Frontera Energy Corp

TSX:FEC

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Julianne, and I will be your conference facilitator today. Welcome to the Frontera Energy's First Quarter 2019 Results Conference Call.[Operator Instructions] 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.After the speaker's remarks, there will be a question-and-answer session. Analysts and investors are reminded that any additional questions or concerns can be directed to the company at [e-mail] call contains forward-looking statements which reflect the current expectations or beliefs of the company based on information currently available. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to vary -- to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations are disclosed under the heading Risk Factors and elsewhere on the company's annual information form dated March 13, 2019. Any forward-looking statements speak only as of the date on which it is made and the company disclaims that any intent or obligation to update any forward-looking statements.I would like to now turn the meeting over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy.

[Gabriel de Alba, Chairman of the Board]

Thank you, operator. And thank you, everyone, for attending today's conference call to review Frontera's first quarter 2019 financial results and provide an update on operational and shareholder return initiatives. First of all, I'm very happy to report that the company delivered impressive financial results during the first quarter. Highlighting the strong potential for cash flow and returns from our stable core production base in Colombia. I would like to congratulate management for their strong execution.With oil prices currently over $5 per barrel higher than the average price during the first quarter, narrower price differentials and Peru production back to peak volumes, I am optimistic that the second quarter of 2019 is positioning to be very strong, too. Frontera's investment in high-return capital initiatives like the Quifa water disposal project and development drilling in the Guatiquia block successfully delivered 4% production growth in Colombia compared to the prior quarter and prior year period. Strong production, prices and cost controls helped Frontera generate over $144 million in operating EBITDA during the quarter and cash flow from operating activities of $72 million. The cost savings initiatives implemented in 2018 are also delivering. G&A costs reduced by over 20% compared to quarterly amounts in 2018, even better than our target of over 10%. Management continues to focus on improving the organization's cost structure and capital efficiencies during 2019.Frontera Board prioritizes enhancing shareholder returns. And this strong financial and operational results has helped the company deliver dividends of $0.495 since the start of the year, a yield of over 4% at the current share price. Together with the share buybacks and the company's NCIB of over 1% of outstanding shares over the same period, it resulted in a total yield return of over 5%. As we have previously stated, the board's policy is to pay $12.5 million in dividends per quarter equivalent to a yield of 1.3% during quarters in which Brent averaged over $60 per barrel. Further, the company intends to continue to repurchase the shares under its normal course issuer bid. This shareholder value initiatives are in addition to the 3 key initiatives that had been realized so far in 2019 with a focus to invest in long-term production and reserve. Examples of execution of these 3 key initiatives include: Number one, increasing our ownership in CGX to over 67% and the approval of our farm-in joint venture agreement with CGX by the Guyanese government. Number two, successfully entering Ecuador by being awarded with our 2 preferred blocks during the Intracampos bid round together with our joint venture partners GeoPark. And number three, signed a farm-in agreement with Parex, whereby the company subject to ANH approval will receive a 50% working interest in the VIM-1 block in Colombia. These initiatives combined with our strong operating and financial performance in the first quarter position Frontera well to meet our 2019 guidance based on current oil prices and differentials.I will now turn the call to Richard Herbert, our CEO, for additional detail on our operating and financial results so far in 2019 as well as some additional detail on current initiatives.

[Richard Herbert, Chief Executive Officer]

Thank you, Gabriel. Good morning, everybody, and thank you for joining our call today. I have now been the CEO of Frontera for just over a year. And so it's exciting to start to see the positive results that our projects and initiatives are delivering. The first quarter's robust financial results highlight the potential for Frontera's asset base and its people to deliver now that we are not burdened by legacy issues, like punitive hedges and redundant ship-or-pay agreements, which have created a drag over the recent quarters. So far, things in the second quarter are looking as good if not better than the first quarter. However, we are not updating annual guidance at this time as we feel it is premature to change our expectations for the year. It is still relatively early in the year and external factors can change quickly, as we saw in the fourth quarter of last year. Should the price environment and our strong production performance continue, then we do anticipate an opportunity to raise our target for 2019.I will start with an update on current operations, including recent drilling results. Then I will speak about our plans and key initiatives being planned for the remainder of 2019. And finally, I will update you on our key strategic initiatives, including our new country entries and updates with respect to material event.First, an update on operations. Colombian production of 65,700 barrels of oil equivalent per day average in the first quarter was up 4% quarter-over-quarter and 4% up year-over-year, recovering to where it was at the end of 2017. This was achieved through the commissioning of new water handling facilities at Quifa, which allowed us to return 80 idle wells to production and tie in 27 new wells and also from strong production from the Candelilla-7 development well in the Guatiquia block. The 5-year strategy that we shared with investors in February of this year showed our intention to stabilize Colombia production in the range of 60,000 to 65,000 barrels per day, while we develop growth options in the North Andean region to diversify and strengthen our portfolio. Colombia production has now been effectively flat and in this range for the last 18 months, providing a strong platform of operational stability and cash generation.For the large part of the first quarter, onshore production in Peru from Block 192 was shut in due to a problem with the NorPeruano export pipeline outside the block. Peru production in the first quarter was an average of 2,300 barrels per day compared to 10,700 barrels per day in the equivalent quarter in 2018. With Peru production back to peak volumes again, current total company production is around 75,000 barrels per day oil equivalent.During the first quarter, Frontera had a positive start to our annual drilling campaign. With exploration successes at Jaspe in the Quifa area and at Seje on the Sabanero block also near Quifa. These wells which float at approximately 150 barrels of oil per a day each are relatively modest from a production perspective, but they help us to maintain production, they add to our reserve base and they expand the field limits within our very large heavy oil asset base. As a result of the successful wells, we are evaluating additional locations to be drilled before the end of 2019 at both Jaspe and Seje.In our light oil business unit, the first plant water injection well at Copa in the Cubiro field ended up encountering oil and thus extending the oil-water contact down dip within the field, which is encouraging for reserves. We also drilled 2 successful development wells at Coralillo on the Guatiquia block. These wells, which have tested oil from 2 zones, are being put on production on a commingle basis at over 1,000 barrels per day per well. The extension of our Guatiquia block as well as ongoing development drilling in our heavy oil business unit is the foundation by which the company has kept production in Colombia relatively level over the past 1.5 years, and by which we expect to sustain Colombia production going forward.And looking ahead in the second quarter, the company will drill exploration wells at Mapache and in the CPE-6 Block while continuing to drill development wells at Quifa and Cubiro. During the third quarter of 2019, the company plans to drill the Belleza-1 well in the VIM-1 block in Colombia with Parex. And following our recent approval of our joint venture offshore Guyana, from the Guyanese government, our teams can now work with CGX, the operator, to execute the exploration program in the Corentyne and Demerara blocks offshore Guyana.In addition to our activities, several exploration wells will be drilled by our peers and neighbors during 2019, which are expected to unlock and derisk the choke-and-flip system of the Guyanese basin in board from ExxonMobil's deep water discovery in the adjacent Stabroek Block.During the first quarter, the company also led the financing of CGX and as a result, we now control over 67% of the outstanding shares of CGX. Combined with our 33% ownership in the block, our economic interests in the offshore acreage is in excess of 74%, which we believe is a high value position given the potential of these 2 blocks. The other transformative event of the first quarter was the Intracampos bid round in Ecuador. With our joint venture partner GeoPark, we were awarded our 2 most preferred blocks. 2 different levels of approval have been granted so far, with final approval of the blocks expected to be awarded in the second or third week of May.Our joint ventures with GeoPark, Parex and CGX demonstrate that Frontera has become a sought-after partner in the region. This opens up a bigger inventory of future opportunities at a more balanced risk profile than the company has had in the past. We will continue to evaluate additional joint venture opportunities as we proceed through expected bid rounds in Colombia and an additional round in Ecuador before the end of this year.On the midstream side of the business, we continue to be confident in our legal position with respect to the termination of our pipeline contracts in Colombia. As previously noted, our continued effort to address legacy issues and commitment, including certain midstream issues, will go a long way towards making Frontera easier to understand for both existing and potential new investors. And finally, as part of our initiatives to improve operating and capital efficiencies, we are in the process of improving our overall cost structure on the operational side of the business. This is similar to what we undertook last year on the administrative side and where we had very strong result. An additional element to this project is the evaluation of our overall portfolio.Now that we have had a chance to evaluate the strategic position of all our assets within our portfolio as well as the upside potential, we are exploring opportunities to divest some noncore assets in the coming months. Proceeds from any asset sales will be used to fund additional development opportunities as they come along, to enhance shareholder returns through share buybacks and dividends and to repurchase outstanding debt.I would now like to turn the call over to David Dyck, our CFO, who will take you through our financial results in more detail.

[David A. Dyck, Chief Financial Officer]

Thank you, Richard. And thank you, everyone, who's joined our call today. It was a very strong quarter from a financial perspective. We generated net income of $46 million or $0.47 per share, the highest level since the relisting of the company over 2 years ago following the restructuring. Volumes sold and net production amounts were in line, resulting in no overlift or underlift and there were no extraordinary or unusual charges in the quarter such as fees paid on suspended pipeline capacity or any impairments. In the quarter, we realized a per BOE price of over $58 relative to an average Brent price of $63.83 per barrel, reflecting strong oil price differential of around $4 per barrel and the impact of natural gas prices on 4% of our production. So far in this second quarter, Brent is averaging $70 per barrel with differentials around $2 per barrel, as the global market remains short heavy-grade crudes.Since I joined the company just over a year ago, we have tried to simplify our operations and in parallel, our financial reporting. We still have some improvements that we are working on, especially as it relates to our investments in associates and midstream assets. But the first quarter of 2019 demonstrates that we can operate in a manner that makes Frontera easier for investors to understand. An example of how Frontera's financial results have been simplified and are easier to understand is that operating EBITDA of $145 million closely matched our cash flow provided by operating activities adjusted for changes in noncash working capital of $140 million. Operating EBITDA was a post-restructuring record and increased 22% compared to the prior quarter, as our results benefited by over $5 per barrel due to changes to our hedging position.I'll provide a quick update on our hedging strategy. As you may remember, we modified our hedging policies in the middle of 2018 such that the company can hedge up to 60% of expected future production going out 12 months into the future. The new policy limits the use of 0 cost collars to 20% of expected future production with the remaining 40% hedged using a put strategy. As of right now, 44% of expected remaining production in 2019 is hedged, 35% with puts with an average strike price of $56.69 per barrel, and 9% using collars with a floor price of $57.05 per barrel and a ceiling price of $75.70 per barrel. For the first quarter of 2020, we have 14% of expected production hedged with a floor price of $58.39 per barrel and a ceiling price of $75.70 per barrel. The total cost of our 2019 put option program was just under $10 million.Our balance sheet remains strong with net working capital over $160 million and a strong cash position of over $340 million not including an additional $146 million in restricted cash. Following a heavy capital program in the fourth quarter of 2018 and 2 onetime cash payment items in the first half of 2019, those being the payment of the IFC put on Bicentenario and the payment of the Transporte Incorporado put option, the company is expected to draw on cash in the first half of the year and build our cash balances during the second half.In terms of releasing some of our restricted cash balances, as we attempt to improve the efficiency of our balance sheet, the company is in the process of setting up additional standby LC facilities with a new lender, the first since the restructuring. The amounts are modest but expected to grow over time as additional lenders are brought onboard. The initial phase is expected to release between $10 million and $30 million of currently restricted cash with additional amounts released as additional facilities are negotiated.Finally, with current oil prices, differentials and foreign exchange rates tracking at better than budgeted levels, I would like to remind everyone that a $1 move in Brent oil prices for the year represents approximately $17 million in additional EBITDA for the year. And an incremental $1 improvement in differentials represents an additional $21 million in annual EBITDA. And a weaker Colombian peso means improved purchasing power from an operational and capital costs perspective.I will now turn the call back over to Richard to wrap up.

[Richard Herbert, Chief Executive Officer]

Thank you, David. Frontera has had a very strong start to 2019 from an operational perspective, production, cost control and pricing was strong. From a strategic perspective, we move forward with 3 joint ventures and 2 new country entries. Between the start of the year and the end of April, over 5% has been returned to shareholders in the form of dividends and share buybacks. We expect current production and prices to fund continued return to shareholders via ongoing dividends and share buybacks throughout the remainder of 2019.We look forward to providing investors future updates as we progress through a very exciting year.Thank you all for attending our call. I would now like to turn the call back over to our operator who will open up the call for any questions that you may have.

[Operator]

[Operator Instructions] There are no questions at this time. Should you have any further questions, please email [e-mail]. This concludes the call. Thank you all for participating.