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Good morning. My name is Sylvie, and I will be your conference facilitator today. Welcome to Frontera Energy's Third 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. [Operator Instructions] 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 actual results or events to differ materially from current expectations are disclosed in the company's Q3 MD&A released November 4, 2020, under the heading 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 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 statements.And I would like to turn the call over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy. Please go ahead.
Thank you, operator, and thank you, everyone, for joining today's conference call to review Frontera's third quarter 2020 financial results. Our third quarter results continue to demonstrate Frontera is a company that can react and thrive through market volatility and regardless of circumstances. The company has a strong balance sheet and cash position, a stable production base, disciplined cost control and a portfolio of growth assets in addition to its significant midstream assets. Since the decline in oil prices in the first quarter, the company's priority has remained to protect the strength of its balance sheet and financial position.We finished the third quarter with total cash of $421 million, including restricted cash of $161 million. In addition, we've strengthened the company's hedge position for the next 3 quarters, providing downside protection in the face of continued volatility in the price of oil. Frontera production rose in the quarter, while production and transportation cost per barrel declined, giving us a more stable and profitable production base going forward. The cost savings this year are permanent and lasting, reducing breakeven costs and improving the economics of the portfolio. This is a testament to management's ability to continue optimizing our operations despite the challenges in the current environment. Our ability to nimble manage production output and costs, combined with our strong balance sheet, allows us to be strategic regarding increasing production as we position for market stability and incremental global recovery.In addition to our sustainable core production base, our exploration portfolio is increasingly promising, offering great upside for our future. Next year, we expect to execute on some of the exciting exploration opportunities in our portfolio, including offshore Guyana, resuming exploration in the Lower Magdalena Valley, continuing from our successful La Belleza well earlier this year, and in Ecuador. Last quarter, we also moved forward to consolidate our position in Puerto Bahia, purchasing the equity and credit interest of the International Financial Corporation (sic) [ International Finance Corporation ], and related funds in the port. Gaining full control of the port opens significant optionality as we continue to explore opportunities to maximize the value of the company's midstream assets, unlocking further shareholder value.In summary, Frontera continues to be well positioned for upside in the current environment and for long-term growth in value creation. We look forward to sharing the details of our progress in the future.I will now turn the call to Richard Herbert, our CEO, for additional details on our operational and financial results.
Thank you, Gabriel, and good morning, everybody. Thank you for joining our call today. The third quarter saw a modest improvement in economic activity and oil price as the world adjusted to the new reality of the COVID-19 pandemic. Nevertheless, conditions remain challenging, particularly as the pandemic has strengthened recently. Regardless, throughout the year, we have faced our challenges head on and have emerged a stronger company. As Gabriel just explained, our acquisition of a controlling interest in Puerto Bahia was a strategic investment, and now we are consolidating the results from the port in our financial reporting.Please keep in mind, as we review our operational and financial results, the consolidation impacts to comparability of our financial statements with prior period, most notably in net income and EBITDA, transportation costs, total cash and total debt. We will make reference to the impacts of the consolidation throughout this call where relevant.At the end of the third quarter, our cash position was effectively unchanged over the prior quarter at $260 million, which includes $2 million from the consolidation of Puerto Bahia versus $256 million at the end of the second quarter. We were buoyed by stronger revenues, a combination of higher sales volume, including the delay of the sale of one cargo from the second quarter, and improved Brent oil pricing during the quarter. Additionally, our capital expenditures were relatively light during the quarter as planned. In July and August, as oil prices firmed up, we brought back online a portion of production volumes originally shut in, in April. Overall, quarterly production was above the high end of second half guidance. In the fourth quarter, increased capital expenditures are targeted towards maintaining production volumes within our guidance range to 40,000 to 43,000 barrels per day.In Peru, with the ongoing community blockade and the closure of the Norperuano pipeline, we have maintained the field in Block 192 shut in throughout the quarter. Frontera notified PeruPetro of lifting of force majeure on July 30, and that the 6-month extension of our service contract, which was negotiated in March, will now expire in February 2021. We continue to hold production costs lower in the third quarter, maintaining the momentum from our cost initiatives this year, despite bringing online much of our shut-in production. Importantly, we maintained water volumes in Quifa at a lower, more optimal level to manage our energy costs, which are the largest component of production costs in the field. Going forward, we will continue to monitor production levels in Quifa and overall field economics and continue to manage energy costs in the field. Overall, third quarter production costs averaged $8.97 per BOE, essentially unchanged from the prior quarter. Importantly, this demonstrates that the cost initiative that we have taken are sustainable and will continue to benefit us going forward.General and administrative costs were impacted by $1.2 million from the consolidation of Puerto Bahia. Excluding the consolidation, general and administrative costs totaled $9.3 million in the third quarter, down from $9.7 million in the prior quarter. Our corporate headcount was further reduced by around 7% from the end of second quarter. Our primary office workforce in Colombia continues to work remotely, reducing office costs and nonessential costs, such as travel and security. We are working on a pilot program to allow workers to come back to the office on a part-time basis to ensure that these cost savings continue into 2021. And transportation costs were $9.89 per BOE in the third quarter versus $11.28 per BOE in the prior quarter, largely as a result of the consolidation of Puerto Bahia, which lowered reported transportation costs by $0.94 per BOE compared to the second quarter of 2020.Looking to the future, our portfolio of opportunities remains strong. In the fourth quarter, we expect to ramp up activity to 4 rigs from 1 rig in the third quarter. Our Colombian activity will be focused on workovers and well services to ensure a stable production profile for the rest of the year. We plan to test our Asai discovery in the Guama block in Northern Colombia and to begin construction on facilities for putting the La Belleza discovery on production. In Ecuador, Frontera continues working to obtain environmental permits to start exploration activities in the Perico block. The permit is expected to be received late this year, and the first well is expected to be drilled during 2021. Operational activities in Guyana have been affected throughout most of 2020 by the COVID-19 pandemic. As a result, we continue constructive and collaborative discussions with the regulatory authorities in Guyana with our joint venture partner, CGX Energy, on our work commitment.This quarter, we continued our focus on protecting the company by maintaining our strong balance sheet, stabilizing production volumes and reducing cost. In addition, our portfolio of opportunities continues to mature so that we will be ready to capture portfolio upside when the time is right.I would now like to turn the call over to Alejandro Pineros, our CFO, who will take you through the financial details of the quarter.
Thank you, Richard, and thank you to everyone who has joined our call today. In the third quarter, Frontera generated positive operating EBITDA of $52 million versus $38 million in the second quarter 2020, primarily due to one Vasconia cargo deferred from the second quarter as well as improved Brent prices. Third quarter Brent crude oil prices averaged to $43 per barrel, 30% higher than the second quarter of 2020, reflecting a partial rebound of oil prices during the quarter. Offsetting some of the higher revenue, we recognized a $6 million loss on risk management contracts. We currently have outstanding Brent-linked risk management contracts covering average production of approximately 100% of current production levels, with floors of $35 to $37 per barrel for the remainder of 2020 and 50% of current production levels at $36 per barrel for the first half of 2021. Combined with the net cash balance and flexibility with respect to next year's capital program, our hedging program further positions Frontera with sufficient liquidity to manage through this period of volatile oil prices.As previously discussed, Frontera maintains a strong liquidity position with a total cash position of $421 million as of September 30, 2020, including restricted cash of $161 million. Note that approximately $26 million of restricted cash and $2 million of cash and cash equivalents is due to the consolidation of Puerto Bahia this quarter. The company has borrowings consisting of $350 million of long-term unsecured notes maturing in 2023 and no mandatory near-term principal payments. As part of the consolidation of Puerto Bahia this quarter, Frontera now reports $203 million of the port's debt on its balance sheet. The additional debt is nonrecourse to Frontera beyond our existing commitment under the equity contribution. Frontera's consolidated total indebtedness, as defined under the indenture covenant, was $352 million at the end of the third quarter. Excluding Frontera's cash and cash equivalents, the company's net debt was approximately $113 million at the end of the third quarter.Interested investors can find the details in our MD&A and press release. We also invite investors to visit our website at www.fronteraenergy.ca and review our updated ESG presentation and 2019 Sustainability Report. We released updated guidance on August 6, 2020, along with our second quarter financials and operational results.Our guidance metrics remain unchanged, with only adjustments to transportation costs due to, one, the acquisition of Puerto Bahia; and two, changes to the reporting treatment of unused ancillary contracts. Our guidance from August did not assume that Lot 192 in Peru will be coming back online. Thus, there is no adjustment needed for Peru? Based on an oil price assumption of $45 per barrel, which was the near-term oil price in early August, we continue to target year-end total cash in the company of $360 million and minimum cash and cash equivalents of $225 million. We are working on a number of initiatives to reduce restricted cash. These cash figures exclude the impact of any financing or acquisition and future initiatives.We 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 a full year 2020 average expected to be between $9.5 to $10.5 per barrel. For transportation costs, we are guiding the second half transportation costs of $9.5 to $10.5 versus full year 2020 transportation cost of $10 to $12 -- $11 to $12 per barrel. 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.I will now turn the call back over to Richard for some closing comments.
Thank you, Alejandro, and thank you for everyone for attending our call. Over the last 2 weeks or so, as the COVID-19 situation has worsened once again, oil prices have once again fallen to 5-month lows. I would like to remind our listeners that Frontera remains well prepared to weather this difficult period. And I also want to recap the relevant metrics that we have talked about during this call.At the end of the third quarter, total cash position was $421 million, including restricted cash of $161 million. Our net debt, excluding nonrecourse debt at Puerto Bahia, was $113 million at the end of the third quarter. Following work done to drive down costs and to shut in our higher-cost wells, the company has reduced average field breakeven from $33 per barrel in 2019 to estimated $27 to $28 per barrel in the second half of the year. Including upstream corporate costs, which is G&A, interest and leases, we expect our upstream corporate breakeven to be around $35 per barrel. We have all our production hedged around $35 per barrel for the remainder of 2020, and a little over half of our production hedged around this price level for the first half of next year.Over the next month, we are going to monitor the economic situation as we finalize our 2021 budget. While we are hopeful that oil prices will stabilize to a degree next year, we will be planning for various scenarios to ensure that the company is able to survive the worst, while maintaining growth optionality to the upside.I will now turn the call back to our operator, who will open the call up for any questions that you may have. Thank you all for listening.
[Operator Instructions] And your first question will be from [ Alvin Chu ] at Trend Capital.
I have 3 questions, really, so I'll begin the first one. Could management disclose what is the latest breakeven brand oil price post-hedging? And also second question relates to the $200 million debt at Puerto Bahia, right? I just wanted to understand what is the repayment profile there? And can management give us additional color on the financial covenant bridge there at debt level? And then the last question, in regards to -- could management give us like guidance on full year CapEx? Is there any change from previous guidance?
I'm going to ask CFO, Alejandro, to talk about the Puerto Bahia debt, and let me just quickly address your other 2 questions. As we touched on, our breakeven Brent oil price at an upstream level is in the order of about $35 a barrel. And we've worked that down by quite a significant amount this year, largely through reductions in our operating costs and also with reductions in our G&A. We've had less success in reducing our transportation costs, we have been able to defer some of our transportation costs in an agreement with the main transportation companies in Colombia. But yes, that's a deferral rather than a reduction. But we've made significant progress in reducing our Brent price this year. And in terms of the impact on -- with hedges, as you will see in our financial results, most of our hedges actually -- the draw on most of our hedges is between $35 and $37 a barrel Brent. So at the moment, while the oil price remains above that, it doesn't have an impact, but it does protect us if we see oil prices going any lower in the future. And just on CapEx...
Sorry. So breakeven price is $35, right? You said -- I didn't quite hear you properly at the beginning.
Yes. We -- if we look at -- what we call our upstream breakeven price, which is the cost -- our production and transportation costs in the field, together with the G&A that comes with that, we're at about $35 a barrel.
Okay. All right.
And just on CapEx, just to say that we are on track to spend the CapEx that we've outlined for this year. We obviously made a major change in our CapEx program back in March, and we shut down a lot of activity. But we're on track to spend the CapEx what we said we -- the programs during the year.
So it's about $120 million, right, for the full year, the CapEx?
Yes, that was -- that's on the upper end of the range. But yes, that's the maximum that we would spend this year.And to address the Puerto Bahia debt and the repayment schedules, let me hand that to Alejandro to answer that.
Thank you, Richard. So the Puerto Bahia, that $200 million that you see now in our financials is the original project finance that was put in place back in 2014 for the construction of the port. The final payment or the schedule goes up until 2025 to finish paying the $200 million. It was originally at $370 million. And the covenant bridges are in relation with defaults that were made during the time of the construction of the project as part of the project financing. So some of these covenants have been in place -- some of these bridges have been in place for a number of years, and there has not been any acceleration of the date whatsoever.
So the amortization of the loan is financed from the cash flows from the port, right? Could you give us a sense like whether the cash flows from the port is sufficient for this amortization or no? And how much is it, on an annual basis, is being amortized? Is it a straight line? Or is it certain unique shape of the...
It's not a straight line. It's something like $20 million, $25 million of principal per year, but it goes up in the future plus interest. What we have in place is an equity contribution agreement with the port up to $130 million. So far, it has been drawn $65 million. And that equity contribution provides for the deficiencies on the cash flows from the port. So Frontera covers the remaining part on the debt servicing up to $130 million. So far, it has been drawn $65 million. And that is 14% interest rate loans. So from the point of view of the control with which -- on the port is not only the 71% that we have on the equity but we also have some loans, mainly the ECA loan, $65 million from the port. And the important [ thing is that ] the $200 million is nonrecourse to Frontera beyond the equity contribution.
Just to add to what Alejandro is saying, this is Gabriel De Alba, the exposure that Frontera has, as Alejandro as mentioned, it's already the difference between the $165 million. So Alejandro, maximum exposure is that difference, correct?
Yes, it's up to $100 million -- up to $130 million.
Exactly. So if the remaining maximum exposure is $65 million.
Correct.
And notably, that is not in any form in the process of acceleration of any type or anything like that. In addition, even though it's called an equity contribution, Frontera has discretion on how the funding comes in. So in coordination with the port, the funding has been done not in the form of equity, but in the form of debt, which positions funding from Frontera senior in the capital structure of the port and above other shareholders, which makes high-ranking as a creditor in the capital structure of the port.
[Operator Instructions] And your next question will be from Chris Dechiario at Marathon Asset Management.
A couple of questions from me. I guess the first, you mentioned a year-end cash target of $350 million, which I assume includes restricted cash, that's a drop from the $421 million in the third quarter. Just wanted to maybe get an idea of what drives the reduction in cash between -- in the fourth quarter, where do you expect that to come from? That's my first question. And then the second question really relates to the Puerto Bahia as well. So maybe if you can just explain the rationale for buying this additional interest and consolidating it. And I think even more importantly, sort of what opportunities are you seeing to maximize the value there? And do you have any sort of time frame for when you might be able to do that?
Yes, Chris, good morning. Thank you for your questions. Again, I'll ask Alejandro to respond on the -- on our cash position in the third quarter versus our sort of target that we've signaled for the end of the year in a minute. And then on Puerto Bahia, as we sort of set out in the press release today, the real advantage to the Frontera of buying the IFC share of Puerto Bahia was to give us more control over the future direction of the port. The structure that we were under did not give us a sufficient level of control to be able to influence the future direction of the port. We have a number of strategic options for the way the port business develops in the future, and we wanted to be able to take control of that. And so by taking over the IFC interests, that now put us in a position where we're in control of the destiny of the port, and we've got some ideas that we want to push forward on with that in 2021. So that's the reason why we did it. Alejandro, in terms of the year-end cash target, can you explain the reduction in total cash in the fourth quarter to the target we've signaled for the -- sorry, third quarter to the target we've signaled at the end of the year, please, for Chris.
Sure, Richard. So Chris, we're finishing cash and cash equivalents in the third quarter at $260 million. Basically, we have remained flat over the past 3 quarters at that level. In August 6, we put our guidance that we will finish the year for cash and cash equivalents at $225 million assuming a $45 Brent price for the remainder of the year, and that's a minimum level. So I think what we are saying is that we are confirming that guidance that we put forward on August 6. Currently, at $260 million, we feel confident that we will meet that guidance. And it will depend on what happens to oil prices going forward. But basically, we are confirming our guidance. Our restricted cash went up to $420 million, part of that is the consolidation of the debt service reserve account in Puerto Bahia, which is restricted cash. So the $360 million for total cash was put in place in August before the consolidation of Puerto Bahia. So I don't think we're signaling that it's going down, I think what we're signaling is that $360 billion is the minimum level that we're having. Also, I wanted to highlight that we have -- as we mentioned in Q2, we have made payments to suppliers that were delayed during the second quarter. So now we are more current in terms of our suppliers. So I think we have managed to maintain cash and reduce payables, and the levels of cash we feel that we can sustained for the rest of the year. Obviously, it depends what happens with Brent prices for the remainder of the year. But if they were to stay at the levels that -- at $40, $45 levels, $45 level, we will be able to deliver guidance.
That's great. And then just one follow-up. You mentioned the payables, that you paid some down, which is great. I mean how much more do you think you have to pay down to get to sort of a normal level of payable days?
I think we're now -- we're current with our suppliers. We're basically paying things that are current, so we don't have anything that is past due except for some of the transportation payments that they provided for a delayed payment that will start in late November. It will go up until the second quarter of next year. So we have close to $20 million in transportation costs that have been delayed as part of an agreement with the pipelines in Colombia. So I think that's the only thing that is noncurrent. But -- it's current, but it's something that has a payment agreement, if you will.
And at this time, we have no other question. Should you have any further questions, please e-mail ir@fronteraenergy.ca. This does conclude the call. Thank you for participating, and have a good day.