Q1 2020 Earnings Call
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Good morning, ladies and gentlemen look into Gran Tierra Energys resorts conference call for the first quarter 2020.
My name is Chris and I'll be your coordinator for today.
This time all participants are in listen only mode. Following the initial remarks, we'll conduct a question and answer session for securities analysts and institutional.
Instructions will be provided at that time for you to queue up for questions.
[noise] anytime during the call you require audio assistance. Please press star zero and a coordinator we'll be happy to assist you.
I'd like to remind everyone that this conference call is being webcast and recorded today Tuesday May 12, 2020 at 11 o'clock am Eastern standard time.
Today's discussion may include certain forward looking information as well as certain non-GAAP financial measures.
I would 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.
Per barrels oil equivalent or be elite amounts are based on a working interest sale before royalties. Finally this earnings call is the property of Gran Tierra energy incorporated.
Any copy or Rebroadcasting of this caused expressly forbidden without the written consent of Gran Tierra energy.
I'll now turn the call conference call over to Gary Good President and Chief Executive Officer of grants here just Dietrich. Please go ahead.
Thank you operator.
Good morning, and welcome to Gran Tierras first quarter 2020 results conference call.
My name is Gary Good re president and Chief Executive Officer.
And with me today are Ryan Ellson, our executive Vice President and Chief Financial Officer, and Tony Berlin, Our Chief operating Officer.
We issued a press release yesterday that included detailed information about our first quarter 2020 results, which is available on our website.
We appreciate you calling in today for the first quarter update and hope you are healthy and well.
We're living an unprecedented times for both the industry and our daily lives.
The last few months have clearly been challenging for the industry, but I'm confident we will come out of this even stronger.
We built the business that has flexibility.
Since we operate 95% of our asset base, we are able to be dynamic and how we respond to the volatile oil price environment.
We've taken immediate actions to position ourselves through this downturn and are laser focused on the things that we can control.
We have significantly cut our 2020 capital program and are actively managing our production by shutting in higher cost barrels.
We're confident we can quickly return these shutting wells to production without reservoir damage or lasting impact.
We're also guarding our balance sheet with our hedges and continue to driver operating and DNA cost reductions.
We're very focused on preserving long term value.
We believe we have a competitive advantage to withstand the current challenging environment, where they are low base decline conventional oil assets and our ability to control capital allocation and timing.
Ill now turn the call over to Ryan and he'll discuss some of our financial highlights Brian.
Good morning, everyone.
Our oil production. The first quarter was 29527 barrels per day down 10% from the fourth quarter 2019. During Q1 volumes were impacted by suspended production of disorient input seven books in the southern put them our region due to a local farmers blockade deferred development drilling shut in of higher cost production.
Okay and wells that were off line, a wait and routine mechanical workovers. These wells or expect to remain offline during this low price environment.
During the quarter Grand here quickly shifted focus from production growth and free cash flow generation to protecting the balance sheet and preserving long term value in response to the significant decline in world oil prices. This shift and focus was accomplished through adjusting oil production volumes deferring capital investments and further optimize optimization of.
More of offering them DNA costs significant progress has been made on lowered operating costs through the renegotiation of vendor contracts material discounts achieved to date. Furthermore, additional operating cost initiatives include personnel and rental equipment off optimization.
In addition to reducing operating costs were benefiting from the recent depreciation of the Canadian dollar in Colombian peso recalling pieces declined 18% versus us dollar from the company's original budget estimates the majority of Gran Tierras operating costs, approximately 80% engineered costs within Colombia are denominated in Colombian pesos all.
DNA costs encounter denominated in Canadian dollars.
Our engineers executive and board of directors have taken 20% reduction seller retainer fees respectively.
Addition, a number of cost optimization and efficiency measures are being implemented that will further reduce companies DNA cost levels consistent with lower anticipate activity levels. We expect these changes to result in a reduction of 30% to 35% and unit costs compared to the company's original budget.
For the quarter, our net loss was 252 million compared to the net income $27 million in the prior quarter due to lower revenues, primarily from the collapse in oil prices unrealized loss on valuation investments goodwill impairment related to acquisitions in 2006 in 2008, and the derecognition of deferred tax asset.
Yeah.
Adjusted EBITDA was 35 million and funds from operations were 22 million.
During the quarter, we entered into additional 2020 oil price hedges to further downside protect against near term low price environment were securing costless Brent colors.
The new new hedges complement grand years prior Brent oil hedges in place, which covers 6000 barrels of production. The first half 2020, and currently have approximately 50% of production hedged.
Total expenditures totaled 44.3 million a decrease of 36% compared to Q4 2019 spend given the low oil price environment. The remainder of the company's 2020 capital program is deferred and only minimal may maintenance expenditures plan for the rest of 2020.
I'd also like to quickly touch on one new regulations issued by the Colombian government designed to support the oil industry. During this downturn decreased by 35 was issued by the Ministry of finance or to expedite expedite the recovery of value added tax and conducts receivables from the ducks orders to ensure that such funds are received by companies in the short term we expect through.
Steve approximately $75 million in 2020.
Although we are facing low oil prices volt oil markets, we believe Gran tierra as a competitive competitive advantage to withstand the current challenge environment with our low decline conventional asset base, our ability to control capital allocation and our low cost structure, we've taken aggressive actions protector balance sheet and cash flow for swift to reduce our 2020.
Alco program and I'm target structural cash cost reductions through organizational.
Organizational operational changes, we will continue to modern answer the near and long term coil price environment and leverage our financial and operational flexibility to further adjust our plan should have become necessary. Lastly, we are in the process of the redetermination of our borrowing base and we expect this to be completed in may of this year I'll now.
During the call over to Tony Chief operating officer discuss our operational highlights.
Thanks, Ryan and good morning, everyone.
As Ryan mentioned following the closing 19 outbreak and the resulting large decrease in all demand and prices Gran Tierra has elected to defer the majority of capital expenditures for the remainder of 2020 and to stack all drilling and Workover rigs.
We took swift action to shut in an economic production and has temporarily suspended fields with zero or negative netbacks at current oil prices.
We have taken precautions to minimize restart costs across all of these assets.
We remain focused on.
Ongoing production and Waterflooding of our core assets Acordionero, Kusiak, Hello, and welcome to which represent 81% of Grand chairs working interest proved reserves as of December 30, Onest 2019.
At Acordionero, we drilled a total of five development wells during the quarter.
All directed at optimizing our waterflood program to maximize ultimate recovery and long term value.
We continue to achieve drilling efficiencies with the Acordionero 59, well drilled completed and placed on production in 15 days.
We also drilled and completed Acordionero 57 for total capital cost of only $1.8 million.
Wells drilled at Acordionero have consistently been delivered at capital cost below $2 million per well this year.
Additional contract negotiations with vendors are forecast to further reduce infill drilling cost by approximately 20% to 30% once drilling restarts with price recovery.
At the ended the quarter, a total of nine oil wells required workovers to restore production we've elected to defer these workovers due to the current low low oil price environment.
If brent prices were to recover to a level above $30 per barrel, we will consider initiating these workovers.
In this area and say block the call Hendi field was producing at approximately 4000 barrels of oil per day prior to the farmers blockades.
The field was continuing to positively respond to increase water injection and pump optimizations.
Most of the blockades in late February 2020 activities are underway to expand the Glenn be water treatment injection and processing facilities under a two phase expansion program.
The combined phase expansion is expected to Bruce boost gross water injection capacity from 19000 to 60000 barrels of water per day.
In summary, we've taken decisive action to protect our balance sheet and cash flows, but swiftly reducing our 2020 capital program.
We believe we have a competitive advantage to withstand the current challenging environment getting our given our low base decline conventional assets the ability to control capital allocation and low cost structure.
Ill now turn the call back to the operator, we'll be happy to answer any questions. Operator. Please go ahead.
Thank you.
Ladies and gentlemen, Google now conduct a question and answer session for Securities analysts you have a question. Please press the star key followed by the one on your Touchtone telephone.
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One moment. Please for your first question.
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And our first question comes from the line, David Brown with BMO capital markets. Your line is now open.
Hi, guys.
Can I start with the work I was pleased.
I guess, leading the question where it is because I was expecting the to to be trending down this quarter in I see that.
A reasonable cost in Q1, then obviously you mentioned you got another nine wells down at the moment so.
It seems quite high I'm wondering therapy.
Issue.
And have you seen any improvement.
Yes, Hey, and power trip to an issue before so have you seen any improvement also offered securing a reliable power source.
Maybe a follow up.
I think you've got about 5000 Boes a day down at the mine, we not what's in the previous announcements that currently if I'm wrong that.
What are you thinking and pull cost thing in Q2.
In terms of additional production downtime.
Production that you could lose to work hard goods.
And as you maybe I'll just quickly out to other part C.
Can you just remind us what workover costs, because we're talking about 5000 barrels a day.
Non while you've probably got some wells down about 1000 barrels a day, which maturity payback quite quickly even at the as these prices.
Yeah, great. Thanks, David It's Tony here.
So.
Some of the Workover activity in the first quarter.
To be sure were unbudgeted.
Related to primarily due to sand issues associated with.
Causing a failure in in the artificial lift equipment to those workovers. However, we did move forward.
Because they are injector conversions that we wanted to get ahead just to be able to proactively manage.
What is your placement.
So that did it come with some accelerated capital or cost associated with with that work.
In terms of power and Howard managing that we read in the first six weeks of the year with.
Stable power generation and.
And then we had a series of of outages that were.
Two of them being linked and tubing unrelated events.
Since we've recovered from those and have.
Improved our reliability of our power generation, we've been without a power failure.
Since that time, which would have been the end of February.
So again.
The the unfortunate part of that power outage has caused some additional wells to go down.
Which we as we've talked to both nine wells at the ended the quarter that we'll be looking to repair.
In terms of costs, yes, we would agree that theres been some high volume wells here and it's really just about managing cash flow for the next quarter.
In terms of spending that money.
Capital cost to remove and repair NSP here in the 800000 dollar range, depending on time keynote activity, but ultimately that's kind of rough budget of what we're looking at so yes. Some of these wells are quick payout and we were pretty closely with finance to to determine when we would.
Initiate that activity again.
In terms of what Q2 looks like.
We have had a couple of additional failures in since the ended the quarter, but ultimately as you mentioned, we're still in that 4000 barrels of oil per day.
Four to 5000 barrels of oil today that are down currently awaiting workovers. So that should give you some indication based on Q on average of about 15000 barrels of oil per day of where Rad.
And David just wanted to on the Workovers in the current price environment you know.
We can make a return on some of that but we're not a huge hurry to get these barrels out of the ground in a $30 oil price environment. So part of the US is just timing just to maximize returns in the future and also just there are restrictions within country colder 19 restrictions.
It is me does make it more difficult to move even a workover rigor around and so in the next four to six weeks, we'll reassess those workovers.
Okay that makes sense. Thank you.
Thank you.
And our next question comes from the line of James Hubbard with numerous your line is now open.
Hi, Thanks, guys.
Two questions. Please.
So your cost seem a lot more valuable than maybe we would have expected.
A couple of months ago in that.
Maybe get into it you can cut your work of is the royalty obviously is.
Let me variability.
Discount exception Im sorry.
Im wondering where you think you can get your cash.
Breakeven Dallas in terms of some.
Cash net back so the bottom bottom line.
'cause Mike.
I'm, just playing around and I may or may have the strong but it seems to me. That's you will if you'll workover is going to be de Minimis, then you'll find that about $30 balance I'm. Just wondering if that's more or less what you think or if youre thinking about radically.
Different number then and then.
Expanding on that on the second question, if we stay in the current oil price environment 20 to $30 and say you stay in your current mode of conserving as much as possible.
I'm wondering is that more decision nodes.
Cash flows always as you just alluded to in announcing last question. This oil could be worth a lot more into future will lead the in the ground and maximize value that way I'm wondering what the main drivers of your philosophy by now.
Yes, Thanks, and all the will those are the first one yes. The the $30 numbers is a reasonable number we've been running our base case for this year is oilseeds at $30. Brent further the remainder of the year and so with that with our view T. refunds.
Income tax refunds et cetera, we're comfortable we can manage the balance sheet and for the second question you're spot on where does not a huge her to get barrels out of the ground in this environment 'cause once those barrels are gone there as you know there drawn for good.
And so we rode is to keep them in the ground right now.
Okay. Okay, great. Thank you.
Thanks.
Thank you.
Next question comes from the line up Alejandro de Michel lease with any you security. Your line is now open.
Hey, guys and couple of questions just two to two to four unlawful from James questions here on your cost call. If what you kind of run the numbers now on without kind of having the refund whether anything that the cost.
Costs could be I'd point in time and then the second question in your press release, you do mention the distillation of their redetermination analytical the potential breaching the covenant. So maybe you can give us some kind of indication how those these.
I just saw golding owned the Redetermination of the loan on also all in labor on the covenant.
Okay with respect to the cash costs, if you look at the combination.
We've shut in anything over higher cost fields relatively higher cost fields. So right now we're just producing from our three core processor is about 80% over one fee reserves and that's cost Jaco Mcafee and Accordant Arrow, we think view, our our operating costs going forward are going to be in $8 range on a go.
Blended basis.
So like is the idea on the operating costs differentials have been moving around lots in Colombia, obviously, we can't control Latin Gexpro Brent price both from from the cash cost bases. We think we've done a good job of really driving those down and law those reductions are structural changes.
On the second question on the Redetermination.
I think it's pretty clear the way we have in the financial statements management is.
Optimistic that will come up with a solution and we'll have we'll know they'll come by the end of this month, but I would say good conversations have been very positive and constructive.
And in terms of the headroom illiquidity headroom that that you have to end use kind of credit line capitals being considered.
No no. It's all part of the Redetermination process.
Okay. That's clear thank you.
Thank you.
Thank you.
And our next question comes from the line of Josef Schachter with sector Energy. Your line is now open.
Thank you very much and thank you for having the conference call and taking my questions.
In terms of the upside.
You got the shutdown and sorry until that is unknown in terms of when that to come back you mentioned in the current general $30 us for brands to do or Workovers, what prices would you need to start great looking at raising production are you looking at 35 40, 45, and then how much production increments could you see.
From different areas.
Those prices to recover if they recover and let's say late Q3 Q4 of this year.
Yes. Thanks, Joe. So this is Ryan yes, I think all on the call oil has been very volatile not just the headline Brent number and Wi Fi front.
As well, but also differentials so I think we'd like to see some stability north of $30 before and really the order would be according narrow.
And then sort on day.
So I think north of $30. So in that 30 to $40 range, we'd look at the program for new drilling.
Tony mentioned the teams on a great job of getting cost on a coordinated with into sub $2 do million dollars.
So those are very economic but again, we're not really going to accelerate those barrels out of the ground in this environment. So going forward to resume development drilling it would be high thirtys low fortys.
Hi, Joe just add part of Suroriente.
The issues with the Coca farmers is still underway that's not been result, and that's a that's a second issue that's really driving when that feel comes online. In addition to what Ryan said on economics.
Okay, and whereas production right now.
Just to put that in context, yes, 21, 22000 barrels a day.
Super that's it from me. Thank you so much.
Thank you.
And our last question comes from a lot of Al Stanton with RBC. Your line is now open.
Yes. Some is just starting to my Thunder I would say I was actually again to ask what production was staying at the moment.
Would you use 21 to 22 is as a decent average for the second quarter.
Yes, I think thats a good number.
And.
Evil spoken about preserving long term value some of my concern Sarah.
This is more or so.
So I'm just wondering whilst it's good to leave some the reserves in advance.
Yes, that's a days you do you need to generate some EBITDA. So I'm just wondering.
What are the pixels all of.
Good morning, how have your covenants is is it just which speaks to the I'll be al.
What does the bondholders, one Tommy and as long as you keep paying interest is not enough or should I worry about the covenants for them as well.
Yes.
As far as on the first question as far as even to your 100% right.
But also like I mentioned do even right now we wanted to move a service very Workover. These wells would the covert 19 restrictions or would it would be complicated to do.
And so and we expect that to be four to six four to six weeks out and then I said if current strip pricing.
Well North of 35, then we would look at doing those workovers. So we are exactly right. It definitely is finding that right balance.
And then on the second point to are on the RBL, we do have meetings based covenants that it we're not compliance it is a.
Event of default and then that's why we're working to lenders as we disclosed to get a waiver on those.
And then on the bonds is there in current space covenants.
What does that mean in layman's terms. Please that we just got if we're in violation, we just can't take on additional debt.
Okay. Thank you.
And can you just.
Good good.
Thank you and our next question comes from the line of Alexis pants and with Stifel. Your line is now open.
Hi, good morning, and thank you for the coal.
Question on liquidity more of a sort of credit on bondholder question here.
We finished the quarter with about 40 million of cash.
Accounts receivable down to less than 10 million you up in the play out an issue with you will supply as during the quarter, we had a big drop and accounts payable.
On the way I calculated about 100 day decline in the average time the payout accounts you peg a supply as.
Which is sort of typical of this type of cycle. When you have another sub.
Yes, no other suppliers.
You have about squeeze pause I calculate $96 million available still under the credit line not see thats subject to account test, but that backward looking which implies you have the ability to take them down as of today. It seems unlikely you get to do so after the second quarter.
So in the context of all of them on the thought you have a coupon payment to I think in 11 days on the.
2027 notes.
When you stand in terms of.
The puzzle haven tons of liquidity.
Have you drawn downside on your credit facility.
And can you give us a bit more color as I alluded to with with respect to accounts payable, which this like a.
Big lots of big lots of cash flow during the quota.
And finally in relation to this the 75 million you mentioned in VIP receipts expected for this year can you give a sense of timing on those I think liquidity Celtic becoming something of a critical question.
Yeah, Yeah with respect to the the payables, we had a very active.
Q4 program.
You are aware and so it really is just on one of those payables in the quarter. So there is more normal course, I wouldn't say its.
Nervous suppliers as normal course payables that we paid.
And with Specter liquidity, we are $204 million drawn on the RBL, we still have $204 million drawn on that.
Not really is our next results will be able to the end of this quarter.
Can you sort of give us a sense of your intentions for the upcoming coupon I'll say the bonds are trading at.
The price it suggests the market's expense not to make it.
We have we fully expect to make it.
Okay, great. Thank you.
Thank you.
Our next question comes down the line of Stephanie full caught with Oxys advisors. Your line is now.
Yes, hi, guys.
Hugh.
A question questions.
First you talk about can production of 21 22009 today I.
Assuming a coal prices in change assuming into selling and distribution Doesnt change is that a good number for Q3 control on Sept. He did allow.
Then a question on tax at so you're talking about $75 million to get back to recover.
Twin to 20.
As you read you become at some of that always it what remains to be recovered in.
Thank you for Q3, Q2, Configurable and lastly, you took about minimum maintenance Capex again, setting an all price environment, what would that be more or less thank you.
Yes, I'll take the Tony here.
I'll take that question on on Q3 Q4 production.
Added $30 price environments as rise already mentioned.
So until we understand better what's going to happen with coal that.
Policy relaxation.
It will drive what we do in terms of activity with the wells that are waiting on Workover activity right now.
So it's that's a difficult number to provide any kind of guidance on for this third and fourth quarter.
With respect to.
Sorry, what was the was the second part of that question.
As I was before going to the VAT and that was around the minimum capex again, assuming oriented our bowel.
So so the minimum capital expenditures that we plan to do for the rest of the year are.
A combination of some of the maintenance activity that we need to use to maintain the.
Facilities and infrastructure, but also.
Paying for licensing and.
Of future projects. So there is some capital associated with that.
That will continue to spend just so that we continue to maintain the flexibility to reactivate and and get activity started again from a regulatory and and government perspective.
So it's about September you would say.
Pardon me.
10 million just to have some sort of sense for the number on a known it won't be that high I think we probably being a $2 million to $5 million for the rest of the year associated with those costs. Yes. Okay. Thank you and lost the was around the two whether the seven following meaning that as you talk about I think from the beginning of the cool.
You have already received some of that are that seek to come into twoq threeq useful.
Yeah, you expect to come Q2, Q3, Q4, we Expectable 50 million over the next five months.
Right thinking and every new cash tax copyright tax to be made.
And the balance of the is it correctly offset.
Correct no cash taxes.
Okay.
Okay.
Thank you.
Thank you and and gentlemen, I'm not showing any further questions on the phone line.
Okay. Thank you. Thank you operator.
I would once again like to thank everyone for joining US today, we look forward to speaking with you over the next quarter to update you on our ongoing progress.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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