Frontera Energy Corporation (FEC) Earnings Call Transcript & Summary

Good morning. My name is Ina, and I'll be your conference facilitator today. Welcome to Frontera Energy's Fourth Quarter and Year-End 2024 Operating and Financial Results Conference Call. [Operator Instructions] 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]. This call contains forward-looking information within the meaning of applicable Canadian securities laws relating to activities, events or developments the company believes or expects will or may occur in the future. Forward-looking information reflects the current expectations, assumptions and beliefs of the company based on information currently available to it. Although the company believes the assumptions are reasonable, forward-looking information is not a guarantee of future performance. Forward-looking information is 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 information. The company's MD&A for the quarter ended December 31, 2024, and the company's annual information form dated March 10, 2024, and other documents it files from time to time with securities regulatory authorities describe the risks and uncertainties, material assumptions and other factors that could influence actual results. Any forward-looking information speaks only as of the date on which it is made, and the company disclaims any intent or obligation to update any forward-looking information, except as required by law. I would now like to turn the call over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy. Mr. de Alba?

Thank you, operator. Good morning, everyone, and welcome to Frontera's Fourth Quarter 2024 and Year-end Operating and Financial Results Conference Call. Joining me on today's call are Orlando Cabrales, Frontera's CEO; Rene Burgos Diaz, Frontera's CFO; and also available to answer questions at the end of the call, we have Victor Vega, VP, Field Development, Reservoir Management and Exploration; Alejandra Bonilla, General Counsel; Ivan Arevalo, VP Operations; and Renata Campagnaro, VP Marketing, Logistics and Business Sustainability. Thanks again for joining us. In 2024, Frontera continued to demonstrate robust performance focused on the execution of the strategic objectives and priorities. The company met its guidance targets, including key upstream operating and financial objectives and delivered on its commitment to return capital to shareholders. The value-center approach resulted in closing the year with a strong balance sheet, including $223 million cash position. The company also lowered its consolidated debt and lease liabilities by over $30 million. During the year, both S&P and Fitch reaffirmed the company's credit ratings of B+ and B, respectively, with a stable outlook, highlighting Frontera's strong credit quality and financial position, underpinning the company's low leverage. For the full year, the Infrastructure business segment delivered strong results, generating a 2024 adjusted infrastructure EBITDA of over $107 million at the midpoint of the company's 2024 guidance target. The company also received over $60 million in dividends and capital distributions from ODL. Frontera continues to make significant progress in its Puerto Bahia operations, reaching several key important milestones, which we expect shall provide shareholders with significant upside potential, including the construction of the connection line with the Refineria de Cartagena, which is expected to be operational by the second quarter of 2025. Additionally, the company announced a new LPG joint venture with Industrias Gasco. Both these projects are strategic for Frontera, but also supportive regionally and for the Colombian economy as a whole. As mentioned during the December operational update, the infrastructure business strategic review is in its final stages. The company is analyzing various options and expects to announce results soon. In the Guyana exploration business, Frontera and its joint venture partner remain firmly of the belief that its interest in and the license of the Corentyne block remain in place and in good standing. The joint venture is assessing all legal options available to assert its rights. The joint venture is committed to promptly resolving this matter and continuing its multiyear efforts and investments to realize value for the people of Guyana and its shareholders from the Corentyne block. Frontera delivered on its commitment to return capital to shareholders. Supported by Frontera's strong financial position from 2024 through today, we have returned approximately $83 million, including $15.1 million in declared dividends, $7.8 million through the repurchase of its common shares through its NCIB and completing 2 successful substantial issuer bids for over $60 million. The SIB saw an over 90% combined participation rate, validating the company's capital distribution strategy. Since 2022, the company has returned over $180 million to its shareholders through normal course issuer bids, substantial issuer bids and dividends. Frontera will continue to consider future investor initiatives in 2025, including potential additional dividends, distributions or bond buybacks based on oil prices, the overall results of our business, cash flow generation and the delivery of the strategic goals. I'd now like to turn the call over to Orlando Cabrales, Frontera's CEO; and Rene Burgos, Frontera's CFO, who will share their views on our fourth quarter and full year results. Orlando?

Thank you, Gabriel. Good morning, everyone, and thank you for joining us for today's call. 2024 was a strong financial and operational year for Frontera. We have continued to execute our strategy and generated positive results, meeting all our guidance metrics for the year and deliver additional value to shareholders. In our Colombian upstream business, we met our 2024 production target after completing successful drilling campaigns in CPE-6 and Sabanero blocks, expanding water handling capacity to 360,000 barrels in CPE-6 block, which reached another record daily production level of close to 9,000 BOE per day in the fourth quarter. And Sabanero, where production reached approximately 2,400 BOE per day during the same period. At our SAARA project, water processing volumes reached an average of 79,000 barrels of water per day in the fourth quarter and an average for the year of 44,000 barrels of water per day. Frontera continues to optimize its SAARA operations in an effort to drive higher water handling and crude oil production volumes and also as a tool to achieve our sustainability and green circular economy goals. I'm also pleased with our continued efforts to manage our cost structure. Despite inflation and other pressures, we met all our cost guidance targets, including the production cost per barrel, which averaged $9.34 per barrel. On our 2024 year-end reserves, we continue our commitment to sustain production and focus on value over volume in Colombia and Ecuador, closing the year with 146 million and 151.3 million barrels of 1P and 2P reserves, respectively. Our 3-year average gross reserves replacement ratio of 60% for 1P reserves and 40% for 2P reserves and presented a reserve life index of 6.8 years for 1P reserves and 10.3 years for 2P reserves. The net present value before tax discounted at 10%. Our NPV10 for December 31, 2024, of our 2P reserves was $3.4 billion or $21.6 per BOE. The NPV10 presented a small decrease mainly due to the reserves decrease. However, the NPV10 per barrel increased year-over-year driven by operational efficiencies, optimization of development plans and the reduction of future development costs. For 2025, we will invest between $30 million and $40 million in exploration opportunities, led by the drilling of our high-impact Hidra-1 exploration well in the VIM-1 block, originally postponed from our 2024 plan. We believe our new field exploration and exploration targets will help unlock reserves growth potential. In our infrastructure business, ODL transported over 243,000 barrels per day. generating $274 million in 2024 EBITDA and returning over $171 million to its shareholders. The company received over $60 million from its 35% interest in 2024. Puerto Bahia generated approximately $15 million in operating EBITDA for 2024, in line with our 2024 guidance despite lower-than-expected liquids and cargo volumes and supported by effective cost controls in the operations. For 2025, our focus in Puerto Bahia shifts to the connection as we look forward to the start-up and ramp-up of volumes via the Reficar connection. Turning to our year-to-date 2025 performance, gross production through March 9 was approximately 40,400 barrels per day, below our guidance range, mainly due to certain unexpected well failures within our light and medium assets. These issues are being addressed, and we remain confident in meeting our 2025 production guidance. On the exploration side, the Greta Norte-1 well was drilled and the well is currently in evaluation phase. We remain focused on executing our recently announced capital and production plan for 2025 and continuing to deliver sustainable production, solid operational and financial results and enhancing investor returns. I would now like to turn the call over to Rene Burgos, Frontera's CFO.

Thank you, Orlando, and good morning, everybody. I would like to take a moment to highlight a few key financial aspects of our full year results. For the full year, the company recorded a net loss of $24.2 million or $0.29 per share. The company's net loss includes roughly $117 million of operating income and $54 million from shared income of associates, our ODL investment, offset primarily by approximately $93 million in deferred income tax expense and $74 million in finance expenses. Our deferred income tax expense amounts reflect our use of historical tax loss balances, impacts of changes associated with the tax rate and fluctuations in the Colombian peso tax rate. Our operating EBITDA for the year was approximately $424 million, in line with the 2024 guidance. I want to take a moment to talk about our key per barrel indicators associated to our realized prices and costs. During the year, our weighted average Brent sales price was $79.33. The company also witnessed an average Vasconia differential on export sales of $5.51. Our purchased crude net margin associated to our dilution and transportation programs was $2.73, higher than the $2.23 for the prior quarter. The quarter-over-quarter variance was a result of higher dilution driven by higher production from our heavy oil assets. Taking a close look into our operating costs, our production, energy and transportation cost per barrel for the year totaled $9.34, $5.11 and $11.39 , respectively, in line with 2024 guidance. This compares to $8.76, $4.49 and $11.21, respectively for 2023 [Technical Difficulty] result of higher well service activity as well as the impact of FX rates and inflationary pressures on services and wages. Energy costs were also higher, mainly related to higher heavy crude oil production levels and higher electricity prices. Transportation costs had a slight increase as a result of annual increased tariffs, partially offset by lower volumes transported primarily attributed to improved domestic wellhead sales. On our infrastructure business, adjusted infrastructure EBITDA for the year was $107 million. This compares to $110 million in 2023. The year-over-year decrease was primarily due to lower EBITDA from ODL, which resulted from higher costs due to inflationary pressures and indexation on wages. ODL volumes reported were 244,000 barrels per day, consistent with 2023 volumes. Frontera cash generation for the year was very strong. Our cash flows from operations totaled $510 million. This was due to a healthy Brent oil price environment during the year, a reduction in domestic withholding tax rates, the impact of our deferred tax asset recoveries as well as dividends and capital distributions from our investment in the ODL pipeline. As of December 31, 2024, the company closed with a $63 million income tax receivable, which we expect to recover during 2025. With respect to our capital expenditures, total CapEx for the year was in line with our guidance at $218 million. Our CapEx for the year included the drilling of 68 development wells in the Quifa, CPE-6, Sabanero and Perico blocks as well as 2 exploration wells in Colombia. As of December 31, 2024, the company closed the year with a total cash position of $223 million, including $193 million unrestricted cash. This was before the January FID of $30 million. In addition, during 2024, the company also reduced its consolidated balances by approximately $30 million. Turning now to risk management. Our current risk management strategy continues to show how our hedging discipline supports our operations and planning. Frontera uses derivative instruments to manage exposure to oil prices and FX volatility. On the other side, the company entered into hedges, successfully securing a 40% hedging ratio until June 2025 at a $70 Brent strike price, protecting against a potential drop in home prices. Frontera has also entered into foreign exchange rate hedges totaling $180 million, covering roughly 40% of the company's expected peso exposure until the third quarter of 2025. This puts has strikes between the COP 4,150 rate and COP 4,200 rate. Both these hedges provide the company with cash flow visibility and help mitigate impacts from future fluctuations while allowing the business to deliver on its 2025 targets. Finally, I'd like to provide an update on our investor value initiatives. On bond buybacks, the company repurchased $5 million notional of its 2028 senior unsecured notes in 2024. Year-to-date, in 2025, the company has repurchased an additional $1 million of its 2028 unsecured notes. Under the company's NCIB program that expired on November 20, 2024, the company repurchased approximately 1.3 million common shares for $7.8 million. As mentioned in our press release, the company intends to file with the TSX a notice of intention to commence a normal course issuer bid for its common shares. This program will be subject to the acceptance of the TSX. We expect our quarterly dividend to have declared and paid approximately $15.1 million during the year for a total of CAD 0.25 per share to shareholders. Together with this results announcement, the Board has declared a quarterly dividend of CAD 0.0625 per share, payable to shareholders of record as of April 2, 2025, and to be paid on or around April 16, 2025. Regarding the company's substantial issuer bids or SABs, the company announced 2 SABs in 2024 for a total of over $60 million at a fixed price of CAD 12 per share. The SABs were widely participated with an over 90% combined participation rate. The company believes this format is the most efficient means to distribute capital to all of our shareholders. In total, the company has returned over $83 million in capital to shareholders since 2024. Frontera shall continue to consider future investor initiatives for 2025 and onwards, including potential additional dividends, distributions or bond buybacks based on our prices, the overall results of our businesses, cash flow generation and the company's strategic goals. I would like to turn the call back to Orlando.

Thank you, Rene. I wanted to provide some color to our 2025 production and capital program. We have a fully funded plan for 2025, delivering approximately $370 million to $415 million in consolidated operating EBITDA at $75 Brent prices. Our plan will leverage our transportation and logistics structure to maximize realized prices while also investing for future growth through facilities expansion and near field and high-impact exploration. We expect to generate consolidated free cash flow of approximately $80 million to $125 million at $75 average Brent prices. Despite lower expected oil prices, Frontera projects strong cash flow generation driven by higher production, lower capital expenditures and a focus on cost control. In our Colombian and Ecuador upstream business, we are targeting production of approximately 41,000 to 43,000 BOE, a 4% increase compared to 2024 production and generate $350 million to $380 million in upstream operating EBITDA. We will invest between $160 million to $190 million in development activities and 18% decrease in development spending from 2024. We will also invest between $30 million to $40 million in exploration activities and a $10 million to $15 million other investments related to HEC activities and new field production technologies. We will focus our drilling efforts in the most productive and profitable assets in the portfolio, building on the successful heavy asset drilling campaign in 2024 in the Quifa and CPE-6 blocks, supplement our drilling activities with our low-cost well intervention program, partially offsetting our natural decline as well as invest in development facilities primarily supporting activities in the Quifa and CPE-6 blocks. On the exploration side, we anticipate investing $30 million to $40 million drilling the high-impact Hidra-1 exploration well in the VIM1 block, the Llanera-1 well in the Llanos 99 block and carry out pre-seismic and predrilling activities in the VIM-46 block. We expect our upstream business to generate free cash flow between $65 million to $95 million, inclusive of $10 million to $15 million in cash tax payments, net of recoveries and debt service of $45 million to $55 million, which includes $32 million of bond interest and $13 million to $23 million related to debt service for local bank facilities. For our growing and stand-alone infrastructure business, we are targeting an infrastructure EBITDA of approximately $20 million to $35 million for 2025, driven by the Reficar connection start-up and additional revenues from SAARA, Including $50 million to $60 million in distribution from ODL, the segment is expected to generate free cash flow of approximately $15 million to $30 million. We have prepared a slide bridging our current production and the buildup of the components supporting our 2025 production targets. Our starting point is the company's fourth quarter 2024 average daily production rate of 42,400 BOE per day. Assuming an asset decline rate of between 25% to 30%, to sustain production, the company would need to replace an annual average of 5,500 to 6,500 BOE per day or a rolling of 2% to 3% of production per month. Frontera's development CapEx program was designed to fully replace our declining barrels via a combination of new wells as well as low-cost decline management well interventions, new technologies and a strategic investment in facilities. Our 2025 new well CapEx program seeks to replace between 3,000 to 4,000 barrels, investing between $100 million and $110 million in 60 to 65 new wells focused primarily on our heavy oil assets. On average, each new well carries an estimated cost of approximately $1.5 million to $2 million and targets an annualized production rate between 100 and 120 BOE per day. These wells have an average an attractive on the 1-year payback period and a capital efficiency metrics of $16,000 to $18,000 per flowing barrel. Under our low-cost decline management well intervention program, the company invests in well interventions and workovers to reduce the impact of the natural decline and optimize the portfolio production rate. For 2025, the company expects to invest approximately $20 million to $30 million in decline management activities with average investment per intervention ranging between $200,000 and $500,000 per well and generating an additional 30 to 40 BOE per day of annualized production. Finally, we plan to invest $15 million to $20 million in strategic projects, including at SAARA, Cajua water handling expansion, along with between $5 million and $15 million in investments in new technologies to enhance production efficiency and reduce water production and build a foundation for further expansion of these key assets for years to come. Overall, these capital projects will allow us to sustain production from last year at around 40,000 to 43,000 BOE per day. Before I wrap up today's call, I would like to highlight our sustainability strategy, where we achieved 100% of our 2024 sustainability goals. Frontera restored, protected and preserved 769 hectares of land as well as recirculated 35.2% of its operational water and utilized 43.4% of generated waste. In the health and safety side, Frontera achieved its best total recordable incident rate performance ever with a 6% reduction compared to the previous year. On our efforts to maintain close relationship with all the stakeholders, including our employees and the communities where we operate, we invest approximately $4.1 million in social projects, benefiting 66,303 people near our operations and increased local purchases from local contractors by 2% compared to last year. As well as in 2024, Frontera was recognized among the top 20 best companies to work in Colombia by Great Place to Work. We implemented an effective cybersecurity plan, maintaining a 0 rate of material cybersecurity incidents. Additionally, for the fourth consecutive year, Frontera during 2024 were recognized as one of the most ethical companies by Ethisphere. And finally, with that, I would like to conclude by saying thank you to Gabriel and Rene for their comments, and thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open up for questions.

[Operator Instructions] First question comes from the line of [ Peter Paulie ] from Jefferies.

If it's okay, I'll go one by one. The '25 CapEx guidance is down about 25% year-on-year with it looks like declines year-on-year in development facilities, other CapEx in Colombia infrastructure. I just wanted to ask if you could share a little more color on what's driving those year-on-year declines, especially given the flattish production year-on-year. Like is CapEx being spent more efficiently? Or has the CapEx profile changed significantly versus 2024? And my second question, is there any level of Brent price you would reconsider any elements of your CapEx plan or shareholder distributions and buybacks, all within the context of your hedges in place?

I can take the first question, and you can take the second one. I think on your first question, Peter, I think the answer is our mantra has been value over volumes. Yes, certainly, we are reducing the development CapEx if you compare it with last year. But our production actually is higher this year than last year in our guidance. So we have been much more efficient in the use of our capital. We are also very much concentrated also in bringing efficiency, further efficiency into our cost structure. we are focusing this year in developing the drilling campaign for our CPE-6 new facilities capacity, which was increased last year to 360,000. So there is room to further optimize the use of that facility, which we already built last year. And we are also working very hard, as I mentioned in my remarks, to increase production in Quifa through the SAARA facility, which we have still room to improve there. So with that in mind, we believe the development CapEx is the right one for the company, and it will allow us to bring that maximum that we have of value over volumes with a higher target of production for this year.

As to Brent price, I think we indicated 2 Brent prices, $75 and $80. $75 is the one that which we struck the plan where like Orlando highlighted, we have a range of potential free cash flow scenarios between $80 to $125. Our hedges today are through the middle of the year around $70 Brent. So I think we're pretty well covered. It will depend how the rest of the year somewhat works out in our ability to actually enact some of those hedges for us to somewhat restrike or replan. But for now, I think we're sticking with that range of potential outcomes. But certainly, if prices continue kind of in a downward trajectory, we will need to kind of adjust our plans or perhaps rethink how our value maximization approach will take. But for now, I think we're pretty good, pretty covered.

And your next question comes from the line of Cristian Fera from KNG Securities.

So I have 2 questions. The first one, if you could please provide some color on the expected shareholder distributions for 2025, including both share repurchases and dividends? And my second question is if you have any news to share regarding the infrastructure business divestment.

Okay. I can take Rene the second one. You can take the first one. On the second one, as we announced it back in May of last year, I mean, we are working diligently to conclude this infrastructure process. We are analyzing various options that we have right now. And we believe that the process, as I think Gabriel mentioned in his remarks, is close, is nearing its final stage. So we hope to announce something soon. Rene, you can take the first one.

Yes. Look, color on distributions, I think as we laid out in our press release, our distributions are multipronged. First, we have NCIBs, then we have our dividend. And then what we've done last year is also the substantial issuer bids. I think as for direction, I think that you should look at the dividend and the NCIB as a straightforward way to returning capital. And the other means of capital distribution, as Gabriel said, will be confirming to overall oil prices, business results, et cetera. So that's the best guidance that I can share with you right now. And again, since 2024, we distributed over $83 million to shareholders. And since 2022, close to $150 million. So we're really key and focused on shareholder distributions. So of course, this year will be no different with us focusing depending upon our business execution.

And if I may, a quick follow-up. Maybe it's a bit too early, but do you already know what are your plans for the proceeds you're going to get of the infrastructure business divestment?

Rene, do you want to take that one?

Yes. Look, I think as we said before in discussions with you all and in these conversations, capital allocation is the Board's remit. So it really depends at the time and the form. Once this process is finalized, the Board will determine the most optimal way for this capital to be distributed. So I think like as Orlando said, we're nearing the end of the process. We're analyzing various options. And as soon as we have better information, we'll communicate with the market in due course.

The next question comes from the line of Alejandra Andrade from JPMorgan.

I just wanted to follow up on the hedges. When you released guidance, I think only first quarter hedges were in place. I'm just wondering what is the percentage now that is hedged of the first 6 months of the year?

Rene, you have that?

Yes, I'll take this one, Orlando. So we've hedged roughly 40% of our net production around $70 Brent.

During the first 6 months...

The first 6 months, yes.

There are no further questions at this time. I will now hand the call back to Mr. Orlando Cabrales for any closing remarks.

Thank you, operator. Thank you to Gabriel and Rene again. Thank you, everyone, for attending the call, and have a good day.

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.