Gran Tierra Energy Inc
NYSE-MKT:GTE
Earnings Call Analysis
Q4-2023 Analysis
Gran Tierra Energy Inc
In 2023, Gran Tierra achieved its production, funds flow from operations, and free cash flow targets, reflecting the robustness of its asset base and commitment to operational excellence. The company also demonstrated its confidence in future growth by repurchasing 6.8% of outstanding shares, despite a valuation disconnect where shares traded at a significant discount to net asset value.
Gran Tierra maintained financial discipline, ending 2023 with capital expenditures at $219 million, at the lower end of guidance. Funds flow from operations stood at $277 million, resulting in $58 million of free cash flow, showcasing the company's positive cash generation and prudent financial management.
Net sales dropped to $637 million in 2023 from $711 million in the prior year, mainly due to a significant decrease in Brent prices. Despite the economic pressures and higher operating expenses, the company navigated inflation effectively, maintaining cost control and resilience in its maintenance activities.
The successful completion of the Suroriente continuation agreement attests to Gran Tierra's commitment to long-term development projects aiming at optimizing oil recovery. Additionally, four wells drilled in the Costayaco field show promising initial production, signaling substantial growth prospects for 2025 and 2026.
Gran Tierra has allocated 40% to 45% of its 2024 capital program to high-impact near-field and low-risk exploration activities. This involves drilling 6 to 9 exploration wells in Colombia and Ecuador, and further investments for future growth, like acquiring 3D seismic over the Tropo block in Ecuador, which indicates the company's commitment to sustainable growth and reserve development.
Gran Tierra reported growth in reserves, achieving 90 million barrels of oil equivalent (1P), 147 million barrels (2P), and 207 million barrels (3P). The rise in net asset values to $44.48 per share for 1P and $79.13 per share for 2P, marks an increase of 288% and 144% from 2020, respectively, demonstrating the company's significant progress in enhancing shareholder value.
With strategic conversions of reserves from probable to proved categories, Gran Tierra stands in a solid position to continue its growth in production and reserves beyond 2024. The company's aggressive approach in reserve replacement and development drilling promises exceptional long-term value for stakeholders.
Gran Tierra has hedged 15,000 barrels with a floor of $80 and put premiums around $3 to manage price volatility. Planning to increase hedges, the company aims to hedge 30% to 50% of production over the next 6 to 9 months, as part of its strategy to mitigate the financial risks associated with oil price fluctuations.
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Good morning, ladies and gentlemen. Welcome to Gran Tierra Energy's Conference Call for Fourth Quarter and Year-End 2023 Results. My name is Olivia, and I'll be your coordinator for today. [Operator Instructions] I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, February 20, 2024, at 11:00 a.m. Eastern Time.
Today's discussion may include certain forward-looking information, oil and gas information and non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday form for advisories and disclaimers with regard to this information and for reconciliations of any non-GAAP measures discussed on today's call.
Finally, this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.
I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.
Thank you operator. Good morning, and welcome to Gran Tierra's Fourth Quarter and Year-End 2023 Results Conference Call. My name is Gary Guidry, Gran Tierra's President and Chief Executive Officer. And with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer; and Sebastien Morin, our Chief Operating Officer. This morning, we issued a press release that included detailed information about our fourth quarter and year-end 2023 results. In addition, Gran Tierra's 2023 annual report on Form 10-K has been filed on EDGAR and is available on our website. Ryan and Sebastien will make a few brief comments, and then we will open the line for questions.
I'll now turn the call over to Ryan to discuss our financial results. Ryan, please go ahead.
Good morning, everyone. We are delighted to announce that Gran Tierra successfully achieved its targets for 2023 in terms of production, funds flow from operations and free cash flow. These milestones underscore the quality of our assets and our unwavering commitment to operational excellence. Our focused efforts on asset development have yielded strong performance across various key metrics.
Additionally, in 2023, we showcased our confidence in Gran Tierra's future prospects by out purchasing 6.8% of our outstanding shares through our normal course issuer bid or NCIB program, demonstrating our dedication to create long-term shareholder value. We're currently trading at a discount to our proved developed producing or PDP net asset value per share by about 46%. Our average cost per each share purchase was $7 per share. Our many achievements during the year result in year-over-year production growth of 6%, strong reserves replacement ratios well above 100%, and the highest 1P, 2P and 3P year-end reserves in the company's history.
In another major milestone in 2023, Gran Tierra issued $488 million of new 9.5% senior secured amortizing notes due 2029 in exchange for its existing notes to improve our balance sheet, reduce overall leverage and provide additional financial flexibility by extending the maturity schedule to better align with expected future cash flows. Approximately 92% of holders' bonds were exchanged, highlighting the support from bondholders. Subsequent to year-end, Gran Tierra issued an additional $100 million of 9.5% senior secured amortizing notes due 2029. The company used a portion of these proceeds to repay $50 million of borrowings outstanding under our credit facility, which subsequently was terminated. Despite a net loss of $6 million in 2023, Gran Tierra achieved a return on average capital employed of 15%, showcasing solid performance in capital utilization.
Gran Tierra's capital expenditures were at the low end of our guidance at $219 million, fully funded by funds flow from operations of $277 million or $8.27 per share, resulting in free cash flow of $58 million or $1.73 per share, demonstrating effective financial management and positive cash generation. Although 2023 adjusted EBITDA decreased by 17%, the company realized adjusted EBITDA of close to $400 million, indicating substantial operational resilience amid challenges with volatile oil prices.
Gran Tierra's net sales for the year were $637 million compared to $711 million in 2022. This decrease was primarily driven by a 17% decrease in Brent price at higher Castilla and Vasconia differentials, partially offset by 7% higher sales volumes and lower transportation discounts in 2023. Despite higher operating expenses in 2023, Gran Tierra effectively managed inflationary pressures, showcasing resilience in cost control and maintenance activities.
One final item I would like to highlight was the successful completion of the Suroriente continuation agreement. By securing the continuation, Gran Tierra is committed to long-term capital projects and development programs with plans of optimizing oil recovery and value for the Suroriente block. We believe the combination of Gran Tierra's robust operational expertise in the Putumayo Basin and Ecopetrol's technical knowledge will continue our joint success in the development of our Suroriente block.
I'll now turn the call over to Sebastien Morin to discuss some of the highlights of our current operations.
Thanks, Ryan. Good morning, everyone. I'll briefly cover a few operational highlights from today's press release as well as our recent press release regarding 2023 year-end reserves.
Operationally, we are building off a successful year in 2023 to start off 2024 on a strong note. Since December 2023, Gran Tierra has drilled 4 oil wells in the Costayaco field in which we are seeing excellent initial production results. The first well, Costayaco-56, has been on production since early January and has been producing a stable average rate of around 1,900 barrels of oil per day and a 2% water cut. A second well, Costayaco-57 was spud on January 6 and brought on production in late January. It has been producing at a stable average rate of around 1,100 barrels of oil per day and a 10% water cut. The third well.
[Technical Difficulty]
Ladies and gentlemen, pardon the interruption, speaker has been disconnected. Please hold while we reconnect the speaker.
Being drilled and will be followed by the final well, Acordionero-128. All wells from this development program are expected to be drilled, completed and on production before the end of the first quarter of the year. Back down in the Southern Putumayo Basin, Gran Tierra intends to commence development drilling in the Cohembi oil field located in the Suroriente block during the latter half of the year. We plan to expand the block's production facilities, increase gas power generation construct new development well pads and make social investments in the area, all with the goal of substantial production growth in 2025 and 2026.
From an exploration perspective, around 40% to 45% of Gran Tierra's 2024 capital program will target high-impact near field and low-risk exploration activities, including the drilling of 6 to 9 exploration wells in Colombia and Ecuador, signifying our dedication to unlocking potential new reserves and fostering sustainable production growth. Building on promising results from the 2022 exploration program, we plan to focus on short cycle time prospects in proven basins with established transportation infrastructure.
In addition, as part of our 2024 capital program, we are currently in the early phases of execution to acquire 238 kilometers square of 3D seismic over the [ Tropo ] block in Ecuador. And to pre-invest in advancing drilling licenses, building pads for the 2025 exploration program in Colombia and Ecuador, which will set the stage for future growth opportunities for the company.
On January 23, 2024, we were pleased to release our 2023 year-end reserve report as evaluated by McDaniel. 2023 saw the highest year-end reserves in our company's history. 90 million barrels of oil equivalent 1P, 147 million of barrel oil equivalent 2P and 207 million barrels of oil equivalent 3P, and we achieved excellent reserve replacement of 154% 1P, 242% 2P and 303% 3P. This also represented the fifth consecutive year that we achieved a 1P reserve growth. These results were driven by success with development drilling and water flooding results in the Chaza block, which contains the Costayaco and Moqueta fields and the Suroriente continuation agreement as outlined by Ryan.
During '23, a combination of our strong reserves growth, ongoing reductions in debt and share buybacks allowed Gran Tierra to achieve net asset values per share before tax of $44.48 1P, up 288% from 2020 and $79.13 2P, up 144% from 2020. With this significant growth in our net asset values per share over the last 3 years, we believe Gran Tierra is well positioned to offer exceptional long-term stakeholder value. The success we achieved in 2023 also reflects our ongoing conversion of reserves from the probable approved category. With 147 booked, proved plus probable undeveloped future drilling locations, Gran Tierra is well positioned to continue to grow the company's production and reserves in 2024 and beyond.
I will now turn the call back to the operator, and Gary and Ryan and I will be happy to take questions.
[Operator Instructions]
Operator?
One moment for our first question.
Okay. Well, we'll proceed. Thank you, ladies and gentlemen, and we'll now conduct a question-and-answer session with the securities analysts. If you have any questions, please press star -- the star key followed by 11 on your touchtone phone. You will then hear an automated message advising your hand is raised. Your question will be pulled in the order they are received. Please ensure that you lift your handset when you're using a speaker phone before pressing any keys. One moment please for the first question.
First question coming from Roman Rossi with Canaccord Genuity.
I have a couple, if I can go one by one. The first one is regarding the quality and transportation discount. So we saw a 30% quarter-over-quarter. I just wanted to know what was the main reason behind this decrease and [indiscernible] for 2024.
Yes. I think the -- Roman, can you hear me okay?
Yes.
Can you hear me now?
I can hear you, but there is a bit of echo.
Okay. Yes, with the quality differentials that mostly is just from the quality. Vasconia and Castilla did widen during the fourth quarter. And so we have seen that fairly consistent into Q1. There hasn't been a substantial change from Q1 to Q4. Currently, the Castilla differential is around $9, and Vasconia is around $5, which is effective what we've budgeted for this year.
Okay. And do you think that the widening [indiscernible] -- do you think that has changed even the [Technical Difficulty].
Sorry, Roman, again. Can you hear me? I think the question was is the result of Venezuela. Yes, that's part of is I think there's 2 issues, is Venezuela, additional potential crude from Venezuela as well as -- actually 3, as well as OPEC starts releasing some of their cuts. We'd expect more of the heavy sours come to the market. as well as the start of the TMX line in Canada, which will get more Canadian heavy crude to tidewater. So it's a combination of those 3 factors. But it's really no surprise to us, and it's right around in our budget numbers.
Okay. And one last question. Regarding OpEx, there was a definite increase in that. Is that because of the lower production in order or was there [indiscernible] inflationary ratios there?
Yes, it was all just driven by the lower production. And so we expect our gross operating cost will be flat to come down slightly in 2024, coupled with increased production. So we expect the per unit cost to drop.
And our next question comes from Oriana Covault [indiscernible].
This is Oriana Covault with Balanz. I believe that there's a bit of a part there, but I'm going to try to put -- I have 2 questions right now. So the first one is regarding your [indiscernible]. What would it take for Suroriente [indiscernible] year?
Yes. With respect to hedging, we did have 15,000 barrels hedged with a floor -- we do still actually until the end of Q1. We have 15,000 barrels hedged with a floor of $80 with the put premiums around $3, which is really part of our physical contract with the offtake. We are looking at adding additional puts in for the remainder of the year. We're just in the process of doing that right now.
Perfect. So that would take us out [indiscernible] how are you thinking increase production?
Yes. Sorry, I missed the question. It broke up a little bit on this side.
Yes. Like in some -- like what are your thoughts around what are your [indiscernible] production hedged production [indiscernible] the year?
Yes. We like to have -- looking out 6 to 9 months, we'd like to have 30% to 50% hedged. And then after 6 to 9 months, 25% hedged on a rolling basis, using puts and really just looking further downside production. And you'll recall, too, is one of the things we have is a very strong operational hedge given that we operate all of our production. So we have a lot of flexibility on our capital expenditures to the extent that prices were decreased substantially, we could very quickly cut our capital program. So that's one way -- another way we protect the business.
Got it. Well, just one last one from my side. You can comment on your [indiscernible] market or you can have a minimum cash value and we saw that this is [indiscernible] 2024.
Yes. I think our guidance out there, we're targeting year-end net debt-to-EBITDA of 0.8x to 1.2x. So if we take the onetime, which is fairly consistent what we've had in the past as a target. We continue to target that. And we'd like to have cash on the balance sheet of anywhere between $50 million and $100 million. And that will fluctuate throughout the year, just with payments to governments, capital program, et cetera. But over the course of the year, we expect to average in that $50 million to $100 million range.
[Operator Instructions] And our next question is coming from the line of Joe Schachter with [indiscernible].
This is going to be a challenging call. If it breaks up, Brian, if you could call me later.
Absolutely.
First question you have in your guidance [indiscernible] and you had a very good quarter. You add in the volume success of Q1 [indiscernible] barrels. Are you expecting depletion affecting the lower [indiscernible] the year no more [indiscernible]?
Yes, on that, I think it's -- the production is -- the Cauca wells have done -- exceeded our expectations. And that's one of the reason why we give a range. And so it's still early days on the wells. So we'll see how these wells progress over the next couple of quarters before providing additional guidance. But we're still comfortable with the range right now.
Okay. How many locations do you have [indiscernible]?
In -- sorry, just to clarify that question, in which area?
We're talking about the Putumayo [indiscernible] you see -- the CYC discovery.
Yes. So out of the 147 2P locations that we have, there is still 26 locations identified for Costayaco, Moqueta for example. And then at Suroriente we've got an additional 30.
Okay. That's good -- that's good info.
One of the things, Josef, one of the things that Sebastien and the team are looking at on Costayaco. We've got some very good results with our reservoir modeling and targeting unswept areas. That's what's outperforming at Costayaco in the north. We have another area in the southern part of the reservoir [ of strike ] that we're going to try to target this year. So we're -- that's why we're excited about Costayaco.
Okay. Good. One last one for me. With the flow in the moderate [indiscernible] in the past, you've talked about maybe -- you talked about maybe few area in [ Minot ] analyze everything in right briefing and [indiscernible] that you had the in new [ app ] in terms of the company?
Yes. The answer to that is that we are always looking for opportunity. We don't see anything specific at the moment, but our business development initiatives are all long term. And so we're looking always for ways to increase value of the company, but we don't have anything specific on the horizon.
[Operator Instructions] Speakers have been disconnected. Please hold while we reconnect the speakers. Yes, speakers you're now back connected. We have [indiscernible] [ Xandra Simon Denny ], your line is open.
So you mentioned that $36 million of $100 million [indiscernible] was used for the credit facility. Where will be the balance used?
Yes. On these -- out of the $100 million, the net proceeds were around $88 million, $35 million went to repay the facility, as you pointed out. And the remainder would it be cash on the balance sheet right now.
And our next question coming from the line of Alejandra Andrade with JPM.
Just a quick one for me, confirming that after you repaid the committed line, you don't have any available lines at the moment, correct?
Correct. Correct. We repaid it and then terminated. We are looking at a working capital facility which coincided better with the business and some of the ebbs and flows of our cash outflows and inflows. But right now, we have nothing in place and we're comfortable just with our free cash flow and cash on the balance sheet.
And gentlemen, there are no further questions at this time. Please continue.
Thank you, everyone, for joining us today. We look forward to speaking with you over the next quarter and update you on our ongoing progress. I would like to thank the entire Gran Tierra team for their hard work in 2023, the fantastic results and to our shareholders for their continued support. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.