying to understand what -- where are those volumes kind of going out from because, as you said in the presentation, you have put more wells into production at the end of the quarter, everything is going well. So trying to understand that difference.

Yes, it's Rob here. If you look at our production, we've wrapped up our 10-well Acordionero drilling program this year with 6 producers and 4 injectors. And we were extremely pleased with the results of our Acordionero drilling program. We averaged well above tight curve at cornedasdar, drilled some great wells up in the north part of the pool there and largely on sweat parts and reservoir. But those wells and new wells do tend to come on really strong, and they do fall off a bit and then flatten out.

So we -- there was some flush production from those new wells. So some of those volumes you saw there were probably right at the time we're getting flush fallings. So it's come off a little bit. And of course, right now, we're in the process of completing and stimulating our Costayaco drilling program wells. And we're extremely pleased with the rates we're seeing from Costayaco -- so as we get those wells test it, stimulate it, initially, their own jet pumps and then we switch over to ESP pump.

So we expect to see another boost in our production over the next few months as those wells come on production as well, right? But so overall, we're extremely pleased with our drilling program that you bolted Acordionero in Costayaco land and Moqueta seeing great rates in all of them. So you will see over the year, production rates will kind of bounce up and fall off a little bit as these new wells come on. But overall, we're beating our type curves and all our joint programs and very pleased.

We're very comfortable with the guidance that we have in the market. As Rob said, the drilling results have been great. And a lot of times the average production, we just put that out with very just to keep the market informed. And that's going to fluctuate a lot. It fluctuates a lot on a daily basis by a couple of thousand barrels. So that's just relative, but we're very comfortable with our average annual guidance.

So just to be clear, those 5 wells that you have put on production on a con are now have been stabilized after that kind of plus production initially coming out.

Yes... Yes, they're definitely stabilizing. We see 6 producing wells we drilled this the Acordionero, there was 4 injectors. And yes, they're definitely stabilizing now. overall, like I said, we were well above type person as well, very, very pleased with results. And yes, they're starting to stabilize now.

We still the wells to bring on Costayaco as well as in Moqueta as well.

Our next question comes from the line of Manuel Mondia with Aquila Asset Management AG.

Yes. And I just would like to ask, given the recent volatility and as you already commented, the situation with the brand, if maybe there is a chance that the guideline that you gave for 2023 may be revised downward a bit, at least in terms of free cash flow because as we see the discount applied to your prices went up and the prices are going down. So just a bit of color on that if it's possible.

Yes. No, we think it's premature. I think again, if we go back to the first quarter, Brent averaged 82 , which is our budget was 85%. Differentials were a little bit tighter than we had budgeted. But again, during Q1, Brent went a lot of 73 to high 87. So we're 73% today. So it's a very volatile business. We're still very bullish on the supply-demand fundamentals, and we think the second half of the year is going to be very, very strong.

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

Thank you, Shannon. I'd like to thank everyone again for joining us today. We hope to see everyone shortly for our Annual General Meeting of Stockholders and look forward to speaking with all of you next quarter and update you on our ongoing progress. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.