Frontera Energy Corporation (OTCPK:FECCF) Q2 2022 Earnings Conference Call August 10, 2022 10:00 AM ET
Company Participants
Gabriel de Alba – Chairman
Orlando Cabrales – Chief Executive Officer
René Burgos – Chief Financial Officer
Renata Campagnaro – Vice President-Marketing, Logistics, and Business Sustainability
Conference Call Participants
Roman Rossi – Canaccord Genuity
Oriana Covault – Balanz
Operator
Good morning. My name is Samira, and I will be your conference facilitator today. Welcome to Frontera Energy’s Second Quarter 2022 Operating and Financial Results Conference Call. All lines are currently on mute to prevent any background noise. 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. Following the speakers’ remarks, there will be time for questions. Analysts and investors are reminded that any additional questions can be directed to the company at ir@fronteraenergy.ca.
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 June 30, 2022, and the company’s annual information form dated March 2, 2022, and other documents it files from time-to-time with securities, regulatory authorities, describes the risks, 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, please go ahead.
Gabriel de Alba
Yes, thank you operator, and thank you everyone for joining today’s conference call to review Frontera’s second quarter 2022 operating and financial results. Joining me on the call are Orlando Cabrales, Frontera’s CEO; and René Burgos, Frontera’s CFO.
René was appointed at Frontera CFO on June 3, 2022. Prior to his appointment of CFO, René, served as Director on Frontera’s board since 2019. René is a financial markets executive with over 20 years of experience in investment management, leverage finance, restructuring, and financial advisory expertise across multiple industries and geographies, specifically in Latin America. We are fortunate to have such a qualified candidate in René to fill this important executive leadership role. I would like to also emphasize that René has already made a very positive impact to the company.
For the next two years as a key member Frontera’s board, including his participation in Frontera’s audit committee, and compensation and human resources committee have helped give him key insights into the company and its financial structure, and has already allowed him to seamlessly excel in this critical role. René clearly understands the shareholder’s perspective and will continue to work with the Board of Directors and the company to unlock value.
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. Thank you again, everybody for joining.
Frontera continue to perform ahead of plan, substantially delivering on its financial and operational objectives in the first six months of 2022. The company also extended its track record of ESG delivery and focused on enhancing shareholder returns to the ongoing normal course issuer bid share buyback and the C$65 million substantial issuer bid. Subsequent to the quarter, Frontera announced a transaction with CGX there was transaction closes will provide an increase and the company’s working interest in the Corentyne block, offshore Guyana to 68% and secure funding of up to $130 million for the joint venture’s second exploration well, Wei-1, which is anticipated to be spud in October 2022. We’re doing this work in one of the most exciting aspiration bases in the world.
In light of the company’s strong operational and financial performance in the first half of this year and the momentum the company expects to carry onto the second half of the year, Frontera is tightening its 2022 production guidance to between 41,000 barrels per day 43,000 barrels per day and increasing its operating EBITDA guidance to between $675 million to $700 million as a result of an increase in assumed Brent prices at $100 per barrel. Frontera looks forward to advancing its exciting inventory of development and exploration opportunities in the second half of this year.
I’ll now turn the call to Orlando Cabrales, Frontera’s CEO, and our CFO, René Burgos, who will share their view on our second quarter results. Please Orlando.
Orlando Cabrales
Thank you, Gabriel, and good morning everyone. And thank you for taking the time to join us this morning. I am very pleased with Frontera’s strong financial and operating results in the second quarter of 2022.
Compared to the first quarter of this year we increased production by 1% to 41,586 Boe per day. We improved its operating netback by 16% to $68.01 per Boe. We increased our net sales realized price by 12% to $91.50 per Boe. We grew our cash provided by operating activities by 114% to $246.6 million. And we generated $190.7 million in EBITDA. Last time the company delivered this level of EBITDA was in the fourth quarter of 2016. This is the fourth consecutive quarter of growth in these important metrics.
On the production side, we increase natural gas production by 9% to just over 10,000 Mcf per day in line with our ESG objectives. And on August 1, achieve a daily production record for the CPE-6 block of our 5,300 Boe per day. In Ecuador, we sold our first production in May and June of more than 28,000 net barrels. We continue to focus on reducing costs across our portfolio.
Despite inflationary pressures, production cost average $12.65 per Boe in the second quarter down 6% compared to the prior quarter. The decreasing production cost was mainly due to quarter-over-quarter decreases in well services activity, as well as lower energy prices.
Transportation costs averaged $10.84 per Boe in the second quarter up 11% compared with the prior quarter. The increase in transportation costs, was mainly due to additional volumes transported in Ecuador, during the second quarter, as well as the initiation of the recent scenario pipeline take or pay commitment, and to lower cost during the prior quarter due to nonrecurring savings related to the Ocensa take or pay project. Overall, the company believes it will reduce operating costs in the second half of 2022 due to lower energy costs and plan reduction in well services activities. The company reiterates its 2022 cost guidance, including production costs of between $11 to $12 per Boe and transportation costs of between $10 to $11 per Boe.
On the investment side, we continue to unlock opportunities within our portfolio with drilling successes during the quarter in Guyana at Kawa-1 and in Ecuador at Yin-1. In Colombia, we began pre-seismic and pre-drilling activities related to social and environmental impact studies in anticipation of upcoming exploration activities at the VIM-22, sorry, 22 – VIM-46 block, Llanos 99, Llanos 119, and CPE-6 blocks in the second half of 2022, and the first half of 2023. And in Guyana, we recently announced our transaction with CGX that increases our working interest in the block and secures up to $130 million in funding for the Wei-1 exploration work. As a result, we anticipate increased total capital expenditure for the year of between $435 million to $495 million.
Finally, I would like to highlight that during the second quarter, we released our 2021 sustainability report, which details the achievement of 98% of our 2021 ESG targets and includes our 2022 ESG goals. As speaking of 2022 objectives, in the second quarter, we naturalize 52% of our total emissions in Colombia. Additionally, the company reduced its CO2 emissions in the second quarter by 31,000 tons of CO2 and 69,160 tons in the first half of 2022. Frontera CO2 decreased in the first half of 2022 is a reduction of approximately 12% of Frontera’s total 2021 CO2 emissions.
I would now like to turn the call over to René Burgos, Frontera’s Chief Financial Officer.
René Burgos
Thank you, Orlando. I’m very excited to join Frontera’s executive team and I please to be here for today’s call with all of you. Look forward to connecting with all of you in the near future. Complimenting what Gabriel and Orlando said earlier, Frontera continues to deliver on its financial target and objectives. A company finished the quarter with a strong balance sheet and healthy credit metrics, including low LTM leverage of 0.3 times.
The company generated over $246 million in cash from operations during the second quarter, benefiting from the very strong oil price environment. During the quarter, the company also continued to strategically deploy capital investing over $70 million in exploration, production and development facilities in Colombia and Ecuador, funding $41 million in debt service obligations, including our final $20 million payment under Puerto Bahia [ph] returning 20 million to investors via the NCIB program and investing $20 million in our potential transformative exploration opportunity in Guyana, just to name a few of our investments.
As of June 30, the company closed with $353 million in cash, including restricted cash, a $30 million increase from the third quarter. Consistent with our commitment to enhance shareholder value during the quarter for internal launch, a C$65 million substantial issuer bid. As close the SIB proceeded by way of a modified Dutch auction procedure with a tender price range from C$11 to C$13 per share. The SIB expires on August 8.
Preliminary results indicate a tender price of C$12 per share. Frontera expects to take up and pay for 5.4 million shares or approximately 5.8% of the total number of Frontera’s issued and understanding shares as of June 30. After the cancellation of the shares taken up and paid Frontera anticipate that the remaining shares outstanding will now be 87.2 million shares. Final results of the SMB will be confirmed by press release tomorrow. We also expect to reinitiate our NCIB program today.
Before handing it over back to Orlando for a closing remarks, I would like to take a minute to touch on certain recent events. On August 8, the incoming government introduce a new tax reform bill, several aspects of this new legislation includes proposal impacting the oil sector, such as a high price, expert tax on crude oil sales, as well as other adjustments to the tax code. We are currently analyzing the potential impact of the proposed tax bill on our business and will keep investors updated on the potential impact from this legislation as it develops.
I would now like to turn the call back to Orlando.
Orlando Cabrales
Thank you, René for sharing your thoughts. Looking ahead to the second half of the year Frontera has a healthy balance sheet, a sensible amount of cash on hand, low debt balances, low leverage, and we continue to manage operating costs during a time of rising inflationary pressures. We remain on track to optimize capital efficiency and free cash flow after development CapEx. And we will maintain a strong capital discipline and a targeted investment approach.
With that, I would like to conclude by saying thank you to [indiscernible] for the comments 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we’ll take our first question from Roman Rossi with Canaccord Genuity. Please go ahead.
Roman Rossi
Good morning. And thanks for taking my questions. Congratulations on this good results. So, I have a couple of questions. I know that you mentioned that you are still analyzing the impact of the tax reform, but I wanted to ask you, what’s the percentage of production that you actually export?
Orlando Cabrales
We export 92% of our production.
Roman Rossi
Perfect. And regarding the other issue there it’s non-disability of royalties, right? So, how much of your royalties are paying cash? Because it seems that only those royalties would be impacted on this reform?
Orlando Cabrales
Well, no, I mean, as René, I mean, René said, we are analyzing the proposal coming from the current government. And I would say that there, I mean a couple of comments on that, the first one is, is it is a proposal. It has to go through Congress. So there is going to be a debate within Congress in going two or three months. That is target number one. Number two, the two proposals that may have an impact on the oil industry is the first one is the, what they call the export tax, which basically tried to captures the upside in the oil prices. And the second one is the on the purity of royalties in the income tax of companies, which has applied in Colombia for a couple of decades.
So those are the two proposals, and address to put it that way to the oil sector. So, we will see, we are analyzing that, we will be, I mean, very, very on top of the discussions in Congress say through our, I mean, the participation in the different trade associations in the oil and gas trade association, in the business trade association, and which is the largest one in the country. So through these associations, we would be actively participating in that. And maybe the last comment I would make is that the, the oil and gas sector has already what we call in Colombia, a high price participation formula in the contracts, not only with ANH, but also with the Ecopetrol whereby we pay in cash or in kind that high price participation formula the price by which, in which that formula is trigger is around $48, $60, which is the one that the government is proposing. So, we have already, that is already place in Colombia. So the discussion will be coming and we will be on top of that.
René Burgos
And Roman just to perhaps just answer your point directly, if you go to our MD&A and I’ll point you to page I think it’s six, we break down our paid cash and in kind. So you get a sense of your question of how much is paid in kind versus in cash.
Roman Rossi
Okay. Thank you. Thank you very much. And just an additional one, I see that on your updated guidance, you are also increasing the development drilling topics. So, where are you expecting to deploy this development, additional topics?
Orlando Cabrales
That is mainly driven by the Wei-1 world in Guyana, and also some development topics in Colombia, which is associated with additional activity in the CPE-6 block. I mean there have been, I mean, very good results in the CPE-6 block recently, as we disclose it, as we announce it, we have record production in the CPE-6 block. So there is a additional training activity in the block.
Roman Rossi
Okay. Thank you very much for taking my questions and congratulations again.
Orlando Cabrales
Thank you, Roman.
Operator
We’ll take our next question from Oriana Covault with Balanz. Please go ahead.
Oriana Covault
Hi, good morning. Thanks for taking my questions. And first I wanted to point out, or if you could comment more on the production figures for this quarter, they seem to have coming flat with respect to first quarter. So just to understand what drove this and how should we expect production going forward, given this time production guidance?
Orlando Cabrales
Well, I think, I mean, the only thing I would, say Oriana. Thank you for your question is, yes, it is up 1%. So that is good. And I think the message to the market is that we are tightening the range in our production guidance. So that gives you an indication of where we are going in terms of production for the whole year.
Oriana Covault
Got it. And maybe follow up with regards to the capital budget. We noticed this increase in development activities and exploration more precisely in Colombia and Ecuador. So just to confirm, would it be a change through the initially budgeted wells, the 65 development Wells, or are you seeing also some inflationary pressures driving these higher development CapEx?
Orlando Cabrales
Certainly. I mean, the inflationary pressures are there. I mean, we are not, I mean, we are part of the market and we are, I mean, experiencing that. As I said, I mean we have been very disciplined in terms of CapEx management, as well as, as our cost based structure. So, we are handling that situation tackling that. And so we hope to keep data under control, but certainly the pressure is there, but the increase, I mean, just rate to rate, what I said earlier is that increase in the development CapEx for Colombia is mainly driven by that additional activity.
Oriana Covault
Got it. Perfect. And just one final one from my side. We noticed this change in the midstream revenue and it certainly was an impact with respects to last quarter. So perhaps if you could comment a bit more, what should we expect in midstream revenues for the upcoming quarters?
Orlando Cabrales
So your question is revenues related to the midstream?
Oriana Covault
Yes, because we noticed significant decrease, like it was compensated with higher intercompany. But just to understand what drove, and I understand there are some changes going on in the midstream segment. So if you could clarify how should we expect this to go in forward?
René Burgos
Yes. So, I was going to highlight that the main difference from this year to prior years, particularly in midstream, was Frontera because of the financing had a take or pay contract that take or pay has now last. And I think the numbers you’re seen now, particularly as you relate to the port are more traditional for a standalone port operation for ongoing business, we should expect the increasing revenues as the port continues to operate. As the port that we have in Portuaria is the largest handler of sort of cargo, we’re focusing on expanding our capability from the drive port and also increasing volumes related to the liquid port as we’ve discussed in order of cost. But, I would say that the numbers now are driven mainly by, that reduction activity related take or pay contractors.
Orlando Cabrales
That is correct, René. And I mean, that is basically the elimination of the take or pay contract that Frontera had with Portuaria, but just to highlight what René said that is that we are taking, I mean, several, several actions, several initiatives to make that the Portuaria business upsell sustaining business going forward. So there are, I mean, so many initiatives very important strategic initiative is going on to make that self sustain. So nothing to report at this point in time, but we are looking on that.
Oriana Covault
Perfect. Thank you very much for taking my questions. Congratulations for the quarter.
Orlando Cabrales
Thank you, Oriana.
Operator
[Operator Instructions] We’ll take our next question from [indiscernible]. Please go ahead.
Unidentified Analyst
Hi, good morning. Thank you for taking my question. I would like to ask about two topics. The first one is about the increase in the CapEx guidance. It just, I want to understand that are the, what’s very increasing the element in development really, because it’s showing that 25% increase, and you’re saying that’s because of an increasing in drilling activity, but how many new words are you planning with this CapEx number and how much of that increase is inflation?
Orlando Cabrales
One second. I would say, Matias – compliment here is, as I said before, the addition in the development CapEx is mainly driven by the additional update in CPE-6. We are drilling five additional works in CPE-6. And in terms of the inflation, inflationary pressure that you mentioned, we are keeping the same risks that we have before in our operations. So that has mitigated the impact of higher rates in the market that you can see today. So the continuation of the campaign with the same risks has helped us to navigate through these inflationary pressures.
Unidentified Analyst
Okay, thank you. How are you seeing the CapEx inflation for next year?
Orlando Cabrales
CapEx inflation for next year, René?
René Burgos
Look, if you think that this is, it’s a very timely question. Right now we are communicating with our suppliers and having structured discussions about how to one minimize overall cost and also optimize the logistics that we’re looking to put in place. So, I think it’s – we do that through, master service agreements, stem by rigs, just so that we can also mitigate any cost. I mean, we’re a player in the market as to, we are seeing some pricing pressure for next year. I think it’s too early to tell. And we will communicate or update you guys on guidance on cost. But what I would say is like, to this year, we’re – CapEx guidance, sorry, updating our CapEx guidance, and reiterating our cost, operating costs and transportation at the levels that we have prior.
Orlando Cabrales
And I would highlight that – this year we are starting earlier than other years, our planning process for the full year. So, and the rational for doing that is exactly that one. I mean, try to mitigate the impact, the impact of the inflation that we are seeing in the market.
Gabriel de Alba
Yes, Orlando, René would like to, this is Gabriel de Alba, and I would like to emphasize, and indeed management has presented well ahead of plan. And the board is working already and has provided approvals to management, so that we can already schedule and contract where what would be a CapEx for next year. Therefore we are limiting potential increases by acting early.
Orlando Cabrales
Exactly. That is correct Gabriel.
Unidentified Analyst
Okay. Thank you. And just one last question on my side, how many shares are remaining to be bought under the NCIB program?
René Burgos
How many share shares remaining?
Orlando Cabrales
He said, yes, we have the number here. 10%, the 12% that’s a total, but we already bought, I know Renata, if you’re on the line, if you can answer that question, because I know you have the number top of your head.
Renata Campagnaro
We purchased about 2 million shares. We have about 3 million, a little bit less available to us under the NCIB.
Unidentified Analyst
Okay.
Orlando Cabrales
Does answer your question, Matias?
Unidentified Analyst
Yes, yes. Thank you.
Orlando Cabrales
And again, that will be obviously on NCIB certainly as, the board and management look at the cash, we can also consider other alternatives.
Unidentified Analyst
Okay. Thank you.
Operator
[Operator Instructions] It appears there are no additional questions at this time.
Orlando Cabrales
Okay. Thank you. Thank you, Operator. And thank you for attending the call.
Gabriel de Alba
Thank you.
Operator
And this concludes today’s call. Thank you for your participation. You may now disconnect.
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