Q2 2022 Gran Tierra Energy Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy result conference call for the second quarter 2022. My name is Justin and I will be your coordinator for today at this time all participants are in a listen only mode. Following the initial.
All of our remarks, we will conduct a question and answer session for security analysts and institutions.
<unk> 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 Tuesday August 9th 2022 at 11, a M eastern time.
Today's discussion may include certain forward looking information as well as certain non-GAAP financial measures. Please refer to 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.
Barrel of oil equivalent or B O E amounts are based on a working interest sales before royalties. Finally this earnings call is property of Gran Tierra Energy Inc.
Any copying or rebroadcast and on this call is especially for bearing with in the written consent of Gran Tierra energy.
I will now turn the conference over to Gary Guidry, President and Chief Executive Officer of Gran Tierra <unk>. Mr. <unk>. Please go ahead.
Thank you Justin.
Good morning, and thanks for joining us for Gran Tierra <unk> second quarter 2022 results conference call.
My name is Gary Guidry, President and Chief Executive Officer, and with me today are Ryan Nelson, Our executive Vice President and Chief Financial Officer.
And Paul Baker, our director of asset management for the Northern Putumayo region in Columbia.
Yesterday, we press released.
Our press release included detailed information about our second quarter 2022 results.
Which is available on our website.
Brian and Paul will make a few brief comments and then we will open the line for questions. Ryan. Please go ahead.
Thanks, Gary.
Good morning, everyone. Gran Tierra has had another strong quarter, where were able to deliver on our development campaigns in both the according to our own cost jaco fields, while continuing to progress the work required before drawing our exploration wells in both Ecuador and Columbia.
During Q2, Gran Tierra generated net income of $53 million up 275% from the prior quarter and versus a net loss of $18 million in the second quarter of 2021. This resulted in earnings of <unk> 14 per share, which is up from four cents in the prior quarter, we achieved material production growth.
Second quarter 2022 oil production, averaging 30607 barrels per day up 4% from the FERC quarter and up 33% year on year. This is the highest quarterly production that Gran Tierra has achieved since the fourth quarter of 2019.
The company's operating netback of $59 62 per barrel was the highest since the third quarter of 2014, which was up 14% from the prior quarter and up 81% year on year. This strong annual increase was driven by Gran Tierra is 33% increase in quarterly oil production year on year and strong growth in.
Brent World oil price.
Q2, 2022 funds flow from operations increased by 345% to $104 million compared to a year ago and was up 19% from the prior quarter again due to higher oil production volumes and strong Brent pricing. Our Q2 funds flow was the highest achieved since the first.
<unk> of 2013.
On a diluted per share basis funds flow from operations was 28 cents per share, which was up from <unk> <unk> per share in the second quarter of 2021 and up from 23 per share in the prior quarter.
In terms of capital expenditures approximately 65% was incurred during Q2, which was 65 million was incurred during Q2, which was higher than the prior quarter's level of $41 million. This was a result of the majority of Gran Tierra as capital development programs in both the cost jaco into coordinates being completed.
During the second quarter.
Gran Tierra is fully repay as Chris credit facility and only two years Gran Tierra Paydowns credit facility balance from $207 million to zero, which clearly demonstrated our commitment to rapidly reduce debt with the company's free cash flow.
As of June 32022, the company had cash balance of 100 $109 million and net debt of $491 million or annualized Q2 net debt to EBITDA ratio was below one times and over the long term, we are targeting net debt to EBITDA ratio of under one times and assumes $60 per barrel.
Brent case.
With our credit facility now fully paid off we plan to maintain a cash balance of $75 million to $100 million in order to maintain liquidity.
We plan to deploy excess cash over and above our targeted cash balance to strengthen our balance sheet buy back shares and accretive opportunities to continue to strengthen our portfolio.
I'll now turn the call over to Paul to discuss some of the operational highlights from our second quarter results.
Thanks, Brian Good morning, everyone.
Gran Tierra continues to drive efficiencies at its major fields and accordion narrow a new pacesetter well was delivered in the quarter, which took only three nine days to drill.
To drill a development well in accordion Arrow has decreased by a further 10% with the average drilling time reduced from five days to 45 days as a result of this reduction the average per well drilling costs have decreased to $1 2 million.
Which is 9% lower than originally budgeted.
We continue to deliver on our outline development programs in accordion narrow with the delivery of the 16th well into 2022 program.
In the Putumayo or cost Jaco development program has been completed under budget because of cost reductions through optimization and a successful application of techniques utilized in our accordion our own development programs.
All five <unk> wells were completed during the first half of the year.
Finally, our exploration programs continue to progress and.
In Ecuador, we are in the final stages of well site construction for the planned bulk of Chico one exploration well in the <unk> block in Ecuador's Oriente basin.
We expect to start drilling this well in the third quarter of 2022 and Columbia in the Putumayo Basin. We continue progressing our exploration activities. The wealthy construction has started for the rose one exploration well in the layout $18 48, a block which has a planned spud date in the third quarter of 2022.
I'll now turn the call back to the operator, and we'll be happy to answer any questions. Operator. Please go ahead.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone please standby will compile the Q&A roster.
One moment for questions.
And again, ladies and gentlemen star one one if you'd like to ask a question.
And our first question comes from OE Iona Cobalt your line is now open.
Hi, good morning, Thanks for taking my question.
I had couple of question, but I think that the main one would go related to the proposed tax reform that was.
And that was submitted by Petros government yesterday, so just trying to understand from the royalty tax extension and the proposed and new pricing scheme, what would how do you see the estimate would be that impact of this fiscal reform proposal at current price levels.
And specifically, how the key potential solar portfolio, our effective tax rate playing out.
Yes, it's.
Good question, we're still working through the tax reform and the implications.
As I'm sure you're aware as the tax reform is just a proposal it still needs to go to two debates in the lower chamber too in the upper chamber before its actually signed into law. So we're currently assessing the impact.
Got it understood that that might be too soon but.
Hello, Todd.
Precisely perhaps trying to understand how does the current toxic Harrison on royalty award.
Does it flow through revenues and how could it impact on your bottom line that would be.
Yes.
To your first thoughts on that.
Following up with that.
Given that it has to go through Congress.
Ed.
Are there any characters that E&P or somebody go requires is that that could prevent from <unk> to go through the way that is all about.
Yes, I think if you I'll touch on the second question first I think if you look at past tax Bill.
Bills that were put forward.
Very similar to what you just saw in the U S.
Time, it gets to the final bill a lot of times it looks quite different than what was originally proposed so that's why we're in a wait and see mode to see what.
What the impacts are.
But we expect to receive some some changes.
But obviously there is no guarantee on that.
And with respect to the royalties are Arctic as are the royalties, we pay to the government in kind they pick up the barrels that we actually don't even deduct those barrels they are taking those barrels right from the wellhead. So we don't see that as a major impact Gran Tierra at this moment, but again, we're still assessing that impact.
Perfect.
Helpful and maybe just one last one.
Your quarter.
Quarterly results.
We noticed that there was still a dunkin' lifting cost to wealth, where cohort so just understanding and framing it in your full year guidance.
What should we expect for the next couple of quarters, given that you seem to be above that.
11% to 13 per barrel that was targeted for the full year.
Yes, we expect as we increase our volumes in the second half of the year, we expect that per barrel metric to go down and we still are planning and be in the range.
Perfect. Okay. Thanks for taking my questions.
A problem at all.
Thank you.
And one moment for our next question.
And our next question comes from Adam Gill from paradigm capital. Your line is now open.
Hi, Good morning, just in terms of Ecuador should you have some success on the exploration program later this year how.
Aggressive could you be in capital allocation to that country and.
In 2023.
Yeah, we're we're watching very closely.
Ecuador and watching very closely.
What president Petro will be doing in Columbia.
As you know we have a big portfolio in Columbia for exploration, but we also are very keen on Ecuador, and so the answer to your question is.
If things do slow down in terms of regulatory in terms of being able to execute program in years two.
Two through four.
President Petros.
<unk>, we would reallocate.
Certainly to Ecuador, we have a very prospective blocks and we have commitments.
We're currently progressing those in the country.
And so for US it really is a portfolio that putumayo into the orientation in Ecuador.
And we'll play that one play that one by year.
But as far as regulatory requirements, we have the <unk> on the entire block. So we could as Gary mentioned the credit growth.
Okay. Thank you.
Thank you.
And one moment for our next question.
And our next question comes from Josef Schachter of Schachter Energy Research service. Your line is now open.
Thank you very much thanks for taking my questions Good morning, Gary and Ryan.
Ryan for you first.
On the debt load you you've mentioned 491 net debt.
And then you want to be down.
At $60.
That level or are we looking at another 100 million $150 million and then how did the leavers work between once you get down to that debt level in terms of more spending on growth versus <unk>.
In CIB.
Or other ways to return money to shareholders. How are you guys looking at that whole metric.
The strong cash flows youll be generating over the coming quarters.
Yes, I think on the first part of your question is yes.
I think by the end of the year view you look at our targeted net debt by the end of the year around $400 million.
We'd be very comfortable at those levels and I think that it is due to your second question.
We will get there by the end of the year it really by Q4.
And then second part of the question is it really comes down to capital allocation as you correctly point out as you know we have a great portfolio.
In Columbia with development and exploration also exploration, Ecuador, and so it is getting that right balance of strength of the balance sheet growth capital and really when we look at growth capital. We're always looking at how do we optimize the NPV of our existing assets.
And then also.
Share buybacks, if you look at where we're trading that right now.
If you look at the NAV per share, especially if you look at strip pricing.
Obviously.
Like most of the industry a substantial discount.
<unk> and even PDP, so again thats a pretty use of proceeds and then also when you look at our bonds are bonds are trading at <unk> 85, right now so that could be another potential use so its really just getting that.
Mix of the capital allocation.
Okay. Okay.
And then one for Gary.
With.
There has been some articles many economists about some disruptions with indigenous people in that corridor. Some issues with the government does that have any ability to disrupt her program and Ecuador are you in the same area or is it a different area I don't want at manpower.
How is the relationship with the local lab.
Indigenous people and people living in the area, where you want to work.
Yes, I think the answer to that Joseph.
The entire oil region.
Has.
Is prone to disruption.
But we've spent a lot of time, both before COVID-19 during COVID-19 and after Covid.
With our community relations working with the folks in the area, where we have operations.
And so we do believe that we have the relationships with with the indigenous community that we can we can progress with what we're doing.
So we're comfortable with our with our operating ability in Ecuador.
Okay Super Thanks, very much for taking my questions and congratulations on the very next quarter.
Thank you thanks, Joe.
Thank you.
One moment for our next question.
And our next question comes from Rodman Rossi from Canaccord Genuity. Your line is now open.
Thank you.
Good morning, everyone. So congratulations on the excellent results and thank you for taking my questions.
So I have got.
Paul.
Yes.
Sequentially So first.
So looking at the Capex break now you book $10 million exploration Capex. So I was wondering what's related to the <unk> exploration well you drill.
It works that well.
The timing of Capex.
And our last press release, we did.
As we mentioned the trucco well Unfortunately, it was was dry.
We released that in the.
The $10 million in Capex I think it's.
A lot of the allocation that's why we give a range on our capex and some of it is just reallocating from development exploration exploration back to development. That's why we try to focus on just the total capital program.
And the location of <unk> is in the region of Costa Jacobo, Canada producing fields.
Okay perfect.
And so.
Regarding.
<unk> weather.
You mentioned you are progressing.
We've been drilling there so yes.
I assume that you have.
Quite long.
Okay.
So when could we expect that you will start selling production.
Yes.
We don't forecast any production from from exploration, but what I can tell you very similar to the putumayo.
The infrastructure is there for when we do test, we we collect that testing volume and we take it to sales. So that allows us to have long term testing to get the information that we need but also generate revenue.
<unk>.
Immediately and so if we have success, we are long term test will be.
Sales volumes.
Okay perfect. Thank you.
One last question so regarding sketching equivalent if you don't have any hedges in place I know oil prices are high.
Right.
Do you have any.
In particular, thank you.
And going forward as we are.
Thanks.
And that was high pressures.
Are you expecting to get anything during the second quarter.
Yes.
Currently working with some of our offtake providers, what sort of hedging arrangements, we can put in place.
It was challenging for when the curve was $12 in backwardation. So we're currently assessing that and working with the optimal structure with our some of our partners.
Okay. Thank you very much and congratulations again.
Thank you.
Thank you.
And one moment for our next question.
And our next question comes from Jose Maria Silva from BT G. Pactual. Your line is now open.
Hi, guys. Good morning, Congrats for the good results.
I have a couple of questions and just picking up on the last one regarding edges.
Could you quantify what was the impact or if there was still any impact.
From hedges that you had in place during the second quarter. That's my first question.
Yeah, our hedging losses in the first half of the year, we're around 26 $27 million.
And so there will be some impact in the second quarter.
Alright.
And the second one is if you can give me.
Hey, guys.
Guidance, let's say your guide for production of the year.
But can you guide on whats.
The exit production that you are hoping to finish 2022.
In terms of total exit production.
Yes.
It will be in the low 30 thousands.
We're currently focusing on.
Developing developing the waterflood that we have so in the 30 to 33000 barrels per day.
We fully expect to deploy capital to to raise that plateau over the coming years, we have very high quality probable and possible reserves we.
We talked about in all of our disclosure the polymer floods that were pilot testing in the quarter narrow.
Those will change what our targets are over the next two to five years, but the answer to your question is.
And the 32 to 34000 barrel a day exit rate.
Perfect very helpful and very clear.
My last question is the following.
Regarding.
Our excess cash or excess liquidity.
When you guys look at your bonds trading.
It is.
Which seems.
Barry This conference, especially given the very good results that you guys are having generating free cash flow.
Also.
Hmm.
During your leverage considerably so.
Are you guys thinking about the possibility of using cash to purchase some of your bonds on the secondary market given they look for this content.
Yes. It definitely is one of the considerations I think in the release we mentioned.
Strengthening the balance sheet share buybacks and potential accretive acquisitions.
Opportunities and strengthen our balance sheet.
Any bond repurchase would be encapsulated within that statement.
So it is definitely something that we're looking at who we agreed that we think they are undervalued.
That's perfect. Thank you very much.
That's it from my side congratulations on the good results.
Speak to you next time, thank you great.
Great. Thank you.
Q.
One moment our next question.
And our next question comes from David Herzberg from Stifel. Your line is now open.
Hi, Thanks for taking my questions I guess I have two this morning, the first is <unk>.
In July and your operations and financial update you had mentioned that you were looking to replace your credit facility with a smaller one I was wondering if you have any developments or color on that and what we might expect in terms of the size and then the second question would be with respect to Capex. If you are still guiding towards that 220 to 200.
$40 million.
Full year 2022 Capex.
Yes, no that's great on the first one yes, we will continue to advance a number of initiatives.
So as we.
As we finalize something to the extent that we do finalize something then we'll announce at that time.
The range, we're looking at is in the $75 million to $125 million a replacement facility.
And on the second question on the Capex.
Yes.
Great. Thank you.
Thank you.
One moment for questions.
And our next question comes from Madame Al amount of Wacko from Barclays. Your line is now open.
Thank you so much for taking my question and congratulations on these great <unk> earnings.
Two quick questions.
Especially related to the 2025 bonds maturing other fee and try and 75 My first one is.
Trying to understand what's the logic behind the consent solicitation and basically now that the concern has failed.
What's your approach is going to be $4 25, and the follow up question is.
Are you guys thinking about choosing down the line free cash flow or are you trying to think about the refi off of these 2020 fives I appreciate you already mentioned.
Some of the key pillars that we're going to focus on four for.
Got it.
Hi.
That buyback or equity so just curious to see how are you thinking about this 2025. Thank you so much.
Yes, I think a lot of it.
Thanks for the question I think a lot of it obviously is dependent on market conditions, but I think if you look at the last two years.
Where we did have we did suffer quite a few bit hedging losses, and we were just ramping up production, we were able to repay $207 million off the credit facility as well as significantly reduce or increase our cash balance we substantially reduced our net debt balance during that period and so I think we're comfortable with the free cash flow nature of the assets.
To the extent that the market wasn't available we'd be in a good position to repay the bonds in full in 2025.
Thank you.
With regards to the consent solicitation. If you can give us just just come some details of why do you think where do you guys do it and what's your strategy now.
We expect another potential some sort of at the same way or or not really.
Yes, I think again a lot depends on the market on the consent solicitation and really the exchange.
Tend to that was to provide a more liquid bond for holders.
We thought was a fair offer and we didn't get to the point, where we wanted to.
And then the offer expired and so I guess, we'll see where we end up on.
On market conditions going forward.
But we're very comfortable with our free cash flow and assets that were in great position regardless of market conditions.
Perfect. Thank you so much guys.
Okay.
Thank you Mo moment for our next question.
Our next question comes from Luke Davis from RBC. Your line is now open.
Hey, Good morning, guys you guys are ramping up some exploration drilling in the back half just wondering if you could provide some.
Individual detail on expectations for.
For each of those six or seven wells and potential timing on when we can see results from them.
Yes.
The expectations I think we have published.
But we certainly certainly can make that available on average.
Our.
Our targets range anywhere from.
Eight to as high as 30 30 million barrels of potential.
On those exploration targets in terms of timing, we're drilling now we're testing.
The case and we're testing the guide as well.
We don't have any any results on that yet.
But we certainly will update shareholders through the year as we as we do have results on those ex price and prospects I can tell you that we're quite excited.
The quality of what we're drilling.
And being in a position after a long period with COVID-19 not having any exploration activity, where we're drilling some months some of our best best prospects.
Got you. So it's fair to say, we will see some results kind of Q4 through early 2023, then on the balance of the program.
Yes, I think we should see some results in Q3 and Q4.
Okay helpful. Thanks.
Thank you and one moment for our next question.
And our next question comes from Garik <unk> from J H Alpine Al Lane Partners. Your line is now open.
Hey, guys. My question was actually answered thanks very much.
Okay. Thank you.
And.
Yes.
Yeah.
There are no further questions I would now like to go ahead and turn the call over to Gary <unk> for closing remarks.
Okay.
Thank you Justin I'd like to thank everyone. Once again for joining US today, we look forward to speaking with all of you next quarter and we will certainly update you as we do have progress throughout the quarter. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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