Gran Tierra Energy - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the first quarter of 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 call is being webcast and recorded today, Thursday, May 2nd, 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.

Gary Guidry (President and CEO)

Thank you, operator. Good morning, and thanks for joining Gran Tierra's first 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 Sébastien Morin, our Chief Operating Officer. On Wednesday, May 1st, 2024, we issued three press releases that included detailed information about our first quarter 2024 results, which are available on our website. Ryan and Sébastien will now make a few brief comments, and we'll open the line for questions. Immediately following this earnings call at 10:00 A.M. Mountain Time, 12:00 P.M. Eastern Time, we will be holding our annual general meeting of shareholders. During that meeting, I will give a brief overview of Gran Tierra and where the company is heading.

I invite you to join us for this call. Dial-in instructions can be found on our website. I'll now turn the call over to Ryan to discuss the key financial highlights from our first quarter results.

Ryan Ellson (EVP and CFO)

Thank you, Gary. Good morning, everyone. Gran Tierra had a great start to 2024. During the first quarter, we have completed a substantial portion of our development plan and are now focused on our 2024 exploration campaign, along with the development of the Suroriente block. During the quarter, Gran Tierra delivered $74 million of Funds Flow, up 24% from the first quarter of 2023, which resulted in $2.34 of Funds Flow per share. After incurring approximately $55 million in capital expenditures, the company generated Free Cash Flow of approximately $19 million. adjusted EBITDA was $95 million for the quarter, up from $93 million in the prior quarter. As at March 31, 2024, the company had a cash balance of $127 million and Net Debt of $510 million.

The 12-month trailing net debt to adjusted EBITDA was 1.3x and is expected to be less than 1x by year-end from a combination of increased adjusted EBITDA and lower net debt. During the quarter, the company issued an additional $100 million of 9.5% senior notes and received cash proceeds of $88 million. With a portion of the funds, we fully repaid the outstanding balance on the company's credit facility of $36 million, and the facility was terminated. Gran Tierra generated oil sales of $158 million, up 9% from the first quarter of 2023 due to higher sales volumes and lower Castilla, Vasconia, and Oriente differentials. Looking at pricing during the quarter, Brent averaged $81.76 per barrel, up 1% from the prior quarter.

The company's quality and transportation discounts per barrel during the quarter were $15.36, which significantly narrowed from $18.45 from the first quarter of 2023. The company's operating netback was $35.37 per barrel, up 1% from the first quarter of 2023. Gran Tierra has repurchased approximately 1 million shares during the quarter. Since January 1st, 2023, the company has repurchased approximately 3.3 million shares, or 10% of the shares issued and outstanding as at January 1st, 2023, from free cash flow. We are very pleased how we have started 2024, and we are having excellent results in our core assets under waterflood. The balance sheet is in excellent shape, and we are very excited about the Arawana exploration well, which Sebastien will highlight.

I'll now turn the call over to Sébastien to discuss our operational highlights from our first quarter results.

Sebastien Morin (COO)

Thanks, Ryan. Good morning, everyone. As Ryan mentioned, capital expenditures of $55 million were higher than the prior quarter of $39 million and down $71 million, down from $71 million compared to the first quarter of 2023. During the quarter, we completed our Acordionero drilling program and the majority of our Costayaco program, achieving approximately a 16% reduction in drilling costs, a savings of approximately $3.8 million between both programs. Total average working interest production during the quarter was 32,242 barrels of oil per day, an increase of 3% over the prior quarter, despite deferred production of approximately 1,000 barrels of oil per day as a result of social disruptions at the Acordionero field. Post-disruption, the field was rapidly ramped back up without issue and is now back producing over 17,000 barrels of oil per day per expectations.

In particular, we are very pleased about the successful drilling program in Costayaco that confirmed the company's reservoir interpretation and extended the field significantly to the North and to the South.

The four wells drilled in the North had a combined initial thirty-day production rate of 5,707 barrels of oil per day, unstimulated and on jet pump. Currently, work has commenced to install the final selective completions, conduct zonal testing and stimulation, as well as installation of the final optimized artificial lift, which we expect will increase production further. To note, Costayaco was originally discovered in 2007. Our 2024 program has increased production to the highest level since 2017. As highlighted in the press release, we initiated our high-impact exploration program with the Arawana-1 well, which was spud on the Chanangue block in early April. We are very excited about the initial open hole logging results of the well, which is drilling to a bottom hole location 1.5 km away, across the fault from the Bocachica-1 well.

Bocachica-1 had an initial 90-day production rate in the Basal Tena of greater than 1,100 barrels of oil per day and continues to produce at approximately 850 barrels of oil per day, 20-degree API oil at less than 1% water cut, and has recovered over 330,000 barrels of oil since June 2023. The Basal Tena is the geologic equivalent to the N Sand in Cohembi, located 20 km to the North. Our mapped area of closure and rock properties observed in Arawana-1 compares well to the Cohembi field. At the end of 2023, the Cohembi field has produced 28 million barrels of oil and has remaining reserves of 25 million 1P, 54 million 2P, and 95 million 3P.

Given these observations, we are very excited to finalize drilling operations at Arawana-1, run casing, and start testing in the next few weeks. Looking to financial metrics, Gran Tierra's operating expenses increased by 2% to $48 million compared to the prior quarter, primarily due to higher workovers, offset by lower lifting costs, primarily related to power generation optimizations in Costayaco, Acordionero, and Cohembi fields. The company's transportation expenses increased by 16% to $4.6 million when compared to the prior quarter. During the quarter, Gran Tierra utilized longer distance delivery points due to low river levels in Colombia, caused by dry El Niño conditions, resulting in higher transportation costs. Today, we are excited to also announce the release of our 2023 sustainability report. I will go through some key highlights below. However, invite you to visit our website and go through the report in its entirety.

2023 was the safest year in company history, with over 17 million work hours without any incidents causing lost time since June 9th, 2022. Through Gran Tierra's reforestation efforts, the company has planted over 1.6 million trees and has conserved, preserved, or reforested approximately 4,500 hectares of land since 2018. This is equivalent to sequestering 20 years of our current greenhouse gas emissions. Gran Tierra is reducing greenhouse gas emissions at its facilities through gas-to-power projects that conserve excess natural gas that would otherwise be flared, using the gas instead to power generation. In 2023, Gran Tierra's gas-to-power projects generated approximately 70% of the total energy used in all of the company's operations.

Gran Tierra has started 2024 on a strong footing, and we look forward to continuing to ramp production through our ongoing waterflood optimization initiatives, new well completions, and exciting near-field exploration program. I'll now turn the call back to the operator, and we will be happy to answer any questions. Operator, please go ahead.

Operator (participant)

Thank you. Ladies and gentlemen, we will now conduct a question and answer session for securities analysts. If you have a question, please press the star key, followed by one one on your touchtone phone. You will then hear an automated message advising that your hand is raised. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please, for your first question. Our first question is from the line of Anne Milne with Bank of America. Your line is now open.

Anne Milne (Managing Director of Equity Research)

Good morning, everyone, and congratulations on your good first quarter. My questions have to do with your outlook for the rest of 2024 in terms of your OpEx expenses and transportation expenses, and possibly some information on the social disruptions that you mentioned at Acordionero. Do you think that's just one time? Is it something that could come back? Just to have a little bit of a sense of what we could expect for the rest of the year. Thanks.

Sebastien Morin (COO)

So I'll start from bottom up in response. So at Acordionero, we actually had a lot of major changes in Colombia, and we don't expect this to come back because the way that the social disruption was handled actually created relationships. And so I think we're back on track on that side of things at Acordionero. From a workovers perspective, that's what really impacted our OpEx the most, and as we go throughout the year, those will reduce. So looking really forward to that. And then on the lifting side, our power generation costs are coming down as we implement these optimization projects, so we should see an improving trend there as well.

Anne Milne (Managing Director of Equity Research)

Okay. Thank you.

Sebastien Morin (COO)

Thanks, Anne.

Operator (participant)

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

Philip Skolnick (Managing Director of Equity Research)

Yeah, thanks. Good morning. Just on the Arawana discovery, you know, how do we- how should we think about it in terms of, you know, it looks like, you know, in terms of size, it's like Cohembi, but I guess in terms of, you know, how many wells, you know, kind of timelines and, you know, ultimate productivity potential and, and kind of costs, you know, kind of how we think about the costs going over the years when you develop this?

Ryan Ellson (EVP and CFO)

Yeah, thanks, Phil. I think why we're so excited is it is a direct analog to Cohembi, in terms of closure size, in terms of fault trapping, in terms of deposition. And so the thickness of this reservoir, very similar to what Cohembi is, very prolific wells, as you've seen at Cohembi. Just as Sebastien mentioned, a kilometer and a half away, we have a well on production in the same formation, that that's a 1,000 barrel a day well, that's still producing 850, 850 barrels a day. It's cummed almost 400,000 barrels. So it's it is not without. That that is the information that we're basing this off of.

If you look at the closure on this structure, as we talked about pre-drill, it's about 11,000 acres of closure, very similar to Cohembi. And when we look at this, that's why we're excited. The volumes that we would expect waterflooding, it's very similar geology, we would waterflood. I think the way you would look at this is 50/50 well type development. And in terms of recoveries, we're using that same analog of 50-100 million barrels that you're seeing at Cohembi on a reserve basis. And it's near infrastructure, and so we're excited because we can very rapidly start appraising this field and go on production as we're appraising. And so it's very exciting.

Philip Skolnick (Managing Director of Equity Research)

Yeah, that sounds like, I guess, just on the 50 wells, how many of those would be water injection?

Ryan Ellson (EVP and CFO)

Yeah, I think-

Philip Skolnick (Managing Director of Equity Research)

Also that-

Ryan Ellson (EVP and CFO)

You would have something very—because this is a, you know, it's, it's, a, a reservoir that's 20-30 feet thick, very continuous. As we're seeing at Cohembi, we're getting quick reservoir response from our injection. The one thing that we're not sure of, that we're going to look at very, very closely is, can we use horizontal wells in a reservoir like this? And that might end up being less wells, but 11,000 acres, 50 wells, that's gonna put you on a 160-200 acres spacing. The viscosity here that we're seeing at Bocachica is better than Cohembi. So everything about it is exciting to us in terms of the analog. The analog, reservoir continuity, we're excited to get on with testing.

Philip Skolnick (Managing Director of Equity Research)

All right, thanks. Sounds great.

Operator (participant)

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

Oriana Covault (Senior Equity Research Analyst)

Hi, thanks for taking my questions. This is Oriana Covault with Balanz. I have two questions, if we may go one by one. The first one is that you mentioned you plan to reduce net leverage towards the one time, on the back of increased adjusted EBITDA and lower net debt. So if you could remind us, what are you targeting in terms of net debt, and how do you expect it to reduce it from current levels, any buybacks or doing something with the shorter bonds? That would be helpful. Thanks to understand.

Ryan Ellson (EVP and CFO)

Yeah, on the net debt, we just expect, if you look at the free cash flow generation throughout the year, we just expect our cash balance to build, and we'd expect our cash balance to build, you know, another probably $50 million from where we're at right now, and our adjusted EBITDA increase. So that'd get us to that, around that one times net debt-to-EBITDA ratio.

Oriana Covault (Senior Equity Research Analyst)

Perfect. And just picking up on that last note in terms of higher cash position and increased free cash flow generation, seeing that it looks like a more favorable pricing backdrop to you. In terms of any excess cash uses, any update from the M&A front in Canada, or where do you expect to use this incremental cash?

Ryan Ellson (EVP and CFO)

Yeah, I think, you know, we continue to look at just in capital allocation in general, from buybacks to debt reduction to M&A, we continue to look at all those options. And then as things progress, you know, we'll look at the best way to allocate that capital. And we always like to make sure that we actually have the cash before we spend it. So, you know, once the money's in the door, then we'll talk about it.

Oriana Covault (Senior Equity Research Analyst)

Perfect. Thank you very much. Congratulations on the quarter.

Ryan Ellson (EVP and CFO)

Thank you. Thank you.

Operator (participant)

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

Roman Rossi (Senior Equity Research Analyst)

Good morning, and thanks for taking my questions. Congrats on this great quarter. So the first one is regarding the share buybacks, right? I just wanted to understand what you are expecting in the coming quarters, because your share has appreciated significantly. So do you have any, like, specific price where you would stop buying back shares? Maybe, I don't know, the PDP value or the 1P value per share.

Ryan Ellson (EVP and CFO)

I think, you know, the share price has performed well, but, you know, that's from a low starting point. So we've gone from trading at 50% of PDP up to 70%-80%, and so we think it's still great value to continue to buy back stock.

Roman Rossi (Senior Equity Research Analyst)

Okay, sounds good. A second question regarding tax. I think you will be paying the bulk of the 2023 taxes next quarter. Can you give us a sense on what you are expecting?

Ryan Ellson (EVP and CFO)

Oh, as far as cash outflow? Yeah, it's fair—remember, because we do prepay a lot of tax just through withholding tax. In 2023, we paid a lot of the withholding tax, so the tax outflow will be around $20 million.

Roman Rossi (Senior Equity Research Analyst)

Okay, awesome. Thank you, Ryan.

Ryan Ellson (EVP and CFO)

Great. Thank you.

Operator (participant)

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

Alejandra Carrillo (Senior Equity Research Analyst)

Hi, thanks for taking my questions. I had two questions. First, on the power generation cost, just clarifying, you said so 70% is now coming from, gas, in your case, your own gas, correct? And, and the remainder, it would be spot. Just a reminder of that breakdown. And then on M&A, drilling a little bit more in terms of opportunities. So you've been discussing Canada and Colombia. Could Argentina also be of interest, to you guys? Thanks.

Sebastien Morin (COO)

So the remaining 30% of power generation comes from either diesel run generation on our facilities or actually connected to the power grids in Colombia. We're trying to displace the diesel from our power generation facilities.

Ryan Ellson (EVP and CFO)

We buy about 500 MCF of gas for CNG supplement it. So but most of it, we don't have the exposure to the spot pricing. I think probably is where the question was.

Alejandra Carrillo (Senior Equity Research Analyst)

Yes. Great.

Ryan Ellson (EVP and CFO)

Yeah. And then on the M&A front, yeah, Argentina, it's not on our radar right now.

Alejandra Carrillo (Senior Equity Research Analyst)

Okay, great. Thank you.

Ryan Ellson (EVP and CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Daria Lima with Bloomberg Intelligence. Your line is now open.

Daria Lima (Senior Equity Research Analyst)

Hi, thank you for taking my questions. Just a couple from me, please. Could you talk about the protests, specifically the timeline? How long did they last?

Ryan Ellson (EVP and CFO)

Yeah, the blockade was around 10 days.

Daria Lima (Senior Equity Research Analyst)

10 days. So that's in March, right?

Ryan Ellson (EVP and CFO)

Correct. Correct.

Daria Lima (Senior Equity Research Analyst)

Perfect. Thank you. And another one is on water optimization program. Are you in any way impacted by the droughts currently in Colombia?

Sebastien Morin (COO)

No, because we take the majority of our makeup water from deep sources. So we actually produce the water from different reservoirs and bring them up into our waterfloodable reservoirs.

Daria Lima (Senior Equity Research Analyst)

Amazing. Thank you so much. That's all for me. Thank you.

Ryan Ellson (EVP and CFO)

Thank you.

Operator (participant)

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

Gary Guidry (President and CEO)

Thank you. I would again like to thank everyone for joining us today. We look forward to speaking with you next quarter for update, and if you're able, please call in for our Annual General Meeting at 10:00 A.M. Mountain Time. Thank you.

Operator (participant)

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