Gran Tierra Energy Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 20, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Gran Tierra Energy's Conference Call for 4th Quarter and Year End 2023 Results. My name is Olivia, 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 with securities analysts and institutions.

Operator

Instructions will be provided at that time for you to queue up for your questions. I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, February 20, 2024 at 11 am Eastern Time. Today's discussion may include certain forward looking information, oil and gas information and non GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important advisories and disclaimers with regard to this information and for reconciliations of any non GAAP measures discussed on today's call. Finally, this earnings call is the property of Gran Tierra Energy Inc.

Operator

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.

Speaker 1

Thank you, operator. Good morning, and welcome to Gran Tierra's 4th quarter and year end 2023 results conference call. My name is Gary Guidry, Gran Tierra's President and Chief Executive Officer and with me today are Ryan Elson, our Executive Vice President and Chief Financial Officer and Sebastian Morin, our Chief Operating Officer. This morning, we issued a press release that included detailed information about our Q4 year end 2023 results. In addition, Grant Tierra's 2023 Annual Report on Form 10 ks has been filed on EDGAR and is available on our website.

Speaker 1

Ryan and Sebastian will 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 our financial results. Ryan, please go ahead.

Speaker 2

Good morning, everyone. We are delighted to announce that Gran Tierra successfully achieved its targets for 2023 in terms of production, funds flow from operations and free cash flow. These milestones underscore the quality of our assets and our unwavering commitment to operational excellence. Our focus efforts on asset development have yielded strong performance across various key metrics. Additionally, in 2023, we showcased our confidence in Gran Tierra's future prospects by repurchasing 6.8% of our outstanding shares through our normal course issuer bid or NCIB program, demonstrating our dedication to creating long term shareholder value.

Speaker 2

We're currently trading at a discount to our proved developed producing or PDP net asset value per share by about 46%. Our average cost of each share purchase was $7 per share. Our many achievements during the year result in year over year production growth of 6%, strong reserves replacement ratios well above 100% and the highest 1P, 2P and 3P year end reserves in the company's history. In another major milestone in 2023, Gran Tierra issued $488,000,000 of new 9.5 percent senior secured amortizing notes due 2029 in exchange for its existing notes to improve our balance sheet, reduce overall leverage and provide additional financial flexibility by extending the maturity schedule to better align with expected future cash flows. Approximately 92% of holders bonds were exchanged, highlighting the support from bondholders.

Speaker 2

Subsequent to year end, Gran Tier issued an additional $100,000,000 of 9.5 percent senior secured amortizing notes due 20.29. The company used a portion of these proceeds to repay $50,000,000 of borrowings outstanding under our credit facility, which subsequently was terminated. Despite a net loss of $6,000,000 in 2023, Grand Tierra achieved return on average capital employed of 15% showcasing solid performance in capital utilization. Gran Tierra's capital expenditures were at the low end of our guidance at $219,000,000 fully funded by funds flow from operations of $277,000,000 or $8.27 per share, resulting in free cash flow of $58,000,000 or $1.73 per share, demonstrating effective financial management and positive cash generation. Although 2023 adjusted EBITDA decreased by 17%, the company realized adjusted EBITDA of close to $400,000,000 indicating substantial operational resilience amid challenges with volatile oil prices.

Speaker 2

Gran Tierra's net sales for the year were 6 $37,000,000 compared to $711,000,000 in 2022. This decrease was primarily driven by a 17% decrease in Brent price and higher Castilla and Vasconia differentials, partially offset by 7% higher sales volumes and lower transportation discounts in 2023. Despite higher operating expenses in 2023, Granitea effectively managed inflationary pressures, showcasing resilience in cost control and maintenance activities. One final item I would like to highlight was the successful completion of the Sorrente continuation agreement. By securing the continuation, Gran Tierra is committed to long term capital projects and development programs with plans of optimizing oil recovery and value for the Sorrente block.

Speaker 2

We believe the combination of Gran Tierra's robust operational expertise in the Putumayo Basin and Equitrol's technical knowledge will continue our joint success in the development of our Sorrente block. I'll now turn the call over to Sebastien Warren to discuss some of the highlights of our current operations.

Speaker 3

Thanks, Ryan. Good morning, everyone. I'll briefly cover a few operational highlights from today's press release as well as our recent press release regarding 2023 year end reserves. Operationally, we are building off a successful year in 2023 to start off 2024 on a strong note. Since December 2023, Gran Tierra has drilled 4 oil wells in the Cossiaco field in which we are seeing excellent initial production results.

Speaker 3

The first well, Cossiaco 56 has been on production since early January and has been producing at stable average rate of around 1900 barrels of oil per day and a 2% water cut. A second well, Kosyako 57 was spud on January 6 and brought on production in late January. It has been producing at a stable average rate of around 1100 barrels of oil per day and a 10% water cut. The 3rd well

Operator

Ladies and gentlemen, pardon the interruption.

Speaker 3

Being drilled and will be followed by the final well, Acordionero 128. All wells from this development program are expected to be drilled, completed and on production before the end of the Q1 of the year. Back down in the Southern Putumayo Basin, Gran Tierra intends to commence development drilling in the Coghimbi oilfield located in the Sorrente block during the later half of the year. We plan to expand the block's production facilities, increase gas power generation, construct new development well pads and make social investments in the area, all with the goal of substantial production growth in 20252026. From an exploration perspective, around 40% to 45% of Gran Tierra's 2024 capital program will target high impact near field and low risk exploration activities, including the drilling of 6 to 9 exploration wells in Colombia and Ecuador, signifying our dedication to unlocking potential new reserves improving basins with established transportation infrastructure.

Speaker 3

In addition, as part of our 2024 capital program, we are currently in the early phases of execution to acquire 238 kilometers squared of 3 d seismic over the Tarapa block in Ecuador and to pre invest in advancing drilling licenses, building pads for the 2025 exploration program in Colombia and Ecuador, which will set the stage for future growth opportunities for the company. On January 23, 2024, we were pleased to release our 2023 year end reserve report as evaluated by McDaniel. 2023 saw the highest year end reserves in our company's history. 90,000,000 barrels of oil equivalent 1P, 147,000,000 of barrel oil equivalent 2P and 207,000,000 barrels of oil equivalent 3P and we achieved excellent reserve replacement of 154 percent 1P, 42 percent 2P and 303 percent 3P. This also represented the 5th consecutive year that we achieved the 1P reserve growth.

Speaker 3

These results were driven by success with development drilling and water flooding results in the Chassa block, which contains the Cossiaco and Moqueta fields and the Suroriente continuation agreement as outlined by Ryan. During 2023, a combination of our strong reserves growth, ongoing reductions in debt and share buybacks allow Gran Tierra to achieve net asset values per share before tax of $44.48 1P, up 2 88% from 2020 and $79.13 2P, up 144 percent from 2020. With this significant growth in our net asset values per share over the last 3 years, we believe Gran Tierra is well positioned to offer exceptional long term stakeholder value. The success we achieved in 2023 also reflects our ongoing conversion of reserves from the probable to the proved category. With 147 booked proved plus probable undeveloped future drilling locations, Gran Tierra is well positioned to continue to grow the company's production and reserves in 2024 and beyond.

Speaker 3

I will now turn the call back to the operator and Gary and Ryan and I will be happy to take questions. Operator, please go ahead.

Operator

Thank

Speaker 1

Okay. We'll proceed. Thank you, ladies and gentlemen. And we'll now conduct a question and answer session for the securities analyst. On your touch tone phone.

Speaker 1

You will then hear an automated message advising your hand is raised. Your question will be pulled in the order they are received.

Operator

First question coming from Roman Rosi with Canaccord Genuity. Your line is open.

Speaker 4

Good morning and thanks for taking my questions. I have a couple, if I can go 1 by 1. The first one is regarding the quality and transportation discounts. So we saw a 30%

Speaker 1

quarter over quarter.

Speaker 4

I just wanted

Speaker 2

Yes. I think the Romain, can you hear me okay? Yes. Can you hear me now?

Speaker 4

I can hear you, but there is some echo.

Speaker 2

Okay. Yes, with the quality of the differentials, mostly it's just from the quality. Vasconia and Castilla did widen during the Q4. And so we have seen that fairly consistent into Q1. There hasn't been a substantial change from Q1 to Q4.

Speaker 2

Currently, the Castilla differentials around $9 and Vasconia is around $5 which is effective what we budget for this year.

Speaker 4

Okay. And do you think that the widening is going to be in Venezuela entering the market? And

Speaker 2

Sorry, Roman, can you hear me? I think the question was, is the result of Venezuela. Yes, that's part of it. I think there's 2 issues is Venezuela, additional potential crude from Venezuela as well as actually 3, as well as OPEC starts releasing some of their cuts, we expect more of the heavy sours come to the market as well as the start of the TMX line in Canada, which will get more Canadian heavy crude to Tidewater. So it's a combination of those three factors, but it's really no surprise to us and it's right around in our budget numbers.

Speaker 4

Okay. Thank you. And one last question regarding OpEx. There was an increase on

Speaker 2

Yes. It was just driven by the lower production. And so we expect our gross operating costs to be flat to come down slightly in 2024 coupled with increased production. So we expect the per unit cost to drop.

Speaker 4

Okay. Thank you very much, Brian.

Speaker 2

Thank you. Thank

Speaker 5

you.

Operator

And our next question is coming from the line of Ariana. Your line is open.

Speaker 5

Hi, this is Oeyana Konrad with Salas. I believe that there's a bit of a there, but I'm going to try to put I have 2 questions. So the first one is regarding your

Speaker 2

Yes. With respect to hedging, we did have 15,000 barrels hedged with a floor or we do still actually until the end of Q1. We have 15,000 barrels hedged with a floor of $80 with the put premiums around $3 which is really part of our physical contract with the offtaker. We are looking at adding additional puts in for the remainder of the year. We're just in the process of doing that right now.

Speaker 5

Perfect. So that would take

Speaker 2

Yes. Sorry, I missed the question. It broke up a little bit on this side.

Speaker 5

Yes, like in some like what are your production hedge production hedge throughout the year?

Speaker 2

Yes. We'd like to have looking out 6 to 9 months, we'd like to have 30% to 50% hedged. And then after 6 to 9 months, 25 percent hedge on a rolling basis using puts and really just looking for the downside protection. And you'll recall too is one of the things we have is a very strong operational hedge given that we operate all of our production. So we have a lot of flexibility on our capital expenditures to the extent that prices were decreasing substantially, we very quickly cut our capital program.

Speaker 2

So that's one way another way we protect the business.

Speaker 5

Got it. Well, just one last one from my side. You can comment on your

Speaker 2

Yes. I think our guidance out there, we're targeting year end net debt to EBITDA of 0.8 times to 1.2 times. So we take the one times, which is fairly consistent with what we've had in the past as a target. We continue to target that and we'd like to have cash on the balance sheet of anywhere between $50,000,000 $100,000,000 And that will fluctuate throughout the year just with payments to governments, capital program, etcetera. But over the course of the year, we expect to average in that $50,000,000 to $100,000,000 range.

Speaker 5

Got it. Thank you very much. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Job Sector with Job Search.

Speaker 6

Good morning, everyone. This is going to be a challenging call. If it breaks up, Brian, if you could call me later.

Speaker 2

Absolutely.

Speaker 6

First question, you have in your guidance 5,000 And you had a very good quarter. You add in the I add in the success in Q1. 30 6 are you expecting depletion?

Speaker 2

Yes, on that, I think it's the production is the Kostiakos wells have done exceeded our expectations and that's one of the reasons why we give a range. And so it's still early days on the wells. So we'll see how these wells progress over the next couple of quarters before providing additional guidance, but we're still comfortable with the range right now.

Speaker 6

Okay. How many locations do you have in the area for going?

Speaker 3

Sorry, just to clarify that question, in which area?

Speaker 6

We're talking about the Putumayo The CYC Discovery. The CYC Discovery.

Speaker 1

Talking about the South and Cristiano.

Speaker 6

Yes. So out of the

Speaker 3

147 2P locations that we have, there is still 26 locations identified for Casiaco Moqueta, for example. And then at Sorrente, we've got an additional 30.

Speaker 6

Okay. That's good. That's good info.

Speaker 1

Okay. One of the things, Joseph, one of the things that Sebastian and the team are looking at on Costa Aco, we've got some very good results with our reservoir modeling and targeting unswept areas. That's what's outperforming at Cociaco in the north. We have another area in the southern part of the reservoir along strike that we're going to try to target this year. So we're that's why we're excited about Costa Alco.

Speaker 6

Okay, good. One last one for me. With the upflow in the margin, you may have some In the past, you've talked about maybe New area in MENA. New area in MENA. Analyze everything and fix the right over steam, have you added for

Speaker 1

Yes. The answer to that is that we are always looking for opportunity. We don't see anything specific at the moment, but our business development initiatives are all long term. And so we're looking always for ways to increase value of the company, but we don't have anything specific on the horizon.

Speaker 6

Okay. That's it for me. Thanks very much. Thanks very much. With the successes in drilling.

Speaker 2

Thank you.

Operator

Thank you. One moment please for our next question. Yes, speakers you're now back connected. And we have a question from William Blair. Alexandra Iundini.

Operator

Your line is open.

Speaker 7

Hi, thanks for taking my question. So you mentioned that 30 $6,000,000,000 of the $100,000,000 was used for the credit facility. Where will be the balance used?

Speaker 2

Yes. On these out of the $100,000,000 the net proceeds were around $88,000,000 $35,000,000 went to repay the facility as you pointed out and the remainder would just be cash on the balance sheet right now.

Speaker 3

Okay. Thank you. Thank you.

Operator

Thank you. One moment please for our next question. And our next question coming from the line of Alejandra Andretti with GBM. Your line is open. Hi, thanks for taking the question.

Operator

Just a quick one for me, confirming that after you repaid the committed line, you don't have any available lines at the moment, correct?

Speaker 2

Correct. We repaid it and then terminated. We are looking at a working capital facility which coincides better with the business and some of the ebbs and flows of our cash outflows and inflows. But right now, we have nothing in place. And we're comfortable just with our free cash flow and cash on the balance sheet.

Operator

Great. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 1

Thank you everyone for joining us today. We look forward to speaking with you over the next quarter and update you on our ongoing progress. I would like to thank the entire Gran Tierra team for their hard work in 2023, the fantastic results and to our shareholders for their continued support. Thank you.

Operator

Thank you. Ladies and gentlemen, Tata can call conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Gran Tierra Energy Q4 2023
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