Gran Tierra Energy Inc. (GTE) Q1 2023 Earnings Report, Transcript and Summary

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. 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. [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 would 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 calls at 10 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 the strong quarter by delivering $60 million of funds flow while delivering on our front end loaded development program, we saw the drilling of 14 development wells out of 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 fund flow slightly by $11 million. By completing the majority of our development program in the first three 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 generate 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 $0.80 per share. We also exited the year with a healthy net debt-to-adjusted EBITDA ratio of one times. As far as Gran Tierra's ongoing commitments to reduce its net debt during the quarter, the company bought back 8 million in face value of Gran Tierra's 6.25% senior notes, the cost of the 2025 bond buyback was approximately $6.8 million, representing a discount 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 a credit facility remaining completely undrawn. During Q1, the Brent price averaged $82 per barrel down 16% from one-year ago. And now 10% from the prior quarter. The government 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 one 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 the 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 price is continuing to remain volatile and brent has sold off the last couple of weeks, well Brent averaging $2 in Q1, it hit 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 one-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 are on track on our targets this year. The company's operating netback was $35.18 per barrel down 33% from one year-ago and down 9% from the prior quarter, changes in funds flow and operating netback were largely driven by the decrease in oil brent oil price and the widening of the policy and transportation discounts over the same time period. We're very pleased with our recent announced agreement with Ecopetrol, the National Oil Company of Colombia where Gran Tierra, Ecopetrol renegotiated agreement for this Suroriente Block in the Putumayo Basin, which was scheduled to end in mid-2024. Gran Tierra will continue to be the operator in Suroriente Block as committing to a capital investment program of $123 million over a three year period from the agreements effective date. It is expected to be funded by Gran Tierra's internal cash flows. The agreement provides an opportunity to add significant value as well as economic life to Suroriente by continuous duration for 20 years. The additional term of the agreement allows long-term investment in infrastructure and work programs to enhance oil recovery efficiency in existing fields and appraisal drillings to extend the life of the fields. Lastly, we're happy to report that Gran Tierra has issued that company's 2022 sustainability report, creating long-term value and delivering on our environmental, social and governance commitments, which can be found on the company's website at www.grantierra.com/ESG. I'll now turn the call over to Rob, who's got 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 a drilling of 14 development wells in three of our major fields, which have been producing oil at rates that are in line with our expectations. In Acordionero Field, development drilling resumed in January 2023 with a 10-well program, if the wells were drilled by the end of the quarter as a result of the program and continued good performance of the fields, 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 59,890 [ph] barrels of water injected per day in first quarter 2022. The polymer flood pilot continues to progress and was expanded with a 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 fields ultimate oil recovery. Our Costayaco development campaign saw four wells drilled during the quarter. Two producers are currently being completed, with time expected in early May 2023 and two 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 waterflood optimization through additional injection are expected to continue to grow production in Costayaco throughout the year. In Moqueta, two wells were drilled during the quarter and both are on production and awaiting stimulation. Two additional development wells are planned in 2023, along with two conversions of existing wells into injectors that are expected to grow production and optimize the waterflood 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're also excited with their plans to recommence exploration drilling during second half 2023. With the drilling of four wells in Ecuador, three in the Charapa Block to appraise the discovery of the Hollin Formation and one 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 four to six 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 will 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 securities analyst. [Operator Instructions]. Our first question comes from the line of Josef Schachter with SERSI. Your line is now open.

Good morning, Gary, Ryan and Rob. I have two questions. On Slide 35 in your presentation, you highlight three of the exploration wells Rose 1, Bocachico and Charapa. Could you guys go into a little bit of detail of what the price is in terms of the size potential production of the wells? And what timeline if you're successful with those volumes, come on? Would they be in '23 or later, or more into 2024? That's the first question.

Okay, yes the first question we're going through to issue a mid-year reserve update on everything that we're doing Josef. But the answer to your question is the pre-drill estimates on Bocachico and Rose were the five to 15 million barrel type reserved range. We haven't seen anything that that deters us from that original pre-drill 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 whether it will occur early to mid-next week.

Okay, super. That's it for me. Thanks very much for answering our questions.

Thank you. Our next question comes from the line of Phil Skolnick with Eight Capital. Your line is now open.

Yes, thanks. Good morning. Just on Suroriente, can you -- how should we think about that $123 million over the next three years and the impact on your growth profile?

Yes, I think that's a good question. I think we're excited about that block. As you know, we haven't drilled well enough blocks since 2018. And even without drilling a well on that block. And just with a successful wrap up of the water injection, we had 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 will start drilling next year. And it'll be a discipline for a program that really focused on development drilling at 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 the Gran Tierra in that 7,000 to 10,000 barrel day range.

Perfect. Thank you.

Over the coming years.

Okay. Great. Thanks.

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

Good morning, everyone. Thanks for taking my question. So I have a question regarding the increase in G&A. You mentioned you're finding that the increase was due to higher costs used to be [indiscernible]. So can you be more clear on that and what you should expect for the rest of the year?

And certainly, it was breaking up a little bit on this side. It was a question with respect to was it DDNA?

Increasing G&A?

G&A. Yes. That was some one-time cost 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. In upper barrel basis, we expect it to be lower, just with the increased volumes.

Okay, awesome. Thank you very much, Ryan.

Thank you.

Thank you. Our next question comes from the line of Adam Gill with Paradigm Capital. Your line is now open.

Thank you. Good morning, gentlemen. 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, as soon as spud, it will be later in the summer in Ecuador, and we should have results continuing results through the end of the year.

And if this two to four well exploration program just going to be one rig.

One rig. Yes.

And then just last one on that, how many?

There go ahead.

I was just going to ask how many potential zones did you see in the two blocks on the first two exploration wells for completion?

Yes, we saw three in the Boca Chica well, and two to three and drop at 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 two to three in each of the wells.

Okay, great. That's my question. Thank you.

Thank you.

Thank you. Our next question comes from the line of Oriana Covault with Balanz. Your line is now open.

Hi, thanks for taking my question. 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 and the production wise pricing and costs. How is the operation coming along vis-à-vis your expectations?

Yes, I think on expectations, we're right on target for our expectations on the development in Ecuador and production costs. As you know, your costs always look a little bit high, we just have one well producing. We have a fairly large pad that we're going to drill two more wells off of and only use to shared facility. So as we drill additional wells, we expect the -- our costs to come down dramatically. But overall, as Gary mentioned, we're really excited about the prospectivity and our results to date [indiscernible] well continues to be a strong performer light oil, close to the infrastructure. So we're very, very excited about Ecuador. And that's why we're coming to drill four wells in the second half of the year this year.

Awesome. And maybe just following-up on mostly seeing like recent price volatility international and wider discounts, although slightly compressing in the last month and for the [indiscernible]. Are you thinking of entering any type of hedging contract or doing any changes in that area?

Yes, pricing has taken quite a bit of differentials out. Like I mentioned, Brent has been as you know, very volatile thinking in Q1 as a low of 73, which is we're testing right now. And as of today and high of 87. So we expect that to remain Brent to remain volatile in the quarter and we are 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 licenses being relinquished in the country. And in taking into account, perhaps the focus on continue looking for opportunities across either Colombia or elsewhere. Do you see this could be some type of assets that you'd be interested in? Or for how is that agenda in terms of opportunities moving along for Gran Tierra?

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 non 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 lands, 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 program, programs that we've been had underway for the last several years.

Perfect. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Alejandra Andrade with JPMorgan. Your line is now open.

Hi, good morning. Thank you so much for taking my question. My question was related to capital allocation going forward. We saw some bond buybacks in a small amount in the first quarter, in addition to in some share buybacks. Just wondering kind of how what the priorities are going forward in the year and how do you envision those two programs? Thank you.

Yes, good question. I think on the allocation, I think if you look at the restrictions that we have, under a normal course issuer bid, we've essentially maxed out the amount of shares that we can buyback under the normal course issuer bid, which can't be renewed until August. So really, the focus will be continued strength on the balance sheet through the repurchase of bonds.

Great, thanks. Thank you.

Thank you. Our next question comes from the line of [indiscernible]. Your line is now open.

Yes, thank you very much. Good morning, guys. 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 were those volumes kind of going out from because, as you said, in the presentation, and 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 Acordionero drilling program of this year was six producers and four injectors and we were extremely pleased with the results of our Acordionero drilling program. We averaged well above type curve. The Acordionero drilled some great wells on the north part of the pool there in the largely on spent parts of the reservoir, but the -- those wells and new wells do tend to come on really strong and they do they do fall off a bit and then flatten out. So we there was some flush production from those new wells. And so the some of those volumes you saw there were probably right at time we're getting a flush fallings. So it's come off a little bit. 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 tested, stimulated, initially there on Jeff Thompson, we switched over to ESP pumps. So we expect to see another boost in our production over the next few months as those wells come on production as well. So overall, we're extremely pleased with our drilling programs this year both at Acordionero and Costayaco and look at seeing great rates and all of them. So you will see over the year, production rates will kind of bounce off and fall off a little bit as these new wells come on. But overall, we're beating our tight curves. All our joint programs and very pleased.

So we're very comfortable with the guidance that we have out in the market. As Rob said, their drawing results have been great. A lot of times average production, we just put that out early. So 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 1,000 barrels. So that's just reality of it. But we're very comfortable with our average annual guidance.

So just to be clear, those five wells that you have put on production on Acordionero, now have been stabilize after that kind of flash production, any heavy coming out?

Yes, they're definitely stabilizing, I would say, six producing wells, we drilled this were at Acordionero that there was four injectors. And yes, they were they're definitely stabilizing. Now, there's an overall like, it's -- we were well about type curves, and as well as very, very pleased results. And yes, they're starting to stabilize now.

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

Okay, that's great. Thank you.

Thank you. Our next question comes from the line of [indiscernible] with Aquila Asset Management AG. Your line is now open.

Yes, thank you for taking my question. And I just would like to ask, given the recent warranty, And as you're really committed to the situation with the Brent, 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 apply zero prices went up and the prices are going down. So just a bit of color on that point, if it's possible.

Yes, no, we think it's premature to think that again, we go back to the first quarter Brent average 82, which was -- we had our budget was 85. differentials were a little bit tighter than we had budgeted. But again, during Q1, Brent went a low of 73 to a high of 87. So we're at 73 today. So you know, it's a very volatile business. We're still very bullish on the supply demand fundamentals, and we think the second half years and be very, very strong.

Okay. Thank you so much.

Thank you.

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

Thank you, Karen. 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.