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Good morning. My name is Jodie and I will be your conference facilitator today. Welcome to the Frontera Energy Third Quarter 2018 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 being webcast on the company's website. [Operator Instructions] 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. Factors that could cause actual results or events to differ materially from current expectations are disclosed under the heading Risk Factors and elsewhere in the company's annual information form dated March 27, 2018. Any forward-looking statement speaks only as of the date on which it is made and the company disclaims any intent or obligation to update any forward-looking statement.I would now like to turn the meeting over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy.
Thank you, Jodie, and good morning, everyone. Thank you for attending today's conference call to review Frontera's third quarter 2018 financial results and provide an operational update, I'm joined by Richard Herbert, our CEO; and David Dyck, our CFO. I will start by saying that from the board's perspective, the company's position and outlook are strong and improving. Despite production interruptions last quarter, current net production has now returned to over 65,000 barrels of oil equivalent and is expected to grow through the fourth quarter. Based on this as well as successful cost management and the expiration of our hedges at the end of October, we are now going to be able to benefit from robust Brent prices in November and December. With this, we are reaffirming our guidance for EBITDA.The board continues to believe that Frontera is trading at a significant discount to its true value on the basis of multiple metrics and the board and management are 100% committed to realizing full value for our shareholders. We have built an exceptionally strong team of operators who are moving forward to exploit the value of our high-quality focused assets in Colombia and Peru. The company has also made significant progress in strengthening our balance sheet, unwinding legacy commitments and focusing on sustainable growth. Cash flow generation is important and improving and overall the capital efficiency of the company is very strong. We still believe there are opportunities here, especially opportunities focused on the shareholders.We are making progress improving the liquidity of the company's equity as David will describe and we continue to be very careful about how we use our robust balance sheet and cash resources to enhance shareholder value. In addition to our spending on growth and maintenance projects, we intend to continue to buy back stock and will evaluate further shareholder value creation options for the company. I would like to also provide now a brief update on some exciting additions to our Board of Directors. We have added Orlando Cabrales, a former Vice Minister of Energy in Colombia and Head of the ANH, to our board. Orlando is an integral figure within the oil and gas industry in Colombia. Orlando replaces Camilo Marulanda, whose recent appointment as a President of ISAGEN consumes more of his time and has caused him to step down.I would like to express my thanks to Camilo for his valuable contribution to the board over the past 2 years as we repositioned Frontera to be the leading publicly traded upstream oil and gas company in Latin America. We are also very excited to welcome Veronique Giry to our board. Veronique is the VP of -- and Chief Operating Officer of ISH Energy in Calgary and she brings with her an impressive technical career in the global oil and gas sector, which will complement the other technical members of our board. Her deep experience will also provide additional insight and perspectives for the company as we continue to pursue growth opportunities over the medium and long term.I will now turn it over to Richard, who would go through the operational update of the company.
Thank you, Gabriel. And good morning, everybody, and thank you for joining our call today. I'm going to talk about 3 important areas of Frontera's business in this summary. First, I'll make some observations about our operations during the quarter. Second, I will give you an update on some of the strategic initiatives that we're pursuing. And third, I'll talk about the progress to build out our portfolio and position Frontera for the long term. So, starting with a summary of the third quarter. Frontera delivered strong results despite the quarter's production being down 9% due to the interruption of production in Peru from the force majeure event on Petroperu's NorPeruano pipeline, which forced us to shut in Block 192. In total, the pipeline was out of service for 92 days, of which 62 days were in the third quarter, impacting our quarterly production by an average of 5,700 barrels per day.As a result of the pipeline outage, our service contract on Block 192 has been extended until September 2019. Production in Colombia was impacted by higher PAP royalty volumes at Quifa linked to higher oil prices and restrictions in our water handling activity at Casimena. I'm pleased to announce that production is now back on track at over 65,000 barrels of oil equivalent per day net after royalties and is expected to grow through the -- throughout the fourth quarter. In line with our plan, we have recently started up the CMA water handling capacity expansion project in our main heavy oil field Quifa. When all phases of the project are operational at the end of this year, we will have nearly 40% of additional water handling capacity at the field. Daily oil volumes are expected to increase through the fourth quarter by 2,000 to 3,000 barrels of oil per day as we reactivate up to 80 shut-in wells.We remain focused on key relationships in the ways of working, which make us the natural partner for the governments and communities where we operate. We seek to operate at the highest levels of HSE performance and ethical compliance to bring technological solutions and be seen as a positive force in our interactions with communities where our assets are located. We were very proud recently to be awarded the Global Compact Canada award for our execution of sustainable development goals in Colombia. Moving to my second theme, we continue to execute on our key strategic initiatives. Our balance sheet continues to improve and we generated cash flow from operations in excess of capital expenditures of $65 million, which helped our cash position grow to over $780 million during the quarter. This strong financial position is important for the execution of our longer-term growth plans.We continue to focus on improving the quality of our portfolio with investments in exploration and development that play to our core strengths in Colombia and Peru. During the third quarter, we had success with the Acorazado-1 exploration well on the Llanos 25 block in Colombia, which will be put on production in 2019. The company plans to drill 36 wells in the fourth quarter; 22 of these wells are new development wells at Quifa, 4 development wells will be drilled in our light and medium oil business unit and 2 of the wells are at Zopilote Sur on the Cravo Viejo block as a result of technical reviews of the asset and the granting of new acreage around the block from the ANH. We've recently finished drilling an exploration well at Coralillo-3 and this has encountered encouraging preliminary results similar to those that we encountered earlier in the year in Coralillo-1.Wells at Jaspe and the start of a water flood pressure maintenance project on the Orito and Neiva CPI blocks look to add additional reserves and improve the company's overall decline rates. During the third quarter, we also terminated 2 long-term ship-or-pay transportation contracts on the Bicentenario and Cano Limon Covenas pipelines for non-provision of service. The termination of these contracts has reduced our future transportation commitments. In addition, we have recently initiated a number of cost savings projects, which will improve the organizational and operational efficiency of the company in 2019 and beyond. The benefits of these projects are already being demonstrated. For example, last month the company reduced office headcount by 15%.Moving to my third theme team, we continue to work on realizing the company's medium to long-term growth opportunities. These projects include our continuing exploration program in 2019, licensing round opportunities in Colombia and Ecuador and the potential for new contract in Peru on Block 192. On this last block, we are in frequent contact with Petroperu and the Peruvian authorities on the developing process to return the block to the state company and we remain interested in a 2019 process to select a partner for the block if the terms are competitive. I continue to visit Peru frequently and have been very impressed with the operations we have in the country, including our offshore Z1 block where we are in the process of testing the gas production potential from the Albacora and Corvina fields.I will now turn the call over to David Dyck, our CFO, who will review the financial highlights of the third quarter.
Thank you, Richard, and good morning. Frontera reported very positive financial results in the quarter. We generated net income of $47 million or $0.47 per share during the third quarter, the first time the company has generated net income since the first quarter of 2017. As previously mentioned, we generated $65 million in free cash flow in the quarter with cash flow from operations of $189 million exceeding capital expenditures of $124 million. This has contributed to the growth in our cash balances by over 7% to $786 million in total cash and by over 6% on an unrestricted basis to $587 million. In October, $45 million of restricted cash became unrestricted with the satisfaction of terms relating to the sale of PEL. Additionally, $64 million of standby letters of credit were drawn relating to the Bicentenario transportation commitments. This amount will be a use of cash during the fourth quarter, but the company is pursuing actions to reclaim that money over time.Working capital remained stable at $331 million, an increase of $14 million compared to the second quarter of 2018. General and administrative costs decreased 12% quarter-over-quarter as we have simplified the organizational structure and made the company more operationally efficient. Further cost savings are expected to be realized in the coming year as operational processes in the field are streamlined and we continue to look for additional ways to simplify our business. The balance sheet remains very strong at Frontera as we are focused on maintaining conservative and manageable leverage metrics for the company. Net debt to trailing 12-month EBITDA is 0x. Debt to book capitalization is 22.7% and interest coverage is at 12x EBITDA on a trailing 12-month basis. It is important to note that these conservative metrics have been maintained during a period when the company was negatively impacted by our legacy hedge positions and higher transportation costs.Based on the strength of our financial condition, S&P has reaffirmed its BB- credit rating with a stable outlook on both the company and its long-term debt. As we move into 2019, the company is updating its hedging strategy. With our hedges rolling off at the end of October, we are unhedged for the remainder of 2018. For 2019, our goal now is to hedge sufficiently to protect Frontera's capital expenditures and financing costs through a combination of financial instruments while retaining the upside benefit from higher Brent oil prices. Finally, the company is reaffirming its annual guidance for operating EBITDA of $400 million to $450 million and per barrel transportation costs of $12.50 to $13.50 per barrel. Other guidance targets have been updated for year-to-date results. Capital expenditures for the full year are now forecast to be between $440 million to $460 million, down 5% at the midpoint from the previous range of $450 million to $500 million.Additionally, general and administrative costs have been have been decreased by 5% to reflect savings from our organizational efficiency programs. Annual production guidance is reduced 5% at the midpoint to between 63,000 to 65,000 BOEs per day reflecting the loss of production in Peru and higher PAP royalties that we mentioned earlier. As a result of lower production volumes, production cost per barrel is now forecast to be $14 to $14.50 per barrel for the full year, an increase of 10%. Lastly, I would like to highlight the improved trading liquidity of the company's equity. Over the past 6 months following the two-for-one share split and the implementation of a normal course issuer bid to buy back the company's stock, the average daily liquidity has nearly quadrupled to approximately 200,000 shares per day reflecting the benefit of these actions. To date, we have purchased 480,561 shares and we have spent $6.7 million on that program. We believe that there's room for continued improvement and we're exploring options to help increase trading liquidity.I will now turn the call back to Richard for some closing comments.
Thank you, David. As you have heard, Frontera is making progress on numerous fronts. Production from our core assets remain strong and we are near to completing a major infrastructure project at our most important field Quifa. We are simplifying our business and reducing costs with significant progress made in 2018 in transportation costs and in G&A. Our 2019 budget will reflect the ongoing efforts to reduce our field operating and capital costs. We continue to position for new opportunities to strengthen our portfolio and provide new production in the medium and long term, which we are well positioned for with our strong balance sheet. And as the Chairman said in his introduction, we continue to look at other options which help to create value for our shareholders.With that, I'd like to turn the call back please to our operator, Jodie, who will coordinate any questions that you might have.
[Operator Instructions]. Your first question comes from the line of Jason Wangler of Imperial Capital.
Wanted to ask as you start talking about 2019, I think the beginning of this year you started to say look, we're going to start to deploy some of this cash that we built up and obviously the strong balance sheet and really the balance sheet's only gotten better throughout the year as you guys cut costs and oil prices have been helpful and that should obviously continue with the hedges rolling off. As you look at '19 and obviously you talked about a bunch of different things that you guys can be doing financially and operationally, how do you think about kind of positioning that and do you expect to kind of deploy more capital I guess into those initiatives given where you're sitting?
Thank you for the question. I mean as you observe, we've been able to build our cash position during this year thanks to the strong cash generation that we've had from the business. I think in terms of what we're going to do in 2019, it's a little bit premature to talk about that at this stage. I think we are still in the process of finalizing our plans for 2019 and obviously once those are final and signed off by our board, we will be sharing them. But I think directionally, I think what you can expect to see is a strong capital program to help sustain our business. But in addition, we're looking at other ways that we can deploy our cash to ensure that we are rewarding our shareholders. And so, that's the -- that's what we're currently involved in.
Okay. And you talked about obviously it in the release as well as in your prepared remarks, but I believe you put on some floors for hedging. Is that kind of a strategy going forward now with the balance sheet where it's at, just basically protecting the downside and then allowing you to participate in the upside or should we look for some other initiatives on that side?
Jason, let me ask David to address the hedging policy going forwards.
Jason, it's David. Yes, that's the way we're looking at our hedging program as we move into 2019. We're just at the beginning part of it and we're continuing to evaluate how we balance our hedging program with our capital expenditure program. But given where we've come from in 2018 looking at buying insurance through a put program is the initial part of our hedging program as we execute in 2019.
Your next question comes from the line of Jenny Xenos of Canaccord Genuity.
In your press release and just during your remarks, you mentioned that you're evaluating additional strategic initiatives designed to enhance shareholder returns. Now you did give a little bit of color saying you will continue to buy back stock and improve stock liquidity, optimize your portfolio. What other strategic initiatives are you considering and what specifically are you doing to further improve stock liquidity?
Jenny, thank you very much for your question. Of course, when we talk about strategic initiatives, we can't talk in detail about things that haven't yet been finalized or that we're still working on. I think what -- let me ask David in a minute to just talk about some of the initiatives we're looking at around our buyback program and other ways that we're thinking of potentially rewarding shareholders. But I think the core focus at the moment obviously is setting a plan for 2019 that will maintain the strong operating performance of the company and the strong cash generation that comes from our business. But with that, let me just hand over to David to give you a bit more color on some of the thinking that we've got around the other strategic initiatives.
Jenny, it's David. Yes, you mentioned the share buyback program and it's been very successful as I noted in my earlier comments. To date we've been participating I think very modestly in that program and yet we've seen a tremendous success. So as we move into 2019, we'll continue that program and if it makes sense, we'll look at options to increase or expand that share buyback program through 2019. And I guess the other part is just striking a balance between our organic initiatives within our core business and providing near-term returns to our shareholders. But as Richard said, it's premature to be any more specific at this point in time.
Okay. With regards to the production guidance, you were previously forecasting 3,000 barrels a day to 4,000 barrels a day of additions at Quifa by year-end and you lowered that by 1,000 barrels. Why is that considering that your water handling capacity commissioning is on schedule? And what is the inventory of the shut-in wells that you could bring online to take advantage of this additional water handling capacity?
Thank you for the question, Jenny. Let's ask Duncan Nightingale, who runs our operations, to address the production forecast for the new CMA project and what the plans for that are.
This is Duncan speaking. The guidance has been lowered a little bit not because we haven't got the well inventory to reactivate or the production potential for that matter. It's really now that we are at the full implementation of the buildout of the facilities, there is a staged implementation of 3 pumps. Each pump has about 167,000 barrels a day of water handling capacity, but each has to go through a different stage of commissioning. The facilities have to go through a different stage of pressure testing upon the implementation of each pump. So for 2018, the guidance that you've been given is more applicable to the staged implementation and the opening up of the wells. As Richard said, we expect to open up about 80 -- reactivate, sorry, 80 wells in addition to bringing on new wells which we are currently drilling. And on a net basis, that should contribute between 2,000 barrels a day and 3,000 barrels a day, probably closer to the -- closer to the 3,000 barrels a day end. But until we get those facilities fully commissioned, the pumps fully activated; we're just being a little bit cautious in our approach to that production.
Understood. And what is the total kind of estimated inventory of wells that may be reactivated as a result of this additional capacity in addition to that 80?
We have the current water handling capacity is about 1.3 million barrels of water per day. The new water handling facilities we're bringing on gives us another 450,000 barrels of water per day and there is some potential optimization depending on the pressures and water cuts et cetera beyond that. So, that will allow us to reactivate additional wells in 2019. I can't give you the exact number at the moment yet, but we do have an inventory probably somewhere in the region of about 120 to 130. So beyond the 80 that we're reactivating in 2018, there could potentially be another 50.
And finally, could you shed some light on the water injection restrictions at Casimena? How temporary are they?
Yes. The water handling restriction issue that we have at Casimena is temporary. We had a production there of about 1,400 barrels a day. Unfortunately, we had to cut that production in half due to a dispute between the ANLA, which is the sort of the environmental regulatory arm, and the ANH. We have 2 conflicting permits, which allow us which both stipulate 2 different injection volumes. So we're currently trying to resolve that dispute between the 2 regulatory agencies at the moment, which is most likely going to result in the submission of a new water injection permit. So at the moment, we have to abide by the lower water injection limit, which basically in terms of barrels of oil per day cuts us back from about let's say 1,400 back to back about 700 barrels a day. So, those additional 700 barrels will be recovered in the early part of 2019.
[Operator Instructions] Your next question comes from the line of Rene Burgos of CarVal.
Can you guys hear me?
We can, Rene.
Three things. Thing number one that I wanted to just address, your adjusted EBITDA for this year year-to-date would have been what $470 million adjusted for the net effect of the hedges. Is that fair just to back out $167 million?
Yes, that's about right.
And if I were to assume for the remainder of the year, you guys are assuming $100 million to $150 million to be generated by the end of this year. Is that right because you had $300 million and you said $400 million to $450 million?
$300 million to the end of the third quarter and about around that. Yes, that's correct, Rene.
Right. I just wanted just to pick your brain because based on where oil prices are, I thought that your assumptions were a little bit lower at the beginning of the year. So, I just wanted to understand whether $100 million to $150 million came in. Why such a large difference there? And second, I'm assuming that if that is the number, then your EBITDA for the full year unadjusted for hedges would have been $620 million, right?
Yes, that's about right unadjusted for hedges. A little bit higher actually.
Okay. So any comment as to the main reasons why because you're also increasing production at the end of the quarter -- the EBITDA just seems a little bit low to me.
Well, we've looked at our fourth quarter fairly conservatively relative to oil price assumptions and as well as we've noted, we've got increase in costs. We've got -- with increased oil prices we've had, we've seen double-digit inflation with respect to our production costs. And so, that kind of offsets some of the potential positive impact that you're talking about.
Okay. The second point that I wanted to address was on Bicentenario and I just think it's a little funny. You guys are working with the Ecopetrol on Quifa and then fighting them on Bicentenario or Senate. Can you -- you mentioned that there were some draws on your -- on some liquidity lines or some LoCs. Can you share with me what the total quantum is and any update on that discussion? Any feedback from them or anything that you can share with us at this point? I know that it's a very delicate situation.
Well, so Rene, its Richard here. I mean I think the first thing I'd say is that Ecopetrol is an important partner of ours in a number of areas in Colombia and we continue to work in a very constructive way with them in Quifa and in our other joint venture projects. The fact that we elected to terminate our pipeline contracts was that was a contractual decision that we made and as part of that, as we've announced in the press release today, we did have in place some standby letters of credit to a total of about $64 million, which Bicentenario has now drawn on them, which will be reflected in our third quarter and fourth quarter financial results. And that is something that is obviously totally outside our control. It's something that -- in our view, this is money that we will be seeking to recover in the future once there is more clarity of a determination of the contracts. But I think other than that, there's nothing else to say on this on this situation at the moment. We continue to work normally with Ecopetrol on our other projects and on the pipelines, there's no developments.
Well, again that's encouraging. They did mention Ecopetrol in their conference call that they've been reversing the flows. So, are you guys expecting to see any sort of pickup on income from that type of activity from that pipeline or how would that affect your investment in that pipeline?
Well, the -- I mean the Cano Limon Covenas pipeline continues to stay out of operation. Even since July -- early July when we canceled our contract on it, it's only worked for a few weeks since then and it's down at the moment. So in order to evacuate oil from the Cano Limon area, the pipeline is being reversed and that's something that obviously does feed into the financial results on the pipeline.
Okay. And I promise few more things. On reserves, do you guys have any ballpark to share with us what it is that you're expecting? I mean is it -- can you at least give us an indication. Are you expecting returns this year to be -- with the work that you've done to date to replace the consumption be greater, be lower and maybe just ballpark it as to because I know you cannot give specifics. I just want to directionally understand where should we be thinking about reserves for next year considering the investment that has been done on the development side?
Rene, I mean that's a very valid question. Obviously, Frontera like a number of companies in Colombia has a relatively short reserves to production life, but that's sort of the nature of the business here in this country. And what we have said we will intend to do each year is replace 100% of our production with new reserves. In terms of the actual numbers for 2018, I can't share any numbers with you yet because we're in the middle of our reserves auditing process with DeGolyer and MacNaughton. Obviously, they'll need to finish their work and we will then update everybody on our reserves at 31st December. I would just reiterate that we intend wherever possible to replace 100% of our reserves and through the year we have been announcing a number of successful projects. We had discoveries in the Guatiquia block at Alligator and Coralillo, in the Quifa area, we found new heavy oil deposits at Jaspe, we've made the Acorazado discovery and obviously, a very significant development well drilling program across our assets also brings new reserves. So we have confidence that we're going in the right direction, but we don't have any numbers yet.
Okay. And my last question is -- and this comment goes to David. As an avid follower of the story and an investor, I think you guys have done a lot of terrific things since you guys took over, but I would just remind you that the stock continues to trend lower. And when you referenced the pluses in share buybacks and other initiatives, as someone sitting on this other end is a little bit -- it's a little bit tough to swallow. We will like to see more action being taken because I am a firm believer of the market not really recognizing the true value. I mean this company on an unhedged basis you just confirmed would have generated $600 million plus of EBITDA and yet -- and have $800 million in cash and yet the stock sits where it sits. So I'm sorry to kind of just let you guys go with that comment, but just be mindful of -- I think there has been some good operating successes. The share buyback may have worked operationally, but clearly, the stock is not reflecting what I believe could be a true value. So, I will leave you with that comment. And as always, thank you very much for the hard work and looking forward to catching up on the next call.
Thank you very much, Rene, and please understand that those issues are not lost on us and we're working as hard as we can to have positive impacts on our share price.
There are no further questions at this time. Should you have any further questions, please email ir@fronteraenergy.ca. This concludes the call. Thank you all for participating.