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Good morning. My name is Jodie, and I will be your conference facilitator today. Welcome to the Frontera Energy's Fourth Quarter and Full Year 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 available through audio 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 13, 2019. 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. Thank you for attending today's conference call to review Frontera's fourth quarter and full year 2018 financial results and update on reserves and operations and the company's strong outlook. I'm joined by Richard Herbert, our CEO; and David Dyck, our CFO from Lima, Peru. In fiscal 2018, we made considerable progress implementing our strategy to transform Frontera. Thanks to the hard work of the Frontera team, today, the company is better positioned to ever -- than ever to deliver strong sustained returns to its shareholders.First, the company's financial and operational performance is strong, demonstrating Frontera's ability to generate cash flow and commitment to sustaining production from core assets at current levels for the next 5 years.Some highlights include: Frontera generated $422 million operating EBITDA in fiscal 2018, up 7% from fiscal 2017. Cash flow from operating activities was $312 million. EBITDA margin as a percentage of net sales was strong, expanding to 39% compared to 35% a year ago.We implemented significant cost savings as part of our optimization plans. As an example, this resulted in a reduction of 10% or $10 million in SG&A cost. This exceeded our guidance.We are now working on improvements in the field, which will give higher efficiencies from an operating cost and capital efficiency perspective. This has started to be implemented at the beginning of the year. We successfully replaced 103% of produced reserves on a 2P basis, while delivering current production at approximately 67,000 barrels per day before royalties or 63,000 barrels per day after royalties.Second, on top of this strong cash-generating platform, we are taking strategic actions to drive growth in the medium to long term. This week, we were awarded 2 new blocks in an important Bid Round in Ecuador. These blocks were our top choices given their proximity to existing producing fields and related infrastructure. This marks Frontera expansion into Ecuador[Technical Difficulty]
Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume momentarily.[Audio Gap]2018. And last, I will provide an update on some of our current strategic initiatives, which include our entry into Ecuador, an update on Guyana and our upcoming drilling in Colombia.Starting with our 2018 reserves report. As Gabriel just indicated, we were successful in replacing 103% of our 2P reserves and have increased Frontera's proved plus probable reserves to 155 million barrels.I'm sorry, I'm just taking a pause. We seemed to have lost the connection on the call. We're just going to pause for a few minutes.[Technical Difficulty]
Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume momentarily. Thank you for your patience.
Okay, this is Richard Herbert again. My apologies to everyone. We seemed to have suffered a cut in the -- break in the line. So we'll just -- I'm just going to restart my CEO report and pick up from where we left off.So I'm going to talk about 3 important areas of Frontera's business in this summary. First, making some observations about the 2018 reserves report. Secondly, I will talk about our operations during the fourth quarter and throughout 2018. And then, thirdly, I will provide an update on some of our ongoing strategic initiatives, which include our entry into Ecuador and updates on Guyana and our upcoming drilling in Colombia.So starting with our 2018 reserves report. As Gabriel indicated in his talk, we were successful in replacing 103% of our 2P reserves and have increased Frontera's proved plus probable reserves to 155 million barrels oil equivalent. This is the first year of positive reserves since the restructuring of Frontera in 2016 and is another benchmark to give us confidence that our existing producing asset and reserve base can deliver stable results over the next 5 years.Our Reserves Life Index has increased over 10% to 6.8 years, and we are working on a number of initiatives to further expand Frontera's Reserves Life Index, which will provide an additional margin of protection for both our equity and fixed income investors.We saw the net present value of our 2P reserves after tax hold essentially flat year-over-year despite using lower future oil price assumptions, based on a review of all of our reserves by DeGolyer and MacNaughton. The big move in our reserves in 2018 reflects the upgrading of 3P reserves in our heavy oil business to 2P reserves since the new water handling capacity at Quifa will enable Frontera to develop additional reserves and keep production flat there at 25,000 to 27,000 barrels a day for 5 years or more.We also added additional reserves in our light oil business with the increase in our acreage on the Guatiquia block following the successful discovery of the Coralillo field.I'll now provide an update on our fourth quarter operations as well as some of the ongoing operational items. Our quarterly production increased 8% to 71,924 barrels of oil equivalent per day, driven by strong production from Peru and growing production in Colombia from both the heavy oil and light oil business units. Again, this was a quarter where we demonstrated the stability of the core production base in Colombia, which has continued into 2019 as the Quifa water handling expansion project has added new volumes along with light oil volumes from Coralillo and Candelilla fields on the Guatiquia block, as we have been delivering production this year consistent with our 2019 guidance ranges despite the downtime so far this year in Peru. But Peru, where we are today, is a positive story. Production on Block 192 has restarted, and it's gradually ramping up with current production at around 5,000 barrels per day. We expect to be back near peak production at levels prior to the force majeure event by the end of this month. Peru remains an important country for Frontera, and once force majeure is lifted, we will continue to operate Block 192 for 9 months or until at least the end of 2019 when the contract is due to expire.Our plan is to bid on the new contract when the government runs a competitive process at some time during 2019. As we have discussed, capital spending last year was back-end loaded relative to prior years. During the fourth quarter of 2018, Frontera invested $156 million on capital expenditures, which resulted in the completion of the Quifa water handling expansion project as well as the drilling of 25 development wells, 2 exploration wells and 6 water injection wells.During the first quarter of 2019, the company plans to drill 28 wells, including 23 development wells in the Quifa Southwest area, 2 development wells in its light and medium oil areas, 2 exploration wells and 1 water injection well at Orito. The company is targeting to keep 7 rigs active throughout the first quarter of 2019. And Frontera had a strong fourth quarter of 2018 from an HSE perspective with no major events.My third theme relates to a number of strategic initiatives that we are pursuing to enhance our portfolio and deliver production and reserves growth over the medium and long term. Yesterday, we announced that we had been awarded 2 exploration blocks onshore Ecuador with our partner GeoPark. This award provides a solid platform for growth in a new country for Frontera in a proven hydrocarbon basin near existing producing fields and infrastructure. We are excited that we were successful on the 2 blocks, which, we believe, have the best prospectivity in the license round. And this is a place where discoveries can be rapidly connected to the well-developed production infrastructure in the basin. I'd like to thank our Ecuador Bid Round team for their great work in delivering our desired result. Once the government has ratified the awards, we will provide more detail on the opportunity that we see on our newly awarded blocks in Ecuador and our future plans.Next, following the expected recapitalization of CGX from their rights offering, Frontera anticipates it will hold a majority ownership position in the company. Together with CGX, we are moving forward with the planning and execution of the Utakwaaka exploration well on the Corentyne block offshore Guyana later this year.And lastly, in the second quarter, Frontera and Parex will spud the VIM-1 exploration well in Colombia, where Frontera will carry $10 million of Parex's well costs as part of a farm-in agreement that was announced in January. Frontera will earn a 50% working interest in the block.I would like to conclude by highlighting that our balance sheet remains very strong, which, as Gabriel said, has enabled the company to declare or pay $0.495 in dividends so far in 2019. Our strong balance sheet also opens up a number of further upstream opportunities for Frontera to pursue as illustrated by our recent farm-ins and new acreage in Ecuador, which are expected to provide future production and reserves growth.We continue to work on rebalancing of the company's portfolio to bring in new growth opportunities: Guyana, Ecuador, potentially Colombia next with the license round in 2019, and beyond that, Peru later in 2019.Oil prices and oil price differentials remain favorable and with Peru production now ramping up, things are looking very positive for Frontera in the first quarter of 2019.Now I would like to turn over to David Dyck, our CFO, who will take you through our financial details in more detail.
Thank you, Richard, and good morning, everyone. Operating EBITDA of $118.4 million in the fourth quarter of 2018 represents an increase of 26.7% in comparison with the third quarter of 2018, largely as a result of the settlement of an overlift accumulated in the second and third quarters of 2018.Net loss attributable to equity holders of the company was $116.6 million or $1.17 per share in the fourth quarter as a result of several onetime items, including impairments on investments in associates, exploration expenses and payments under terminated pipeline contracts. These items were offset by the benefits of reversal of provisions related to the high-priced royalty provision in Colombia. As previously mentioned, Frontera continued to improve its cost structure in the fourth quarter by completing a project to improve organizational efficiency and reduce our general and administrative costs. These efforts helped the company deliver lower G&A expenses of 21.1 -- sorry, $21.8 million in the fourth quarter of 2018, a decrease of 4.9% from the fourth -- from the third quarter of 2018 and a decrease of 10.7% from the fourth quarter of 2017. We expect to realize continued benefits from these initiatives going forward that will result in additional reductions in G&A costs in 2019 of approximately 10%. In 2019, we're looking at significant improvements in operational efficiency that will lead to additional savings on our operating costs as well as improving our capital efficiency.Frontera's balance sheet remained very strong with $216 million of working capital, including $446 million of cash and cash equivalents as at December 31, 2018. We're going to be using some of our cash balances in the first half of 2018 as the cash management cycle normalizes following the increased capital spending in the second half of 2018. We remain focused on maintaining conservative and manageable leverage metrics for the company. Net debt to trailing 12-month EBITDA is negative 0.2x net book to capitalization is 25.5%., and interest coverage is at 12.4x EBITDA on a trailing 12-month basis. These strong metrics help us maintain our BB- rating with S&P and B- rating with Fitch.As we approach the end of the first quarter, I would like to highlight our current position relative to our annual guidance for 2019. As Richard mentioned, so far, we have maintained production within our guidance range despite Peru production being down for the bulk of the quarter. To date, in 2019, Brent oil prices are averaging nearly $63 per barrel, slightly below our assumption of $65 per barrel for 2019. As we discussed at our Investor Day, each $1 move in Brent prices represents approximately $17 million in annual EBITDA impact. On a very positive note, the Vasconia differential is averaging about $3.70 per barrel so far in 2019, which is significantly below our estimate of $8.40 per barrel for 2019. Each $1 change in Vasconia differentials represents approximately $22 million in annual EBITDA impact.We have a hedging program in place where we have hedged approximately 27% of our 2019 expected production and 42% of expected first half 2019 production with Brent oil puts at $55 per barrel. We continue to advance our hedge positions for the second half of 2019 using a combination of puts and other instruments to protect our capital program required to maintain our production and reserve profile.Finally, I would like to reiterate something Gabriel touched on earlier. We have been using our normal course issuer bid and dividend policy to enhance returns to shareholders. Since July, we repurchased approximately 2.4% of our outstanding shares as part of our share buyback program. And with the announcement of a $0.165 dividend yesterday, we will have paid out $0.495 in dividends, representing a 4% yield in first 4 months of 2019. These initiatives, combined with production growth from Colombia and the restart of production in Peru, position Frontera for a very strong 2019.I will now turn the call back to Richard for some closing comments.
Good. Thank you, David. 2018 was a good year for Frontera where we met our guidance objectives and replaced all of our produced reserves. We started off 2019 very well. We are delivering on our medium- to long-term growth initiatives. These initiatives include opportunities in Peru, Ecuador, a bid round in Colombia and the drilling of our exploration wells on VIM-1 in Colombia and on the Corentyne block offshore Guyana. We have been delivering what we promised and look forward to continue to regain and build trust with the market, providing updates as the year progresses and as we position Frontera for future production and reserves growth.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 Jenny Xenos of Canaccord Genuity.
Can you hear me?
Yes, we can hear you.
Fantastic. I have 4 questions please, if I may. First of all, could you please provide us with some color on some of your impairments, specifically related to Colombian oil and gas proprieties in Q4 and those related to Puerto Bahia? Secondly, could you update us on the progress of selling down oil inventory in Peru? Thirdly, could you please update us on your drilling in Colombia, specifically the Seje-1 exploration well, Jaspe-8D exploration well and Coralillo-2 development well? And finally, what is the status of your -- of the government approvals of your joint venture in Colombia?
Jenny, it's David. In terms of the impairments, I don't know if you've had an opportunity to go through our MD&A. We've got a table in there on Page 12 that outlines the various component parts of our impairments. And as you note, part of it relates to investments in associates, that's roughly $48 million; and impairment of exploration and evaluation assets, that's $67 million, and then a few other things rounding out for the total impairment booked in the fourth quarter of 2018. In terms of the -- your question on the oil inventory in Peru, we had spoken --
David, sorry, if I may but pardon me. So the impairment related to oil and gas properties in Q4 specifically, is it largely then related to block Llanos 25?
A big part of it is that, yes, as well as Z-1 in Peru. Those are the 2 exploration programs in 2018.
So there are still some impairments for Z-1 in the fourth quarter?
Yes. In terms of the -- your question on the oil inventory in the pipeline in Peru, we had spoken earlier that if Peru production would not be coming on, we would have an opportunity as the -- as our share of production was evacuated from that pipeline to monetize the inventory. With production back on, we will be selling cargoes, but additional production will be going into the line, so the Peru inventory position should remain relatively constant depending on others' oil going into the pipeline. So I guess, you'll see the oil within the pipeline coming out in terms of sales, but additional inventory will be put into the pipeline as production ramps up.
Jenny, this is Richard Herbert. Just to add to what David said there. The plan is to have a cargo in April. Probably -- that will probably be a cargo of about 600,000 barrels gross. And our share of that, we're expecting to be between 250,000 and 400,000 barrels. So that's going to be the oil that's already in the pipeline. And then as David said, we are now ramping up production to allow us to have -- to go back to a more sort of regular sale of cargoes during the year. So that's the situation on the Peru pipeline. I'm going to hand over to Duncan Nightingale who is here just to talk about the results of the 3 wells that you asked about, the Seje well in our Sabanero Block, the Jaspe-8 well on Jaspe, both in the Quifa area, and then the Coralillo-2 well, which was drilled in our Guatiquia block.
Jenny, it's Duncan Nightingale speaking. Yes, the 3 wells you've mentioned there, Seje, which was obviously drilled in the Sabanero block, is performing very well, relatively low water cuts. It's about 180 barrels a day. It's a nice exploration discovery for us. We're obviously monitoring the reservoir performance at the moment, well productivity, and that could obviously represent a future development for us if that well continues to perform in a very, very positive manner. So that was a nice exploration discovery there in 2019 and also would represent hopefully new reserve volumes that can be booked to the end of 2019. As far as Jaspe is concerned, Jaspe-8, again, that was a pleasant surprise, about -- almost 180 barrels a day stabilized flow rate there with a relatively low water cut. That well is now on long-term test. We're monitoring the reservoir performance there with equal anticipation of perhaps being able to move forward with a new development there later this year with our joint venture partner in the block. As far --
You were planning -- sorry, Duncan, this is with regards to Jaspe. You were planning or you were considering, I should say, declaring commerciality at Jaspe early in 2019. Is that sort of something that you're still thinking about? Or will that decision likely come later in the year?
We're in discussions with Ecopetrol on the development of the Jaspe discovery. Those discussions are underway with our -- between our technical teams. We'll probably be able to announce something later this year on that, Jenny, but we hope to be able to move forward with the declaration of commerciality, yes, you're correct. And with respect to Coralillo-2 in the Guatiquia block, again, very, very positive discovery there. We have high -- oil saturated reservoirs both in the Guadalupe and in the Lower Sand-1. The Guadalupe has been tested, flowed 837 barrels on a stabilized flow rate with very, very low water cut. We've just closed that Guadalupe in for pressure buildup, and then we will reopen the Lower Sand-1, proceed with the testing and pressure buildup for that. We will also take oil samples and then apply to the ANH to co-mingle both the Guadalupe and Lower Sand-1 well. So hopefully, we can achieve that in the coming month.
Good. Duncan, thank you. And, Jenny, Richard, again. Just to add to that. As people saw in our Investor Day in the beginning of February, we were awarded an extension of the Guatiquia block on the basis of the Coralillo discovery last year. And that new area will allow us to expand our drilling efforts during 2019, and we've just recently started the drilling of our next Coralillo well, which is going to be Coralillo-6. And we have a number of locations identified in this new area, which we will be drilling during this year, which will become an important source of sustaining production from Guatiquia and adding new reserves in the area. And then on your final question, Jenny, you asked about the status of government approval on our JV in Colombia. Did you mean Guyana?
Guyana, yes. I apologize.
Yes, I thought so. And I mean, the update there is that the request for approval has gone in. There's been a number of conversations with the government and clarifications on the status of the JV and how it's being structured. But to date, we haven't yet received any formal feedback from the government either to approve our farm-in or any idea of when that's actually going to happen. But obviously, in the political situation in the country, we are either expecting some results in the near future or otherwise there potentially will be some delay, but we'll update people as soon as we have some definitive news on that.
[Operator Instructions] There are no further questions at this time. Should you have any further questions, please e-mail ir@fronteraenergy.ca. This concludes the call. Thank you all for participating.