Gran Tierra Energy Inc. (GTE) Q3 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the Third Quarter 2022. My name is Kathy, and I'll 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 security analysts and institutions. Instruction will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference call is being webcast and recorded today, Thursday, November 3, 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 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 a property of Gran Tierra Energy Incorporated, any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy. I'll now turn the conference call over to Gary Guidry, President, Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Thank you, Kathy. Good morning, and thanks for joining Gran Tierra's third quarter 2022 results conference call. My name is Gary Guidry, I'm 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. On Tuesday, November 1, we issued a press release that included detailed information on our third quarter 2022 results, which is available on our website. Paul and Ryan will make a few brief comments and then we'll open the line for questions. I will now turn the call over to Ryan to discuss key financial highlights from our third quarter results.

Thank you, Gary. Good morning, everyone. Gran Tierra achieved a strong quarter by delivering $94 million of funds flow and $37 million of free funds flow, while drilling three exploration wells the Bocachico well in Ecuador and the Gaitas and Rose wells in Colombia. Over the last 12 months, we generated net income of $168 million, adjusted EBITDA of $462 million, funds flow of $350 million and free cash flow of $146 million. This free cash flow allowed us to execute our share buyback plan and strengthen our balance sheet via bond buybacks and the complete pay down of our former credit facility. During the quarter, we strengthened our balance sheet, while reducing the overall outstanding shares to 358 million shares, representing a reduction of about 2.9% in our total outstanding share count during the quarter. The company exited the quarter with $118 million of cash on the balance sheet and net debt of $462 million with our new credit facility remaining completely undrawn. During Q3, the Brent oil price averaged $97.70 per barrel, up 33% from one year ago, but down 13% from the prior quarter. The company's quality and transportation discount widened to $13.37 per barrel in Q3, up from $13 per barrel in the prior quarter and $11.50 per barrel one year ago. The increases in this discount were driven by the widening of the Colombian oil price differentials relative to Brent oil price. During Q3, we achieved net income of $39 million, up 10% from the third quarter of 2021. Q3 earnings of $0.11 per share were down from $0.14 per share in the prior quarter. Gran Tierra's total average production in Q3 was 30,391 BOPD, up 5% from the third quarter of 2021 and approximately flat with second quarter of 2022. During the quarter, the Suroriente Block in Colombia's Putumayo Basin experienced occasional disruptions due to localized blockades. The impact of these blockades lowered the company's total average production in Q3 by approximately 920 BOPD. Gran Tierra generated Q3 oil sales of $168 million, up 24% from one year ago and down 18% from the prior quarter. Funds flow from operations was $94 million, up 36% from one year ago and down 10% from the prior quarter. The company's Q3 operating netback was $44.26 per barrel, up 28% from one year ago. Cash netback per barrel was $33.42 compared to $37.71 in the prior quarter, which was only an 11% decrease despite a 13% decrease in the Brent pricing. Compared to one year ago, cash netback per barrel increased 31% from $25.50. In terms of CapEx, during Q3 we incurred $57 million of capital expenditures, which were lower than the prior quarter's level of $65 million, as the majority of Gran Tierra's capital development programs in both Acordionero and Costayaco were completed during the second quarter of 2022. During Q3, Gran Tierra drilled three exploration wells, the Bocachico well in Ecuador and the Gaitas-1 and Rose-1 wells in Colombia. Subsequent to the quarter end, we drilled in case the Charapa Norte well in Ecuador and testing will commence shortly. As part of our ongoing commitment to reduce Gran Tierra's net debt, during Q3 we bought back approximately $20.1 million face value of Gran Tierra's 6.25% senior notes due February 2025, for an approximate cost of $17.3 million, representing a discount of about 14% to the face value of our 2025 bonds. Purchases' bonds will generate interest savings of about $3 million over the remaining term to the maturity of the 2025 bonds. During the quarter, we repurchased 10.7 million shares, representing about 2.9% of our shares outstanding for a total price of $14.4 million, which was at an average cost of $1.34 per share. With current production of approximately 32,000 BOPD, we look forward to finishing 2022 on a strong note and are excited about our plans for our 2023 development and exploration capital programs. As many of you are aware, there have been numerous proposals for changes in the tax regime in Colombia, given the uncertainty on what the ultimate changes will be, we don't have any comments on the proposed changes other than Columbia's long history of providing a stable environment for long-term investment, and we expect that to continue in the future. I'll now turn the call over to Paul to discuss some of the operational highlights from our third quarter results.

Thank you, Ryan. Good morning, everyone. Gran Tierra continues to drive efficiencies at its major fields. As Ryan mentioned, our production for the quarter was 30,391 barrels of oil per day. So far, during fourth quarter to date, our production is averaging 32,291 barrels of oil per day. Our waterflood projects in our core fields continue to yield stable and expected results with low natural declines. During Q3, we commenced our enhanced oil recovery, polymer injection project in the Acordionero field, this pilot injection test is a milestone. After several years of laboratory work and modeling indicated the Acordionero reservoir suitability for polymer injection. We are also excited about the initial exploration results that the company has achieved in both Colombia and Ecuador. Bocachico-1 was the first well that we drilled in Ecuador. After the previously disclosed initial production testing of the deepest zone, the T Sand, the company moved uphole and tested the U Sand which was water-bearing. We now plan to go back to the T Sand to stimulate it and place it on a long-term test before moving uphole to test the Basal Tena formation. Gran Tierra's second Ecuador well, Charapa Norte-1 has finished drilling and is being cased to the total depth of the well. A core was cut in the Hollin Sand which had oil shows throughout the 60 feet of core, with 40 feet of potential oil pay identified. We plan to production test Charapa Norte-1 during November of 2022. In Colombia, we drilled the Rose-1 well in the Putumayo Basin. The company production tested the N Sand over a 72 hour period and during this period, the well flowed naturally without a pump at an average stabilized rates of 242 barrels of oil per day of 15 degree API gravity and two barrels of water per day with a gas-oil ratio of 10 standard cubic feet per barrel. In the Middle Magdalena Basin, based on the encouraging results of the Gaitas-1 exploration well, we moved a drilling rig to the Gaitas pad and on October 27 we spud the Gaitas-2 exploration well. We expect Gaitas-2 to target multiple reservoir zones in a location that is structurally higher than the Gaitas-1 well, in a planned effort to test the Lisama Formation and the deeper Umir Sand further away from possible oil-water contacts. I'll now turn the call back to the operator, and we'll be happy to answer any questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session for our securities analyst. [Operator Instructions] Our first question comes from the line of [indiscernible] from Balanz.

Hi, good afternoon. Can you hear me?

Yes, crystal clear.

Perfect. Thanks for taking my question. This is Oriana Covault with Balanz. I had three questions if we may go one by one that would be great. First, starting on the lifting costs. We noticed that lifting cost year-to-date continue to be well above the high-end of your full year guidance. So just wanted to understand what drove this increase in third quarter? And if you're sticking to this range and how you plan to reach such reduction by fourth quarter?

Yes. I think part of the lifting cost is obviously, there's a set amount of inflation globally. But also in Q4, Paul had mentioned that we're over 32,000 barrels a day. A substantial amount of our lifting costs are fixed. So as we ramp up production during the quarter, that per unit cost will decrease.

Understood. And perhaps take into that guidance for production in the fourth quarter, just to understand better the impact that you saw during the quarter due to this operational disruptions and contingencies in the third quarter. So if you could perhaps provide more detail on what drove this impact in production levels in Colombia, the nature of the issues, and how should we think of this going forward?

Yes. The disruptions that we had during the quarter were in the -- predominantly in the Suroriente Block, which was around 920, 950 barrels a day impact. And those were blockades is -- the majority of the blockades were against the central government, not against Gran Tierra. So unfortunately, we just get caught in the middle of that. We're working very closely with the government to mitigate those blockades going forward. And again, unfortunately, it's a difficult one to predict. So we aren't anticipating blockades during the quarter. But again, it's a challenging one to predict.

Understood. And maybe just my last one. We saw in your corporate presentation that you're guiding for cash position for year-end of about $190 million roughly in the midpoint with about $70 million coming from working capital and other cash items. So just if you could share more details on how do you plan to achieve this target?

Yes. I think when you look at the quarter, obviously, it's a pretty constructive oil price environment right now. Our CapEx is dropping during the quarter, clearly compared to the past quarters, a lot of the development program is behind us. And so, we have a free cash flow build just on our operations. But then also, we expect our 2021 tax refund in the range of $20 million to $25 million to come in during the quarter as well.

Thank you. Our next question comes from Werner Riding of Peel Hunt. Your line is now open.

Hi, guys. There is no FY '23 guidance yet, but I guess we're only weeks away from being in the final month of this year. And so the outcome for 2022 is largely known. So to the extent possible, could you perhaps give us a feel for future production expectations next year? And then following on from that, I was just wondering on which year you see peak production being achieved from your current assets?

Yes. The short answer is we're meeting -- we meet with our Board of Directors annually to discuss our long range plan, life of all of our assets and then a five year outlook. And out of that rolls our budget for 2023. We'll be press releasing that in mid -- early to mid-December, which will give you all of the guidance that we expect. In terms of peak production, this year as you know, we focused on several things. One was balance sheet. Our balance sheet is in great shape. And the second thing we focused on is expanding our waterfloods in our big fields. And then the final that Paul mentioned is our pilot test on polymer. So if you combine all of those, we do have clear room to increase production, expanding waterfloods, expanding recovery. And as Ryan mentioned, we have some exciting exploration wells success that we're going to appraise. And so we'll give you some guidance on 2023, but in terms of peak production, we've got lots of dry powder for the next couple of years.

Thank you. Our next question comes from the line of Josef Schachter with [SERSE] (ph)

Good morning Gary, Ryan and Paul. Thanks for taking my questions. First to go to the balance sheet and probably for Ryan. As asked earlier about the $118 million on the U.S. now and $180 million to $200 million at year end because of the comments you made before of how you get there, you probably don't need more than $100 million. Are you looking to take advantage during Q4 or Q1 of any disruptions in the market where you can buy bonds at a big discount like you did during the quarter? Are you looking at maybe being more aggressive on your NCIB? And -- or is there acquisition potential where you can get some additional assets that fit within your core areas? And can you kind of walk me through how you see the cash being used? Or do you really want to keep that much cash on the balance sheet going forward?

Yes, thanks Josef for your questions. I think when we look at the capital allocation, if you look at Q3, it was somewhat balanced. We had some development capital, some exploration capital as well as the share repurchases and the bond repurchase as well. We would expect the share repurchase and bond repurchase to continue in Q4, obviously always dependent on market conditions. And then we always are looking at how we optimize our portfolio and not going to be buying assets, could be selling assets, it's really booking the long-term value and always being insured that we have the best portfolio possible. So -- but just on a static case, it would be -- the focus would be continuing on appraising the exploration as well as the share repurchase and bond buybacks.

Okay. And just to clarify, you mentioned the NCIB was at $1.34 per share. Is that Canadian or U.S.?

U.S.

That was U.S. Okay. Good. That’s it from me. Thanks very much.

Thank you.

Our next question will come from the line of Matias Castagnino of BCP Securities. Your line is now open.

Hello. Can you hear me?

Yes.

Okay. Thanks for taking my question. I just want to ask about Petro's remarks of allowing the exploration on existing contracts and not allow new contracts. I know that is not yet defined. Don't want to ask about your view on that. Just two questions. The first one, I understand if that happens you will still have full access to your 2P reserves, right, those are from existing contracts and you are freely to explore and develop them. And the second question is that, I have the sense that private players in Colombia were not granted a lot of new contracts in the recent past. So can you tell me how many of your existing contracts were granted in the past, let's say, three to five years?

Yes. I think the short answer is President, Petro has clearly said no new exploration contracts. Gran Tierra is in a very good position. We're focused in all three of the basins in Colombia. The Putumayo is the big one for us, but we also have lands and exploration in the Middle Magdalena and the Llanos basin. We've also come through a couple of years here where we refocused our exploration efforts. We went through the regulatory process. So we have an inventory of lands -- on lands that we currently have to drill over the next couple of years. President Petro has not said anything about existing lands, and we found that the regulators and the governments are -- business as usual cooperating in what we're doing. But having said that, we've also had some success -- early success in Ecuador as well. It's the same basin as the Putumayo, we have some exciting things to do in Ecuador. And so the short answer to your question is, we're continuing our focus on enhanced recovery in our big fields in Costayaco, Moqueta, Acordionero. And we have lots of inventory to continue drilling over the next couple of years. Just speaking for Gran Tierra.

Okay. Thank you.

Thank you. Our next question comes from the line of Roman Rossi of Canaccord Genuity. Your line is now open.

Thank you very much. Good morning everyone. So I have a couple of questions. I will ask them sequentially, if I may. The first one is related to the new marketing agreement you have in place. So, of course, you can have a positive or negative impact depending on the next month's price change. So I just wanted to know if you are thinking about any type of hedging in order to mitigate the impact of these prices changes?

Yes. I think on the -- no, we're not. I think we're hedging the current structure. But we are looking at how we put additional hedges in place just for general price protection, not so much the month variance, because we're really on the -- whether we price at M or M+1 over a longer period -- long-term, as you mentioned, you're ending up getting the same price. If you look at in October, we're going to get the price -- assuming production volumes are flat. In October, we're at the average Brent price of November. And in November, we had the average Brent price as in December. So it's really just that one month variation. So we're not looking at hedging that, but we are looking at -- and we're working in conjunction with putting together our capital program on price production to make sure that we expect prices to continue to be volatile, but just to make sure we have the downward protection, so we don't have to start and stop our capital program.

Perfect. And then the second question is related to the exploration campaign. So, so far, quite positive results. And just wanted to check what is -- what are you expecting for next year? The focus will be put to [indiscernible] and Ecuador. And maybe adding on the Ecuador, what's the pending commitment down there?

Yes. Our total commitment in Ecuador is 14 wells. And we're just in the process of converting one of those to a seismic program. And those 14 wells are -- will include some appraising work, it’s part of the process. And so, we're quite comfortable with what we're doing in Ecuador and where we're going prospectivity-wise today. And in terms of what are we planning for next year, we're planning for an additional four wells in Ecuador, that's our plan for the year. That could increase certainly with success that we're having. And several wells -- we have several wells planned in the Putumayo as well as the Middle Magdalena Valley, and we'll disclose our firm plans in December, as I mentioned, after we've gone through our planning process with our Board.

Thank you. Our next question comes from Jose Maria Silva of BTG. Your line is now open.

Hello. Can you hear me?

Yes.

Yes. Crystal clear.

Thank you very much. [indiscernible]. A couple of questions that I would like to ask and I would like to go one by one. So it seems we were on Ecuador, we'll start there. When should we start to expect, let's say, first significant oil to start coming out of there? And do you have already all the infrastructure in place that once this starts yielding proper oil, you can export out of the country and start to deliver that oil? That's number one.

Yes. On the production, the test barrels that we already had from Bocachico, we already have those in the pipeline. So it's very, very quick for us to get our barrels to market. As you remember, we're -- a lot of our barrels -- actually all of our barrels in the Putumayo Basin, we're selling those into Ecuador right now. So we're very familiar with the trucking, the offloading and just the regulatory processes in Ecuador. So that will be a bottleneck at all. And as far as production ramp-up, we're -- as we mentioned, we're just looking to isolate the Upper T sands before moving up to the Basal Tena, which is -- the Basal Tena the N Sand equivalent in the Putumayo. So we'll be testing that and then we'll be testing Charapa Norte here in the month of November. So assuming we have positive test results, things going to ramp up fairly quickly. And Gary mentioned, we already have four wells in our plan for next year. And with success, that could increase as well. So it really is going to be the upcoming test results coupled with capital allocation for next year.

Okay. I know this is quite preliminary, but any level of production that you -- we should expect for next year coming from Ecuador?

I think we're going to have to wait for the test results.

Okay. Perfect. Regarding the bond repurchases, you said you expect those to continue going into this quarter and next year. Do you have any limit in mind of how much they want to repurchase? And is there any limit at which assets -- or else you would have, let's say, to tender the bonds and call them to all the holders?

Yes, the limit is really just not tripping over the creeping tender rules. It is something that we work very closely with the people repurchasing the bonds. So that is -- and there's not really a bright line test on what that entails. But we work very closely with legal counsel as well as the banks assist on not to trip that up. So that really is the limiting factor. And as far as the quantum to the extent there was no limitations on that. Quantum -- we're trying to get the right balance of allocating the free cash flow to share buybacks, bond repurchases as well as optimizing the NPV of our existing assets and putting money towards exploration as well, especially based on the results that we've had thus far.

Okay. That's perfect. Regarding the production, can you guide us for -- you said already how much the quarter-to-date production has been on average. Do you have -- and I'm sure you have on your budget and exit production for 2022 that we should expect for the end of the year?

Yes. The exit production is going to be in the 32,000 to 34,000 barrels a day range. We're just in the process of bringing on wells. And so that's our plan. And we'll give you a sense of where we plan to take that in 2023 in mid-December.

Okay. Perfect. And at the risk of cannibalizing the call, I will continue here a little bit. You on the beginning of the call, you said that you do not want to quantify yet the impacts of the new tax structure and things like that. I know that's moving subject, because like the taxes were originally to be a 10% tax surcharge and then it changed to be a dynamic one. But can we have, let's say, an idea of the magnitude that this could be -- it's like $10 million or $50 million, just to have an idea how much of an impact this could have on free cash flow generation for next year in terms of the tax -- extra taxes that you will have to pay? Can you give, let's say, some kind of range or are you still reluctant to share something like that?

Yes. I think we would feel more comfortable giving a range once the legislation has been passed. And then as Gary mentioned, once we put our numbers out in December, we should have much more -- it will either be finalized or of much more clarity. And then we'll provide that at that point.

Thank you. Our next question comes from the line of Garrett Fellows of J.H. Lane Partners. Your line is now open.

Hi there. I'm just wondering if you guys could provide some more clarity around the use of the excess cash by the end of the year. I know you said for development exploration bond and equity per purchases, but if you had $100 million of excess cash, how much of that would go to development and expiration, how much to bonds and how much to share repurchases?

Yes, I think it's -- when we look at -- we only have two months left in the year. So when we look at really the excess cash, it's really -- wasn't really targeting excess cash by the end of the year. It really will be in conjunction with putting together our 2023 plan and budget. So I think it just outgain the capital at that point. So we probably have more than our target at the end of the year, and then it will dovetail into what our 2023 looks like.

Okay. But I guess just in terms of like what you guys will come after more so than others will be a 50-50 bonds in equity? Or how do you see that playing out?

Yes. On the bonds and equity, similar to what we had during the quarter, Q3 is fairly balanced between the bonds and the equity, and we would expect that to be the same in Q4 as well.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of [indiscernible] of Barclays.

Hello. Can you hear me?

Yes.

Okay. Good morning. Thank you for taking my question. I wanted to ask a similar question about the '25, and if you're planning on doing any liability management. Thank you.

Yes, liability management is I guess always a function of market conditions. Right now, we're carefully monitoring the market. But out base plan currently is just to continue to look at repurchasing the 2025's as well as the equity.

Okay. Thank you.

You’re welcome.

We have an additional question from Josef Schachter of SERSE. Your line is now open.

Thanks again for allowing me another question. Gary, this one is for you more on the political side. We're seeing, of course, Colombia and Venezuela, the leadership becoming more friendly, refinery issues there. The United States seems to be opening up now, allowing Chevron to do work there and Repsol to move product into Europe because of the shortages. Do you see some of the basins you're working in moving into Venezuela? And is something like -- if the door opens again and the Colombia and Venezuela government signed agreements, would you see that as an area for Gran Tierra to be working in, assuming the U.S. government removes any sanction or legal issues against people working in their Americans, Canadians or whatever?

Yes. I think the short answer is, we always monitor what was going on in the regions that we operate. Venezuela is no different. The relationship between Colombia and Venezuela certainly will help from a humanitarian standpoint. There is quite a few refugees that are in Colombia and straining the system. So I think, overall, that will be helpful if they can normalize relations between the two. In terms of business and business development for Gran Tierra, the short answer is, we'll continue to monitor what's going on. The skillset that we have in Colombia, the team that we have in Colombia and Ecuador would fit right in to Venezuela. But my view is, that would be a very long-term transition, if it happens at all.

Okay. Thanks for the extra color on that. Thank you very much.

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

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

Yes. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.