Gran Tierra Energy Inc. (GTE) Q3 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the Third Quarter 2021. My name is Vic, 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 2, 2021, 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 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 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 thanks for joining us for Gran Tierra's third quarter 2021 results conference call. My name is Gary Guidry, President and Chief Executive Officer. And with me today is Ryan Ellson, our Executive Vice President and Chief Financial Officer. Yesterday, we issued a press release that included detailed information about our third quarter 2021 results, which are available on our website. Ryan will make a few brief comments, and then we will open the line for questions. Ryan, please go ahead.

Good morning, everyone. During the quarter, we achieved material production growth with our third quarter 2021 oil production averaging approximately 29,000 barrels per day, up 26% from the second quarter of 2021 and up 53% from the third quarter of 2020. We also announced a temporary setback from a localized farmers' blockade, production from Suroriente and PUT-7 has been temporarily shut in due to a blockade directed at the Colombian government. Once the government gets the blockade lifted, we expect to quickly restore Suroriente and PUT-7's production levels to their current capacity of 4,400 to 4,700 BOE per day. Current total corporate production is approximately 26,000 barrels per day. And once the blockade ends, we expect to quickly restore production to approximately 30,000 to 31,000 barrels per day. Despite the blockade's impact on production, we believe the situation can be resolved quickly and expect the current strong Brent oil price environment to partially offset the financial impact on production. Brent prices averaged approximately $84 during October, which is 16% higher than the $72 Brent price we had assumed for budget purposes during the fourth quarter of 2021. Q3 funds flow from operations increased by 758% to $69.1 million compared to the third quarter of 2020 and increased 197% from the second quarter of 2021 due to higher production volumes and strong Brent pricing. Gran Tierra also continues to have a laser-sharp focus on reducing debt. We paid down the credit facility balance of $150 million at September 30, and have paid an additional $20 million during October for a current balance of $130 million. We expect the bank facility to be paid down to a balance of $80 million by December 31, 2021. Our operating netback of $34.95 per barrel was up 5%, an increase of $1.51 relative to the prior quarter. During the quarter, Gran Tierra generated net income of $35 million, an increase of approximately 300% from the net loss of $18 million realized in the prior quarter. The quarter's adjusted EBITDA improved substantially to $82 million. In terms of CapEx, third quarter capital spend of $35 million was flat quarter-on-quarter. The company generated third quarter free cash flow of $34 million, the highest since the fourth quarter of 2012, which was deployed to strengthen the balance sheet. In terms of hedges, for the remainder of the year, we have hedges in place for 10,000 barrels per day with a weighted average floor of $57 with a weighted average ceiling of $65.29. During the quarter, we realized hedging losses of $7 million. Currently, we do not have any hedges in place for 2022. In terms of operations, we believe the team's prudent reservoir management of Acordionero's waterflood has restored the field's production to an average level of 14,427 barrels per day in the third quarter of 2021, up 49% from a year ago and the highest quarterly average production since the fourth quarter of 2019. The 2021 drilling program in Acordionero was very successful. And based on results to date, we find an active drilling program of both oil producers and water injectors during 2022. Moving to the Putumayo, a quick update on our infill development drilling campaign of 3 oil producers at Costayaco. All 3 of these successful new oil wells started production during the third quarter and drove a significant increase in Costayaco's oil production to 6,292 barrels per day during the third quarter, up 50% from the first quarter of 2021. Based on the results of this year's program, we anticipate growing additional development wells in Costayaco in 2022. On Moqueta, we completed a work program that was designed to optimize the waterflood, which we expect will increase the field's ultimate oil recovery. The workover program was very successful, and we anticipate drilling additional development wells in Moqueta in the second half of 2022. Lastly, at Suroriente, our facility expansion program is progressing, which is expected to allow additional production to be brought online in Q4 2021. In summary, despite the temporary setback from the recent Suroriente and PUT-7 blockade, which we expect to be resolved quickly, we are targeting further debt reduction in the fourth quarter of 2021, in line with our previously announced capital allocation strategy. Looking ahead, with the stronger Brent oil price environment in tandem with our restored production volumes, we are on track to generate significant 2021 free cash flow in 2021 and 2022. Next year, we plan to focus on continued strength in our balance sheet, the ongoing development of our core assets and measure by high-impact exploration program. 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 David Herzberg from Stifel.

I have two. The first has to do with hedges. Is there a point at which you might reconsider or decide to hedge some of your production for 2022? And then secondly, is there any more sort of specificity you could provide around your capital allocation for next year? If the idea is to, let's say, have a balance on the credit facility of $80 million at the year-end this year, from what you see right now, are you hoping, let's say, to completely put down that credit facility next year? If you can give some guidance could be appreciated.

Yes. Thanks for the questions. Yes, with respect to 2022 hedges, our hedges -- once -- we just are in the process of finalizing our 5-year plan. And once we -- which we're pretty well done now. And so we'll look at having hedges in place in the coming months. But definitely before year-end, to protect our capital program for 2022 as well as ensure we get adequate free cash flow to pay down the credit facility in the first half of next year.

In terms of capital allocation, we've had some really positive results on our waterfloods in particular, at Acordionero and Costayaco, and Ryan mentioned, Moqueta as well. And so we're going to continue optimizing our reserves -- long-term reserves in those fields. And we've got some exciting near field exploration that will allocate a small amount of capital -- a modest amount of capital to during 2022. And so the real focus for 2022 is continued development and optimization of our waterfloods.

Your next question comes from the line of Josef Schachter from Schachter Energy.

On the taxes receivable, with that money coming in, is that going to go towards that paying down that deadline, as you just mentioned in the first half of '22, Ryan?

Yes, you're correct.

Okay. The second one, you mentioned, Gary, about a modest amount of capital for exploration next year, which are adjacent to the low-cost drilling or drilling that could add reserves in your 4 core areas. Given you have a large number of blocks in your exploration program, you only show really 1 chart on the new presentation, Slide 27. Have you been able to work with the government because of the challenges of the sector over the last few years, where you can get extensions on the drilling programs versus the commitments that you had in the past so that you keep the land and you can work on them in 2023 or 2024 when you've got the debt under a better situation and your production is higher?

Yes. The answer is yes. We have been able to get extensions both in Ecuador, in particular and in Colombia. What also has been very helpful working with the Government of Colombia is moving commitments from blocks after we've spent money on seismic processing, acquisition and looking at higher potential exploration. The program to move those commitments into areas where we have higher prospectivity has been underway even during the COVID period. And so we're quite enthusiastic about our portfolio over the next couple of years, and we've used the time with the regulatory process to get the wells that we want to drill up in the very top of the queue. And so Overall, I think it's a combination of extensions as well as being able to move commitments to higher prospectivity blocks, Josef.

Okay. Two more for me. One, the operating net -- operating costs have gone up, is that because of the greater activity in the waterfloods? And should we be thinking USD 17 going forward? Or for the first 9 months, you were 15, 14. What do you suggest for modeling?

Yes. We'd expect those costs come down in the fourth quarter and in 2022. That's a function of a little more activity in the third quarter, just restoring some of the volumes were not from the blockades. So we did get hit a little harder in this quarter, but we expect that to come down in the fourth quarter. And next year, as our production increases and we have about 70% of our costs fixed, we'd expect that per unit number to come down.

Okay. And last one for me. If you have a kind of a run rate of funds flow now about $200 million, given the commodity situation we see now and if you do a similar CapEx to this year, are we looking at -- are you looking at some kind of a target number of $400 million or $500 million for the long-term debt before you start looking at shareholder returns, the most companies are being dragged into the shareholder returns of dividends, stock buybacks, special dividends? Are we still 1 or 2 years away from that situation?

No. I think, Josef, there's 2 things we look at. One is the absolute number, which you correctly pointed out. And we'd like to target that to be $500 million or less, and our net debt-to-EBITDA to be under 1.5x. So we expect that, -- especially at strip pricing that we'll be able to get to those criteria next year.

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

Thank you, operator. I would like to once again thank everyone for joining us today. We look forward to speaking with you over the next quarter and update you on our ongoing progress. Thank you very much.

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