Gran Tierra Energy Inc. (GTE) Q4 2019 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to Gran Tierra Energy's Conference Call for Fourth Quarter and Year End 2019 Results. My name is Jimmy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the initial remarks, we will conduct a question-and-answer session for securities analysts and institutions. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being webcast and recorded today Thursday, February 27th, 2020 at 11 A.M. 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 for 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 and year end 2019 results conference call. My name is Gary Guidry, I'm Chief Executive Officer and with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer; and Tony Berthelet, our Chief Operating Officer. We issued a press release yesterday that included detailed information about our fourth quarter and year end 2019 results. In addition, Gran Tierra's 2019 annual report on Form 10-K has been filed on EDGAR and is available on our website. Ryan and Tony will make a few brief comments and then we will open the line for questions. Ryan over to you.

Good morning everyone. Average production for 2019 was 34,817 barrels of oil per day consistent with the revised 2019 guidance of 34,800 to 35,000 barrels of oil per day. During 2019, we generated net income of $39 million or $0.10 per share, EBITDA of $364 million, adjusted EBITDA of $326 million, and funds flow from operations of $272 million or $0.72 per share. Gran Tierra's Q4 capital spend totaled $69 million which was down 41% as expected from the third quarter 2019 amount of $116 million. This reduction reflects the completion of the extensive facilities expansion and gas-to-power project at Acordionero which was required to fully implement the field's waterflood to enhance ultimate oil recovery. At year end, $118 million was drawn on our credit facility. This increased from Q3 as we had approximately $200 million of payables at September 30th from our active capital program in Q3 and our VAT receivable grew to approximately $130 million. Free cash flow and anticipated collection of our current value-added tax receivable will be used to reduce the amount drawn on our credit facility. We were pleased with the increase in 1P reserves to 79 million, 100% of it is oil, representing a 200% 1P reserves replacement and growth in 1P net present value discounted 10% to $1.5 billion before tax and $1.3 billion after-tax. And 1P net asset value of $2.50 per share before tax and $1.83 per share after-tax. On a 2P basis, we replaced 100% of our production and maintained the company's 2P reserves at 142 million barrels of oil and increased 2P NPV to $2.9 billion before tax and $2.3 billion after-tax and 2P net asset value per share to $6.23 before tax and $4.49 after-tax. Looking to 2020, we will focus on balance sheet strength, development of our core assets, and our measured, but high-impact exploration program. Since the beginning of 2020, response to the coronavirus has caused a decrease in the Brent oil price and a widening of crude oil price differentials in Colombia. As a result, we have elected to amend the company's planned 2020 capital budget by reducing capital by approximately $25 million. Our 2020 revised capital budget is $175 million to $195 million. And deferral of the capital is primarily in exploration and infrastructure. In the event that headwind persists in the second half of 2020, further deferrals could be made. Given the fact we operate 29 of 32 blocks, we have control over capital allocation timing. Similar to the events of June 2019, local farmers have set blockades in the Southern Putumayo region to protest against the Colombian national government. The previous blockade in June 2019 lasted approximately three weeks. It's important to note that these protests are not directed at the oil industry or Gran Tierra. In response to the blockades, we have proactively shut-in our fields in the Southern Putumayo, resulting in approximately 4,000 barrels of oil per day being shut-in. The blockades have also prevented the drilling of two development wells in Cohembi. We have contracted rig but we're waiting for the blockades to be resolved before mobilizing the rig to the field. We have placed Brent oil hedges of 6,000 BOE per day of production, approximately 20% of our net production in the first half of 2020 with a floor of $55 and a ceiling of $69. In addition, we have Colombian peso hedges of approximately US$40 million equivalent. I'll now turn the call over to Tony Berthelet, Chief Operating Officer to discuss some of the highlights of our current operations and key upcoming catalysts.

Thanks, Ryan. Good morning, everyone. I'll briefly cover a few operational highlights from yesterday's press release and provide some updates on current activity. We are ahead of schedule on our 2020 development program at Acordionero with four wells of our 12- to 14-well program being rig released. We are currently moving the rig to pad two to continue infill drilling operations. Acordionero-55 was brought on production January 24 setting a record for spud to on production of 15 days. It has stabilized at 500 barrels of oil per day. Acordionero-56 was brought on production January 31. It is currently producing at 600 barrels of oil per day. Acordionero-57 was brought on production February 17 and is currently producing at 540 barrels of oil per day. And Acordionero-58 was brought on production this week and is currently recovering completion fluids. We continue to actively manage the Waterflood at Acordionero by sector, allowing for optimum Waterflood performance in both Lisama A and Lisama C intervals. On a field level, the current instantaneous and cumulative voidage replacement ratios are 1.1 and 0.3 respectively. Both of these numbers represent increases of approximately 180% since June of 2019. Snubbing unit operations at Ayombero-2 and -3 successfully recovered the upper completion and both wells have been secured pending further evaluation. The snubbing unit recently completed recovery operations at Chuira-1, where the upper completion has been recovered from the well and the well has been turned over to operations. The well is currently flowing to surface and is cleaning up. In the Putumayo Basin, as Ryan mentioned, we have approximately 4,000 barrels suspended due to blockades affecting our Southern Putumayo operations. We're currently monitoring the situation and will restore production as soon as practical. We are mobilizing the rig to begin development drilling at – operations at Costayaco in the Chaza Block with expected spud next month. The Cocona-2 exploration well in the PUT-1 Block is targeting the fractured A-Limestone play trend as well as additional oil zones which were successfully encountered in the Vonu-1 exploration well. Cocona-2 has been drilled through the target formations to a planned TD of 10,603 feet and we have currently suspended well operations due to the mechanical failure associated with the drilling rig. We plan to return to this well following development drilling at Costayaco. Based on encouraging results in the N Sand A-Limestone and U Sand from logging while drilling and cuttings analysis, this well is expected to be put on production test in the first half of 2020 pending rig scheduling. Finally, I'd like to reiterate our commitment to go beyond compliance on the ESG front. In 2019 Gran Tierra had its best safety record in terms of lost time injuries or LTI and total recordable injuries. Our 2019 LTI ratio of 0.02 was 80% below the industry average for Latin American exploration and production companies in 2019. On the environmental side, we continue our strong partnership with the international nongovernmental organization Conservation International, where we have committed to reforesting 1000 hectares of land and securing and maintaining 18,000 hectares of forest through the NaturAmazonas project in the Putumayo Basin. Gran Tierra's total NaturAmazonas investment in the Andes-Amazon rainforest corridor through this project is forecast to be $13 million. We have also planted a total of over 560,000 trees and have conserved preserved or reforested almost 1,400 hectares of land through environmental efforts. For the last four years, Gran Tierra has voluntarily released an assessment of its greenhouse gas or GHG emissions. Gran Tierra is reducing greenhouse gas emissions at its facilities through gas-to-power projects that convert excess natural gas that would otherwise be flared and uses it instead for power generation. And in Acordionero, we are reinjecting solution gas for pressure maintenance. The NaturAmazonas project alone is expected to sequester approximately 8.7 million tons of CO2 over its lifetime. I'll now turn the call back to the operator. And Gary, Ryan and I will be happy to take questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session for securities analysts. [Operator Instructions] Your first question comes from David Round with BMO Capital Markets. Your line is now open.

Hi, guys. I'll start with a pretty predictable one, but obviously, a lot of focus on Acordionero at the moment. So are you able to give us a current production number there and just run through how you're expecting that to trend over the course of the year? The second one is just on costs, because obviously with the gas-to-power and better ESP reliability you should be in a pretty good position there. I can see you brought guidance down by about $0.5 from last year. But I suppose the question is, could you do better than that? Or is there anything else offsetting the savings there?

Thanks, David. It's Tony here. I'll take the first part of that question. Acordionero production has been averaging around 15,000 to 16,000 barrels a day for the first part of the year, so we're on track from that perspective in terms of what we set for budget for Acordionero. And forecast for the year is on track. We don't see any potential hiccups there. Operating costs?

With respect to the operating costs, yeah, our operating costs have come down. Part of it is as we inject more water -- our power consumption is going up by about 50%. So on a per unit cost - per unit basis it's dropping dramatically, but we are increasing the amount of power that we're using. So the number that we have in there is reflective of that forecast.

Okay. And can I just -- a quick follow-up to the first question. Obviously, you have downtime from certain wells and I think that was pretty evident in December. But is there anything like that going on at the moment? Because I suppose my simplistic thinking assuming you got the well back on in December, I'm going with a starting point of 16,000 and then add in let's say, the 15,00 that you've added through the new wells so far, it gets me to around 17,000, 17,500 today. Is that the way I should be thinking about it? Or are there wells down at the moment that I need to take into account?

Yeah. I think inside Acordionero we have planned downtime associated with routine ESP repairs. And for the most part for the first part of the year we're on track with the expected failure rate and workovers. But yes, we do have a couple of wells that are down right now and that would be the gap on your number from 17,000 to our 15,000 to 16,000 number right now.

Great. Makes sense. Thank you.

You bet.

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

Thank you, operator. Thanks to everyone for dialing in. It's a volatile time in the markets and in the world in general. We appreciate your support and your patience. We're working as diligently as we can. We will certainly advise investors once the current blockades in the Southern Putumayo are resolved. The governments are working diligently trying to resolve those issues and we're doing everything we can to support them. So thanks again for your time, your patience, and we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude today's conference call. You may now disconnect.