Gran Tierra Energy - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, welcome to Gran Tierra Energy's Results Conference Call for the Q2 of 2023. My name is Shannon, and I will be your coordinator for today. At this time, all participants are in 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. 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 state 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 copy and 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 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 Ellson, our Executive Vice President and Chief Financial Officer, and Rob Will, our Vice President of Asset Management. On Tuesday, August 1st, 2023, we issued two press releases that included detailed information on our Q2 2023 results, and about our midyear 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.

Ryan Ellson (EVP and CFO)

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 Q1 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 of the Colombian peso versus the US 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 to drill exploration wells in Ecuador in the Q4 of 2023, building on our successful 2022 exploration campaign. As of June 30th, 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 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 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 2Q was 33,719 barrels per day, up 10% from one year ago and an increase of 7% compared to the prior quarter. The company's 2Q to date 2023 average production has been approximately 35,300. The company's Operating Netback was $34.58 per barrel, down 42% from one 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 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 behind us, we are 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 and have benefited the environment and local communities, including the reforestation and restoration of over 14,000 hectares of land and planting of over 1.2 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 the NaturAmazonas 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.

Rob Will (VP of Asset Management)

Good morning, everyone. During Q2 2023, the Acordionero 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 2023, the company drilled a total of 21 wells. In the Acordionero, 10 wells were drilled, 6 are on production, 4 are on water injection. In the Chaza Block, Gran Tierra has completed its drilling campaign, the Costayaco, which consists of 7 wells, 4 of which are producers and 3 of which are water injectors. Moqueta, we drilled 4 production wells.

A particular note, the Costayaco-54 well was drilled and is the most northern well drilled in the Costayaco field. 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 mid-year reserves update. The positive results announced in the reserves update are a testament to Gran Tierra's operational success and our in-country relationships that have allowed the company to secure the Suroriente license continuation. We invite you to read the reserves update press release in its entirety on our website. As of June 30th, 2023, Gran Tierra now has the highest reserves in the company's history.

94 million barrels of 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 6 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 Brent 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%. Costs associated with Finding and Development of 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 and 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, 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 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 comes from the line of Alexandra Symeonidi with William Blair & Company, United Kingdom. Your line is open.

Alexandra Symeonidi (Analyst)

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 payment, 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.

Rob Will (VP of Asset Management)

The question, higher-

Alexandra Symeonidi (Analyst)

Debt.

Rob Will (VP of Asset Management)

Debt? Yeah, it's really net debt decreased.

Alexandra Symeonidi (Analyst)

For the, for the taxes. Sorry. My question was about taxes. Yeah, guidance for cash taxes for the second half.

Rob Will (VP of Asset Management)

Yeah, the only taxes that we pay in the second half are the withholding tax, which, you know, 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.

Alexandra Symeonidi (Analyst)

Okay, perfect. Thanks very much. Very clear. 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?

Rob Will (VP of Asset Management)

Yeah. Yeah.

Ryan Ellson (EVP and CFO)

Well, we expected operating costs per barrel to trend down throughout the year, just with the, you know, look at our average for the quarter was, you know, around $33.07 in Q2. You know, we're around about $35.00 right now, so that will help. Then we did, you know, we are a little bit higher than we had forecasted originally, and that was just with the strength of the peso. As our production increases, we expect our per unit cost to decrease.

Alexandra Symeonidi (Analyst)

Okay, great. Thank You. My last question is about CapEx. 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?

Ryan Ellson (EVP and CFO)

Yeah. Our original guidance was 210 to 250 for the year.

Alexandra Symeonidi (Analyst)

Yeah.

Ryan Ellson (EVP and CFO)

I think in our last release, we, we lowered that to 210-230. We, we narrowed the range. We do expect it at the lower end of the range.

Alexandra Symeonidi (Analyst)

Okay. Thank you.

Operator (participant)

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

Anne Milne (Analyst)

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? The second, I think you hinted at 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, your, your cost basis and, is there anything you can do about that to, to mitigate it?

Gary Guidry (President and CEO)

Yeah. On the hedging, we, we go through a, an annual process of, 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. We'll evaluate that in the third and the Q4 here, depending on what we, we allocate for capital for 2024, and make those decisions, depending on the capital program, but also what our outlooks are. We'll let Ryan answer the question on the peso.

Ryan Ellson (EVP and CFO)

Yeah, the, the, the peso obviously started the year, I think, around COP 4,000, ran up all the way to COP 5,000, now we're back down to around, around COP 4,000. You know, it, it, it has put a little bit of cost pressure on. You know, we hadn't done our budget at COP 5,000, we've done it around COP 4,200, so it's about significantly higher than what we had budgeted. But it still is a negative impact, especially 75% of our operating costs are, are in Colombian pesos. You know, inflation has tamed a little bit in Colombia, that's offsetting some of the inflationary pressures. It, it won't have a material impact on our results.

You know, this quarter, you know, is predominantly because our payment of taxes in the Q2, both in April and June, and that was really the payment of our 2022 taxes. That's why you'll see in our results, we booked a large realized gain, and that was just the change in peso. It was truly a realized gain because we did make that payment this quarter.

Anne Milne (Analyst)

Okay. Thank you very much.

Ryan Ellson (EVP and CFO)

Thanks, Anne.

Operator (participant)

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

Roman Rossi (Analyst)

Good morning. Thanks for taking my questions. Excellent additions on the reserve side. 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 hold cash in order to decrease the leverage ratio?

Ryan Ellson (EVP and CFO)

Yeah, on that question, we, we did max out the NCIB, and we, and we can renew it, sometime this month, and then we would look to re- renew it. Even if we do renew, we do have lots of flexibility on whether we purchase shares on it or not. You know, last year we did repurchase 10% of our shares, but we would look to renew it.

Roman Rossi (Analyst)

Okay, awesome. 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, midpoint guidance. You mentioned that the exploration campaign will only begin in Q4, we should expect a light CapEx in Q3 and a higher CapEx in the fourth?

Ryan Ellson (EVP and CFO)

Correct. Yeah, Q4 will predominantly be driven by the, the exploration wells, as well as building pads and getting ready for the 2024 development campaign. Development and exploration campaign.

Roman Rossi (Analyst)

Perfect. Thanks. The last question is regarding the Castilla and Vasconia differentials. We've seen that they have narrowed significantly. What are we expecting for the second half of the year?

Ryan Ellson (EVP and CFO)

Yeah, I think, you know, we budgeted, you know, the number that we were forecasting is, is higher than what they currently have. I think Castilla is close to, you know, $6 today. It's narrowed quite a bit, and Vasconia is below $4. You know, we're, we're forecasting around, you know, $7.50 for Castilla and around $4 for Vasconia for the second half. The market is tighter than that right now.

Roman Rossi (Analyst)

Okay, great. Thank you, Ryan.

Ryan Ellson (EVP and CFO)

Thank you.

Operator (participant)

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

Josef Schachter (President and Founder)

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.

... up $82 million from where you are at June 30th. You've also, in, in the first half, did some buying of the 6.25% Senior Notes, February 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? Are there other purposes that you might find to, to use that for?

Ryan Ellson (EVP and CFO)

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

Josef Schachter (President and Founder)

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

Ryan Ellson (EVP and CFO)

Yeah, I think we'd like to get our gross debt down to $500 million and our net debt, you know, around $400 million-$425 million. 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.

Josef Schachter (President and Founder)

Okay, super. Yeah, that-- 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?

Gary Guidry (President and CEO)

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

Josef Schachter (President and Founder)

and MENA is, is, is the main locate, main, main area, or are there other areas as well?

Gary Guidry (President and CEO)

Yeah, we, we, we always look in, in the basins that we're in and the, the countries that we're in, Colombia, Ecuador, but, but the, the targets for diversific- diversifying beyond those countries is definitely MENA.

Josef Schachter (President and Founder)

Right. Okay. Just to clarify what you've said before. Thanks very much, Gary, and good luck for Q3. Looking forward to see the results, given the stronger commodity prices.

Gary Guidry (President and CEO)

Thanks, Josef.

Operator (participant)

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

Oriana Covault (Analyst)

Hi, thanks for taking my question. I had 2 questions. If we go may, if we may go one by one, that, that would be great. First, on the operating side, we noticed a 9% sequential decrease in Acordionero volumes. Just wondering if you could provide more insight into how are you seeing production growing across Ecuador and the Putumayo, and, 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.

Ryan Ellson (EVP and CFO)

Yeah, I think part of that was just timing on when we brought on wells. We did it probably, we had some flush production in, in the Q1, and then decreased in the Q2. 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.

Oriana Covault (Analyst)

Perfect. Just going back to the CapEx question, I just, I just wanted to confirm whether the exploration program through the remainder of the year, of the year, will only be concentrated in Ecuador. Just looking at the 2023 guidance and the plan of going into 4-6 wells between Colombia and Ecuador. Just wanted to confirm if, if you, if we should expect to see any, anything, anything coming from Colombia as part of the Suroriente continuation program.

Gary Guidry (President and CEO)

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

Oriana Covault (Analyst)

Perfect. Thank you very much.

Operator (participant)

Thank you.

Ryan Ellson (EVP and CFO)

Thank you.

Operator (participant)

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

Garrett Fellows (Analyst)

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?

Ryan Ellson (EVP and CFO)

Yeah, it's a good question. Yeah, our, our base plan is that we repay them as, as we come due. As, as you rightly point out, is that we will have some excess cash, and we will look at deploying capital to the 2025s and, and, and targeting maturities.

Garrett Fellows (Analyst)

Okay, thanks very much.

Operator (participant)

Thank you.

Ryan Ellson (EVP and CFO)

Thanks.

Operator (participant)

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

Gary Guidry (President and CEO)

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 (participant)

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