Gran Tierra Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the Q2 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 your questions.

Operator

I would like to remind everyone that this conference call is being webcast and recorded today, Wednesday, August 2, 2023 at 11 o'clock a. M. Eastern Time. Today's discussion may include certain forward looking statements 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.

Operator

Any production volumes are based on working interest sales before royalties. Finally, this earnings call is the property of Gran Tierra Energy Inc. Any copy and a rebroadcasting of this call is expressly forbidden without the written consent of Gran TIARA Energy. I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of GranTIra. Mr.

Operator

Guidry, please go ahead.

Speaker 1

Thank you, operator. Good morning, and thank you for joining Gran Tierra's Q2 2023 results conference call. My name is Gary Guidry, President and Chief Executive Officer. And with me today are Ryan Elson, our Executive Vice President and Chief Financial Officer And Rob Wihl, our Vice President of Asset Management. On Tuesday, August 2023, we issued 2 press releases that included detailed information on our Q2 2023 results And about our mid year 2023 reserves update, both of which are available on our website.

Speaker 1

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.

Speaker 2

Thanks, Gary. Good morning, everyone. During the first half of twenty twenty three, Gran Tierra completed its Development campaign was a drone of 21 development wells in 3 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 $53,000,000 of funds flow while incurring $66,000,000 in capital expenditures, Which were both broadly the same as the Q1 of this year. Adjusted EBITDA was $85,000,000 compared to $89,000,000 in the prior quarter.

Speaker 2

Both funds flow and adjusted EBITDA were negatively impacted by $13,000,000 in realized foreign exchange loss during the quarter, Which was caused by a strength in the Colombian peso versus the U. S. Dollar. With the development campaign now complete, we expect Capital expenditures will be lower for the second half of the year, while benefiting from the increased production from our new producing wells. Looking ahead, we are entering exciting phase of growth where we're gearing up to drill exploration wells in Ecuador in the Q4 of 2023 building on our successful Full 2022 exploration campaign.

Speaker 2

As of June 30, 2023, the company had a cash balance of $69,000,000 and net debt of $503,000,000 With a forecasted free cash flow in the second half of twenty twenty three, we expect to exit 2023 with over $150,000,000 of cash. Looking to pricing, during the quarter, the Brent oil price averaged $77.73 per barrel, which was down 31% from 1 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 Q2, the Vascony differential narrowed to $5.53 per barrel down from $7.87 per barrel in the prior quarter, Well, the Castillo oil differential narrowed to $9.41 per barrel, down from $15.17 per barrel over the same time period.

Speaker 2

In July 2023, we have continued to see differentials narrowing with the Vascoevia differential down to $3.96 per barrel And the Castilla differential down to $6.64 per barrel. Gran Tierra's average production for Q2 was 33,719 Barrels per day, up 10% from 1 year ago, an increase of 7% compared to the prior quarter. The company's 2nd quarter Today, 2023 average production has been approximately 35,300. The company's operating netback was $34.58 per barrel, Down 42% from 1 year ago and down 2% from the prior quarter. The drop in operating netback over the last year was largely driven by the decrease in oil price With the strong current production base, Brent oil price above $80 per barrel, Narrow differentials and the majority of capital expenditures behind us, we're very excited about the second half of the year.

Speaker 2

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 We are extending your support to the Natural Amazonas project. During the 1st 6 years of the project, Gran Tierra's initial investment of 13,000,000 Has already produced impactful results and have benefited the environment and local communities, including the reforestation And restoration of over 14,000 hectares of land and planting of over 1,200,000 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 natural zone project. I'll now turn the call over to Rob to discuss our mid year 2023 reserve update and operational highlights from our Q2 results.

Speaker 3

Good morning, everyone. During Q2 of 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 waterflood scheme. As Ryan had indicated, the company has completed its 2023 development campaign. During the first half of twenty twenty three, the company drilled a total of 21 wells. In the Cuaderno, 10 wells were drilled, 6 are on production, 4 are on water injection.

Speaker 3

In the Chassa block, Granterra has completed its drilling campaign at Casiaco, which consists of 7 wells, 4 of which are producers and 3 of which are water injectors. In Moqueta, we drilled 4 production wells. Of particular note, the Cusacko fifty four well was drilled and is the most northern well drilled in the Cusacko field And the success of the well has resulted in the identification of multiple additional drilling opportunities to target unswept regions of oil. With our 2023 development campaign now complete, the company is pleased to provide a midyear reserves update. The positive results announced in the reserves update are a testament to GranTerra's operational success and our in country relationships That have allowed the company to secure the seriept date license continuation.

Speaker 3

We invite you to read the reserves update press release in its entirety On our website. As of June 30, 2023, GranTerra now has the highest reserves in the company's history, 94,000,000 barrels oil equivalent or BOE on a 1P basis, dollars 150,000,000 BOE on a 2P basis 212,000,000 BOE on a 3P basis. In the 1st 6 months of 2023, the company added 16,000,000 BOE of 1P, 26,000,000 BOE of 2P and 35,000,000 BOE of 3P reserves, which allowed us to achieve reserve replacement ratios of 2 70% on a 1P basis, 4 33% On a 2P basis and 5 99% on a 3P basis. Despite a decrease In the Brent price forecast used in the mid year 2023 McDonough Reserve Support relative to the 2022 Year end McDaniel reserves report. For the 1st 2.5 years of the evaluation, the combination of our successful development Drilling campaign, the serie empty 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.

Speaker 3

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%. Costs 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, dollars 5.33 for 2P $3.86 for 3P. These mid year reserve results are testament to Gran Tierra's ability to operate as a full cycle exploration and production Which offers value

Speaker 4

to our

Speaker 3

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.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session for securities analysts. Our first question comes from the line of Alexandra Simeon Needy with William Blair and Company, United Kingdom. Your line is open.

Speaker 5

Hi. Thanks for taking my questions. I have 3, if I may. I'll go ahead and ask 1 by 1. I'm seeing higher taxes this quarter.

Speaker 5

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.

Speaker 2

Higher debt. Yes, it is really net debt a decrease.

Speaker 5

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

Speaker 2

Yes. The only tax that we pay in the second half are the withholding tax, which recently the Colombian government has increased the withholding tax and that's really just a Prepayment for the following year taxes and that works out to 8% of revenue.

Speaker 5

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?

Speaker 5

Because you have been saying about higher production in the second half, right?

Speaker 2

Yes. We expected operating cost per barrel to trend down throughout the year just with the if you look at our average for the quarter, it was around 33 7 in Q2, we're running with 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. But as our production increases, we expect our pre unit cost to decrease.

Speaker 5

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

Speaker 2

Yes. Our original guidance was 210 to 250 for the year. I think in our last release we were lowered that to 210 to 230. So we narrowed the range. So we do expect that at the lower end of the range.

Speaker 5

Okay. Thank you.

Operator

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

Speaker 6

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 under what conditions or at what prices would you consider reinstating some hedges?

Speaker 6

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 base is and is there anything you can do about that to mitigate it?

Speaker 1

Yes. On the hedging, we go through an annual process of looking at all of our assets over a 5 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 3rd and the 4th 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 Brian answer the question on the peso.

Speaker 2

Yes. The peso obviously started the year Yes, I think 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 We hadn't done our budget at 5,000. We've done around 4,200.

Speaker 2

So it's not significantly higher than what we had budgeted. But it still is a negative impact, Special 75 percent of our operating costs are in pesos. Inflation has tamed 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 was predominantly because of our payment of taxes in the second quarter both in April June And that was really the payment of our 2022 taxes.

Speaker 2

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.

Speaker 6

Okay. Thank you very much.

Speaker 2

Thanks, Ann.

Operator

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

Speaker 7

Good morning and thanks for taking my questions. Excellent Additions on the reserve side. So I have a couple I will do 1 by 1. 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 call it cash in order to decrease the leverage ratio?

Speaker 2

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

Speaker 7

Okay, awesome. And then adding to the CapEx question we had before, You need to spend around $83,000,000 during the second half of the year to reach like midpoint guidance. But you mentioned that the exploration campaign will only begin in Q4. So we should expect a light CapEx in Q3 and higher CapEx in the 4th?

Speaker 2

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

Speaker 7

Perfect. Thanks. And the last question is regarding the Castilla and Basscony credentials. We've seen that they have narrowed significantly. So what are we expecting for the second half of the year?

Speaker 2

Yes, I think we budgeted The number that we were forecasting is higher than what they currently have. Do you think you'd but I think Castilla is close to $6 today. So it's 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 higher than that right now.

Speaker 7

Okay, great. Thank you, Rayan.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Joseph Schachter with Schachter Energy Research, your line is now open.

Speaker 4

Good morning, guys. And two questions. The first one for Ryan. You mentioned that net debt was $503,000,000 and you expected cash by year end to be $150,000,000 So up $82,000,000 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.

Speaker 4

Do you see using that money for buying back more bonds Or do you really have a strong need to want to see $150,000,000 in cash on the balance sheet at year end? Or are there other purposes that you might find to use that for?

Speaker 2

Yes. It's a good question. I think it's we target to maintain a cash balance of $75,000,000 to $100,000,000 and that will vary by quarter and depending on activity. So we're comfortable with the $75,000,000 to $100,000,000 cash balance. So we would look Yes.

Speaker 2

We're going to deploy the, let's call it, the excess cash in the second half and that could be a combination of bond repurchases, share repurchases Or just add a little extra cash to gear up for a more active 2024 program.

Speaker 4

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 Where do you see the targeted debt number you want to have going forward in 2024?

Speaker 2

Yes. I think we'd like to get our gross debt down to $500,000,000 and our net debt around $400,000,000 to $425,000,000 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.

Speaker 4

Okay, super. Yes, I agree with that. Question for Gary. In past presentations you've mentioned that you were looking at Diversifying into maybe MENA or 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?

Speaker 1

Yes. The answer is yes. We continue looking at diversifying value add acquisitions and It's a continuous process and will continue into 2024. So We see lots of things that are out there that could add value. We're sitting at Trading at half of our PDP, and you can see the transactions that are happening globally.

Speaker 1

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.

Speaker 4

And Maine is the main area or are there other areas as well?

Speaker 1

Yes. We always look in the basins that we're in and the countries that we're in, Colombia, Ecuador, But the targets for diversifying beyond those countries is definitely MENA.

Speaker 4

Okay. So just to clarify what you said before. Thanks very much, Gary, and good luck for Q3. We look forward to see the results Given the stronger commodity prices.

Speaker 1

Thanks, Joseph.

Operator

Thank you. Our next question comes from the line of Orianna Kowal with Valens. Your line is now open.

Speaker 8

Hi, thanks for taking my question. I had 2 questions. Go may if we may go one by one, that would be great. First, on the operating side, we noticed a 9% So just wondering if you could provide more insight into how are you seeing production growing across Ecuador and the Putumayo, and if you have any color that you could share in terms of what drove the Acorogenero lower production on a quarter over quarter basis, sorry.

Speaker 2

Yes. I think part of that was just timing on when we brought on wells. So we did it probably we had some flush production in the Q1 and then decrease in the Q2. We all set some wells down during the quarter, which we So, we have brought on and as we see our

Speaker 8

production around that 35,000 barrels right now. Perfect. And just going back to the CapEx question, I just wanted to confirm whether the exploration program through the remainder of the year We'll only be concentrated in Ecuador. Just looking at the 2023 guidance and the plan of going into 4 to 6 wells between Colombia and Ecuador, just wanted to confirm If we should expect to see anything coming from Colombia as part of the Solorriente Continuation Program?

Speaker 1

Yes. The answer is yes. We're focused on Ecuador. We've had some really good success. We've drilled 2 wells, 2 discoveries And we're looking for critical mass in Ecuador on the development side.

Speaker 1

We do have some very exciting things to drill in Colombia, But that will likely occur in our 2024 capital program.

Speaker 8

Thank you very much.

Operator

Thank you. Our next question comes from the line of Garrett Fellows with JH Lane Partners, your line is now open.

Speaker 9

Hey guys, thanks for taking the question. Could we just talk about plans to address the 20 25 maturity and would you guys perhaps use some of that excess cash to reduce the overall quantum of debt?

Speaker 2

Yes, it's a good question. Yes, our baseline is that we repay them as we come new. And as you rightly point out is that we will Kash, and we will look at deploying capital due to 2025s and targeting maturities.

Speaker 9

Okay. Thanks very much.

Operator

Thank you. Gentlemen, there are no further questions at this Tyme, please continue.

Speaker 1

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.

Operator

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

Powered by Quartr
Earnings Conference Call
Gran Tierra Energy Q2 2023
00:00 / 00:00