Frontera Energy Corp

TSX:FEC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Joanna, and I will be your conference facilitator today. Welcome to Frontera Energy's Second Quarter 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. Following the speakers' remarks, there will be time for questions. Analysts and investors are reminded that any additional questions can be directed to Frontera following today's call at [e-mail].

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, 2024, and the company's annual information form dated March 7, 2024, and other documents at files from time to time with securities regulatory authorities, describe 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 Intera Energy. Mr. De Alba. Mr. De Alba, you may begin.

[Gabriel de Alba, executive]

Thank you, operator. Good morning, everyone, and welcome to Frontera's Second Quarter 2024 Earnings Call. Joining me on today's call are Orlando Cabrales, Frontera's CEO; Rene Burgos, Frontera's CFO. Also joining us today and available to answer questions at the end of the call, we have Victor Vega, BP Steel Development, Reservoir Management and exploration. Alejandra Bonilla, General Counsel; Ivana Revolo, VP Operations; Renata Campagnaro, VP Marketing, Logistics and Business Sustainability.

Thank you for joining us. Frontera continues to execute on its strategic priorities in support of long-term growth and the sustainability of its business. During the quarter, Frontera and Ecopetrol entered into a 2-year contract to treat and dispose water from the Quifa block at Frontera's SAARA Reverse Osmosis Water Treatment facility. This agreement is set to increase crude oil production capacity at the Quifa block by the end of 2024 for term to increase processing capacity at SAARA to 250,000 barrels per day. We have 100,000 barrels of water treated at SAARA, it's expected to translate in 1,000 barrels of production net to Frontera.

Subsequent to the end of the quarter, from Frontera broke ground on the construction of the bidirectional hydrocarbon flowline connection between Puerto Bahia liquids terminal and Refineria de Cartagena. The company expects connections will drive significant volume and shall become operational by year-end 2024. Frontera also announced that we executed an agreement with GASCO a leading Latin American energy provider that will see the company develop the lowest cost, liquefied petroleum gas, also known as LPG import facilities for Colombia at Puerto Bahia.

As part of the agreement, Puerto Bahia and GASCO will establish a joint venture to develop, construct and operate a 20,400 ton LPG refrigerated storage facility at Puerto Bahia 4 terminals in Cartagena. The project is expected to cost between $50 million and $60 million, which will be shared between Puerto Bahia and GASCO. Puerto Bahia's contributions are expected to be largely in time. The collaboration is a significant step forward in meeting Colombia's growing energy needs and demonstrates Puerto Bahia's and GASCO's commitment to investing in the country's energy infrastructure. These are concrete actions from tariffs taking to create value.

Today, Frontera's Board declared a quarterly dividend of CAD 0.05 per share. Year-to-date, the company has declared EUR 11.7 million in dividends. In addition to our quarterly dividend, the company announced its intention to commence a substantial issuer base of $30 million, a response to which the company will offer to purchase for calculation, a portion of its common shares at a fixed price per share. The terms of the SAB, including pricing, shall be communicated in due course, and the company expects that the SAB will be completed in October 2024.

Under the company's current NCIB, the company has purchased $6.6 million year-to-date. The company has also bought back $3.5 million of its 2028 unsecured loans. In total, the company's post-return so far $31 million of capital to our stockholders. Frontera shall also continue to take actions to unlock value for its stakeholders and remains committed to this effort for the remaining of 2024 and beyond, including potential additional dividend share buybacks, distributions or bond buybacks based on the company's results, cash flow generation and the company's strategic goals, including our ongoing pursuit of strategic alternatives for interest in the current time block in Guyana and our growing Colombian infrastructure business.

I'd like now to turn the call over to Orlando Cabrales, Fonterra's CEO; and Rene Burgos, Frontera's CFO, who will share their views on our second quarter results. Orlando?

[Orlando Cabrales Segovia, executive]

Thank you, Gabriel. Good morning, everyone, and thank you for joining us for today's call. Frontera's demonstrated solid second quarter and half year 2024 results. Production increased approximately 5% on a quarter-on-quarter basis to 39,912 barrels per day. Production for June and July was on average 40,300 per barrel per day. During the quarter, our heavy crude ore production grew 6% on a quarter-over-quarter basis, reaching approximately 24,800 barrels per day. The increase in heavy production was mainly driven by increased water disposal capacity from a new injector well in the Quifa block, the start-up of the SAARA plant during the month of May, which is currently processing approximately 50,000 barrels of water per day.

Increased water handling capacity in CPV where we are handling approximately 300,000 barrels of oil per day at the moment, we are on track to increase to 350,000 barrels per day by the end of the year as well as additional activities in the Sabanero block. Frontera conventional natural gas and natural gas liquids increased 22% and 9%, respectively, quarter-over-quarter due to increased production and La Belleza as a result of the compression facilities expansion and gas reinvestment projects, which increased processing capacity from 2000 to 330,000 NCF day per day in the VIM-1 block. The company's light and medium curve oil production was flat compared to the prior quarter as we benefit from an increase in our Ecuador production from the Perico Norte -6 and Perico Centro 2 wells coming online, offset by natural declines in our Colombian light and medium crude oil fields.

We continue to invest in workover on growth service activities to maintain production, primarily in the light and medium blocks. In the second quarter, we completed 32 well work horse and currently have 4 work oil rigs active on our blocks. In total, we drilled 3 wells at our Quifa, CPE-6 during the quarter. And we currently have 3 drilling rigs active on our Quifa and CPE-6 stores.

On the exploration side, at the Hidra-1 exploratory well, all drilling activities have been completed with rig mobilization and spudding of the well expected in the third quarter. In the Llanos-119 block, the company acquired 80 square kilometers of 3D piping during the second quarter. In the Llanos-99 block, we continue pre-seismic and social and environmental studies. In Ecuador, following recent successes in the Perico block, the first well of the Espejo campaign called Espejo Sur- B3 has been completed, showing initial gross production of 500 barrels per day. The second well, Espejo Norte A-1 was spud at the end of July and drilling operations are ongoing. Despite some inflationary pressure on costs across the industry, we remain on track to achieve our 2024 capital production and EBITDA guidance.

In our infrastructure business, during the quarter, OBL paid the first dividend and return of capital of $31.3 million in April or approximately 50% of the $62.8 million total figure and capital return payments the company expects to receive this year. Operationally, ODL continues to maintain strong operating and financial performance with transported volumes increasing about 1% quarter-over-quarter and EBITDA reaching $68 million for the quarter. Puerto Bahia continues to move forward with its strategic agenda, breaking ground on the construction of the Reficar connection and achieving an important milestone with the start of horizontal drilling directional drilling in the Canadian VK in July.

During the quarter, we also started up our SAARA Water Treatment Plant with a goal of reaching 250,000 barrels of water treated per day by the end of the year. During the month of June, the plant realized its first gross revenues associated with the water treatment collaboration agreement with Ecopetrol for the Quifa block. I would now like to turn the call over to Rene Burgos, Frontera's CFO.

[Rene Diaz, executive]

Thank you, Orlando. I'd like to take a moment to highlight a few key financial aspects of our second quarter results. For the second quarter, the company recorded a net loss of $2.8 million or $0.03 per share. This quarter's net loss followed approximately $13.4 million in income from operations for a share of income from associates, which includes $15 million of sharing to offset primarily by roughly $16 million in net finance costs, $8 million related to risk management contracts and approximately $33 million in income taxes, including almost $31 million in deferred income taxes, primarily due to the impact of nondeductible expenses and differences related to foreign currency fluctuations.

During the quarter, the company has income tax rate of 50%, inclusive of the 15% soil tax associated to the 2022 Colombia tax reform. Operating EBITDA for the quarter was approximately $110 million. Compared to the prior quarter, our EBITDA benefited from higher production volumes and sales volumes as well as higher oil prices, partially offset by mixed results on our cost side. From a viral standpoint, I'd like to take a moment to share the key indicators related to our realized prices and costs. During the quarter, we saw weighted average Brent sales prices for Frontiera of $84.6 and an average out in a differential on our export sales of $4.10. This quarter, we also added a reconciliation of our purchased crude activities. In addition, we believe we will aid in understanding our operations and the impact of the operations activities on our operating netback. Our purchase prudent margin represents the difference between a purchase group volume cost and the appreciated sales. These purchase crews are used as part of our ongoing dilution needs as well as to be refined domestically for use within our internal operating consumption and benefit sales.

For the second quarter, the purchased crude net margin was $2.13, lower than $2.39 for the prior quarter. A quarter-over-quarter variance was a result of lower than we -- taking a quote at our operating cost, our production, energy and transportation cost per barrel for the quarter quoted $10.79, $4.74 and $10.9,respectively. This compared with $10.21, $5.29 and $1.73 in the prior quarter. The increase in production costs quarter-over-quarter resulted primarily from higher well service activities as well as the impact of FX rates and persistent inflationary pressures.

On the energy front, as the drive season concludes electricity purchasing are normalizing and are also trending lower, so far growth, proplyreduced energy costs yet partially offset by higher energy ed during the quarter. For the second quarter, electricity cost accounted for 31% of our energy consumption and 46% of our total energy cost.

On transportation, we saw cost increase during the quarter due to an increase in local fill volume as well as improved revenue for some of our heavy crude oil production. During the quarter, our operating netback was $46.40 per BOE compared with $43.97 per BOE in the prior quarter. The increase was a result of higher oil prices during the quarter, lower tonsportation costs and energy costs was partially offset by higher production costs. Cash generation for the quarter remained strong with cash flow from operations totaling $150 million, thanking part of the strong print oil price environment, the reduction of holding tax rate on export sales of dividend and capital payment from ODL and short-term prepayment repeat from customers associated with crude sales. Capital expenditure for the quarter were roughly $80 million, primarily due to cost associated with drilling 3 wells, up from 21% in the prior quarter at Quifa, Cajua, CPE-6 and Perico block for $32 million.

On the infrastructure side, adjusted EBITDA in the second quarter of 2024 was $27.8 million compared with $25 million in the current quarter. The quarter-over-quarter increase was due to improved performance at Puerto Bahia driven by higher liquid volumes and cost optimizations and greater sales volumes and revenues from Promotora Agricola operation during the quarter. ODL volumes transported over 240,000 barrels per day in the second quarter of 2024 compared to 246,000 in the first quarter, mainly due to an increase in crude oil volumes received and transported from Caño Sur and Llanos 34 blocks. ODL's EBITDA for the second quarter was approximately $68 million, down 3% on a quarter-over-quarter basis, with inflationary secreting higher operating costs and G&A, partially offset by slightly higher volumes as compared to the first quarter.

As of June 30, 2024, the company reported a total cash provision of $215 million, including $181 million of unrestricted cash, of which $142 million are in the issuer and bond guarantors. Following the other quarter, the company received approximately $90 million in tax refund proceeds associated to its 2023 income tax return.

Turning now to risk management. Our credit risk management strategy continues to show how our hedging discipline supports our operations and planning. Frontera uses instruments to manage exposure to oil prices and FX volatility. And on the oil side, the company entered into hedges successfully secured a 40% hedging ratio until November 2024. Projecting again a potential drop in oil prices an average strike of $75 to $38 per barrel. Frontera has also entered into foreign exchange rate hedges totaling $90 million, covering 40% and 20% of our expected peso exposure for the third and fourth quarter above the 4,000 paper weight, respectively.

These hedges provide the company's stability and help mitigate impact from future fluctuations while allowing the business to deliver on its targets.

Finally, I'd like to provide an update on our shareholder value initiatives. Under the company's current NCIB, which come in on November 21, 2023, the company has repurchased approximately 1.4 million common shares, or just over 2% of our total common share percent for cancellation for approximately $8.2 million as of August 7. With respect to our quarterly dividend on July 16 Frontera paid approximately $2.9 million or $0.0625 per share up to shareholders. Together with the results announcement, the Board declared a quarterly dividend of CAD 0.0625 per share, payable to shareholders of record as of October 2, 2024, on or around October 16, 2024.

Additionally, Frontera has no intention to commence a substantial issuer day through which the company will offer to purchase $30 million of its common shares for cancellation at a fixed price per share. The terms of the SAB in we will determine in the court, and the company expects that it will be completed in October 2024. The SAB will not be conditional upon any minimum number of shares being tendered and will be subject to conditions customary for contention of the future. As a terms, this portfolio distribution highlight the strong financial results of the first half of 2024. And the company release this format, the SAB is the most efficient need to receivable capital to all of our shareholders and look forward to the launching of this process soon.

Together with the proposed SAB, the company poised to return so far this year over $51 million of capital to our stakeholders including $11.7 million in the car dividends, $6.7 million of common share repurchases and $3.5 million in buyback of its 2028 unsecured notes. Frontera continues to take action to unlock value for all of the stakeholders and we committed to its efforts for the remainder of 2024 and beyond, including the ongoing strategic redeposit as well as potential additional distributions. I would like to now turn the call back to Orlando.

[Orlando Cabrales Segovia, executive]

Thank you. Thank you, Rene. Before I wrap up today's call, I would like to highlight that in the quarter, Frontera achieved 48% of its superiority goals for the year. During the second quarter, Frontera expanded its protection and preservation coverage activities to 168 hectares. The company invested $500,000 in projects in communities near our operations in Colombia, Ecuador and Guyana and purchased 10.7% of our total goods and services from local suppliers. And finally, the joint venture and the government of Guyana have engaged in regular constructive and collaborative conversations throughout the joint venture steer on the current invoke, including discussions regarding the notice of potential commercial interest for the way one discovery, timing and conditions under which further activities could be performed in the Corentyne block. We will look forward to completing these discussions in an expeditious manner and will provide an update as soon as possible.

Along with our active pursuit of a strategic alternative for our interest in the Corentyne block in Guyana , which is still ongoing, and our recently announced a strategic alternatives review for our growing Colombian infrastructure business. The company remains focused on unlocking value from the sum of its parts. With that, I would like to conclude by 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]

[Operator Instructions] The first question comes from Gergen Elina at Bloomberg Intelligence.

[Gergen Elena, analyst]

Congratulations on a very great quarter. I did have a couple of questions. So my first question is on the cost base. I noticed that your energy cost on down all over your production costs have expanded. Could you please shed some light on that?

[Rene Diaz, executive]

As we said earlier, there's 2 things happening. On the energy side, we continue to see a normal allocation of energy prices, particularly electricity costs, now that the dry season is over. And we actually do expect electricity income to continue to trend lower for the remainder of the year. Today, for example, electricity costs account for 31% of our consumption and yet they are still around plus to 50% of our total cost. So we expect to continue to see some benefits there going forward. On the operations side, we have had -- and we communicated this last quarter, we've included additional workover activity in some of our blocks to optimize our production, this to be essential CapEx. And that has increased our cost. However, we have also seen the impact of FX and persistent inflation driving some of these costs higher. We expect those to normalize over the rest of the year, but we are still kind of in the middle of that impact.

[Gergen Elena, analyst]

That's very clear. And just a second question on the Reficar connection. What do you estimate its EBITDA contribution would be? And what will be the time line for that?

[Rene Diaz, executive]

We are very excited about the Reficar connection. We expect it to become operational in December of this year, and we believe this is something that would help the economy in the region and support the significant investment as bioperitopic refinery. What we have guided to is, we believe, a significant amount of volumes are going to go through the ports, particularly on doubling the volume to the port. If you think about it as measured by the capacity of the pipe, but we have not yet indicated or guided on an EBITDA note. However, we do believe that the potential value or EBITDA drivers here is significant, is measured just on a volume basis. Just to give you some color, as you could see in the press release, we are handling in the second quarter, we handle around 64,000 barrels of liquids in the port, the connection line that we are building as we speak, and we expect to become operational by the end of the year, has the capacity to handle 84,000. So that is why we have been saying that we have and display have capability to double in terms of volumes, the handling of liquids in the court.

[Gergen Elena, analyst]

I see. And do you expect to use this new pipeline to maximum capacity?

[Orlando Cabrales Segovia, executive]

We -- I think what we said earlier, our agreement with uerto Bahia the connection is a take and pay. So that's why we're guiding based on volume. And we would expect, look, we want to maximize the value. And I think there is a lot to be telling about the benefit to your Cartagena.

[Operator]

The next question comes from Christian Ronac at KNG Securities.

[Christina Ronac, analyst]

Hello, everyone. Thanks for the presentation and congratulations for the results. So I have 3 questions. If you don't mind, I'd like to go one by one. The first question is regarding the tax situation. If you could provide us some color on that, specifically, why did you receive this $90 million refund? And what are the taxes that we should expect for the full year?

[Rene Diaz, executive]

Excellent. So thank you very much for your question, Christian. So to your 2 questions. The second question, I'll tackle first. We are in line with our guidance as it relates to the net cash taxes to pay for the year. So I'll point you to that. I think we said we expect to pay for the year net taxes or receive a net benefit of between $10 million and $20 million. So that is in line with that. As it relates to the tax situation, you need to remember that we paid factors in for 2 ways. One is we're holding that we make, and we make a revolving base of 5.6% every year, every month, and that's on our crude sales. And then at the end of the year, when we actually file our tax declaration, then we pay up a difference. And hopefully, this will help me answer the second question or your first question. So on the first question, Frontera has carried significant deferred tax at for years. And what has happened is with the government increasing the the tax rate to 6%, some of these do have now been accelerated. And what that $90 million recovery is the repayment of last year withholding tax payments in excess of our actual taxes as offset by our DTA. That's effectively what it is. And the process to get a tax refund is one that started in March, and we were successfully concluded that in July. Does that make sense?

[Christina Ronac, analyst]

Okay. Yes, that's great. My second question is regarding this repurchase program, the new repurchase program that you announced. So will this be contingent to the infrastructure business sale? And if so, or if not, do you plan to use all these $30 million by 2024?

[Rene Diaz, executive]

So look, this is a great question. And I want to do 2 things. One, I will point you the back in time in June of 2022, we announced MSAB. And at that time, we repurchased roughly $50 million worth of shares. At that time, we also used a modified DUC auction process to perform that SAB. This time Irene, we're assuming this process is one that is going to be launched. We hope to be launching it over the next few weeks, and we expect to end in October. So at your question, no, it's not contingent on any set transaction, it is just a matter of time for us to get our documentation ready and be able to launch it for too participating.

The second thing that I would say to that is, as we analyze the different alternatives for us to distribute capital to shareholders and SIB at a fixed price is the most attractive way in the most efficient way, considering the jurisdiction and location of the different shareholders that support this company. So we hope the full participation of all of our investors because we believe is the best way cleanest and most efficient way to move this capital back.

[Christina Ronac, analyst]

Okay. So that means that by October, you should be using these $30 million to buy back shares?

[Rene Diaz, executive]

Yes.

[Christina Ronac, analyst]

Okay. And then the third question is regarding your PIL loan. So I was wondering that i case you sell the ODL pipeline your stake, will you need to repay this loan? Or are you interested in doing so?

[Rene Diaz, executive]

Look, I -- firstly, I would like to really thank the team at Macquarie and our other lenders. They have been very supportive of us, also buying capital to build Reficar connection. So we're very thankful and we built a very strong relationship with them for the particular support. As part of the potential transaction and monetizing some of our assets, the most clear path would be for us to be paid back loan. And I think there are some covenants associated with that. And also it is -- look, it is an expensive month of what we believe is the value of the underlying assets. So that you are running assumption we'll get the money if thats okay.

[Operator]

[Operator Instructions] Our next question comes from Juan Cruz at Morgan Stanley.

[Juan Cruz, analyst]

Good morning. Congrats on the nice results. Perhaps you can help us understand a little bit more what's happening with for the Guyana operation. There was some confusion in the marketplace last week because the statement made by the government about some licenses that CGX and Frontera own and some of the blocks that there was a noise some noise about whether or not they will be extended, and that caused some sort of confusion in the marketplace. Maybe you can help us explain what that means for you and what that means if it's, in fact, valid or if not at all, what that means for the different blocks, either the current or if this affects in any way, shape or form your efforts to farm down or to find partners for your operation in Guyana, that's all.

[Orlando Cabrales Segovia, executive]

Thank you Juan for the question. As I mentioned earlier, Frontera and the government of Guyana, we are continuing to be regular, very constructive, constructive and collaboration conversations throughout the JV tenor on the content growth, including discussions regarding conditions under which further activities could be performed by the JV in the block. So we will continue -- I mean we will continue with those conversations. We will continue with our payables. We're fully unlock to a low value in the block, and we will provide certainly an update to the market as soon as soon as possible. So that's the only effect thing that I can say at this point in time.

[Juan Cruz, analyst]

Okay. So as far as we're concerned, the process continues normally?

[Orlando Cabrales Segovia, executive]

That is correct yes.

[Juan Cruz, analyst]

All right. So no changes for your licenses, no potential return of any blocks for the time being?

[Orlando Cabrales Segovia, executive]

No, no changes. And as I said, we will provide the update as soon as possible.

[Operator]

Next question from Gergen Elena of Bloomberg Intelligence.

[Gergen Elena, analyst]

All right. Thank you. My question was just ask icon. So thank you.

[Operator]

Next question from Christine Guerrero at Octane Investments. This does conclude our Q&A session. I will turn the call back over for closing comments..

[Orlando Cabrales Segovia, executive]

Well, before I wind u, Christine, do you hve something?

[Operator]

Christine is no longer in Q. Apologies.

[Orlando Cabrales Segovia, executive]

Sorry?

[Operator]

One moment, please.

[Orlando Cabrales Segovia, executive]

I think you mentioned that Christine was going to ask something but--

[Christine Guerrero, analyst]

Yes. I was wondering why I was bumped out of the queue, but I've still been here. So kind of cycling back to the statements being made from the Vice President of Guyana in his weekly press conferences, he's recently stated that right now, the QT license appears to be in limbo because the extension hasn't been granted as CGX did not supply the government sufficient information of their financial capabilities. But really, if you look at the state of CGX and Frontera, I mean, nothing has really changed with these 2 companies since they acquired the licenses. So what I'm wondering is this for some reason, the extension does not get granted? Is there going to be any legal recourse in order to recover the staff cost from the government of Guyana since they appear to be acting in bad faith?

[Orlando Cabrales Segovia, executive]

Christine, thank you for your question. And to be honest, I don't have anything else to add to what I previously said, responding one question. The conversations are regular. We believe are very constructive, and we will continue to have those conversations. So to be honest, I have nothing else to add.

[Christine Guerrero, analyst]

Okay. Yes. I just -- like I said, I was wondering about the legal point of it. But I think getting that made public is probably good enough because like I said, just -- it appears to be a bad base issue on the part of the government, if the JV has been fulfilling its requirements and yet the license extension isn't forthcoming because that traditionally speaking, within the industry, that would have been a rubber-stamp situation..

[Orlando Cabrales Segovia, executive]

Thank you, Christine. Thank you for your question.

[Operator]

TWe don't have any further questions that you may proceed with closing comments.

[Orlando Cabrales Segovia, executive]

Thank you. Thank you, everybody, and thank you, everyone, for attending to way forward. And thank you to Gabriel and Rene.

[Operator]

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.