Gran Tierra Energy Inc. (NYSE:GTE) Q2 2022 Earnings Conference Call August 9, 2022 11:00 AM ET
Company Participants
Gary Guidry – President & Chief Executive Officer
Ryan Ellson – Executive Vice President & Chief Financial Officer
Paul Baker – Director of Asset Management
Conference Call Participants
Adam Gill – Paradigm Capital
Joseph Schachter – Schachter Energy Research Survey
Roman Rossi – Canaccord Genuity
Jose-Maria Silva – BTG Pactual
David Herzberg – Stifel
Luke Davis – RBC
Operator
Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy Results Conference Call for the Second Quarter 2022. My name is Justin, and I will be your coordinator for today. [Operator Instructions] I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, August 9, 2022 at 11 a.m. Eastern Time.
Today’s discussion may include certain forward-looking information as well as certain non-GAAP financial measures. Please refer earnings and operational update press release we issued yesterday for important disclaimers with regard to this information and reconciliations of any non-GAAP measures discussed on today’s call.
Per barrel of oil equivalent or BOE amounts are based on a working interest sales before royalties. Finally, this earnings call is property of Gran Tierra Energy, Inc. any copy or rebroadcasting of this call is especially for bidding within the written consent of Gran Tierra Energy.
I will now turn the conference over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.
Gary Guidry
Thank you, Justin. Good morning, and thanks for joining us for Gran Tierra’s second quarter 2022 results conference call. My name is Gary Guidry, President and Chief Executive Officer; and with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer; and Paul Baker, our Director of Asset Management for the Northern Putumayo region in Colombia.
Yesterday, we press released – our press release included detailed information about our second quarter 2022 results, which is available on our website. Ryan and Paul will make a few brief comments, and then we will open the line for questions. Ryan, please go ahead.
Ryan Ellson
Thanks, Gary. Good morning, everyone. Gran Tierra has had another strong quarter where we were able to deliver on our development campaigns in both the Acordionero and Costayaco fields, while continuing to make progress on work required before drilling our exploration wells in both Ecuador and Colombia
During Q2, Gran Tierra generated net income of $53 million, up 275% from the prior quarter and versus a net loss of $18 million in the second quarter of 2021. This resulted in earnings of $0.14 per share, which is up from $0.04 in the prior quarter.
We achieved material production growth for the second quarter 2022 oil production averaging 30,607 barrels per day, up 4% from the prior quarter and up 33% year-on-year. This is the highest quarterly production that Gran Tierra has achieved since fourth quarter of 2019.
The company’s operating net back of $59.62 per barrel was the highest since the third quarter of 2014 which was up 14% from the prior quarter and up 81% year-on-year. This strong annual increase was driven by Grand Tierra’s 33% increase in quarterly oil production year-on-year and strong growth in the Brent world oil price.
Q2 2022 funds flow from operations increased by 345% to $104 million compared to a year ago and was up 19% from the prior quarter, again, due to higher oil production volumes and strong Brent pricing.
Our Q2 funds flow was the highest achieved since the first quarter of 2013. On a diluted per share basis, funds flow from operations was $0.28 per share, which is up from $0.06 per share in the second quarter of 2021 and up from $0.23 per share in the prior quarter.
In terms of capital expenditures, approximately 65% was incurred during Q2, which was – $65 million was incurred during Q2, which was higher than the prior quarter’s level of $41 million. This was a result of the majority of Gran Tierra’s capital development programs in both Costayaco and the Acordionero being completed during the second quarter.
Gran Tierra has fully repaid its credit facility. In only two years, Gran Tierra fully paid down its credit facility balance from $207 million to zero, which clearly demonstrated our commitment to rapidly reduce debt with the company’s free cash flow.
As of June 30, 2022, the company added a cash balance of $109 million and net debt of $491 million. Our annualized Q2 net debt-to-EBITDA ratio was below one times. And over the long term, we are targeting a net debt-to-EBITDA ratio of under one times and assume $60 per barrel of Brent case.
With our credit facility now fully paid off, we plan to maintain a cash balance of $75 million to $100 million in order to maintain liquidity. We plan to deploy excess cash over and above our targeted cash balance to strengthen our balance sheet, buy back shares and accretive opportunities to continue to strengthen our portfolio.
I’ll now turn the call over to Paul to discuss some of the operational highlights from our second quarter results.
Paul Baker
Thanks, Ryan. Good morning, everyone. Gran Tierra continues to drive efficiencies at its major fields. In Acordionero, a new pacesetter well was delivered in the quarter, which took only 3.9 days to drill. For the time to drill a development well in Acordionero has decreased by a further 10% with the average drilling time reduced from 5 days to 4.5 days.
As a result of this reduction, the average per well drilling costs have decreased to $1.2 million, which is 9% lower than originally budgeted. We continue to deliver on our outline development programs in the Acordionero with the delivery of the 16th well in the 2022 program.
In the Putumayo, our Costayaco development program has been completed under budget because of cost reductions through optimization and the successful application of techniques utilized in our Acordionero development programs. All 5 of Costayaco wells were completed during the first half of the year.
Finally, our exploration programs continue to progress. In Ecuador, we are in the final stages of well site construction for the planned Bocachico-1 exploration well in the Chanangue Block in Ecuador’s Oriente Basin. We expect to start drilling this well in the third quarter of 2022.
In Colombia, in the Putumayo Basin, we continue progressing our exploration activities. The well site construction has started for the Rose-1 exploration well in the ALEA-1848A Block , which has planned funded in the third quarter of 2022.
I’ll now turn the call back to the operator, and we’ll be happy to answer any questions. Operator, please go ahead.
Question-and-Answer Session
Thank you. [Operator Instructions] And our first question comes from Oriana Covault. Your line is now open.
Q – Unidentified Analyst
Hi, good morning. Thanks for taking my question. I had a couple of questions, but I think that the main one would go related to the proposed tax reform that was – that was submitted by Petro’s government yesterday. So just trying to understand from the royalty tax exemption and the proposed and new price scheme, what would – how do you see the estimated EBITDA impact this fiscal reform proposal at current price levels? And specifically, how do you see potential changes in your effective tax rate playing out?
Gary Guidry
Yes. It’s a good question. We’re still working through the tax reform and the implications. And but you know, as I’m sure you’re aware, is that, you know, the tax reform is just a proposal, it still needs to go to, you know, two debates in the lower chamber two in the upper chamber before it’s actually signed into law. So we’re currently assessing the impact.
Unidentified Analyst
Got it. I understand that might be too soon. But if there are any thoughts, more precisely perhaps trying to understand how do the current tax exemption on royalties work? Does it flow through your net revenues? And how could it impact in your bottom line, that would be perhaps your first thoughts on that.
And just following up with that, given that it has to go through Congress and Senate? Are there any chances that E&Ps or some legal recourses that – that could prevent from it to go through the way that it’s been proposed?
Gary Guidry
Yeah. And I think if you – I’ll touch on the second question first. I think if you look at past tax bills that were put forward, very similar to what you just saw in the US, or you know, time it gets to the final bill a lot of times looks quite different than what was originally proposed. So that’s why we’re in a wait and see mode to what the impacts are. But we expect to see some changes. But obviously, there’s no guarantee on that.
And with respect to the royalties, you know, our take is a lot of the royalties, you know, we pay to the government in kind, they pick up the barrel. So we actually don’t even deduct those barrels, they’re taking those barrels, right from the wellhead. So we don’t see that as a major impact to Gran Tierra at this moment, but again, we’re still assessing that impact.
Unidentified Analyst
Perfect. That’s very helpful. And maybe just one last one from your quarter, your quarterly results. We noticed that there was still a jump in lifting costs owed to wells work overseas. To just understanding it and frame it in your full year guidance, what should we expect for the next couple of quarters given that you seem to be above the 11 to 13 per barrel that was targeted for the full year.
Gary Guidry
Yes. We expect that as we increase our volumes in the second half of the year, we expect a per barrel metric go down, and we still plan them to be in the range.
Unidentified Analyst
Perfect. Thanks for taking our question.
Gary Guidry
No problem.
Operator
Thank you. And one moment for our next question. And our next question comes from Adam Gill from Paradigm Capital. Your line is now open.
Adam Gill
Good morning. Just in terms of Ecuador, should you have some success on the exploration program later this year. How aggressive could you be in capital allocation to that country in 2023?
Gary Guidry
Yeah. We’re watching very closely Ecuador and watching very closely what President Petro will be doing in Colombia. As you know, we have a big portfolio in Colombia for exploration, but we also are very keen on Ecuador.
And so the answer to your question is, if things do slow down in terms of regulatory, in terms of being able to execute program in years two through 4 of President Petro’s term, we would reallocate certainly to Ecuador. We have very prospective blocks and we have commitments. We’re currently progressing those in the country.
And so for us, it really is a portfolio, the Putumayo into the Oriente and Ecuador, and we’ll play that one by a year.
Ryan Ellson
As far as regulatory requirements, we have the EIAs on the entire block. So we could, Gary mentioned, be quite aggressive.
Adam Gill
Thank you.
Operator
Thank you. And one moment for our next question. And our next question comes from Joseph Schachter from Schachter Energy Research Survey. Your line is now open.
Joseph Schachter
Thank you very much. Thanks for taking my question. Good morning, Gary and Ryan. Ryan, for you first. On the debt load, you mentioned 491 net debt, and then you want to at a $60 debt level. Are we looking at another $100 million, $150 million? And then how do the levers work between that once you get down to that loan debt level, in terms of more spending on growth versus NCIB where or other ways to return money to shareholders. How are you guys looking at that whole metric given the strong cash flow you’ll be generating over the coming quarters?
Ryan Ellson
Yeah. I think on the first part of the question is, yes, so we think by the end of the year if you look at our targeted net debt by the end of the year around $400 million. We would be very comfortable at those levels. And I think that is to your second question, we will get there by the end of the year, really by Q4.
And then the second part of the question is it really comes down to capital allocation. As you correctly point out is, you know, we have a great portfolio in Colombia, both development and exploration, also exploration Ecuador, and so just getting that right balance of strengthening the balance sheet, growth capital, really, when we look at growth cap, we’re always looking at how we optimize the NPV of our existing assets. And then also share buybacks, you know, if you look at where we’re trading at right now. And you know, if you look at the NAV per share, especially if you look at strip pricing, you know, we’re obviously trading, like most of the industry a substantial discount to, you know, one P and even PDP. So again, that’s a pretty use of proceeds.
And then also, when you look at our bonds, the bonds are trading at $0.85 right now. So that could be another potential use. So it’s really just getting that the right mix of the capital allocation.
Joseph Schachter
Okay. Good to hear on that. And then one for Gary. With – there’s been some articles form economists about some disruptions with indigenous people and Ecuador and some issues with the government.
Does that have any ability to disrupt your program in Ecuador? Are you in the same area? Or is it a different area then how our — how is the relationship with the local indigenous people and people living in the area where you want to work?
Ryan Ellson
Yes. I think the answer to that, Joseph, is the entire oil region has – is prone to disruption, but we’ve spent a lot of time, both before COVID, during COVID, and after COVID with our community relations, working with the folks in the area where we have operations.
And so we do believe that we have the relationships with the indigenous community that we can progress with what we’re doing. So we’re comfortable with our operability in Ecuador.
Joseph Schachter
Okay, super. Thanks so much for taking my questions and congratulations on the very next quarter.
Ryan Ellson
Thank you.
Gary Guidry
Thanks, Joseph.
Operator
Thank you. One moment for our next question. And our next question comes from Roman Rossi from Canaccord Genuity. Your line is now open.
Roman Rossi
Thank you. Good morning, everyone. So congratulations on the excellent results. And thank you for taking my questions. So I have a couple. Let’s ask sequentially. So first, so looking at the CapEx break down, you booked 10 million of exploration CapEx. So I was wondering, this was related to the dry exploration wells you drilled. And where was that well drilled?
Gary Guidry
So the tenure of CapEx, we did drill – in our last press release, we did – as we mentioned, the Truco [ph] well, and unfortunately it was dry. So we released that. And the $10 million in CapEx, I think it’s – a lot of the allocate, hat’s why we give a range on our CapEx some of it is just reallocating from development to exploration, exploration back to development. That’s what we try to focus on just the total capital program. And the location of Truco was is in the region of Costayaco Moqueta of the producing fields.
Roman Rossi
Okay. Perfect. And so regarding Ecuador, as you mentioned, you are progressing with the drilling there. So I assume that you have quite long testing period there. So when could we expect that you will start to selling production?
Gary Guidry
Yeah. We don’t forecast any production from exploration, but what I can tell you very similar to the Putumayo, that the infrastructure is there for – when we do tests, we collect that testing volume and we take it to sales. So that allows us to have long-term testing to get the information that we need but also generate revenue effectively immediately. And so if we have success, we – our long-term test will be the sales volumes.
Roman Rossi
Okay, perfect. Thank you. And just one last question. So regarding hedging, you currently don’t have any hedges in place. I know [indiscernible] but do you have any – anything particularly thinking going forward, as we are seeing some down – down shut downs by pressures, are you expecting to get anything during second quarter?
Gary Guidry
We’re currently working with some of our offtake providers about what sort of hedging arrangements we can put in place. It was challenged before when the curve was $12 in backwardation. So we’re currently assessing that and working with optimal structure with our – some of our partners.
Roman Rossi
Okay. Thank you very much. And congratulations again.
Gary Guidry
Thank you.
Operator
Thank you. And one moment for our next question. And our next question comes from Jose-Maria Silva from BTG Pactual. Your line is now open.
Jose-Maria Silva
Hi, guys. Good morning. Congrats for the good results. I have a couple of questions and just picking up on the last one regarding hedges. Could you quantify what was the impact or if there was still any impact from hedges that you had in place during this second quarter? That’s my first question.
Ryan Ellson
Yeah. Our hedging losses in the first half of the year were around $26 million, $27 million. And so there was some impact in the second quarter.
Jose-Maria Silva
Okay. And the second one is if you can give me some guidance, let’s say, you guide for production of the year. But can you guide on what the exit production that you are hoping to finish 2022 with in terms of total exit production?
Ryan Ellson
Yeah. It will be in the low 30,000s. We’re currently focusing on the developing the water floods that we have. So in 32,000, 33,000 barrels per day, we fully expect to deploy capital to raise that plateau over the coming years. We have very high-quality, probable and possible reserves. We talked about in all of our disclosure, the polymer floods that were pilot testing in Acordionero. Those will change what our targets are over the next 2 to 5 years. But the answer to your question is, in the 32,000 to 34,000 barrels a day exit rate.
Jose-Maria Silva
Perfect. Very helpful and very clear. My last question is the following, regarding your excess cash or excess liquidity when you guys look at your bonds trading in the ’80s, which seems very discounted, especially given the very good results that you guys are having generating free cash flow of lowering your leverage considerably. So are you guys thinking about the profitability of using cash to purchase some of your bonds on the secondary market, given they look so discounted?
Ryan Ellson
Yeah. It definitely is one of the considerations. I think in the release we mentioned, strengthen the balance sheet, share buybacks and potential accretive acquisitions or M&A opportunities. And to strengthen the balance sheet, any bond repurchase would have been calculated within that statement. So it is definitely something that we’re looking at. So we agree that we think they’re undervalued.
Jose-Maria Silva
That’s perfect. Thank you very much, Ryan. That’s it from my side. Congratulations on the good results and speak to you next time. Thank you.
Ryan Ellson
Thank you.
Operator
Thank you. One moment for our next question. And our next question comes from David Herzberg from Stifel. Your line is now open.
David Herzberg
Hi. Thanks for taking my questions. I guess I have two this morning. The first is in July in your operations and financial update. You had mentioned that you were looking to replace your credit facility with a smaller one. I was wondering if you had any developments or color on that and what we might expect in terms of the size? And then the second question would be with respect to CapEx if you’re still guiding towards a $220 million to $240 million full year 2022 CapEx?
Ryan Ellson
Yes. No, that’s great. On the first one, yes, we will continue to advance a number of initiatives. So as we finalize something to the extent that we do finalize something then we’ll announce at that time. I think the range we’re looking at is in the $75 million to $125 million replacement facility. And on the second question on the CapEx, yes, we’re so comfortable with that $220 million to $240 million range.
David Herzberg
Okay. Thank you
Operator
Thank you. One moment for questions. And our next question comes from [indiscernible] from Barclays. Your line is now open.
Unidentified Analyst
Thank you so much for taking my question. And congratulations on these great 2Q earnings. I have two quick questions. Especially related to the 2025 bonds maturing, obviously, in 2025.
My first one is trying to understand what’s the logic behind the consent solicitation? And basically, now that the consent has failed, what’s your approach is going to be for 2025. And the follow-up question is, are you guys thinking about using down the line free cash flow? Or are you guys trying to think about the refi of these 2025? I appreciate you already mentioned some of the key pillars that we’re going to focus on for Gran Tierra – debt buyback or equity. So I’m just curious to see how you’re thinking about this 2025? Thank you so much.
Gary Guidry
Yeah. I think a lot of it – thanks for the question. I think a lot of it obviously is depending on market conditions. But I think if you look at the last 2 years. and you know, where we did have, you know, we did suffer quite a few bit hedging losses, and we were just ramping up production, we’re able to repay to repay $207 million off the credit facility, as well as significantly reduce our – or increase our cash.
We substantially reduced our net debt balance during that period. And so I think we’re comfortable with the free cash flow nature of the assets. To the extent that the market wasn’t available, we’d be in a good position to repay the bonds in full in 2025
Unidentified Analyst
Thank you. And then with regards to the consent solicitation [ph] if you can give us just some details of why did you think – where do you get to do it? And what’s your strategy now? Should we expect another potential some sort of LME in the same way or not really?
Gary Guidry
Yeah. I think again, a lot depends on the market. On the consent solicitation and really the exchange, the intent of that was to provide a more liquid bond for holders. We thought it was a fair offer, and we didn’t get to the point that we wanted to and then the offer expired.
And so I guess we’ll see where we end up on market conditions going forward. But then we’re very comfortable with our free cash flow and assets that we’re in a great position regardless of market conditions.
Unidentified Analyst
Perfect. Thank you so much, guys.
Gary Guidry
You’re welcome.
Operator
Thank you. One moment for our next question. Our next question comes from Luke Davis from RBC. Your line is now open.
Luke Davis
Hey. Good morning, guys. You guys are wrapping up some exploration drilling in the back half. Just wondering if you could provide some individual detail on expectations for each of those 6 or 7 wells and the potential timing on when we see results from them?
Gary Guidry
Yeah. The expectations, I think we have published, but we certainly can make that available. On average, our targets range anywhere from 8 to as high as 30 million barrels of potential on those exploration targets.
In terms of timing, we’re drilling now. We’re testing we cased [ph] and we’re testing the guide as well. We don’t have any results on that yet. But we certainly will update shareholders through the year as we do have results on those exploration prospects.
I can tell you that we’re quite excited on the quality of what we’re drilling and being in a position after the long period with COVID, not having any expiration activity, we’re drilling some of our best prospects.
Luke Davis
Got you. So is it fair to say we’ll see some results kind of Q4 through early 2023 then, on the balance of the program?
Gary Guidry
Yeah. I think we should see some results in Q3 and Q4.
Luke Davis
Okay, helpful. Thanks.
Operator
Thank you. And one moment for our next question. And our next question comes from Garrett Fellow from JH Lane Partners [ph] Your line is now open.
Unidentified Analyst
Hey, guys. My question is actually answered. Thanks very much.
Gary Guidry
Okay.
Operator
Thank you. And there are no further questions. I would now like to go ahead and turn the call over to Gary Guidry for closing remarks.
Gary Guidry
Thank you. Thank you, Justin. I’d like to thank everyone once again for joining us today. We look forward to speaking with all of you next quarter, and we will certainly update you as we do have progress throughout the quarter. Thank you very much.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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