Gran Tierra Energy Inc. (GTE) Q2 2023 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy’s Results Conference Call for the Second 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. Instructions will be provided at that time for you to queue up for a question. I would like to remind everyone that this conference call is being webcast and recorded today, Wednesday, August 2, 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, operator. Good morning, and thank you for joining Gran Tierra’s second 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, August 1, 2023, we issued two press releases that included detailed information on our second quarter 2023 results, and about our mid-year 2023 reserves update, both of which are available on our website. Ryan and Rob will make a few brief comments, and then we will open the line for questions. I’ll now turn the call over to Ryan.

Thanks, Gary. Good morning, everyone. During the first half of 2023, Gran Tierra completed its development campaign with the drilling of 21 development wells in three of our major fields, which have been producing oil at rates in line or exceeding our expectations. Gran Tierra achieved another strong quarter by delivering $53 million of funds flow while incurring $66 million in capital expenditures, which were both broadly the same as the first quarter of this year. Adjusted EBITDA was $85 million compared to $89 million in the prior quarter. Both funds flow and adjusted EBITDA were negatively impacted by $13 million in realized foreign exchange loss during the quarter, which was caused by a strengthening the Colombian peso versus the U.S. dollar. With the development campaign now complete, we expect capital expenditures to be lower for the second half of the year while benefiting from the increased production from our new producing wells. Looking ahead, we’re entering an exciting phase of growth where we’re gearing up the drill exploration wells in Ecuador in the fourth quarter of 2023 building on our successful 2022 exploration campaign. As of June 30, 2023, the company had a cash balance of $69 million and net debt of $503 million. With a forecasted free cash flow in the second half of 2023, we expect to exit 2023 with over $150 million of cash. Looking to pricing during the quarter, the Brent oil price averaged $77.73 per barrel, which was down 31% from one year ago and down 5% from the prior quarter. The company’s quality and transportation discount narrowed to $14.10 per barrel down from $18.45 per barrel in the prior quarter. The Castilla and Vasconia oil differentials have continued to narrow throughout 2023. During the second quarter, the Vasconia differential narrowed to $5.53 per barrel down from $7.87 per barrel in the prior quarter while the Castilla oil differential narrowed to $9.41 per barrel down from $15.17 per barrel over the same time period. In July 2023, we have continued to see differentials narrowing with the Vasconia differential down to $3.96 per barrel and the Castilla differential down to $6.64 per barrel. Gran Tierra’s average production for second quarter was 33,719 barrels per day, up 10% from one year ago, an increase of 7% compared to the prior quarter. The company’s second quarter-to-date 2023 average production has been approximately 35,300. The company’s operating net back was $34.58 per barrel down 42% from one year ago and down 2% from the prior quarter. The drop in operating net back over the last year was largely driven by the decrease in oil price and the higher differentials over the time period. With the strong current production base, Brent Oil price above $80 per barrel, narrow differentials and the majority of capital expenditures in behind us, we’re very excited about the second half of the year. We’re also pleased to announce, we plan to invest again in the protection and conservation of the Andean-Amazon rainforest in the Putumayo Basin of Colombia by extending our support to the NaturAmazonas project. During the first six years of the project, Gran Tierra’s initial investment of $13 million has already produced impactful results that have benefited the environment and local communities, including the reforestation and restoration of over 1,400 hectares of land and the planting of over 1.2 million trees. We look forward to our continued partnership with the NGO Conservation International and are excited to build upon the positive impacts we’ve already made with that NaturAmazonas project. I’ll now turn the call over to Rob to discuss our mid-year 2023 reserve update and operational highlights from our second quarter results.

Good morning, everyone. During second quarter 2023, Acordionero’s production averaged approximately 18,000 barrels of oil per day. Another strong quarter performance due to the successful 2023 drilling program and the ongoing prudent management of the enhanced oil recovery water flood scheme. As Ryan had indicated, the company has completed its 2023 development campaign. During the first half of 2023, the company drilled a total of 21 wells. In Acordionero 10 wells were drilled, six are on production, four are on water injection. In the Chaza Block, Gran Tierra has completed its drilling campaign Costayaco, which consists of seven wells, four of which are producers, and three of which are water injectors. Moqueta, we drilled for production wells. A particular note, the Costayaco 54 well was drilled and is the most northern well drilled in the Costayaco field, and excess of the well has resolved it in the identification of multiple additional drilling opportunities to target [indiscernible] regions of oil. With our 2023 development campaign now complete, the company’s pleased to provide a mid-year reserves update. The positive results announced in the reserves update are a testament to Gran Tierra’s operational success and are in-country relationships that have allowed the company to secure Suroriente license continuation. We invite you to read the reserve’s update press release in its entirety on our website. As of June 30, 2023, Gran Tierra now has the highest reserves in the company’s history, 94 million barrels oil equivalent or boe on a 1P basis, 150 million boe on a 2P basis and 212 million boe on a 3P basis. In the first six months of 2023, the company added 16 million boe of 1P, 26 million boe of 2P and 35 million boe of 3P reserves, which allowed us to achieve reserve replacement ratios of 270% on a 1P basis, 433% on a 2P basis, and 599% on a 3P basis. Despite a decrease in the brand price forecast used in the mid-year 2023, McDaniel Reserves Report relative to the 2022 year end McDaniel Reserves Report for the first 2.5 years of the evaluation. The combination of our successful development drilling campaign, the Suroriente contract continuation, our focus on maintaining low operating costs and our share buyback program allowed Gran Tierra to achieve increases relative to 2022 year end in net asset values before tax. Our 1P net asset value before tax is now $49.54 per share, up 7% and our 2P NAV before tax is now $84.39 per share, up 15%. Cost associated with finding and developing these reserves, excluding changes in future development costs and on a per boe basis came in at $8.55 for 1P, $5.33 for 2P and $3.86 for 3P. These mid-year reserve results are a testament to Gran Tierra’s ability to operate as a full cycle exploration production company, which offers value to our stakeholders via the success we have achieved through the drill bit. I’ll now turn the call back to the operator and we will be happy to answer any questions. Operator, please go ahead.

Thank you. [Operator Instructions] Our first question comes from the line of Alexandra Symeonidi with William Blair & Company, United Kingdom. Your line is open.

Hi, thanks for taking my questions. I have three if I may. I’ll go ahead and ask one by one. I’m seeing higher taxes this quarter. I guess this is because of the last tax payment for the fiscal 2022. Can you please provide some guidance for cash taxes for the second half of the year? This is my first question. Thank you.

Thinking was the question, higher…

Debt.

Yes, it was really net debt decreased or increased…

For the taxes, sorry, so my question was about taxes. Yes, so guidance for cash taxes for the second half.

Yes, the only taxes that we pay in the second half are the withholding tax, which the reason the Colombia government has increased withholding tax and that’s really just a prepayment for the following year taxes, and that’s works out to about 8% of revenue.

Okay, perfect. Thanks very much. Very clear. Then the operating expenses at $15.86, we’re running a bit above guidance. Do you expect the second half to converge because you have been saying about higher production in the second half, right?

Yes. We expect the operating cost per barrel to trend down throughout the year just with the – we look at our average for the quarter is around 33.7 in Q2. We’re right about 35,000 right now, so that will help. And then we did – we are a little bit higher than we forecast originally, and that was just with the strength of the peso.

Okay.

But as our production increases, we do expect our per unit cost to decrease.

Okay, great. Thank you. And my last question is about CapEx. So given that the trading campaign has finished for the year, do you expect CapEx to come at the lower end of the guidance for this year?

Yes. Our original guidance was $210 million to $250 million for the year.

Yes.

And think in our last release, we were lowered that to $210 million to $230 million. So we narrowed the range. So we do expect at the lower end of the range.

Okay. Thank you.

Thanks.

Thank you. Our next question comes from the line of Anne Milne with Bank of America. Your line is open.

Thank you. Congratulations on the results. Two questions I have. One is I noticed that you currently do not have any hedges in place. So I just wonder at under what conditions or at what prices would you consider reinstating some hedges? And the second, I think you hinted that a little bit in the last answer – question and answer, which was the stronger peso. How has that affected your – I guess to what degree your cost basis and is there anything you can do about that to mitigate it?

Yes, on the hedging, we go through an annual process of looking at all of our assets over a five-year period. We’re just starting that process. And you’re correct, we are unhedged at the moment. So we’ll evaluate that in the third – in the fourth quarter here depending on what we allocate for capital for 2024 and make those decisions depending on the capital program, but also what our outlooks are. And we’ll let Ryan answer the question on the peso.

Yes, the peso obviously started the year, anger [ph] around 4,000 ran up all the way to 5,000. Now we’re back down to around 4,000. So it is putting a little bit of cost pressure on. We hadn’t done our budget at 5,000. We’ve done around 4,200. So it’s not significantly higher than what we had budgeted. But still is a negative impact, especially 75% of our operating costs are in pesos. Inflation has changed a little bit in Colombia. So that’s offsetting some of the inflationary pressures. So it won’t have a material impact on our results. This quarter we did it is predominantly because our payment of taxes in the second quarter, both in the April and June, and that was really the payment of our 2022 taxes, and that’s why you’ll see in our results we booked a large realized gain and that was just the change in peso. So it was truly a realized gain because we did make that payment this quarter.

Okay. Thank you very much.

Thanks, Anne.

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

Good morning and thanks for taking my questions. Excellent additions on the reserve side. So I have a couple, I will go one by one. The first one you mentioned that the NCIB was completed. I was wondering if you are expecting to renew it or if you are expecting to just off hold cash in order to decrease the leverage ratio?

On that question, we did maximum the NCIB and we can renew it sometime this month and then we would look to renew it even we do renew, we have lots of flexibility on whether we purchase shares on it or not. Last year we did repurchase 10% of our shares, but we would look to renew it.

Okay. Awesome. And then adding to the CapEx question we had before, you need to spend around $83 million during the second half of the year to reach like mid-point guidance. But you mentioned that the exploration campaign will only begin in fourth quarter, so we should expect a light CapEx in third quarter and higher CapEx in the fourth?

Correct. Yes. In Q4 will probably be driven by the exploration wells as well as building pads getting ready for the 2024 development campaign – development and exploration campaign.

Perfect. Thanks. And the last question is regarding the Castilla and Vasconia differentials, we’ve seen that they have narrowed significantly. So what are we expecting for the second half of the year?

Yes. I think we budgeted the number that we’re forecasting is higher than what they currently have, I think – but I think Castilla is close to $6 today. So it is narrowed quite a bit and Vasconia is below $4. We’re forecasting around $7.50 for Castilla and around $4 for Vasconia for the second half, but the market is tighter than that right now.

Okay. Great. Thank you, Ryan.

Thank you.

Thank you. Our next question comes from the line of Josef Schachter with Schachter Energy Research. Your line is now open.

Good morning, guys. And two questions. The first one for Ryan, you mentioned that net debt was $503 million and you expected cash by year-end to be $150 million, so up $82 million from where you are at June 30. You’ve also in the first half did some buying of the 6.25% Senior Notes Feb 2025. Do you see using that money for buying back more bonds? Or do you really have a strong need to want to see $150 million in cash on the balance sheet at year-end? Or are there other purposes that you might find to use that for?

Yes. Its a good question. I think it is – we target to maintain a cash balance $75 million to $100 million, and that will vary by quarter and depending on activity. So we’re comfortable with the $75 million to $100 million cash balance. So we would look at where to deploy the – what’s called the excess cash in the second half, and that could be a combination of bond repurchases, share repurchases or just having a little extra cash to gear up for a more active 2024 program.

Okay. Where do you see the comfort zone on net debt given your production levels and let’s say in an $80 print number? Do you want to see that number at 400 and then you’re happy and you can leave it there? Where do you see the targeted debt number you want to have going forward in 2024?

Yes. I think we’d like to get our gross debt down to 500 and our net debt around 400 to 425. We think that’s a reasonable number, especially with our production base, the low capital requirements of our assets. We think that’s a very manageable number.

Okay. Super. Yes, that’s – I agree with that. Question for Gary, in past presentations you’ve mentioned that you were looking at diversifying into maybe MENA other places around the world. Has there been much progress on that and do you see 2024 maybe adding another leg to the stool of the business?

Ye. The answer is yes. We continue looking at diversifying value-add acquisitions and it’s a continuous process and we’ll continue into 2024. So we see lots of things that are out there that, that could add value. We’re sitting at a – trading at a half of our PDP and you can see the transactions that are happening globally. There are not many transactions outside of Canada and North America in general. But we – I think the answer to your question is we will continue our process of looking for value-add.

And MENA is the main locate – main area or are there other areas as well?

Yes. We always looking in the basins that we’re in and the countries that we’re in Columbia, Ecuador, but the targets for diversifying beyond those countries is definitely MENA.

Right. Okay. So just to clarify what you’ve said before, thanks very much Gary and good luck for Q3. Looking forward to seeing the results given the stronger commodity prices.

Thanks, Josef.

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. I had two questions. If we go may – we may go one by one that would be great. First on the operating side, we noticed a 9% sequential decrease in Acordionero volumes. So just wondering if you could provide more insight into how are you seeing production growing across Ecuador and Putumayo? And if you have any color that you could share in terms of what drove the Acordionero lower production on a quarter-over-quarter basis, sorry.

Yes. I think part of that was just timing on when we brought on wells. So we did probably – we had some flush production in the first quarter and then decreased in the second quarter. We also had some wells down during the quarter, which we subsequently have brought on, and that’s where we see our production around that 35,000 barrels right now.

Perfect. And just going back to the CapEx question, I just wanted to confirm whether the expiration program through the remainder of the year. Will only be concentrated in Ecuador just looking at the 2023 guidance and the plan of going into four to six wells between Columbia and Ecuador, just wanted to confirm if we should expect to see anything coming from Columbia as part of the Suroriente continuation program.

Yes. The answer is, yes. We’re focused on Ecuador. We’ve had some really good success. We’ve drilled two wells, two discoveries, and we’re looking for critical mass in Ecuador on the development side. We do have some very exciting things to drill in Columbia, but that will likely occur in our 2024 capital program.

Thank you very much.

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

Hey guys, thanks for taking the question. Could we just talk about plans to address the 2025 maturity and would you guys perhaps use some of that excess cash to reduce the overall quantum of debt?

Yes. It is a good question. Our base plan is that we repay them as we come due and that as you, right, we point out is that we was some excess cash and we will look at deploying capital to the 2025s and targeting maturities.

Okay. Thanks very much.

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

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

This concludes today’s conference call. Thank you for participating. You may now disconnect.