Gran Tierra Energy - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's Results Conference Call for the Q2 of 2024. My name is Michelle, and I'll 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 questions. I would like to remind everyone that this conference call is being webcast and recorded today, Thursday, August 1st, 2024, at 11:00 AM 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 regards 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'll now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra Energy. Mr. Guidry, please go ahead.

Gary Guidry (President and CEO)

Thank you, Operator. Good morning, and thanks for joining Gran Tierra's Q2 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 Wednesday, July 31st, 2024 we issued a press release that included detailed information on our Q2 2024 results, which is available on our website. Ryan and Sebastien will make a few brief comments, and then we will open the line for questions. Ryan, please go ahead.

Ryan Ellson (EVP and CFO)

Thank you, Gary. Good morning, everyone. I will start off by saying that we're very pleased with how Gran Tierra has wrapped up the first half of 2024. During the Q2 we were able to begin our high-impact exploration campaign that started off with the previously announced discovery of Arawana. In addition, we have also progressed a number of our development programs, including initiating civil works in the Suroriente block to kick off a five-well drilling campaign with the second rig in the second half of 2024. During the quarter Gran Tierra delivered net income of $36 million, or $1.16 per share. Further, Gran Tierra achieved operating netback of $113 million, which was up from $105 million in the prior quarter, and adjusted EBITDA of $103 million, which was up from $95 million in the prior quarter.

The company also strategically revised its 2022 tax return during the quarter to use its long-term tax receivable balance to offset current tax liabilities rather than applying net operating loss carryforwards. This decision was driven by higher current and future tax rates and increased profitability in Colombia. As a result, the current tax expense increased by $28 million, but this was offset by long-term tax receivable, resulting in no cash outflow. We were able to preserve our net operating loss carryforwards of approximately $85 million for future periods, providing greater tax benefit in 2024 and in the future. This tax initiative also allowed us to recover $18 million of taxes receivable in 2024 and accelerate the recovery of an estimated $65 million of taxes receivable over the next three years.

During the quarter, the company spent $61 million in capital expenditures, which were higher than the $55 million in the prior quarter due to the commencement of the 3D Seismic Program in Ecuador and the drilling campaign. We also installed the final completion and artificial lift systems in the Costayaco development wells. As of June 30th, the company had a cash balance of $115 million and net debt of $521 million. The 12 month trailing net debt EBITDA was 1.3x and expected to be less than 1x by the year-end 2024 from a combination of increased EBITDA and lower net debt. Gran Tierra generated oil sales of $166 million, up 5% from the prior quarter due to higher Brent pricing and narrow Costayaco and Vasconia oil differentials. Looking at pricing during the quarter, Brent averaged $85.03 per barrel, up 4% from the prior quarter.

The company's quality and transportation discounts per barrel during the quarter were $12.79, which significantly narrowed from the $15.36 in the prior quarter. The company's operating netback was $38.80 per barrel, up 10% from the prior quarter. Share buybacks continue to be a key area in which we allocate our free cash flow. Since January 1st, 2023, Gran Tierra has repurchased approximately $3.9 million, or 11% of the outstanding shares. During the quarter, Gran Tierra has repurchased approximately 400,000 shares. We're looking forward to the second half of the year, where we plan to drill the remainder of our high-impact near-field exploration wells in Ecuador including drilling two wells to further appraise the exciting Arawana discovery. As part of the Fast Track Appraisal Program Arawana, the drilling schedule and civil works have been accelerated to allow the drilling of these two wells prior to year-end.

From a development perspective, we are completing the civil works associated with the building infrastructure in the Cohembi pad in the Suroriente block to begin drilling the five wells from the single pad in the fourth quarter of 2024. We are very pleased about our first half results, and there are still many more catalysts in the second half of 2024. Lastly, I want to highlight that we also issued an S-3 yesterday, updating our shelf prospectus that was set to expire in August 2024. This filing is routine in nature, and the timing of its issuance is a direct result of the timing of the expiry. The process renews our S-3 shelf prospectus for a further three years. I'll now turn the call over to Sebastien to discuss our operational highlights from our Q2.

Sebastien Morin (COO)

Good morning, everyone. As Ryan mentioned, capital expenditures of $61 million were higher than the prior quarter of $55 million, and down from $66 million compared to the Q2 of 2023. Total average working interest production during the quarter was 32,776 barrels of oil per day, an increase of 2% compared to the prior quarter, and up 4% on a per-share basis since the Q2 of 2023. During the Q2 of 2024, Gran Tierra installed selective completions, systematically stimulated multiple zones, and added electrical submersible pumps at Costayaco 56, 57, 58, and 59, which were drilled as part of our first half 2024 development campaign.

While the temporary offline status of these wells for the planned selective completions did impact Q2 production by about 700 barrels per day, the improvements have resulted in enhanced production with rates exceeding initial peak rates, with all wells now back online. Given the ongoing positive performance from our core fields on waterflood and recent exploration success, we remain very comfortable with our 2024 production guidance. Looking to operating expenses, they decreased by 3% to $47 million compared to the prior quarter, primarily due to lower workover activities as a result of continued improvement in artificial lift reliability. On a per-oil basis, operating expenses also decreased by 1% when compared to the prior quarter, as the company continues to focus on pushing forward further cost savings and operational efficiency initiatives.

The company's transportation expenses increased by 24% to $5.7 million compared to the prior quarter of $4.6 million due to El Niño phenomena causing low water levels in the Magdalena River, resulting in Gran Tierra utilizing longer delivery points. The river levels have now returned to normal conditions, allowing for use of our preferred shorter delivery routes for the second half of 2024. Our exploration program in the Chanangue block remained very active, with the drilling and installation of a multi-zone selective completion at the Bocachico Norte J1 well. Log and core data indicated reservoir and net pay in multiple zones, including the Basal t ena sand, T-Sand, and B-Limestone. Testing is now underway and expected to continue throughout the third quarter. Note that although the B-Limestone was not a primary target, it had positive shows while drilling, indicating it may be connected to a productive fracture network.

The completion install will allow for efficient multi-zone selective stimulation, production, and commingling of the Basal Tena sand, T-Sand, and B-Limestone. In addition, the Arawana J1 and Bocachico J1 wells continue to yield strong production results with a combined 1,600-1,800 barrels of oil per day. Gran Tierra plans to convert both wells from jet pump to electrical submersible pumping systems in the second half of 2024 to further increase production rates. Upon finishing the drilling of the Bocachico Norte J1 well, the rig was moved over to the Charapa block on July 14th. The Charapa B6 well was spud, with the primary target being the Hollin Formation. The well has reached total depth of 11,170 ft on July 31st after successfully logging and coring the zones of interest.

We are seeing very encouraging results in the Charapa B6 well, which has been cored with excellent oil shows throughout the Hollin Formation. We anticipate finalizing drilling and completion operations early in August, with testing planned to begin immediately afterwards. Following the drilling of the Charapa B6 well, the rig will begin drilling the Charapa B7 well from the same pad in the Q3 of 2024. Also on the Charapa block the 3D Seismic program has been completed, and the data is currently being processed. Preliminary interpretations of the high quality 3D seismic data confirm potential prospectivity and additional areas of interest, including better definition and confidence in our reserve estimates over the Charapa structures. The 3D Seismic data will further delineate reserves, underpin future drilling locations scheduled for 2025, and support future development planning.

Overall, the company continues to follow through on the capital plan and is experiencing early success in the 2024 exploration campaign. We remain optimistic about the second half of 2024, where we are drilling some very exciting wells in both the Charapa and Chanangue blocks. 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 the question-and-answer session for securities analysts. If you have a question, please press the star key followed by one one on your touch-tone phone. You will then hear an automated message advising your hand is raised. Your questions will be polled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question. Our first question comes from Alejandra Andrade with JPM. Your line is open.

Alejandra Andrade (Latam Corporates Research)

Hi, good morning. Thanks for taking my question. I just have two questions. First, I wanted to discuss a little bit the production outlook for the second half of the year. And then also, if you could give a little bit more color on all the tax moves that are happening in the numbers, that would be great. Thank you.

Sebastien Morin (COO)

I think we're very, very pleased with our first half results and continue to look forward to our exciting catalysts that are coming. As we just stated, both of our two new exploration wells are currently on testing, which we're happy with. And so we continue to reiterate our guidance for the year.

Alejandra Andrade (Latam Corporates Research)

Perfect.

Ryan Ellson (EVP and CFO)

On the taxes, yeah, and probably the best thing is if you look in the notes in the financial statements, we did put a reconciliation to try to explain some of the movements. But effectively, what we were able to do with the refiling is just to keep $85 million of non-capital losses. You know, those rates were done at a 35% tax rate, with the current rate being 50%. So we get the benefit of utilizing those losses in a higher tax rate environment. So that's the first one.

But it also allowed us to accelerate some of these long-term receivables that we had. So although we had to book a current tax expense, there was no cash outflow. We actually netted the payable that was generated from that refiling with long-term receivable that we had. So really, there was acceleration of those receivables. It allows us to collect further money, $65 million, over the next three years.

Alejandra Andrade (Latam Corporates Research)

Great. Thanks.

Ryan Ellson (EVP and CFO)

You're welcome.

Operator (participant)

Thank you. Our next question comes from Diego Espinoza with BTG Pactual. Your line is open.

Diego Espinoza (Associate Director)

Hi. Thank you for taking my question. Can you hear me?

Ryan Ellson (EVP and CFO)

Yep, we hear you.

Diego Espinoza (Associate Director)

Perfect. Just have a couple of questions. First one is that CapEx, right now you have around $150 million. How much do you expect to spend during the second half of the year? And in terms of working capital, we saw some relief during this quarter. Do you expect that this should be reversed during the next quarter or in the fourth quarter? That's it.

Ryan Ellson (EVP and CFO)

Great. Yeah. On the capital guidance, we're comfortable with the guidance that we have in the market right now. So we think that's a reasonable range given our first half results and our program for the second half. And then with respect to working capital, yeah, a lot of that working capital release was from the tax filings and moving the long-term receivable into current receivable, sorry, long-term into current. So we don't expect that to reverse in the following quarter, but it was more of a one-time item this quarter.

Diego Espinoza (Associate Director)

Perfect. Thank you very much.

Ryan Ellson (EVP and CFO)

Great. Thank you.

Operator (participant)

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

Gary Guidry (President and CEO)

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

Operator (participant)

Thank you for your participation. This does conclude the program. You may now disconnect.