Gran Tierra Energy Inc. (GTE) Q3 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Gran Tierra Energy's Results Conference Call for the Third Quarter 2024. 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 questions. I would like to remind everyone that this conference is being webcast and recorded today, Monday, November 4, 2024 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 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 Gran Tierra's third quarter 2024 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 Sebastien Morin, our Chief Operating Officer. On Monday, November 4, 2024, we issued a press release that included detailed information about our third quarter 2024 results, which is available on our website. Ryan and Sebastien will now make a few brief comments, and then we will open the line for questions. I'll now turn the call over to Ryan to discuss some of the key financial highlights from our third quarter results. Ryan?

Thanks, Gary. Good morning, everyone. I want to start off by saying how excited we are that on October 31, 2024, Gran Tierra completed its acquisition of i3 Energy. We believe the purchase of i3 Energy uniquely positions Gran Tierra as a premier diversified oil and gas company with assets in Canada, Colombia, and Ecuador. The i3 acquisition has diversified Gran Tierra into Canada while adding 253 net booked drilling locations with an average 77% operatorship and production totaling 18,000 barrels of oil equivalent per day. Canadian landholdings equaled almost 1.2 million gross acres and include 53 gross sections in the Montney and 144 gross sections in the Clearwater, two of the most prolific plays in North America. The i3 acquisition has increased Gran Tierra's PDP reserves by 42 million barrels of oil equivalent, or 96%, 1P by 88 million barrels of oil equivalent, an increase of 97%, and 2P by 174 million barrels of oil equivalent, an increase of 119%. Gran Tierra now has approximately 178 million BOE of 1P and 322 million BOE of 2P reserves, with a 1P reserve life index of 10 years and a 2P reserve index of 18 years. We believe the currently depressed natural gas prices we see in Western Canada will be alleviated as major LNG projects include LNG Canada are brought online, along with increased electricity demand in North America. In the short-term, Gran Tierra will focus on developing the significant oil-weighted opportunities in its Canadian portfolio while still developing and appraising our high-impact oil opportunities in South America. We look forward to the integration of our teams and are confident the combined company will have top-tier technical and operational skill sets. Now on to the quarterly results. Gran Tierra generated $60 million of funds flow from operations, or $1.96 per share, which was up 31% from the prior quarter, mainly as a result of the one-time tax adjustment that impacted the prior quarter. Adjusted EBITDA was $93 million compared to $103 million in the prior quarter. And during the quarter, Gran Tierra generated net income of $1 million. As of September 30, 2024, the company had a cash balance of $278 million and net debt of $509 million. We do expect the cash balance to come down by approximately $170 million as a result of funding the i3 acquisition. We continue to have long-term net debt-to-EBITDA target of 1x or less. Gran Tierra generated oil sales of $151 million, down 9% from the prior quarter due to lower price and wider oil differentials. Speaking of pricing during the quarter, Brent averaged $78.71 per barrel, down 7% from the prior quarter. The company's quality and transportation discounts per barrel during the quarter were $14.10, which were higher than the $12.79 in the prior quarter. This is the result of the widening differentials from all three of our benchmarks: Vasconia, Castilla and Oriente. Finally, the company's operating netback was $34.18 per barrel, down 12% from the prior quarter, as mentioned previously, due to the combined lower Brent pricing and higher differentials. As a result of the i3 acquisition announced on August 19, 2024, Gran Tierra was required to pause its share buyback program result in only 370,000 shares repurchased during the quarter. From January 1, 2023 to September 30, 2024, the company repurchased approximately 4 million shares or 12% of the shares issued and outstanding at January 1, 2023, from free cash flow. A some of you may have seen this morning, along with the results announcements, Gran Tierra also announced the TSX approval of the renewal of its normal course issuer bid. The renewal reinforces Gran Tierra's commitment to continue to focus on share buybacks as a key component of our shareholders' returns. I'll now turn the call over to Sebastien to discuss our operational highlights from our third quarter results.

Good morning, everyone, and thank you, Ryan. From a capital perspective, during the quarter, we incurred capital expenditures of $53 million, which were lower than the $61 million when compared to the prior quarter. This was primarily due to timing of our rig program, where we only operated one drilling rig during the quarter compared to two in the prior quarter. Total average working interest production during the quarter was 32,764 barrels of oil per day, which was consistent with the prior quarter. During the quarter, the company had lower volumes in the Acordionero field, which were caused by increased downtime related to workovers, the decrease was partially offset by higher production in the Costayaco field in Colombia and increased production from the Chanangue and Charapa Blocks in Ecuador, as a result of the successful exploration drilling campaign, which I will touch upon later. Gran Tierra's operating expenses decreased by 2% to $46 million, compared to the prior quarter, primarily as a result of lower overall workover costs, which were offset by higher lifting costs primarily associated with inventory fluctuations in Ecuador. The company's transportation expenses decreased by 31% to $3.9 million compared to the prior quarter of $5.7 million due to the utilization of shorter distance delivery points. As reported in Q2, barging restrictions on the Magdalena River have now been resolved with increased water levels, which have returned to sufficient levels for barging operations. Operationally, we continue to progress the Cohembi field development plan in the Suroriente Block, with civil works and facility construction progressing smoothly in preparation to commence our drilling program in the later part of the fourth quarter 2024. We are also currently working on increasing our fluid handling capacity at Acordionero with the water treatment facilities expansion projects expected to be completed in mid-December. The expansion will result in an addition of 21,500 barrels of water handling per day, which represents a 35% increase in water treatment capacity. This is consistent with our long-term approach to optimizing our waterflood performance. Gran Tierra has steadily increased total fluid production and water injection at Acordionero by 18% per year to continue growing and maintaining oil production while improving sweep efficiencies and recoveries. Looking to exploration, the Charapa-B7 well marks our sixth consecutive discovery in Ecuador. Spud on August 30, 2024, the Charapa-B7 well had an impressive initial 30-day production rate of 2,043 barrels of oil per day, the highest of any of our Ecuador wells to date with less than 1% water cut and 25 API oil from the Basal Tena. All the exploration success we have had in Ecuador has allowed us to achieve a major milestone of over 1 million barrels of cumulative oil production, and this is only the beginning. The drilling rig has now been moved from the Charapa Block and mobilized to the Chanangue Block to drill two wells, the Zabaleta-K1 and Zabaleta Oeste-K1 exploration wells. The Zabaleta-K1 well is located 4 kilometers to the east of Arawana-J1 well drilled earlier this year and is 200 feet up structure. Both wells will target the Basal Tena formation as well as assess potential in the T-Sand, U-Sand and B-Limestone. We have also now completed the initial processing of our newly acquired seismic data over the Charapa Block, which is currently being interpreted. Preliminary interpretations of the high-quality 3D data confirm potential prospectivity and additional areas of interest, including better definition over the Charapa structure. The 3D data will further delineate reserves, underpin future drilling locations scheduled for 2025 and further support future development planning. [indiscernible] (0:10:41): 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. Ladies and gentlemen, we will now conduct the question-and-answer session for securities analysts. [Operator Instructions] Our first question comes from the line of Greg Pardy with RBC Capital Markets. Your line is now open.

Thanks, good morning and thanks for the rundown. Really, I had a couple of different sets of types of questions, but the first part is cash tax. Cash tax came in higher than we were expecting. Now with the acquisition under your belt, I am just wondering what your tax position will look like, particularly as you head into 2025.

Thanks, Greg. Yes, I think the cash taxes came in just oil prices continues in Colombia, still continues to hover above the threshold of the 15% surtax. So, with oil prices currently, we’d expect that to come down in the fourth quarter. Actually, we think we’ll move down to 10% surtax. And looking at Canada, as you know, Canada, actually Alberta in particular has a very favorable tax regime with only 23%. And so, we would expect that to continue to decrease on an overall basis. We expect our tax rate to be lower in 2025 than in 2024.

Okay, that’s helpful. And then just related to the buyback, yes, I did see that you reviewed the NCIB. Is that Ryan, how is that connected to the company? I mean is that a function of free cash flow generation opportunistic? How should we think about the buyback?

Yes, I think on the buyback is, we did put automatic share purchase plan, so we’ll continue to buy back stock. So, even if we are in blackout, we can continue to buy. But I think if you look at since 2023, we really have funded that buyback through free cash flow. And so, we expect that to continue in the future. And for us when we’re trading at a discount to PDP, we think it’s a great way to return capital to shareholders and increase long-term net asset value.

Okay, thanks. And it’s all obliged me just with the last one really comes back to the motivation, an outlook for the company, now with i3 under your belt. Can you just remind us your thinking going into consummating that deal, maybe from a reserve, reserve life perspective, diversification, really just want to understand what drove you to do it, number one. And then number two is how we should maybe think even about an allocation of capital or focus as you go through 2025 and beyond. Thanks very much.

Yes, thanks. I think the overall strategy of the company, we have been trying to find the right set of assets to enter Canada for a couple of years, i3 provided that for us, the platform as well as the team. And we really entered Western Canada to continue growing in the basin. It’s really should be considered an entry into the basin. We see lots of opportunity on conventional and unconventional assets, but with a real emphasis on conventional for ourselves as a company, we also see diversification of both oil and gas and that’s one of the attractions that we see for this particular set of assets. In terms of capital allocation, we’re in a very unique position. We have some recent discoveries which we think are material in Ecuador, as well as some underdeveloped assets here in both the Clearwater, the Montney, the Simonette Montney and several other areas within the Canadian portfolio. And so, what you will see from us in 2025 is allocating to the new oil discoveries in Ecuador, continued development of our mature water floods in Colombia, as well as some very interesting things here, oil opportunities here in Western Canada, that would be our allocation near term. But we are quite excited. As Ryan mentioned, we’re quite excited about the underdevelopment of the assets here in Western Canada. And we’ll be pursuing those quite vigorously.

Understood. Thanks very much.

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

Good morning. And congratulations on the closing of the i3 acquisition. I have a couple of questions this morning. One, on your 2024 guidance it looks like you right now are on the EBITDA level anyway, right, sort of in the middle, maybe slightly on the lower end for EBITDA the year on the last 12 month basis, you think you will end up in the middle of your sort of lower case guidance for 2024. And then just when will you have your any indications for a 2025 guidance? I assume that’s maybe towards the beginning of the year. That would be my first question.

Great. Thanks, Anne. Yes, we’re comfortable that we’ll end up within the guidance. Obviously oil prices have been a little choppy last little while, so that will have an impact in the last couple months of the year, but we are quite comfortable we will be in that range. And then we expect to come out with 2025 guidance in early January.

Okay. And could you talk to us a little bit about how your CapEx plan will change for 2025? I assume you will be increasing because of the Canada acquisition. How much higher do you think you’ll be for the year?

Yes, I think we’re still working through our five-year plan right now. But I think the way to look at Canada, as Gary mentioned, there is lots of opportunities in the Canadian assets. And the beauty of Canada, which is different than Colombia and Ecuador, a lot of it’s half cycle economics, most of the capital is drilling wells. And so, as we allocate capital, we expect to see commensurate increase in production. As Gary mentioned, we’re targeting the oil weighted assets in 2025. So, I would expect Canada to be essentially cash flow neutral as far as CapEx and cash flow.

Okay, thank you. Also, for this quarter you had a slightly higher discount rate to Brent. Do you expect that to continue? Is there anything that could change that in the fourth quarter of the year?

Yes, and that discount is really just Vasconia, Castilla and Oriente all widened a little bit. Part of the widening of differentials actually is because of the Trans Mountain pipelining in Canada, which is somewhat ironic. But that’s one of the drivers of that. An extra 580,000 barrels of crude coming on the market, which is a natural competitor for the Colombian and Ecuadorian crudes.

That’s interesting? Something so far away.

Yes.

And then my last question. I know it’s sort of really big picture, but given the attractive fields that you’ve acquired in Canada and the strong reserve base, do you have any idea of down the road how you see a breakdown between, let’s say production and cash flow in Canada versus South America? I mean right now it’s still going to be relatively small on the EBITDA level, but I imagine that proportion will increase over time.

Yes, there is two. I guess there is two conflicting things there in the sense that we expect with all the discoveries that we’ve had in Ecuador, we expect Ecuador to grow quite a bit as well. And with the oil weight in there, I would still expect South America to make up, the majority of our adjusted EBITDA. With Canada continuing to grow especially in the future in a more robust gas price environment. So, I think that will evolve. But it’s always it’s important for everyone to remember is that we’re not going to stop developing in South America. Ecuador and Colombia are still core areas for us, and we expect them to continue to grow as well.

Okay. And so South America will continue to be a majority going forward.

Yes.

For the time being?

For the time being, yes, definitely.

Okay. Okay, great. Thank you very much.

Thank you.

Our next question comes from the line of Peter Bowley with Jefferies LLC. Your line is now open.

Thank you for the call. Thank you for taking my questions. First, in the context of low 70s, brent, in 2025, do you still expect to pay your bond amortization in 2026 from free cash flow? And second, regarding capital allocation, how are you thinking about – with your 2029 bonds trading above the 12% yield, how are you thinking about capital allocation and would bond buybacks ever be considered as part of your plan? Thank you.

Yes, I think on the 2026 amortization, we are quite comfortable between cash on hand that we will exit this year and then free cash flow in 2025. And 2026 remember the amortization till the end of October, we’re quite comfortable with that amortization. So, we don’t have a concern there. And then on the capital allocation, we think right now we will continue to focus on longevity of the assets and invest in the ground. And then we do have obviously the $25 million maturing in February of this year, which obviously we will pay. And then also the maturing 2026 and then the slight $25 million in 2027. And we expect to fund all three of those with just cash on hand and free cash flow. Keep in mind, remember, we do have a lot of flexibility on our capital allocation, given that in South America – we have all of our assets – we operate all of our assets, and in fact, all of our blocks, with the exception of one, we have 100%. So, that gives us a lot of flexibility. And then Canada, we operate with 78% – 77%. So again, still have some flexibility on capital allocation in Canada.

Great. Thank you.

Thank you.

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

Hi. Thanks so much for the call. I just had two quick questions. First, I mean, I saw that you changed a little bit the terms of the committed facility in Canada. $74 million maturing next year. Was wondering if there’s any expectation to do something in Colombia as well in terms of committed lines. And then also, how are you thinking about your hedging program for next year? That’s it. Thanks.

Great. Thanks. Yes, and the reason why we reduced the Canadian facility, the borrowing base support is quite a bit higher. We just don’t have really a use of proceeds for those funds right now. So, we treat it as more of a working capital facility. And instead of paying additional standby fees, we reduced the committed amount. So that was a conscious decision by Gran Tierra. And we will continue to look at putting a similar facility on the Colombian assets as well. And stay tuned for that. And then our hedging program we are looking at, as we finalize our five-year plan and capital allocation, we are looking at increasing our hedging program. You’ll see we do have a new corporate deck on our website that outlays the hedges that we acquired with i3, particularly the gas hedges that they had in place are quite interesting for 2025. We’ll continue looking at hedging 30% to 50% for the next six months and then 20% to 30% for the following six months on more of a systematic basis.

Great. Thank you.

You’re welcome.

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

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

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