Q3 2021 Gran Tierra Energy Inc Earnings Call

November 2, 2021

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy's results conference call for the third quarter 2021. My name is Vic 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. If at any time during the call you require audio assistance. Please press star zero and a coordinator will be happy to assist you. I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, November 2nd 2021 at 11 AM eastern time.

Our actions will be provided at that time for you to queue up for questions at any time during the call you require audio assistance. Please press star zero and a Kuwaiti Nieto he will be happy to assist you I.

I would like to remind everyone that this conference call is being webcast and recorded today Tuesday November 2nd 2021 at 11, a M eastern time.

Today's discussion may include certain forward-looking information as well as rate than 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. Barrel of oil equivalent or BOE amounts are based on a working interest sales before royalties. Finally, this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcast of this call is expressly forbidden without the written consent of Gran Tierra Energy.

Sure.

Barrel of oil equivalent or B O E amounts are based on a working interest sales before royalties. Finally this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcast of this call is expressly forbidden without the written consent of <unk>.

I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr Guidry. Please go ahead.

Thank you operator. Good morning, and thanks for joining us for Gran Tierra is third quarter 2021 results conference call.

Good morning, and thanks for joining us for Gran Tierra is third quarter 2021 results conference call.

My name is Gary Guidry, President and Chief Executive Officer, and with me today is Ryan Ellson, Our executive Vice President and Chief Financial Officer.

Yesterday, we issued a press release that included detailed information about our third quarter 2021 results. Which are available on our website. Ryan will make a few brief comments and then we will open the line for questions. Ryan. Please go ahead.

Which are available on our website.

Ian will make a few brief comments and then we will open the line for questions. Brian. Please go ahead.

Okay.

Good morning everyone. During the quarter, we achieved material production growth with our third quarter 2021 oil production, averaging approximately 29000 barrels per day, up 26% from the second quarter of 2021 and up 53% from the third quarter of 2020.

We also announced a temporary setback from a localized farmers' blockade production from sorted and put seven has been temporarily shut in due to a blockade directed at the Colombian government. Once the government gets the blockade lifted, we expect to quickly restore assortment and put seven production levels to their current capacity of 44047 Boe per day. Kurt total corporate production is approximately 26000 barrels per day and once the blockade ends we expect to quickly restore production to approximately 30 to 31000 barrels per day.

Seven.

4400, 4700 Boe per day.

Kurt total corporate production is approximately 26000 barrels per day and once the blockade ends we expect to quickly restore production to approximately 30 to 31000 barrels per day.

Despite the blockade the impact on production, we believe the situation can be resolved quickly and expect the current strong Brent oil price environment to partially offset the financial impact on production.

Brent prices averaged approximately $84 during October which is 16% higher than the $72 Brent price, we had assumed for budget purposes during the fourth quarter 2021.

Q3 funds flow from operations increased by 758% to $69.1 million compared to the third quarter of 2020 and increased 197% from the second quarter of 2021 due to higher production volumes and strong brand pricing.

Gran Tierra also continues to have a laser-sharp focus on reducing debt, we paid down the credit facility balance of $150 million at September 30, and paid an additional $20 million or in October for the current balance of $130 million.

We expect the bank facility, we paid down to a balance of $80 million by December 31 2021. Our operating netback of $34.95 per barrel was up 5% an increase of over $1.51 relative to the prior quarter.

Our operating netback of $34.95 per barrel was up 5% an increase of over 51 relative to the prior quarter.

During the quarter Gran Tierra generated net income of $35 million, an increase of approximately 300% from the net loss of 18 million realized in the prior quarter. The quarter's adjusted EBITDA improved substantially to $82 million. In terms of Capex third-quarter capital spend of 35 million was flat quarter on quarter.

The company generated a third-quarter free cash flow of 34 million, the highest since the fourth quarter of 2012, which will support the strength of the balance sheet.

In terms of hedges for the remainder of the year, we have hedges in place for 10000 barrels per day with a weighted average floor of $57 with weighted average ceiling of $65.29. During the quarter, we realized hedging losses of 7 million currently we do not have any hedges in place for 2022.

Hedges in place for 2022.

In terms of operations, we believe the team's prudent reservoir management of ordinary waterflood has restored the fuels production to an average level of 14427 barrels per day in the third quarter of 2021, a 49% from a year ago and the highest quarterly average production since the fourth quarter of 2019.

Sure.

The 2021 drilling program coordinator was very successful and based on results to date, we found that actually drove programmable oil producers water directors during 2020. Moving to the Putumayo, a quick update our infill development drilling campaign through oil producers across the Arco, all three of these successful new oil wells to our production during the third quarter and drove a significant increase in cost Jack who's ever production to 62092 barrels per day during the third quarter up 50% from the first quarter of 2021. Based on results of this year's program, we anticipate drilling additional development wells and caused jaco in 2022.

Moving to the Putumayo quick update our infill development drilling campaign through oil producers across the Arco all three of these successful new oil wells to our production during the third quarter and drove a significant increase in cost Jack who's ever production to 6200 92 barrels per day during the third quarter up 50% from the first quarter of 2021 based on results of.

This year's program, we anticipate drilling additional development wells and caused jaco in 2022 and.

In Canada, we completed a work program that was designed to optimize the waterflood, which we expect will increase the field's ultimate oil recovery. The Workover program was very successful and we anticipate drawing an additional development well in Mckenzie and the second half of 2022.

Lastly, [Orient] our facility expansion program is progressing which is expected to allow additional production will be brought online in Q4 2021.

In summary, despite the temporary setback from the recent sorted into put seven blockade, which we expect to resolve quickly, we're targeting further debt reduction in the fourth quarter of 2021 in line with our previously announced capital allocation strategy. Looking ahead with a stronger Brent oil price environment in tandem with our restored production volumes were on track to generate significant 2021 free cash flow in 2021 and 2022. Next year, we plan to focus on continued strengthen their balance sheet. The ongoing development of our core assets and the measure what high impact exploration program. I'll now turn the call back to the operator and we'd be happy to answer any questions. Operator. Please go ahead.

Significant 2021 free cash flow.

In 2021 2022 next year, we plan to focus on continued strengthen their balance sheet. The ongoing development of our core assets and the measure what high impact exploration program I'll now turn the call back to the operator and we'd be happy to answer any questions. Operator. Please go ahead.

Thank you, ladies and gentlemen, we will now conduct a question and answer session for Securities analysts. If you have a question. Please press star a key followed by one on your touchphone. You will hear a thorn acknowledging your request. Your questions will be put in the order they are received. Please ensure you leave the handset if you are using a speaker phone before pressing any keys. One moment please for your first question. Your first question comes from the line of Beaven [inaudible] from Stifel. Your line is open.

<unk> will be Paul in the order they are received.

Please ensure you leave the handset if you are using a speaker phone before pressing any keys one moment. Please for your first question.

Your first question comes from the line of Beaven.

There's big from Stifel. Your line is open.

Hi, Thank you for taking my question. I have two. The first has to do with hedges is there a point at which you might reconsider or decide to hedge some of the production for 2022? And then secondly, is there any more sort of specificity you could provide around the capital allocation for next year? If the idea is to, let's say have a balance on the credit facility of $80 million this year. From what you see right now are you hoping let's say to completely pay down that facility next year? Can you give some guidance? That would be appreciated. Thanks.

Hedges is there a point at which you might reconsider or decided to hedge some of the production for 2022, and then secondly is there any more sort of specificity you could provide around capital.

Capital allocation for next year.

If the idea is to let's say have a balance on the credit facility of $80 million. This year. So what you see right. Now are you, hoping lets say to completely pay down that facility next year.

Can you give some guidance.

That would be appreciated.

Yeah. Thanks for the questions. Yeah with respect to 2022 hedges. Our hedges, we just are in the process of finalizing our five-year plan, which we're pretty well done now. And so we'll look at having hedges in place in the coming months. Definitely before year-end, we will protect our capital program for 2022 as well as ensure we've got the adequate free cash flow to pay down the credit facility in the first half of next year. In terms of capital allocation, we've had some really positive results on our waterfloods in particular in Acordionero and in Costa Yanko, Ryan mentioned Moqueta as well.

Our hedges.

Once we just are in the process of finalizing our five year plan and once we and which we're pretty well done now and so we'll look at having hedges in place in the coming months.

Absolutely before year end, you will protect our capital program for 2022 as well as ensure we've got adequate free cash flow to pay down the credit facility in the first half of next year.

In terms of capital allocation, we've had some really.

Positive results on our on our waterflood in particular, it according to <unk> and in Costa Yanko, Ryan mentioned Makena as well.

So we're going to continue optimizing our reserves, long term reserves in those fields. And we've got some exciting near field exploration that will allocate a small amount of capital, a modest amount of capital to during 2022. And so the real focus for 2022 is continued development and optimization of our waterfloods.

And we've got some exciting some some exciting near field exploration that.

That will we'll allocate.

Small amount of capital a modest amount of capital to during 2022.

And so the the real focus for 2022 is continued development and optimization of our of our waterflood.

Thank you.

Your next question comes from the line of Josef Schachter from Schaeffler Energy. Your line is open.

Good morning, Gary and Ryan, and thanks for taking my questions. On the taxes receivable with that money coming in is that going to go towards paying down that deadline as you just mentioned in the first half of '22, Ryan?

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The taxes receivable with that money coming in is that going to go towards paying down that deadline. As you just mentioned in the first half.

22, Ryan.

Yes, you are correct.

Okay. The second one you mentioned, Gary about modest amount of capital for exploration next year, which are adjacent to the low-cost drilling that could add reserves in your four core areas? Given you have a large number of blocks in your exploration program you only show really one chart on the new presentation. Slide 27.

Next year, which are adjacent to the <unk>.

At low cost.

Drilling or drilling that could add reserves in your four core areas.

Given you have a large number of blocks in your exploration program you only show really one chart on the new presentation.

Slide 27.

Have you been able to work with the government because of the challenges of the sector over the last few years, where you can get extensions on the drilling programs versus the commitments that you had in the past so that you keep the land and you can work on them in 2023 or 2024, when you've got the debt under a better situation? And your production is higher.

And your production is higher.

Yes. The answer is yes, we have been able to get extensions both in Ecuador in particular. And then Colombia, what also has been very helpful. Working with the government of Colombia is moving commitments from blocks after we've spent money on seismic processing acquisition.

Get extensions both in Ecuador in particular.

And then Colombia, what also has been very helpful. Working with the government of Colombia is moving commitments from from blocks. After we've spent money on seismic processing acquisition.

And looking at higher potential exploration the program to move those commitments into areas, where we have higher prospectively. It has been underway even during the COVID-19 period, and so we're quite enthusiastic about our portfolio over the next couple of years. And we've used that time with the regulatory process to get the wells that we want to drill up in the very top of the queue. And so overall I think it's a combination of extensions as well as us being able to move commitments to hire prospectively blocks, Joseph.

It has been underway even during the Covid the COVID-19 period, and so we're quite we're quite.

Enthusiastic about our portfolio over the next couple of years and we've used that time with with the regulatory process to get the wells that we want to drill.

Up in the very top of the queue and so overall I think it's a combination of extensions as well as us being able to move commitments to hire prospectively blocks Joseph.

Okay. One or two more from me. One, the operating net operating costs have gone up is that because of the greater activity in the waterflood and when should we be thinking $17 US going forward or for the first nine months you were 15-14? But what would suggest for modelling?

One or two more from me one.

The operating net operating costs have gone up is that because of the greater activity in the waterflood and when should we be thinking $17 U S going forward or for the first nine months you were 15 2014.

But he would suggest for modeling.

Yes. We would expect those costs come down in the fourth quarter and in 2022. That was function of you know a little more activity in the third quarter, just restoring some of the volumes whatnot from the blockades. So we do get hit a little harder in this quarter, but we expect that to come down in the fourth quarter and next year as our production increases and we have 70% of our cost fix we'd expect our per unit number to come down.

We would expect those costs come down in the fourth quarter and in 2022 that was function of you know a little more activity in the third quarter, just restoring some of the volumes what not from the blockades. So we do get hit a little harder in this quarter, but we expect that to come down in the fourth quarter and next year as our production increases and we have.

90% of our cost fix we'd expect our per unit number to come down.

Okay, and last one for me if you have a kind of a run rate of funds flow now about $200 million given the commodity situation we see now and if you do a similar CAPEX to this year. Are you looking at some kind of a target number for $500 million?

Given the commodity situation, where you see now and if you do a similar capex to this year.

Or are we looking at are you looking at some kind of a target number for $500 million.

For the long term debt before you start looking at shareholder returns. The most companies are being dragged into the shareholder returns of dividends stock buybacks special dividends. Or are you still one or two years away from that situation?

No, I think there's two things we look at. One is the absolute number which you pointed out and we'd like to target that to be $500 million or less and our net debt to EBITDA to be under 1.5 times.

Theres two things we look at one is the absolute number.

Would you pointed out and we'd like to target that to be $500 million or less and our net debt to EBITDA to be under one and a one five times.

We expect that especially at strip pricing that we'd be able to get to those criteria next year.

Okay. Super. It does it for me, thank you very much.

It does it for me thank you very much.

Gentlemen, there are no further questions at this time, please continue. Thank you, operator, I would like to once again thank everyone 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.

Thank you operator, I would like to once again, thank everyone 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.

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

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Okay.

Yes.

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All right.

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No.

Q3 2021 Gran Tierra Energy Inc Earnings Call

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