GTE Q3 2020 Earnings Call

Operator: Good morning, ladies and gentlemen and welcome to Gran Tierra Energy's Results Conference Call for the Third Quarter 2020. My name is Victor and I'll 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 analyst and institutions. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, November 3, 2020, at 11:00 a.m. 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 in today's call. Per barrel of oil equivalent, or BOE, amounts are based on a working interest sale 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 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: Thank you, operator and good morning to everyone. You'll find our quarterly results on our website at grantierra.com. With me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer. Ryan will be giving an overview of the quarter and the path that we're on. Tony Berthelet, our Chief Operating Officer will give a summary of the operating activities and then we'll open the line to questions. Over to you Ryan.

Ryan Ellson: Good morning, everyone. On our last call, we outlined aggressive actions we undertook to protect our balance sheet and cash flows given the recent volatility faced by the oil and gas industry. We have achieved significant reductions in operating and G&A cost and we're well positioned for 2021 and beyond. We also discussed how we have initiated the required activities to safely resume several operations throughout our Colombian portfolio and strict accordance with our COVID-19 protocols. Production is now beginning to ramp up and developments in workover activities are underway. We're pleased with the progress that Gran Tierra has achieved with the safe restart of operations. The safety of our staff, contractors and local communities where we operate is paramount. We commend the teams for their excellent work during the many challenges of 2020 and their diligent management of COVID-19 safety protocols which is allowed and earlier restarted development activities then we originally forecast. One of our key objectives is to finish 2020 strong in order to set up for constructive 2021. We believe we're well positioned to withstand the current volatile environment and with our low base decline, conventional oil asset base and the operational control for capital allocation and timing, while maintaining a low-cost structure ensuring the safety of our people. Now I'll discuss some of the production and financial highlights. Our oil production in the third quarter was 18,944 barrels per day, down 6% from Q2. Current production is approximately 22,000 barrels per day. Through both direct refunds from the Colombian Government and VAT on our oil sales. Gran Tierra has collected total VAT and income tax receivable of approximately $97 million during 2020. By the end of the third quarter, Gran Tierra had also paid down its credit facility balance of $200 million compared to $200 million at the end of Q2 and had $21 million of cash and cash equivalents. During Q3, GT has combined operated workover and transportation expenses of $12.63 per barrel were down 31% relative to the first quarter of 2020. G&A cost were down 8% on a per barrel basis over the same timeframe. On an aggregate basis, these expenses decreased from $5 million in Q1 of this year to $27 million in Q3, a 53% reduction. The majority of these cost reductions represent structural improvements in operations which are expected to be maintained in a rising oil price environment. As a result of ongoing cost save initiatives, we also expect future per well drilling and completion capital costs to be reduced by approximately 30% in Acordionero and 20% at Costayaco compared to 2019. With the significant oil price volatility logistical challenges due to COVID-19. Gran Tierra elected to keep Q3 capital expenditures at a relatively low $7 million. Our Q3 net loss was $108 million including a non-cash ceiling test impairment of $105 million. These results are an improvement Q2's net loss $371 million which includes a non-cash ceiling test impairment of $398 million. These non-cash impairments result in significantly lower oil prices that occurred in respective rolling trailing 12-month period. Q3 adjusted EBITDA was $22 million up from Q2's $18 million. Q3's fund flow from operations was $8 million up from Q2's $6 million were in excess of Q3's capital expenditures. During the quarter, we entered into additional oil price hedges to further downside production against near-term low-price environment by securing three-way Brent collars, a total of 11,000 barrels per day is hedged for the fourth quarter of 2020 and 9,000 barrels per day for the first half of 2021. In summary, we've taken aggressive actions protect our balance sheet and cash flows given recent volatility facing industry. We've achieved significant reductions in operating G&A cost and we're well positioned for 2021. I'll now turn the call over to Tony, Chief Operating Officer to discuss our operational highlights.

Tony Berthelet: Thanks Ryan and good morning, everyone. At Acordionero, the first workover rig restarted operations on September 1 and it's currently on its fourth workover. This first workover rig is forecast to continue operations in the field through the end of 2020 and into the first quarter of 2021. A second workover rig is now started up at Acordionero to accelerate workover activity. These workover rigs are expected to return production by 2020 year end on a total of eight to 10 wells which went offline during the first half 2020. The total combined productivity capacity of the 10 highest priorities well for workover is estimated to be approximately 3,500 barrels of oil per day. We also expect to restart development drilling at Acordionero during the fourth quarter. We plan to drill one to two new oil wells by 2020 year end. These new wells are expected to begin production during the first quarter of 2021. The drilling rig is then forecast to continue drilling new development oil wells at Acordionero throughout 2021. The next 10 planned wells eight oil producers and water injectors are scheduled to drilled from the newly constructive Southwest pad. Each of these new wells is expected to have an additional oil production rate of approximately 550 barrels of oil per day. Moving to Putumayo. We are pleased that the Cohembi field commenced production on August 28th after previous shut in due to local farmer blockades. Prior to the blockades in late February 2020, activities were underway to expand the Cohembi water treatment injection and processing facilities under a two phased expansion program. The combined phased expansion will be expected to significantly boost growth water injection capacity to potentially increase ultimate oil recovery. Lastly at Moqueta, Gran Tierra continued to optimize water flow during the quarter and oil production and water injection were in line with expectations. In summary, we're pleased that we've been able to safely resume operations and strict accordance with COVID-19 safety protocols that we have put in place. I'll now turn the call back to the operator and we'll be happy to answer any questions. Operator, please go ahead.

Operator: [Operator Instructions] and our first question will come from the line of Werner Riding from Peel Hunt. You may begin.

Werner Riding: So in spite of production having restarted and Brent back at 40. Your equity is obviously remaining stubbornly low because of concerns around your debt position. I don't have a specific question per se. But I'll be more interested to hear your plans on how you're going to meaningfully reduce your debt so that equity holders can see some transfer of value to their part of the capital structure?

Ryan Ellson: Yes. I'll take a stab at that. I think when we look out to - we'll start with Q4 here. Obviously, the objective as Tony mentioned is to continue workover program in Acordionero, as well as Costayaco and development drilling in Acordionero. The company looks a lot different at 20,000 to 30,000 barrels a day that does 22,000 barrels a day from a free cash flow perspective. So ultimately there's been nothing changed to the asset base as far as original oil in place etc. This is really just a timing issue due to your very challenging 2020 with a pandemic and the price war, so underlying asset quality is there and in a rising oil price environment we do expect to generate more free cash flow which ultimately will be used to reduce our debt.

Werner Riding: Okay, all right. Thank you.

Operator: Thank you. Our next question will come from the line of Leo Han from Eight Capital. You may begin.

Leo Han: It's not really related to the quarter. Just wondering seeing a lot of industry consolidation here in North America whether it's in Permian or here in Canada also known as Husky just wondering if you could sort of comment on the outlook on a consolidation trend in Latin America and how do you see Gran Tierra play a role in this. Thanks.

Gary Guidry: Sure. I think across the industry you're starting to see consolidation. It's not just the Permian, it's not just Western Canada. You've seen Occidental Petroleum sell over $700 million worth of assets to a private equity backed firm in Colombia. We fully expect the consolidation in the industry to continue, it's been a tough year for the entire industry. But don't let that mask the overarching climate change, the transition of energies and to do that, I think the industry are facing unprecedented obstacles. I guess obstacles is the best word or headwinds for capital in the market. And so the consolidation in the Permian is certainly welcome by the industry. It's hopefully going to end up in a better managed portfolio and different reasons for different consolidation goal and we don't expect Latin America in general to be any different. It's a matter of sustainability long-term.

Leo Han: Yes, thanks for the color. Just a quick follow-up, I think last time we talked a little bit bitter [ph] spread taming [ph] the markets from buyers, sellers are pretty high. Do you still see that as a case today or do you see that spread kind of start to narrow down there?

Ryan Ellson: I think there's a bit half spread is always it's tough to pin that down especially when price has been so volatile. But I think what you've seen is to get around that challenge is companies essentially merging with zero premiums and I think we'd expect to see little to no premiums going forward.

Leo Han: Thanks, appreciate the color. That's it for me.

Operator: Thank you. Our next question comes from the line of David Round from BMO Capital Markets. You may begin.

David Round: Just one on the deck, I think you've got the next redetermination this month. So I was wondering if you can say anything about expectations there and whether because you were quite late in agreeing in the last redetermination whether you've already suffered the borrowing base reduction given the crisis, we've seen this year. And then, there was also a talk in the last set of results of possibly pre-payments facilities. Is there any update around those pieces [ph]?

Ryan Ellson: On the borrowing base part of it, the objective is to have the borrowing base done by the end of November. So we've just started that process. Its good reminder everything is relative. If you look at last time when we started the redetermination process Brent was $18 in April, so prices are more constructive but it's a challenging time for not just the sector, but for the banks as well with their exposure to energy. So as we have more information on that, we'll certainly release it. We're always looking at other sources of liquidity. You mentioned prepays that's one source. There's also potential farm-out's asset sales etc. Right now we're looking at all sources of liquidity to strengthen the balance sheet for the benefits of all stakeholders.

David Round: Okay that's great. And can I just maybe just one at Acordionero. And apologies, if I missed it. But [indiscernible] how you expect to see production ramp over at least the next couple of months.

Tony Berthelet: Yes, you bet. It's Tony here. So as we mentioned in our press release, we're targeting eight to 10 high productivity wells that basically during this first and second quarter, late first quarter and through the second quarter as those wells went down. We chose not to repair those. So really, it's about continuing base waterflood optimization and then layering in that shut in production. And as I mentioned we're in our fourth workover and we'll look to continue that activity through the remainder of the quarter to build out production gap.

David Round: Okay, great. Thank you.

Operator: Thank you. Our next question will come from the line of Al Stanton from RBC. You may begin.

Al Stanton: I just want to go back to some of the guidance you gave earlier in the year for second half spending, it was things like CapEx at $25 million to $35 million, I suppose based on what you spent in Q3, those numbers are now sort of $18 million to $28 million. I was wondering if that is still reasonable guidance. And then also, with respect to money coming in that was commentary about tax rebates. I was wondering if they were flowing in Q4 as you previously anticipated and then time that all together. I appreciate you had your covenants relaxed. But there is the one outstanding one which I think is EBITDA to interest which has to be at two times. I was wondering if that has any concern for you in the fourth quarter.

Ryan Ellson: Yes, I'll touch on that. With respect to the capital, there's no changes to our previous issued guidance. With respect to the EBITDA. If you look at our financial statements, I think we're fairly robust disclosure in there based on our current forecast. We expect to be in compliance. But as you know the challenges in the market right now things are volatile. So I would encourage you to take a look at our financial statements and disclosure in there. And then, so what was the last question, Al?

Al Stanton: The tax rebate?

Ryan Ellson: That's actually the - thankfully it has been come in, as we anticipated and right now most of the lumpy amounts that have come in during this quarter and going forward on all of our sales, we do have VAT charge on our sales, so that really is we got that monthly from our customers.

Al Stanton: And if I may, can I just ask one last question. I've seen the cost coming down on transportation and that's not reflected in a lower realization. So I was wondering how the dynamics of the local oil market are, whether you're happy with well head prices I suppose effective with.

Ryan Ellson: We actually improved our net back both at Acordionero and in Suroriente, during the quarter. Acordionero started in July and then Suroriente started in September. So we're quite happy with the current arrangements that we have and also have been very pleased with the current differentials both, as with the shortage of heavies [ph] worldwide differentials have continued to tightened. They were fairly tight in the quarter and they've even tightened more in the last week or so.

Al Stanton: Thanks guys.

Operator: Thank you. Our next question will come from the line of Josef Schachter from Schachter Energy. You may begin.

Josef Schachter: Gary, two questions. Right now, what is the situation with COVID in Colombia? Are they facing the same kind of issues where we're getting like in Europe where there is more caseloads and they're going into quarantine again? And if such a thing was happening, what would that do to impact your activity plans in Q4 and going forward, if there was an acceleration of caseload and more of a quarantine situation?

Gary Guidry: Okay, thanks Josef. No, Colombia is not seeing the significant spike that is occurring in Europe. I think the country has done a good job of the way they managed COVID in the country. We operate it throughout Tony and the team have made crew changes from the very beginning. By putting protocols in place and so our view as we're gradually bringing our staff in Bogota back into the office. But throughout all of the COVID outbreak we continue to operate our fields that are economic and so we're very comfortable with our teams protocols that are in place to move people and logistically around the country to ship oil, throughout the country. And we monitor it closely. But the answer to your first question, is no. Not seeing the same thing that's happening in Europe. And the second is, we don't anticipate any impact with what we have in place.

Josef Schachter: Okay, super. My next - is onto the cover. Is if we have as - the questions are about the debt. If we see Brent at $45.50, the extra capital would not go into more activity, it would go to pay down debt. And then on the other side of the coin, if we saw Brent go to $35 or $30 because of all the issues of maybe more COVID and less demand. Would you restrain your spend and when you cut back and what price point we should be watching for the activity level to be pulled back?

Gary Guidry: Yes, I think the answer to that Josef is, back in August, September as things started stabilizing. We had hedges in place, we put more hedges in place. But for, we started reactivating fields and the anticipation was through the middle of next year. We're comfortable that we have hedges in place to reactivate fields and start ramping production. Naturally, we like the rest of the industry watch it. Our pressure point is $25 to $30 a barrel, where we have to reverse that and we watch that closely because it cost us money to shut in fields and the first part of your question is, what is our pressure point on the downside. We're comfortable even with today's volatility that we have the financial instruments in place. The first part of your question is it $45 to $50. The beauty of our portfolio is we effectively operate everything and so we have the ability to allocate capital and you're exactly right. At $45 to $50 a barrel, we will manage our development and our operation going forward into next year as well and that's really what Tony and the team watch.

Josef Schachter: Okay, super. Thanks very much. That's does it for me.

Operator: Thank you. Our next question will come from the line of Miguel Ospina from Compass. You may begin.

Miguel Ospina: I have three questions. The first one is, if you can give us some color on OpEx going forward, you have been spending between $20 million to $25 million per quarter. So my question here is what is a more sustainable level going forward? The second question is, if you have any exit production target with all the development plans that you have. And the third question is, if you can confirm that your expected CapEx for the fourth quarter will be between $25 million to $30 million, is that right? Thank you.

Tony Berthelet: It's Tony here. I'll take the OpEx question. I'll start off with that. So yes as we come into the fourth quarter clearly, we're going to continue with some of the minor field reactivations. So looking at a lifting cost forecast coming through the quarter I would expect us to be in that $20 million range to $22 million somewhere in that range. On the workover cost obviously, we're going to continue to accelerate the workover activity on those suspended wells. So some of that cost will increase as we continue that workover and that's a split between capital and OpEx for that activity. So in the fourth quarter, yes, we will see some incremental cost but there will be barrels coming with that, some on a per BOE basis. We like to stay relatively flat. So that's - on OpEx. And then in terms of exit target, much will depend on how things go with managing COVID and continuing that activity. But on that we'll provide more formal guidance coming up. But yes, we're at 22,000 barrels now and we look to continue to add production both through minor fields and some of the workover activities.

Ryan Ellson: And then on that as Tony mentioned, we do have a fairly certain [ph] amount of fixed cost. 70% of our cost are fixed. So as we ramp up production, we would expect to get the benefit into the end of this year and into next year and our capital guidance was $25 million to $35 million.

Miguel Ospina: Thank you, guys.

Operator: Our next question will come from the line of Ivan Fernandes [ph] from [indiscernible]. You may begin.

Unidentified Participant: On VAT refunds could you tell us exactly what was the total collected during only the third quarter? I guess the language is a little bit I guess you could have included October and early November in the language you put in the press release.

Ryan Ellson: Yes, we only included in here just for the year-to-date, now year-to-date was as of September 30.

Unidentified Participant: Okay, all right. So what was the total for the third quarter?

Ryan Ellson: That is a good question.

Unidentified Participant: It is because I was reading the language on the second quarter and it doesn't quite make it easy to calculate the total to that point.

Gary Guidry: You want to come back to that one, Ryan?

Ryan Ellson: Yes, I'll come back to that one.

Unidentified Participant: Okay, sure. The second question is on the recalculation on the lending base for the revolver. Sorry, I joined the call little late so I'm not sure you already commented on this. But could you tell us how this conversations are going; I think the next calculation is 9 November, correct?

Ryan Ellson: We just kicked off the process, so as we have more news, we'll update the market.

Unidentified Participant: So you can't give us any feeling to how the reaction has been so far.

Ryan Ellson: Literally the process has just started. But I think in putting context of the last redetermination, prices are up quite a bit higher. Our costs are down and we're comfortable with our reserve base.

Unidentified Participant: Okay. Great. So again I don't want to hold up the call. So if you guys would like maybe email me the answer for the VAT for the third quarter, that will be fine.

Ryan Ellson: No, actually the amount collected just during the third quarter was $50 million and that's a combination of revenue as well as direct refunds.

Unidentified Participant: Okay and do you have any kind of expectations for the fourth quarter on VATs?

Ryan Ellson: For Q4, most of it I mentioned earlier, most of its coming through the revenue side of things and depending on pricing. We would expect between $10 million and $15 million.

Unidentified Participant: Okay, thanks a lot guys.

Ryan Ellson: Thank you.

Operator: [Operator Instructions] our next question will come from the line of Akbar Casar [ph] from [indiscernible]. You may begin.

Unidentified Participant: Just a few questions from me. The first one is, I was just looking through the cash flow statement, working capital especially the accounts payable line item has been quite a large drag for the year-to-date period. Specifically there's a line item on under cash flow from investing activities. I think for $69 million for the year-to-date period. Can you explain what that is?

Ryan Ellson: I think if you look at Q4 of last year. There's a very heavy spend and in Q1 of this year was fairly heavy spend relative to our funds flow. We're expecting a more of balanced quarter but then prices fell out at the end of February. So really that's it to unwinding the payables. So now we've gotten all of our vendors current.

Unidentified Participant: Do the payables related to CapEx spend that was done last year?

Ryan Ellson: Exactly, CapEx and OpEx but the majority would be CapEx.

Unidentified Participant: Okay, there is not a concern [indiscernible] suppliers wanting to collect faster because there's concern on the company.

Ryan Ellson: No, it was just us getting all those payables current. There was a little more the entire industry includes our suppliers felt a lot of stress in the dark days of April, May and June. So I think everyone is feeling some stress during that period. Now our suppliers are in good shape and we have everyone caught up.

Unidentified Participant: Okay the next question I had, you mentioned earlier that you have settled leverage for liquidity farm-outs and assets sales being a couple of them. And I guess you just mentioned that. But can you give may be just some numbers around or just some details on what the options are? How fast could you execute on those plans and one the farm-out point? I mean obviously you've cut the capital plan quite a bit. Does it make sense to maybe farm-out just so that someone else can carry the CapEx and you not maybe harming some of the assets by under investing in them?

Ryan Ellson: Yes, no that's good question. As far as timing, we said the market is quite volatile. But we're continuing to look at those options and one of them could be either sales some reserves or a farm-out or farm-in to some of our exploration wins and we look at both of those options. I think from our core assets from a development standpoint. I think we're very comfortable that we're maintaining proper reservoir management on Acordionero, Costayaco, Moqueta and Suroriente. So to the extent that we could accelerate some of the explorations with someone else's money - absolutely something that we would do.

Unidentified Participant: I mean what would be the [indiscernible] for that decision. I mean things are pretty tough right now, so why not do it now?

Ryan Ellson: Yes like I said we're looking at that process and as we have any updates on that, we'll certainly let the market know.

Unidentified Participant: Okay and just couple more questions. Is there any way to free the hedge the Vasconia discount, that in fact widens out in another sell off that you can protect yourself?

Ryan Ellson: Yes one of the challenges, we do overhead hedges with our syndicate and right now our syndicate doesn't have the capacity to hedge Vasconia. But it is something that we'll continue to look at.

Unidentified Participant: Okay and then the last question, I also joined a few minutes late. I'm not sure you touched on this. But proforma for all these workover programs, what is your production going to be?

Tony Berthelet: Yes, it's Tony here. So we've talked about adding roughly 3,500 barrels in production some of which we already added to get to that 22,000 barrel production rate to-date. So that's kind of the target that we're looking at with eight to 10 highest producers wells that are currently shut in.

Ryan Ellson: And [indiscernible] any of the new drilling or anything.

Tony Berthelet: That's correct.

Unidentified Participant: So how do I reconcile the 22,000 with the 30,000 plus that you were doing a year ago?

Gary Guidry: Well I think the big part is, we stop drilling. We stop our developmental drilling at Acordionero and some other things we're planning and so that's really just deferred production that will catch up once we start drilling. Tony and the team are working on that now and we expect to resume production before the end of the year.

Ryan Ellson: And we do have other production behind pipe that we will workover in Q4 and Q1 of next year as well as some other fuels we'll bring on in a more constructive environment.

Unidentified Participant: Constructive environment being what?

Gary Guidry: Better price.

Tony Berthelet: Better price, yes.

Unidentified Participant: Okay, all right. Thank you.

Operator: Thank you. And all right gentlemen, there are no further questions at this time. Please continue.

Gary Guidry: Okay, thank you operator and thanks everyone in participating in today's conference call. It's been a very unusual year. We thank you for your patience and your support and look forward to talking to you after the next quarter. Thank you.

Operator: Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.