Frontera Energy Corp
TSX:FEC
Earnings Call Analysis
Summary
Q3-2023
In a robust third quarter, Frontera Energy's core businesses shone, keeping production cost, operating EBITDA, and capital expenditure within the set guidelines. A significant discovery in Guyana boosted prospects, with a strategic review in progress to maximize this asset. The Colombian and Ecuador upstream segment saw a daily production average of 41,477 BOE, marking a 15% jump in heavy oil production. The company's midstream ventures yielded a 14% income rise, with a 17% increment in total pumped volumes to roughly 252,000 barrels per day. Strides in cost efficiency were evident, with a 4% general and administrative cost reduction and the initiation of a performance enhancement plan. Frontera's cash position strengthened to $221 million, and capital spending tallied at $74.1 million for the quarter.
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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 2023 Operating and Financial 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. There will be time for questions following the speakers' remarks. Analysts and investors are reminded that any additional questions can be directed to the company at ir@fronteraenergy.ca.
This call contains forward-looking information within the meaning of applicable Canadian securities laws relating to activities, events or developments the company believes or expects will or may occur in the future. Forward-looking information reflects the current expectations, assumptions and beliefs of the company based on information currently available to it. Although the company believes the assumptions are reasonable, forward-looking information is not a guarantee of future performance. Forward-looking information is subject to several risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking information.
The company's MD&A for the quarter ended September 30, 2023, and the company's annual information form dated March 1, 2023, and other documents it files from time to time with securities regulatory authorities describes the risks, uncertainties, material assumptions and other factors that could influence actual results. Any forward-looking information speaks only as of the date on which it is made. And the company disclaims any intent or obligation to update any forward-looking information, except as required by law.
I would now like to turn the call over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy.
Thank you, operator. Good morning, everyone, and welcome to Frontera's Third Quarter 2023 Earnings Call. Joining me on today's call are Orlando Cabrales, Frontera's CEO; and Rene Burgos, Frontera's CFO. Also, available to answer questions at the end of the call, we have: Victor Vega, VP, Field Development, Reservoir Management & Exploration; Alejandra Bonilla, General Counsel; Ivan Arevalo, VP, Operations; and Renata Campagnaro, VP, Marketing, Logistics & Business Sustainability.
Frontera's three core businesses continue to deliver solid performance. In the company's Colombia and Ecuador Upstream Onshore business, production cost, operating EBITDA and CapEx are within 2023 guidance at $80 per barrel average Brent price for the year. The company delivered strong operational and financial results and increased its total cash position, including restricted cash, to $221 million as of September 30.
In its potentially transformational Guyana Exploration business, Frontera and joint venture partner, CGX Energy, announced the discovery of 342 feet, 104 meters, of net pay at North Corentyne, confirming the significant potential of the Corentyne block. With the joint venture to our drilling program now complete, the joint venture, with support of Houlihan Lokey, a leading global investment bank and capital market expert, is actively pursuing strategic options for its potentially transformational Guyana Exploration business, including a potential farm-down as it progresses its efforts to unlock value towards potentially transformational investments in Guyana. In its stand-alone and growing Colombia Midstream business, income increased 14% during the quarter. And preconstruction activities have begun on the important pipeline connection between Frontera's Puerto Bahia liquids terminal to the Cartagena refinery. Puerto Bahia will build, operate and maintain the 6.8-kilometer, 18-inch bidirectional hydrocarbon flow line, which will have a nominal capacity of 34,000 barrels per day. The connection will be capable of handling imported and domestically produced crudes and other hydrocarbons.
Importantly, during the quarter, the company continued to drive cost out of the business, reducing G&A by 4%. Building on this positive momentum and to better position the company for sustained long-term success, subsequent to the quarter, Frontera's Board of Directors approved a performance improvement plan that will improve organizational and operational efficiencies, reduce operating costs and better align the company's workforce with current business needs, top strategic priorities and key growth opportunities. Frontera will conduct again an NCIB to permit purchases of up to 10% of its outstanding float.
I'm excited about the strong performance from Frontera's three key businesses and the tangible steps the company is taking to enhance value for its shareholders. I'll now turn the call over to Orlando Cabrales, Frontera's CEO; and our CFO, Rene Burgos, who will share their views of Frontera's third quarter results and the performance of our three core businesses. Orlando?
Good morning. Thank you, Gabriel, and good morning, everyone. Frontera delivered a positive third quarter result.
Year-to-date, our daily production has averaged 41,477 BOE per day. Compared to the same period last year, we increased our heavy oil production by 15% due in part to increased water handling at SAARA and increased natural gas liquids production by 100% compared to the same quarter last year.
At CPE-6, we delivered record quarterly average production of 5,803 BOE per day, up 13% quarter-over-quarter, through development drilling, new flow lines and expanded facilities. CPE-6 also recently achieved record daily production of 6,435 barrels per day.
Capital spending for the quarter was $74.1 million primarily to drill 14 development wells at Quifa, Cajua and CPE-6, as well as 1 exploration well in the Perico block in Ecuador. The company has also invested in new flow lines in the Quifa block to connect with the SAARA project and has also invested in improved development facilities to increase water-handling capacity in the CPE-6 block.
Taking a closer look at our three core businesses. In our Colombia and Ecuador Upstream business, Frontera produced 40,150 BOE per day from its Colombian operations. We currently have three drilling rigs and three workover rigs active at our Quifa and CPE-6 blocks in Colombia. As I have mentioned before, increasing water-handling capacity is key to Frontera's efforts to grow production at Quifa, where our current water-handling capacity is approximately 1.6 million barrels of water per day.
During the third quarter, Frontera continued its recommissioning efforts at SAARA, its reverse osmosis water treatment facility, which has nameplate capacity of up to 1 million barrels of water per day. As of October 2023, the plant has processed 16.3 million barrels of water as part of its recommissioning program, providing irrigation source water to the company's nearby ProAgrollanos palm oil plantation. The company is actively engaged in discussions with Ecopetrol to permanently bring the SAARA facility online under terms mutually acceptable to both companies.
In Ecuador, Frontera's share of production was 652 barrels per day of medium crude oil compared to 613 barrels per day in the prior quarter. On the Frontera Perico block, we drilled the Perico Centro-1 well during the quarter with oil found in 3 intervals and initial tests delivering average production of approximately 800 barrels per day of 28-degree API medium crude oil. The company believes that the Upper Holli presents additional exploration and production opportunities. With the completion of drilling activities at the Perico Centro-1 well, the company has satisfied its four-well exploration commitment on the block.
In addition, the Perico Norte A4 well was completed on November 4 of this year with initial production rates of approximately 1,200 barrels per day of 29.4-degree API crude oil. The company continues to conduct long-term testing at the Jandaya-1, Tui-1 and Yin-1 exploration wells as it prepares environmental impact assessments in advance of obtaining production environmental licenses.
Turning now to our Midstream Colombian business. We continue our efforts to unlock shareholder value from these core businesses. Building on Gabriel's comments about the preconstruction activities that are between Puerto Bahia and Reficar, I will add that once in service, the connection will enable the continuous transport of crude oil and other hydrocarbons between Puerto Bahia's port facility and the Cartagena refinery.
Since the announcement in August 2023, the connection project has already achieved notable technical, environmental, social, financing and procurement milestones. I would like to thank our partner, Reficar and Ecopetrol, for their dedication to complete the connection agreement with us and look forward to exploring the full potential of the connection in the coming months and years.
Regarding our midstream business results. Total ODL volumes pumped were approximately 252,000 barrels per day in the third quarter, up 17% compared to the third quarter of last year. Puerto Bahia liquids volumes were approximately 54,000 barrels per day during the third quarter, down 11% compared to the third quarter of last year, driven mainly by lower imported crude volumes. Puerto Bahia liquids revenues were $7.8 million during the third quarter, up 1% compared to third quarter of 2022, mainly due to higher tariffs. Adjusted midstream EBITDA in the third quarter was $29.9 million compared with $17.6 million in the second quarter -- in the third quarter of last year.
Before turning the call over to Rene, I would like to discuss our Guyana Exploration business. At the joint venture announced yesterday, we have discovered a total of 114 feet, 35 meters, of net pay at the Wei-1 well and a total net pay of 342 feet, 104 meters, discovered to date on the Corentyne block, approximately 200 kilometers offshore from Georgetown, Guyana.
The Wei-1 well was targeted at Maastrichtian, Campanian and Santonian aged stacked sands within the channel and fan complexes in the northern section of the Corentyne block. As reported on June 28 of this year, the data acquisition program at the Wei-1 well included wireline logging, MDT fluid samples and sidewall coring throughout the various intervals. Based on this data acquisition program and additional information provided through the independent laboratory analysis processes, the JV is pleased to report the following.
In the Maastrichtian, Wei-1 test results confirm 13 feet of net pay in high-quality sandstone reservoir with rock quality analogous with that reported in the Liza Discovery on the Stabroek block. Fluid samples retrieved from the Maastrichtian and log analysis confirm the presence of sweet medium crude oil with a gas-oil ratio of approximately 400 standard cubic feet per barrel. These results demonstrate the potential for a stand-alone shallow oil resource development across the Corentyne block.
In the Campanian, petrophysical analysis confirms 61 feet of net pay almost completely contained in one contiguous sand body with good porosity and moveable oil. Oil exampled during MDT testing as well as samples analyzed downhole confirms the presence of light crude oil. In the Santonian, petrophysical analysis confirms 40 feet of net pay in blocky sands with indicators of oil in core samples.
Although current according interpretation of the Campanian and Santonian horizons show lower permeability than the high-quality Maastrichtian, the JV believes these horizons may offer additional upside potential in the future. There were no safety or environmental incidents through Wei-1 well operations. As is normal course following discoveries such as those made by the JV at Wei and Kawa, additional operational activities will be required before commerciality can be determined.
Total cost associated for the Wei-1 well are now estimated to be within $185 million and $190 million following the successful implementation of several initiatives. Final working interest calculation with our JV partner will be determined in December of this year after closeout of the Wei-1 well. I would now like to turn the call over to Rene, Frontera's CFO.
Thank you, Orlando and Gabriel. Good morning, everybody. Thank you again for participating on our call, for your interest in our company and your continued support. I'd like to take a moment to highlight a few key financial aspects of our third quarter results.
In the third quarter, the company recorded net income of roughly $33 million. The company's third quarter net income included primarily operating income of $64 million, share of income from associates or investment in ODL of $14 million, partially offset by finance expenses of $16 million and total income tax expenses of $33 million. This last expense included a $10 million tax provision related to certain 2020 income taxes. Operating EBITDA for the quarter was approximately $138 million. This compares to $116.5 million in the second quarter, an 18% increase in quarter-over-quarter operating EBITDA, primarily as a result of higher Brent oil prices and improved differentials during the quarter and partially offset by higher production and transportation costs. Drilling down on our operating costs. Our operating and transportation cost per barrel in the quarter totaled $13.86 and $11.73, respectively. This compares with $11.20 and $10.70 in the third quarter. Year-to-date, our production and transportation cost per barrel totaled $12.77 and $11.27, respectively. This compares with $12.34 and $10.40 in the prior period.
The increase in production costs year-over-year was primarily a result of inflationary pressures, the impact of FX volatility, higher electricity cost, higher fuel consumption, partially offset by lower well services activity. On the transportation side, we have experienced higher costs associated with the annual increase in transportation tariffs, the impact of FX volatility and higher transported volumes resulting from the company's sales mix.
This quarter, we have presented our production and transportation indicators to capture the impact of our FX hedging activities, which are a critical component of our [indiscernible]. Our FX hedging positions have contributed to an $0.80 per barrel and $0.20 per barrel benefit on our production and transportation costs, respectively. I will provide more information on our hedging activities in a minute. Adding to our communicated comments and consistent with our restructuring plan, we remain committed to driving down costs out of our business. On the operating cost front, we have a top-down focus on cost control and continuously review for differentiation of activity and enacting cost-saving measures. Moving on, cash generation for the quarter was strong with cash flows from operations totaling $154 million compared with $184 million in the prior quarter. Cash generation from operating activities remained strong due to stronger quarter-over-quarter Brent oil prices as well as $64 million in income tax and VAT recoveries. As of the third quarter, the company reported a total cash position of $221 million, including $109 million of unrestricted cash, up 3.5% compared to $214 million as of the second quarter of 2023. Prior to wrapping up, I would like to provide an update on our Guyana 2023 spending, our financing efforts, our risk management strategy and our proposed NCIB program. Complementing Orlando's comments, costs associated for the Wei-1 wells are now estimated to be within $185 million and $190 million. This follows the successful implementation of several cost reduction initiatives. Cash outflows remaining to our Guyana exploration program as of the end of the third quarter are expected around $15 million to $20 million. Additionally, Frontera expects its indirect working interest will vary between 93.3% million and 93.4% with final working interest calculations to be determined in December 2023 after we close out Wei-1 well operations. We continue our efforts to grow our liquidity and funding activities. During the quarter, the company borrowed $18 million under the new 1-year working capital loan facility with Bancolombia. The company concurrently repaid in full is outstanding $12 million balance under the Citibank working capital loan announced in June of this year. Additionally and subsequent to the quarter, the company signed via its subsidiary an LOI with Macquarie Bank to fund a $30 million accordion in relation to the Puerto Bahia interconnection. We greatly appreciate all of our bank's efforts and support. On to our current risk management strategy. Our strategy continues to show how our hedging discipline is supporting our operations and planning. Frontera uses derivative instruments to manage exposure to oil price and FX volatility. On the oil side, the company entered into new puts of approximately 1.5 million barrels with puts averaging $79 per barrel with this helping protect approximately 40% of the company after royalties estimated production through December and approximately 20% through January. Frontera has also entered into foreign exchange-related hedges totaling $180 million or approximately 40% of our estimated FX exposure for the fourth quarter and through the first half of 2024. We said this provides the company with visibility and will help mitigate future fluctuations in order for the business to deliver on its targets. Lastly, from a shareholder initiatives standpoint, Frontera intends to implement a normal course issuer bid to permit the purchase of up to 10% of its public float or approximately 3.8 million shares over the next year as mentioned by Gabriel, which is subject to the approval of the TSX.
And with that, I think my part is completed. I will turn it now to Orlando for his wrap-up.
Thank you, Rene. Before I wrap up today's call, I would like to highlight that during the quarter, we achieved a total recordable incident rate of 0.49, which is the best safety performance in company history and below our objective for the year of 0.74. Also, during the quarter, protected and preserved 1,367 hectares of land in the Serranía de Manacacías Park in Brazil. And when combined with reforestation plantings and sustainable use projects, the company has exceeded its goal of 1,000 hectares for the year and totaling close to 6,000 hectares preserved. The company also recycled 41.4% of water used in its operations and has offset 33% of its Colombian emissions through the purchase of carbon credits.
I'm incredibly proud of the entire Frontera team for their dedication to safe and responsible operations. With that, I would like to conclude by saying thank you to Gabriel and Rene for their comments, and thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open the call up for questions.
[Operator Instructions] And your first question will be from a Sara Konstantine at Boomtown.
Yes, I have five questions for you. I'm trying to give it to you all upfront and then how the order you guys want to answer them in. So I think the first one, I think, that everyone is asking is in terms of the press release that was filed...
Sara, sorry. Could you please get closer to your phone as we're having trouble hearing you? It's not clear.
Okay. Is this better?
Now it's better.
Okay. Yes, so the first question, I think, everyone is asking at the moment is what happened in terms of the Santonian assessment between the June press release, when you were saying there were 210 feet of hydrocarbon-bearing sands in the Santonian, now we're seeing 40 in Wei? So that's the first question. And I guess, the next couple of questions are more related to the process you all will be running such as what types of entities have been reaching outperformance? What is your plan if Houlihan is unsuccessful? And I guess, another question is in terms of Bluefin and Haimara, if those are successful results, what do you expect that will do for your plans?
And then I guess, the last question is in terms of the NCIB, the reason why we chose to do an NCIB versus a modified Dutch auction, I know you all did that in the previous year or 2. So those are my questions.
Okay, so I got three questions. So Victor, you answer the first one.
Okay, the first question that you were asking is about the 200 feet of pay that we -- or the payload of hydrocarbon-bearing sands that we published in the previous press release and then what we have mentioned right now. So as probably you know, when we mentioned hydrocarbon-bearing sands, that's basically the total lost work that you see in the well -- not the well, when you go through the well and you realize all the [indiscernible].
And what you to do after that, and it's customary in the industry, nothing new, is you actually incorporate a net pay calculation, which is based on some rock properties and cutoffs that you use, which is basically the porosity in the [indiscernible] products that are used, and so the type of rock that you have, the analysis that you have and consistent with the evaluation of the two wells, the Kawa well and the Wei well in the Campanian and in the Maastrichtian.
So what we did was we took all of that volume and then we said, okay, out of all of that volume that you have in the hydrocarbon-bearing sands, which are products that we use and confirm the information that we got from the core, which is the reason why we did not release the number at the time because we were analyzing the core data.
When we looked at that, that was the result that came out. So it's basically the [indiscernible] of details that you have seen in any kind of analysis of these kind of wells. That's when you go from [ gross ] of the volume, its potential in hydrocarbon-bearing sands and you go into a more refined number, which is the net pay using some of the cuts, okay?
Yes. And on your question about the -- what we are thinking in terms of the Houlihan Lokey engagement, I think the first thing that I would reiterate is that we remain very excited about the results. As I said in my remarks, the result in the Maastrichtian demonstrate the potential for stand-alone shallow oil resource development in the block. So we remain very excited about that.
And the fact that we engaged Houlihan Lokey, which is a leading investment bank, to look for strategic options, including a potential farm-down, is indicative of that excitement based on the results that we have. We are getting ready in preparations for launching a potential process. But I wouldn't say any more on that, given that we are doing preparation for that.
We have -- the next question was on the NCIB versus modified Dutch auction. I would say an NCIB program is very straightforward and quick one to implement. We're excited about launching that program. It will also help [indiscernible] for the stock. And that does not include any other future activities that we could use upon discussion with the Board. But the immediate one is the NCIB. Upon [indiscernible] approval, we would like to begin that asset.
Okay. Yes, appreciate you responding to that. I guess, one more question kind of in relation to all that. Is there going to be an updated resource report using all the information you now have regarding what you think the potential is of all of the targets or, I guess, potential targets?
Your question is in relation to our resource report for Guyana, [indiscernible]. We will deliver our resource report for our Colombian operations [indiscernible] that we will deliver probably in February. We'll probably announce it once we have that. As it relates to our efforts in [indiscernible], we are not changing our [indiscernible] process, and we're very excited and encouraged and appreciate the help from Houlihan Lokey. And we'll deliver the news, as they become available, to our investors.
And we actually never -- I mean, we never intended to have a resource report at this point of the process, right? As you know, in Canada, regulations are very strict in terms of disclosing any numbers, which has to be evaluated by a third party through a specific methodology. So we never intended to do that. I mean, what we have been doing is analyzing all the data that we have, which was a significant amount of data. So it has taken longer than what we expected. But again, I mean, very excited about what we found, and look forward for the next step in this journey.
At this time, we have no other questions, please proceed. We have no other questions, you may proceed with any closing comments.
Thank you, operator. Thank you for organizing the call. Thank you, everyone, for attending the call.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.