Frontera Energy Corporation (FEC) Earnings Call Transcript & Summary

Good morning. My name is Joanna, and I will be your conference facilitator today. Welcome to Frontera Energy's Fourth Quarter 2020 Results Conference Call. [Operator Instructions] This call is scheduled for 60 minutes. I would like to remind you that this conference call is being recorded today and is also available through audio webcast on the company's website. [Operator Instructions] Analysts and investors are reminded that any additional questions can be directed to the company at [email protected]. This call contains forward-looking statements, which reflect the current expectations or beliefs of the company based on information currently available. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Certain material assumptions were applied in formulating such forward-looking statements. These assumptions and factors could cause actual results or events to differ materially from current expectations as disclosed in the company's Q4 MD&A released March 3, 2021, under the heading Risks and Uncertainties and under the heading Risk Factors and elsewhere in the company's annual information form dated March 3, 2021. Any forward-looking statements speaks only as of the date on which it is made, and the company disclaims any intent or obligation to update any forward-looking statements. I would now like to turn the conference over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy. Please go ahead.

Thank you, Joanna, and thank you, everyone, for joining today's conference call to review Frontera's 2020 fourth quarter and year-end financial results, independent reserve assessment and the 2021 capital plan and guidance. I am also excited to discuss our CEO succession plan and the company's strategy. First, I would like to welcome Orlando Cabrales Segovia, who has been appointed as CEO, effective March 15, 2021, replacing Richard Herbert, who has served as CEO for the last 3 years. I'm extremely proud of the advances Frontera has made with Richard. Personally, and on behalf of the Board, I want to thank Richard for all that has been achieved on his watch. Richard will continue to support and help Frontera in an advisory capacity with a focus on Guyana after March 15. On behalf of the Board, I can express our excitement about Orlando becoming Frontera's CEO. Orlando has been an Independent Board Member of the company since 2018 and know the management team extremely well. He also has a clear understanding of Frontera's E&P business, Guyana opportunities and our infrastructure assets. Having acted as President of Colombia's Natural Gas Association, Vice Minister of Energy, President of Colombia's National Association of Hydrocarbons under which managed a $200 million exploration budget and with experience at various senior roles at BP, Orlando brings extensive, on the ground leadership and management experience. He also brings a strong reputation and deep relationships in the region among his many other strengths. He is also committed to maintaining an operating culture that has made Frontera one of the most ethical companies in the world. Orlando's leadership and technical experience make him the right candidate to deliver value-focused production, driven by sustainable cash flow generation and reserves from Frontera's Colombian operations, while continuously making operational improvements and driving cost efficiencies across our business. In addition, his local and regional reputation and relationships position him to unlock value from the exciting opportunities we have in our exploration portfolio and infrastructure assets. These are exciting times for the company. I will now turn the call over to Richard Herbert, who will discuss our fourth quarter and year-end 2020 operating and financial results.

Thank you, Gabriel, and good morning, everyone, and welcome to this call. I'd like to start by saying that I'm very pleased to pass the leadership of the company over to Orlando, who I first worked with 25 years ago in Colombia. I have every confidence that the future prospects for Frontera under his leadership are very bright. And I look back with genuine pride upon the achievements of the Frontera leadership team supported by our Board over the past 3 years since I became the CEO. We have enhanced the culture of Frontera, as evidenced by our improved health and safety performance and ethical reputation. The last recently rewarded by our recognition as one of the world's most ethical companies by Ethisphere. Colombian upstream operations have been transformed by reducing costs and focusing on value over volumes. And we have built a strong portfolio of renewal options for the future. The acquisition of CGX and joint venture interests in key exploration blocks, including the Corentyne and Demerara blocks offshore Guyana, the VIM-1 block in the Lower Magdalena Valley of Colombia and exploration blocks in Ecuador. So first, let me turn to Q4 and the year-end 2020 results. As you all know, 2020 was one of the most challenging years in a generation. The impacts of the COVID-19 pandemic was felt in all parts of daily life, and the oil and gas industry was no exception. Significant decreases in oil price brought on by lower demand due to the pandemic severely impacted sector bottom lines as global oil supply outpaced demand for much of the year. For Frontera, the decline in oil prices in 2020 was an opportunity to take meaningful steps to make substantive changes across our business. In April 2020, Frontera voluntarily shut in higher cost production, reduced capital spending and accelerated cost reduction initiatives across the company. These actions not only preserved our strong financial position during an uncertain time but also represented an inflection point for Frontera as we strive to become a stronger, more resilient returns-focused company. I'm very proud of what our team accomplished in 2020 under such difficult circumstances. We reduced capital expenditures by 69% compared to 2019, focusing spending on our core assets in Colombia. We reduced production costs by 7% and transportation costs by 10% year-over-year, and we expect the cost efficiencies we achieved in 2020 to be permanent, improving the company's cost structure and competitiveness going forward. We also reduced G&A by 28%, making difficult decisions to reduce headcount, salaries, and cash compensation for management and Board members. In addition to weathering the worst crisis in recent history and maintaining our strong balance sheet, Frontera also delivered several key objectives for the year. We reached a binding pipeline settlement agreement in Colombia, pending final approvals. We achieved exploration success at the La Belleza well on the VIM-1 block in the Lower Magdalena Valley of Colombia and continued our development of the Hamaca field in the CPE-6 block, two exciting opportunities that we believe will accelerate renewal in our portfolio. We advanced our exciting Guyana exploration opportunity, identifying significant prospectivity in our 2 deepwater blocks and securing additional time to complete our work plans. And we have been advancing our plans to drill our first exploration well in Guyana this year. And we delivered production at the high end of our revised August 2020 guidance. We also made the decision to transition out of Peru and some of the highest cost and highest carbon barrels in our portfolio. We transformed the cost structure of the company, demonstrating resilience to a very low oil price environment and making Frontera a more competitive company. And importantly, we achieved these results without sacrificing our commitment to health and safety. We reduced our Total Recordable Incident Rate by 16% in 2020 compared to 2019 and introduced measures to limit the spread of COVID-19 in all our operating areas to maintain a safe and healthy working environment. We also made significant progress on standardizing our approach to ESG across our business, and we are very proud of the Ethisphere recognition I mentioned earlier. I would like to thank our employees for their tireless efforts and commitment to safety and for responsibly operating through all the challenges and uncertainty of 2020. I'd now like to move on and talk about Frontera's year-end 2020 independent reserves assessment. In 2020, Frontera added 30.6 million barrels oil equivalent of 2P reserves, driven by 6.4 million barrels oil equivalent from the exciting La Belleza discovery in the VIM-1 block. Also from reduction of in-kind royalty payments and reduction in high price participation royalties related to the Quifa block and also to technical revisions. These additions were primarily offset by 16.1 million barrels oil equivalent of 2020 production and the debooking of 5.7 million barrels oil equivalent 2P, including all of our Peruvian reserves in Blocks 192 and Z-1 or Z-1 and the Orito field in Colombia, as Frontera pursued its exit from these areas. We also increased net 3P reserves by 14.6 million barrels oil equivalent to 221.8 million barrels oil equivalent, an increase of 7% compared to year-end 2019. These strong reserves additions, combined with reduced production, resulted in 2P reserves replacement of 154% and extended Frontera's reserve life index to 10.3 years 2P based on 2020 production. If we exclude Peru, our 2P reserves replacement ratio was 191%. We achieved a finding and development cost of $3.38 per BOE in 2020 on a 2P basis compared to $11.53 per BOE in 2019 in Colombia, with upstream reserve-based capital expenditures of $101 million compared to $289 million in 2019, not including changes in future development costs. Our 1P F&D cost was $7.38 per BOE compared to $11.32 per BOE in 2019. Finally, the net present value, NPV, for our net 2P reserves discounted at 10% before tax is $1.888 billion as at December 31, 2020, compared to $2.514 billion as at December 31, 2019. The decrease in NPV for the 2P reserves is primarily due to lower commodity prices at year-end 2020. Frontera's 2020 reserves results are a credit to the perseverance of our entire team. Given the backdrop of pandemic related restrictions and challenges, decreased capital spending, focused on our highest return production, limited exploration and development drilling and a significant decrease in oil prices during the year. And now, as I leave Frontera, I would like to recognize and thank the Frontera Board and the management team for all their support during the last 3 years. I would also like to thank Frontera's investors for their commitment to the company and for the many interesting and helpful discussions that we have had. And finally, I would like to wish Orlando every success as he takes over as CEO. I would now like to turn the call over to Alejandro Pineros, our CFO, who will take you through our 2020 financial results.

Thank you, Richard, and good morning, everyone. The company recorded a net loss of $497.4 million or $5.13 per share compared with net income of $294.3 million or $3.01 per share in 2019. Cash provided by operating activities was $226.8 million compared with $547 million in 2019, contributing to a total cash position at December 31, 2020, of $401.2 million, including $168.9 million of restricted cash. Operating EBITDA in 2020 was $172.3 million compared to $586.2 million in 2019. Capital expenditures were $108.1 million in 2020, down 69% compared to $345.9 million in 2019 as the company focused its 2020 capital budget and activities on essential maintenance, workovers and activities that sustain production from higher netback fields. Production costs averaged $11.13 per BOE in 2020, a 7% decrease from 2019. Transportation costs averaged $11.27 per BOE in 2020, a 10% decrease from 2019. Our operating netback averaged $15.84 per BOE compared with $31.65 per BOE in 2019. Frontera delivered full year production of 47,800 barrels per day, lower compared to 70,875 barrels per day in 2019, but on the higher end of the 46,000 to 48,000 barrels per day range provided by the company on August 6, 2020, in its guidance update to the market. Production in Colombia was 46,461 barrels per day in 2020 compared to 63,625 barrels per day in 2019 as the company proactively reduced its capital program, shutting highest cost production and mature fields naturally declined. In Peru, production from Block 192 was suspended in February 2020, with volumes remaining shut in through the end of the year. I would like now to turn the call over to Gabriel to provide an update on Frontera's strategy.

Thank you, Alejandro. In the past years, Frontera's business has been simplified with a focus on becoming a low-cost exploration and production company in its Colombian E&P business by creating potential large-scale offshore in Guyana and by generating longer-term value opportunities through investments in our infrastructure assets in the Puerto Bahía dry and wet port and the ODL pipeline. We have worked to improve the company's ethical performance and reputation, driven down cost, maintained a strong cash position and created a stable, cash-generating exploration and production platform. Looking ahead, Frontera will focus on delivering value-focused production, cash flow and reserves from Frontera's strong Colombian operations; continuous operational improvements; and greater cost efficiencies. Frontera is advancing its exciting exploration portfolio, including drilling the Kawa-1 well in the Corentyne block in offshore Guyana. And building on the success of the La Belleza discovery in Colombia's VIM-1 block with our partner, Parex. Keeping a strong balance sheet, we have delivered shareholder value through dividends and share buybacks and resolved the company's largest continued liabilities, pending final approvals. Frontera also intends to file with the TSX a notice of intention to commence a normal course issuer bid for its common shares. If accepted by the TSX, the company will be permitted under the NCIB to purchase during a 12-month period up to 5,197,612 shares, representing approximately 10% of the company's public float. This is as calculated in accordance with TSX rules and is the maximum allowed. I would now like to turn the call over to Orlando Cabrales, Frontera's incoming CEO, to discuss our 2021 capital plan and guidance.

Thank you, Gabriel. Good morning to everyone. I'm very, very excited to be here today. I very much look forward to being a direct part of the management team in the next exciting phase of Frontera. First, I would like to recognize Richard for his dedicated leadership and efforts to progress the company over the last 3 years, and in particularly, during what was a very challenging 2020 and thank him for his support during the transition. Now on to Frontera's 2021 capital plan and guidance. As Richard discussed, in 2020, Frontera significantly reduced capital expenditures from our 2020 guidance, paused development drilling, focused spending on our highest return assets, ensuring higher cost production. While preparing our 2021 plan, we considered various production and CapEx scenarios that would have seen increased production and EBITDA through higher development CapEx, particularly in our key heavy oil fields of Quifa and CP6. We expect to increase production in CPE6 by 40% and expect to drill 15 wells and develop additional water handling facilities to progress this field. By focusing on value over volumes, we believe we have found the sweet spot with our 2021 capital plan that will optimize both capital efficiency, cost efficiency and free cash flow after development CapEx in 2021 and beyond. In 2021, we anticipate average daily production in Colombia in the range of 40,500 to 42,500 barrels of oil equivalent per day and anticipate exit production of approximately 43,000 barrels oil equivalent per day. We anticipate capital expenditure this year in the range of $200 million to $295 million, focused on 4 key areas: Colombia development, Colombia and Ecuador exploration, Guyana exploration and Guyana infrastructure. This includes: $110 million to $130 million in development capital focused on the company's strong Colombian base; $30 million to $40 million to drill 2 exploration wells in the VIM-1 block in 2021, and to complete seismic and preparatory work in Ecuador in advance of potential drilling in 2022; $40 million to $90 million, principally for the Kawa-1 exploration well on the Corentyne block, a world-class offshore oil opportunity during the second half of this year; and $15 million to $20 million for the Berbice Port construction in Guyana. Importantly, we forecast operating EBITDA of $275 million to $325 million. I will now turn the call back over to Gabriel for some closing comments. Thank you.

Thank you, Orlando. The company entered 2021 with a strong cash position and a lower cost production focus in Colombia that we believe can be maintained, be self-funded and generate free cash flow for the foreseeable future. Frontera will focus on value over volumes and will maximize returns on capital and production. The company will continue to drive costs out of the business and use its material free cash flow to invest in its exciting exploration and development opportunities. The company is working to unlock long-term value from its infrastructure assets, and Frontera's exploration and development portfolio offers exciting value-adding opportunities, including drilling our first well in the world-class offshore Guyana basin and 2 additional wells in the VIM-1 block with our partner, Parex. Above all, Frontera will be relentlessly focused, disciplined and committed to delivering maximum value to shareholders, including via the NCIB announced last night. Thank you, Richard, Orlando and Alejandro, and thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open the call up for questions.

[Operator Instructions] First question comes from [ Luis Fernando at NN Investment Partners ].

Just quick ones from my end. Can you give me a little bit more color on -- there was a sort of meaningful increase in SG&A costs and in production costs for fourth quarter '20. If you can give us a little bit more color there. Then also on the reserve as well, a little bit more color on the decline for PDP reserves, particularly and any expectations for 2021? And lastly, you mentioned the plan to resume share buybacks. Is there any plans on dividends as well?

[ Luis ], thank you for the questions. I'll hand over to Alejandro to address the G&A and the production costs in the fourth quarter and also to talk about the -- your last question. Just on the reserves, just to point out, yes, our PDP reserves did decline. They went down from 37 million barrels at the end of 2019 to 26 million barrels at the end of last year, which is a drop of 11 million barrels, which is -- equates to about 30,000 barrels a day on an annual basis. So obviously, with the reduction in our capital program last year and the decision not to drill development wells, we depleted our PDP reserves. Now that we are back in a stable position, obviously, the investment program for 2021, we will see that be replenished and sustained in order to sustain the underlying production. So no real surprises in what happened to PDP last year. It's what you would predict to happen in the circumstances. So let me just pass it over to Alejandro then just to address what happened in the fourth quarter of last year on costs.

Sorry, just a quick follow-up on the PDP then. Obviously, it makes a lot of sense what you're saying. But in terms for 2021, as you go back to normal, should we expect that to stay relatively flat for 2020, as in not deplete further? Or should we expect even an increase in PDP?

Yes. It's very hard to predict how these movements will happen during the year. But what I would say is that it will certainly stabilize and probably increase somewhat. The -- our 1P reserves life has now extended to 6.5 years from previous 4.9 years. That 1P is -- includes proved undeveloped as well as proved developed. And so I would expect to see us keep the reserves life index stable, which means that we will be promoting both proven undeveloped barrels into proved developed and bringing a new 2P backlog into proven. So that's the process for work. And it certainly shouldn't go down anymore. Alejandro, would you like to address the first question, please?

Sure. Thank you, Richard. Yes. We did have an increase in production costs and G&A in the fourth quarter. The main driver is due to one cost or onetime events. In production costs, we had the impact of close to $0.50 per barrel coming from remediation and cost in Peru as we exit the Block 192. There is also an impact on FX in Colombia. And also similar, there was an impact on FX in G&A as well. On G&A for 2021, we're projecting close to $3 per barrel, so that should be -- we're projecting to maintain our G&A levels relatively low.

And if you allow me, one quick comment on the 2021 plan. In the 2021 plan, we are assuming the same -- I mean, almost the same production and transportation cost that we have along 2020. But of course, we will focus on continuous operational improvements and greater cost efficiencies during 2021.

[Operator Instructions]

There was a question on the NCIB. Alejandro, you can address it, if you like?

Sure. So on the NCIB, as you pointed out, the company is focusing its shareholders' initiatives on the NCIB program. We're currently not intend to return to dividends.

Part of the thinking was we heard from our shareholders that the NCIB was, in many cases, more efficient on a tax basis than the dividend. And while the company has dividend capacity, at the moment the plan is not being reinstated.

The next question is from David Popowich from CIBC.

I guess I was just hoping for a little bit more color on the management transition. It certainly came as a surprise to me, but I was just wondering if this was part of some previously planned management transition, as part of Richard's commitments with the company? Or if there's any more color you can give as to how this came about in the past few months?

I mean I can give you the perspective -- thank you for the question. I can give you the perspective from the Board side. Certainly, the Board has been looking at the stage at which Frontera currently is and the need for a more localized focus in order to maximize production efficiencies as well as further enhance the local relationships. Certainly, in the COVID world, the ability also to travel has been diminished. So we thought, with this dynamic, the focus of having Orlando to take over the baton and bring those local relationships and the local experience, as he mentioned, can help us not only on performance, including improving targets on the cost side, but also with relationships with our key stakeholders on the ground. I can tell you already that we have received very good welcoming messages from our key stakeholders in country. So we believe that those relationships can also help us unlock value, not only in the E&P side, but also on our other assets. And we will be working hard with Orlando's leadership to facilitate to those relationships further improvements, not only on cost, but also on the other assets, including the infrastructure assets.

All right. And just as a follow-up question to the previous analyst. I was also wondering about the buyback and how you guys plan to implement that this year. I mean, you guys have essentially outlined a cash flow budget. So this execution of the NCIB, is that contingent on higher oil prices and cash flow? Do you fully intend to buy back the full 10% of the float? How will you guys be approaching that over the course of 2021?

Good question. As the Board and management reviewed the NCIB, the rules require us to allocate funding to the plan. Otherwise, we could not even file for it. And by filing it, you need to have the intention to fully execute on it. So you can count on the cash having been allocated and the intention to be fully to work on filling it up the amount that has been described. Obviously, we have to determine the mechanics and the pricing of it, but the intention from the company is indeed to execute it in full and the capital has been allocated for it.

All right. And last question for me. Just on the guidance for capital spending this year. So you've outlined a range of $40 million to $90 million for the Kawa exploration well. I guess I was just kind of wondering why that's such a wide range. And could you talk about whether that's a dry hole cost? I mean, does that include testing? And also, how does the infrastructure spend progress in tandem with the drilling costs? I mean, is the infrastructure expense contingent on success? Or how is that working?

If you want, I can give the Board's perspective and Orlando, Richard, Alejandro, you can add. The CGX is a subsidiary of Frontera. Frontera has an economic interest of about 80% on CGX. CGX has, I believe -- with Frontera has an investment plan on the Kawa well. Frontera has allocated the amount required for its JV, a portion, but it has also reserved what could be a larger amount for the full exploration of that well. If you read more closer on the statements, you will also be able to see that there is -- that there are comments related to reviewing strategic alternatives. So what we have reserved for the maximum amount, there are other strategic alternatives that are being pursued at this time. That's why the range is there.

Yes. Gabriel, I think that is clear and nothing to add. As you said, I mean, we will be pursuing those strategic alternatives, and that is why the range is wide.

And the infrastructure spend that is not contingent on success. That is part of the budget that has been allocated for this year as well.

That is correct. Yes.

[Operator Instructions] There are no further questions at this time. Should you have any further questions, please e-mail [email protected]. This concludes the call. Thank you all for participating.

Thank you.

Thank you.

Thank you.

Thank you, Joanna. Good bye, everyone.

Thank you.