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Good morning. My name is Joanna, and I will be your conference facilitator today. Welcome to Frontera Energy's Second Quarter 2020 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.After the speakers' 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 ir@fronteraenergy.ca.This 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 the actual results of the company to differ materially from those discussed in the forward-looking statements. Certain material assumptions were applied in formulating such forward-looking statements. These assumptions and factors that could cause the actual results or events to differ materially from current expectations are disclosed in the company's Q2 MD&A released August 6, 2020, under the headings Risks and Uncertainties and under the heading Risk Factors and elsewhere in the company's annual information form dated March 5, 2020. Any forward-looking statements speak only as of the date on which it is made and the company disclaims any intent or obligation to update any forward-looking statements.I would now like to turn the call over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy.
Thank you, operator, and thank you, everyone, for joining today's conference call to review Frontera's second quarter 2020 financial results.I would like to begin by acknowledging all those that have been impacted by the COVID-19 pandemic. It is an unprecedented global event and for all that have joined us today, we hope that you and your families are safe and well.The stark circumstances of the quarter, including the combination of the global shutdown with a price war in the oil market affected the energy industry widely. It also exposed a clear delineation between those E&P companies that were prepared for the crisis and those that were not. With significant cash in hand, lower cost and a team with a track record of disciplined operations and growth, Frontera showed itself to be a company that can adjust and thrive even in the toughest of challenges.In the quarter, we took further steps to preserve our balance sheet and strong financial position, finishing the second quarter with a total cash of $395 million, including restricted cash of $139 million. We also took advantage of market conditions to strengthen the company's hedge position for the next 4 quarters. This provides downside protection in the face of continued volatility in the price of oil.We made significant strides in reducing the company's cost base both in the field and around the corporate structure. These cost savings are permanent and lasting, reducing breakeven cost and improving the economics of the portfolio.We continued to look at ways to optimize our operations. We have also brought back on line the majority of the fields previously shut in, giving us a more stable and profitable production base going forward. Our ability to manage production and cost combined with a strong balance sheet allow us to be strategic regarding increasing operations as we see stability and incremental global recovery. It also allows us to deliver on our exploration portfolio, which is beginning to show increasingly positive leads and options for our future.The information we gathered from the seismic work in Guyana is showing strong potential in one of the most prospective offshore oil areas in the world. In addition, we are planning to soon resume exploration in the lower Magdalena Valley, continuing from our successful La Belleza well earlier this year and in Ecuador.During this time, we have also had the ability to further advance our infrastructure portfolio options, including the just announced plans to increase our ownership and rights in Puerto Bahia, Colombia's newest and most automated multipurpose port facility.Despite volatility and challenges presented by the current global pandemic, our long-term vision for the company has not changed, nor has our commitment to deliver value for all of our shareholders. The company is very well positioned for upside in the current environment and we look forward to sharing the details of our progress.I will now turn the call over to Richard Herbert, our CEO, for additional details on our operating and financial results as well as some additional detail on current operational initiatives.
Thank you, Gabriel, and good morning, everybody. Thank you for joining our call today. The second quarter saw some of the bleakest conditions that I have seen in our industry in the last 40 years with crude oil prices falling to the lowest level since the financial crisis and the major risks posed by the COVID-19 pandemic to our operations and the safety of our employees, contractors and the communities in which we operate. We faced the challenge head on and have emerged a leaner and stronger company.We are focused on ways to preserve the company's strong balance sheet and cash position. We did this through a number of initiatives. We monetized fully in the money crude oil hedges for a cash gain of $27 million. We also worked closely with our key suppliers to extend payment of certain bills into the second half of the year, including part of our pipeline transportation costs.Offsetting some of these initiatives, we were required to post additional cash collaterals for certain exploration commitments that converted $32 million of unrestricted cash to restricted cash. And we had cash outflows for year-end 2019 dividends of $11 million and semiannual interest payments of $18 million. As a result, our cash and cash equivalents position was $256 million as of June 30, 2020, as compared to $265 million at the end of the first quarter.In the second half of the year, we expect to have to catch up payables to our vendors, at which point cash inflows versus outflows should stabilize. We'll talk in more detail about where we expect to finish the year when we discuss guidance in a short while.We made meaningful strides on a number of cost initiatives this quarter, including renegotiating tariffs with key contractors, services and pipelines; freezing all our truck tariffs; eliminating nonessential maintenance; subleasing spare storage capacity at Puerto Bahia; limiting staff and contractors to the minimal operational level; and reducing energy needs through lower water handling.Overall, second quarter production costs averaged $9.03 per BOE, down 28% from the prior quarter. Importantly, we expect that these cost initiatives are enduring and will stay with us going forward.General and administrative costs totaled $10 million in the second quarter, down 35% from the first quarter of 2020. Two steps which included reducing our office headcount by over 25% at the end of the first quarter: reducing management and director cash compensation by between 25% and 10% and renegotiating our office space in Bogota to reduce capacity when we eventually return to the office by 50%.Transportation costs were relatively stable at $13.61 per BOE. An important note on our transportation costs is that they included $2.30 of BOE in noncash charges that are under dispute related to ancillary facilities.In the first quarter, we asserted our rights to stop paying on certain contracts related to the Bicentenario Cano Limon-Covenas pipeline system, which will reduce the company cash outlays by around $33 million annually. In April, we voluntarily shut in 14,000 to 15,000 barrels a day oil equivalent of higher cost Colombian production in certain heavy and light medium oil fields. Over the past months as oil prices have firmed up, we have brought back on line about 60% of the original shut-in volumes. Further shut-in volumes will be brought back into production as conditions permit.Overall, this work done to drive down costs and shut in the higher cost wells has resulted in Frontera reducing its field breakevens by close to 20% from $33 a barrel in 2019 to around $27 to $28 a barrel for the second half of 2020.Our development expenditures are down about 75% from the initial budget set for 2020 of $350 million. This significant reduction in capital spending, the majority targeted at development activity to mitigate decline, and the production we have elected to keep off-line has resulted in current production as of July 31 of approximately 43,000 barrels a day oil equivalent, all from our Colombian fields. Despite limited capital investment planned in the second half of this year, we expect to maintain stable production through year-end of around 40,000 to 43,000 barrels a day oil equivalent.Our Block 192 service contract in Peru remains shut in at present under force majeure as it was for the entire second quarter and we continue to evaluate opportunities to restart production when conditions permit.Our portfolio of future opportunities continues to evolve and mature. We plan to consolidate our position in Puerto Bahia by purchasing the equity and credit interest of the International Finance Corporation and its related funds. This deal will give us additional crude oil marketing and storage options as well as additional optionality around the port. We will pay $3 million at closing, that's another $4 million on or before 2022. Upon closing, Frontera and its subsidiaries will own approximately 72% of the outstanding shares of Puerto Bahia.In the VIM-1 block in Colombia in the Lower Magdalena Valley, Frontera and Parex, the operation's 50% partner, continue the permitting and approval work required for the development of the La Belleza-1 discovery, which we made at the end of last year. Work has also commenced on the development plan concept. Planning is underway for the scouting and permitting required in preparation for drilling 2 exploration commitment wells in VIM-1 as early as 2021.In Ecuador, Frontera continues working to obtain environmental permits to start exploration activity in the Perico block. The permit is expected to be received late this year and the first well is expected to be drilled in late 2021.In offshore Guyana, Frontera and CGX Energy, the operator, finished the processing of the 3D seismic data shot over the northern portion of the Corentyne block late last year. Interpretation of the depth migrated data set is currently ongoing to mature leads and prospects for future drilling. We are encouraged by the initial results, which show the presence of a significant number of exciting leads.Last week, Apache announced the third discovery in their neighboring Suriname Block 58, reportedly their best discovery made to date in terms of net pay and reservoir quality. Our joint venture partner, CGX energy, continues to engage in discussions with the government of Guyana on alternative approaches to our work commitments in the country.The work we have done this year has created the foundation for a leaner, lower cost Frontera. We have stabilized our balance sheet strength through the crisis and protected our future revenues with a new hedging position. We expect our production to be stable through the end of the year, while maintaining the cost reductions that we have made. And finally, the opportunities that we have in our portfolio for future growth and development continue to move ahead, providing an exciting future for Frontera.I would now like to turn the call over to Alejandro Pineros, our CFO, who will take you through the financial details of the second quarter.
Thank you, Richard, and thank you, everyone, who has joined our call today. In the second quarter, Frontera generated positive operating EBITDA of $29 million versus $44 million in the first quarter of 2020, primarily due to lower volumes sold and lower global crude oil prices.Given the low oil prices and higher Vasconia differentials experienced in the quarter, we made the deliberate choice to move one Colombian cargo into the third quarter, utilizing our oil storage capacity at Puerto Bahia. The cargo is scheduled for delivery in early August and will result in an increased realized sales price of about $10 per barrel.Second quarter Brent crude oil prices averaged $33 per barrel, 65% lower than the first quarter of 2020, reflecting the significant volatility in global oil markets. Offsetting some of the lower revenue, we had realized gains in risk management of $40 million in the quarter, including monetizing fully in the money hedges for the second half for cash gains of $27 million.We rolled over some of the proceeds from risk management in the second quarter to strengthen the hedging position for the next 12 months. We currently have outstanding Brent-linked risk management contracts covering average production of approximately 41,000 barrels per day at $35.37 per barrel for the remainder of 2020 and 18,000 barrels per day at $35 for the first half of 2020.Combined with a net cash balance and flexibility with respect to our capital program, our hedging program further positions Frontera with sufficient liquidity to manage through this period of volatile oil prices.Second quarter capital expenditure of $16 million versus $65 million from the first quarter were largely related to remaining activity after we moved to cut spending levels in response to the low oil price environment. As previously discussed, Frontera maintains a strong liquidity position with a total cash position of $395 million as of June 30, 2020, including restricted cash of $139 million. The company has borrowings consisting of $350 million of long-term unsecured notes maturing in 2023 and no mandatory near-term principal payments.We're releasing -- updating guidance, reflecting the actions we have taken to reduce our capital programs and cost structure as well as our enhanced hedging portfolio, providing greater stability to cash flows. We now expect daily average production of 40,000 to 43,000 barrels per day for the second half of the year and 46,000 to 48,000 barrels per day for the full year average of 2020.Our production costs are expected to fall to $8 to $9 per barrel in the second half of the year, with the full year 2020 average expected to be between $9.5 to $10.5 per barrel. Transportation costs include about $2 per barrel of noncash charges related to unused ancillary facilities under dispute. Including these charges, we are guiding to second half transportation costs of $13.5 to $14.5 per barrel versus 2020 average transportation cost of $13 to $14 per barrel.At current strip prices, we expect to finish December 31, 2020, with total cash of at least $360 million, including restricted cash and cash and cash equivalents of over $225 million. We're working on a number of initiatives to reduce restricted cash.As Richard mentioned, we expect some catch-up in vendor payments in the second half of the year, followed by stable cash flows at current oil price levels. These cash figures exclude the impact of any financing or A&D initiatives.We forecast capital expenditures between $20 million to $40 million for the second half of the year, totaling $100 million to $120 million for 2020. We're building a portfolio of projects to execute development, workover and well service work with robust economics.I will now turn back over to Richard for some closing comments.
Thank you, Alejandro. Building on our strong financial and operational position at the start of the year, we took important steps during the second quarter in response to the challenging and unpredictable events of the year. We are now in a strong position to sustain the company, restart development activity and move forward with our exciting portfolio of growth projects.Thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open the call up for any questions that you may have.
[Operator Instructions] Your first question comes from Luis Serrano from MN (sic) [ NN ] Investment Partners.
I was just wondering if given your very strong cash position and where your bonds are trading in the secondary if you would consider or be willing to do any buybacks of the bonds?
Luis, thank you for your question. Obviously, we have a set of choices of what we can do with our cash position. At this stage, we don't have any plans to buy back bonds, but it is always an option for us in the future. I think I'll just leave it at that at this stage, unless, Alejandro, if you'd like to add anything else.
No, Richard. I would just say that our focus right now is to maintaining a strong balance sheet and making sure that we have enough resources to fund our capital program for the rest of the year and maintain healthy cash volumes. So nothing further to add.
The next question comes from Anish Kapadia from Hannam.
Yes, I just had some questions around your acreage in Guyana alongside CGX. Again, it seems like there's been some quite positive news flow from the region. So just a few things on that. I was wondering if there's any update in terms of when you'll be putting some detail out on the prospectivity, potential CPR on the block. And also alongside that, if you think you can kind of update in terms of farm-out discussions and timing for yourselves and CGX?And then in terms of the prospectivity over there, it sounds like you've had some encouragement from the 3D seismic. Can you also talk about some of the read-throughs that you've seen from the Apache block, whether some of those similar discoveries and horizons you think would exist on your block from the data you've seen so far?And then just a final one is on -- in terms of some of the existing discoveries on those blocks in terms of Stabroek and elsewhere in Guyana. Some of those appear to overlap onto some of your blocks. Have you had any initial unitization discussions?
Very good, Anish. Well, thank you for the questions. And I know Hannam is so knowledgeable about Guyana. So -- I mean, let me say the first thing is that -- of course, you mentioned positive news flow from the country. I mean, I think we're all very pleased and relieved to hear that a new government has now been elected after a 5 month sort of hiatus following the general elections back in March and we're starting to see movement with the appointment of a new cabinet. And so, I think this is positive for us because it removes a sort of serious blockage in being able to confirm our forward work plans and agree how we're going to adjust our plans with respect to the delays and difficulties we've had because of the COVID-19 outbreak. So I think we are very encouraged by the certainty of the election results and being able to move forward.In terms of your question on when are we in a position to reveal more details about the prospectivity of our blocks, I think -- I mean, this is something that we're in discussion with our partner, CGX on. We will work with some independent confirmation of that prospectivity and as and when the work is completed, we'll be in a position to release on it. But we're not at that position just yet. We still have some more work to do. We're still doing the final, more specialized seismic processing on the Corentyne block, and as we've indicated, we are reprocessing the 3D seismic data over the other block, the Demerara block, to improve the imaging ahead of selecting prospects for drilling. But when we're able to, we will be releasing information about how we view the prospectivity of the blocks.In terms of farm-out discussions, we aren't in a position to talk about that just yet. We have said in the past that it is our and CGX's intention to bring a partner or partners into this project with us in due course. I think the timing of that is still being worked on. And again, once we've got some information we can talk in more detail about that.Your next question you asked a little bit about how analogous does our acreage look compared to some of the adjacent areas. I mean, I think it's safe to say that geologically we see a lot of analogs between the prospectivity on our blocks and that of surrounding areas. It's a relatively small and now quite well understood basin. It has an extremely prolific and productive source rock in it. So we're confident that our blocks are located in a position which will -- which has had the possibility of receiving a very large hydrocarbon charge.In terms of the specific prospect details, well, we're still working on that. We do have some limited data over the adjacent blocks that have allowed us to correlate the discoveries that have been made with our blocks and we see that, in general terms, we are looking at a very similar geological situation in our Corentyne and Demerara blocks compared to the adjacent areas. So that I think is very encouraging.And finally in terms of existing discoveries, again, until we have completed our technical work and I think probably have drilled some wells, we won't be in a position to start thinking about overlap of discoveries or any form of unitization discussions. That's premature at this stage.So Anish, I hope that addresses the questions that you had.
Yes. That's very helpful. But just one quick follow-up. In terms of timing of drilling, is there any update on that given there's well -- license expiry you're up against?
We don't have an update at this stage, Anish. And I think we -- I mean, the reason for that, I think, has been what we talked about first of all, which is the sort of political hiatus, that it's made it very difficult for -- to have a -- we've been in a very constructive dialogue with the government during the last few months, but we haven't been able to get to any definitive agreements on the timing for our drilling commitments.We are optimistic now that with the appointment of a new government and just settling down of the situation in Guyana that we can bring this to a rapid conclusion and have the clarity on what we need to do moving forward.
Your next question comes from Jacob Steinfeld from Ashmore.
I have 2 questions. I guess the first is, what are you assuming for the differentials for the second half of the year? That would be my first question. And secondly, if you could provide maybe a little bit more detail on your cash bridge for the second half of the year given you had $395 million and you're expecting to have at least $360 million by year-end.
Let me turn it over to Alejandro, who can explain what our thinking on differentials is and how we bridge between June 30 and the end of the year in terms of our cash position.
So for your first question, Jacob, we're assuming $4 average Vasconia differential for the second half of the year. And in terms of the cash, we have said that we will have $360 million at the end of the year and we expect to have cash and cash equivalents $225 million or above.I think for the second part of the year what we expect is after we pay some of the catch-up payments with vendors to become cash flow neutral, including some of spend that we will do in terms of the CapEx for the second semester. So that's roughly the expectation for the second part of the year.
Right. I guess what I was asking for was a bit more specificity. So I guess under the production that you're assuming and the costs and differentials, your $45 Brent, et cetera, like what are you expecting in the second half for EBITDA, how much of the working capital catch-up do you have, et cetera? If you just walk me through the numbers how you end up with $35 million negative.
Okay. We have mentioned that we have 20 -- between $27 and $28 of field cost breakeven. So I think we're aiming to leave some money for corporate expenses and interest payments and some money for the development CapEx we're going to execute in the second part of the year. So we think that at $45 we will have enough money to have a balanced cash flow for the remainder of the year.At this point, we are not guiding on EBITDA for the second part of the year. But I think what the message that we want to send is that we will have cash and cash equivalents about $225 million.In terms of our field breakeven, we're estimating a $4 price differential, cash royalties at $1, production cost at around $8.5 per barrel, transportation cost of $14. If you take out the $2 noncash charges and the $2 blending cost, that's how we get to that $27 of field breakeven for the second part of the year.
Alejandro -- if I could just add, Jacob. I mean, I think his -- I think Alejandro sort of said this on -- at the start of his answer. But I mean, to put it in very simple terms, the way we're thinking about this is that it -- at about a $45 oil price going forward, which is sort of the strip price. We've looked at our cash generation. We've said this -- we -- as we've said, we have an element of unpaid contractor bills that come from the first half of the year that we have deferred payments on. We obviously want to stabilize that. So there's an outflow on that.And then beyond that, our goal is essentially to run the business cash flow neutral till the end of the year, which means that we can start to put more money into our capital program to work over wells and start a drilling program again to help stabilize the production. So that's how we're really thinking about the second half of the year at the current oil prices.
At this time, there are no further questions. You may proceed.
Well, very good. So I think, Joanna, if there's no further questions, I just like to say a very big thank you to everyone for joining the call today. Thank you for your interest in Frontera, your support to Frontera. And with that, we'll end the call. Thank you all very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines at this time. Enjoy the rest of your day.