Frontera Energy Corp
TSX:FEC
Earnings Call Analysis
Q4-2023 Analysis
Frontera Energy Corp
Frontera emphasizes its focus on sustainability and streamlining operations. The Infrastructure segment realized an adjusted EBITDA of $120 million with robust cash flow generation, illustrating Frontera's potential as a standalone business entity. Commitment to ESG goals was reflected through achieving 108% of their targets for 2023, complemented by the commencement of Ikotia, a solar farm expected to halve the CPE-6 oil block's power consumption, significantly contributing to Scope 1 greenhouse gas emissions reduction.
Financially, the company recorded a net income of $183 million ($2.27 per share) driven by operating income, gains from hedging, and income from their ODL investment. EBITDA for the year came in at the higher end of their guidance at approximately $467 million. The increase in operating cost per barrel, notably due to inflation and energy costs, did not significantly hinder performance. For 2024, Frontera offers clarity on costs, expecting energy to be a smaller portion of total costs, projected at 35%. The company expects robust cash generation with operating cash flow reported at $411 million, and capital expenditures in line with guidance at $443 million, including investment in their Guyana Exploration business.
Ending the year with a strong cash position of $190 million, Frontera continues its efforts in returning value to its shareholders. These include share buybacks, with around 600,000 shares repurchased as of March 2024, a forthcoming quarterly dividend of CAD 6.25 per share due in April 2024, and the repurchasing $1.5 million of its 2028 senior secured notes.
Frontera aims to maintain production at 40,000 to 42,000 BOE per day in 2024, while also reducing capital expenditure by 10%. The company plans to invest strategically in development activities, exploration, and infrastructure. Notably, $105 million to $130 million will be directed towards drilling 60 to 65 new wells focusing on heavy oil assets with each well expected to cost between $1.5 million to $2 million and have an average production rate of 100 to 120 BOE per day.
Frontera is channeling its capital into strategic projects that promise to bolster future growth. $45 million will be invested in reserve osmosis water treatment facilities and gas processing capacity expansion, ensuring continued production as well as setting up for future expansions. Frontera’s infrastructure business is also set to undergo development with projected 2024 adjusted Infrastructure EBITDA of $95 million to $150 million.
Frontera's management reaffirms its commitment to delivering on operational and financial targets with a strong balance sheet. It plans to move ahead with exploration opportunities in Colombia and Ecuador and expects its ongoing exploration business and infrastructure projects to further solidify shareholder confidence. The focus on sustainable business growth coupled with disciplined capital allocation endorses Frontera's intention to sustainably maximize shareholder returns.
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Good morning. My name is [ Luddie ] and I'll be your conference facilitator today. Welcome to Frontera Energy's Fourth Quarter and Year-End 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. Following the speakers' remarks, there will be time for questions.
Analysts and investors are reminded that any additional questions can be directed to Frontera following today's call 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 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 information. The company's MD&A for the quarter ended December 31, 2023 and the company's annual information form dated March 7, 2024, and the other documents it files from time to time with securities regulatory authorities described the risks and 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. Mr. De Alba, please go ahead.
Thank you, operator. Good morning, and welcome to Frontera's fourth quarter and yearend 2023 earnings call. Joining me on today's call are Orlando Cabrales, Frontera's CEO; Rene Burgos Diaz, Frontera's CFO. Also available to answer questions at the end of the call, we have Victor Vega, VP, Field Development, Reservoir Management and Exploration; Alejandra Bonilla, General Counsel; Ivan Arevalo, VP, Operations; and Renata Campagnaro, VP Marketing, Logistics and Business Sustainability. Thank you for joining us.
Frontera successfully achieved its strategic, capital and production targets across the 3 core businesses in 2023. In our Colombia and Ecuador Upstream business, the company delivered average daily production of over 40,900 barrels of oil per day, in line with 2023 production guidance, while it also generated operating EBITDA of $467 million, at the higher end of guidance for 2023.
Our value centered approach resulted in closing the year with a strong balance sheet, low leverage and a solid cash position.
In our stand-alone and growing Infrastructure Colombia business, the business segment delivered strong results, generating 2023 full year adjusted infrastructure EBITDA of $120 million and received $47 million in capital distributions from ODL. Expecting breaking ground soon, we remain focused on development of the connection between Refineria de Cartagena, Reficar and Puerto Bahia's liquids terminal, which we expect will importantly increase throughput volumes through our liquid ports and drive economic growth for the Cartagena Bay area.
Frontera's interest in the ODL pipeline and in Puerto Bahia, a unique stand-alone infrastructure business, provides shareholders with significant upside potential.
In our Guyana Exploration business, Frontera and its joint venture partner, CGX Energy, continue its active efforts in pursuing the strategic options, including a potential farm down to develop its interest in the Corentyne Block in offshore Guyana, following the announcement of the second oil discovery in the Corentyne Block. Our data room is open, several management presentations have been completed, and other ones are ongoing.
Looking ahead, Frontera's significant maturing assets, value-centric production, capital plan and sound balance sheet position the company to deliver its 2024 objectives and drive value for shareholders. Looking ahead, Frontera's significant maturing assets, value-centric production, capital plan and sound balance sheet position the company to deliver its 2024 objectives and drive value for shareholders from its 3 core separate businesses. Supported by its ongoing NCIB program and recently initiated dividend program, Frontera remains committed to enhancing shareholder returns. Furthermore, the company will continue to consider future shareholder initiatives in 2024 and beyond, including potential additional dividends distributions or bond buybacks, based on the overall results of our business and the company's strategic goals.
I'll now turn the call over to Orlando Cabrales, Frontera's CEO; and our CFO, Rene Burgos, who will share with their views on our fourth quarter and full year results. Orlando?
Thank you, Gabriel. Good morning, everyone, and thank you for taking the time to join us this morning. We are going to present just a few slides to help us facilitate the understanding of the -- of our remarks.
2023 was a strong financial and operational year for Frontera as the company continued to take steps to deliver additional value to shareholders. In our Colombia and Ecuador Upstream onshore business, we delivered average daily production of 40,919 BOE per day, with an increase in our heavy crude oil production of 9% year-over-year.
I'm also pleased with our continued efforts to diligently manage our cost structure. Despite inflationary pressures, we delivered production costs, transportation costs and capital expenditures within our 2023 guidance. In total, we safely and responsibly executed $285 million in capital spending across our Colombia and Ecuador Upstream onshore business.
In 2023, we drilled 65 development wells, including 2 injector wells at the Quifa CPE-6, Cajua and Cubiro blocks, and completed 73 well interventions.
We advanced our recommissioning efforts at SAARA, our reverse osmosis water treatment facility for Quifa. By the end of 2023, the plant had processed just under 21 million barrels a quarter as part of the recommissioning program, providing irrigation source water to Frontera's nearby ProAgrollanos palm oil plantation. At the beginning of 2024, we successfully completed the pilot phase of the SAARA project with Ecopetrol. The company intends to invest in the commissioning of the first phase of the project, a stabilization phase to reach a minimum of 250,000 barrels of water per day available for the Quifa Block, subject to final JV approval, and targeting additional net production of up to 3,000 barrels of oil per day once target water levels are reached.
Additionally, the company invested in the expansion and improvement of development facilities at CPE-6, which doubled our water handling capacity to 240,000 barrels of water per day. In 2024, we plan to further expand our water handling capacity for the block to 360,000 barrels of water per day. These efforts will continue to support future production growth at the block.
Turning now to our 2023 year-end results. Our commitment to value our volumes in our upstream Colombia and Ecuador business continues to deliver results as we closed the year with about 109 million and 164 million BOE in the 1P and 2P gross reserves, respectively.
We achieved a 3-year average gross reserves replacement ratio of 104% for 1P reserves and 79% for 2P reserves, while maintaining a reserve life index of 7.3 years for the 1P reserves and 11 years for 2P reserves. The net present value of our 2P reserves before tax and discounted at 10%, at December 31, 2023, was estimated at $3 billion before tax or $21.50 per BOE. Notably, the [indiscernible] per BOE increased by 2% as compared to 2022, driven by operational efficiencies and reduced future development costs and despite a decrease in the forecast oil price.
In CPE-6, we successfully replaced close to 100% of the block's 2P net reserves, while reaching another annual average production record from the block of approximately 6,200 BOE per day. In Ecuador, we increased our 2P reserves by close to 4 million barrels, for a total of 4.7 million BOE. We expect to continue building on our recent wins in Ecuador.
For 2024, we will invest $35 million to $45 million in exploration opportunities. In Colombia, we expect to drill the high-impact Hydra-1 exploration well during the second half of the year. While in Ecuador, we will drill 2 additional wells in the Espejo Block our nonoperated block with our JV partner GeoPark. Additionally, we are also advancing 3 drilling and seismic investments for our VIM 46, Llanos 99 and Llanos 119, which we expect to drill in 2025. We believe these near-field exploration opportunities will help reload our reserves, setting us up for future growth.
In our stand-alone and growing Infrastructure business, ODL transported over 243,000 barrels per day, generating $285 million in 2023 EBITDA, and returning over $135 million to its shareholders. Puerto Bahia generated approximately 20 million in 2023 EBITDA and achieved 2 significant milestones: The successful refinancing of the ports legacy project finance debt and designing of the commercial agreement with Reficar. During the first quarter, Frontera anticipates breaking grounds on the connection. Frontera has secured an additional $30 million in committed funding subject to certain conditions present in connection with these projects from its existing group of lenders led by Macquarie Group, and expect collection start up by the end.
For the full year, our Infrastructure segment generated an adjusted Infrastructure EBITDA of $120 million and $54 million in segment cash flows from operations, including $47 million in distributions from ODL, highlighting the strong profitability and cash flow generation capacity of our stand-alone and growing Infrastructure business.
In our potentially transformational Guyana Exploration business, we successfully completed Wei-1, the second well of our 2-well program, where we believe that approximately 500 million to 600 million BOE of PMean unrisked gross prospective resources are present in multiple Maastrichtian horizons in the northern portion of the Corentyne Block. We continue to work with our advisers in exploring potential strategic alternatives, including a potential farm down.
Before turning the call over to Rene, I would like to take a moment to discuss Frontera's strong sustainability performance in 2023. We achieved 108% of our 2023 ESG goals. We began operations of our first solar farm called Ikotia in December, which we expect will reduce CPE-6 oil power consumption and offset 50% of the block's Scope 1 initiatives.
With almost 1/4 of the year in the books, we remain focused on executing our recently announced capital and production targets and continuing to deliver a strong operational and financial results, and maximize shareholder returns.
I would now like to turn the call over to Rene Burgos, Frontera's CFO.
Thank you, Orlando, and thank you, everyone, for joining us today. I'd like to take a moment to highlight a few key financial aspects of our full year results.
For the full year, the company recorded net income of $183 million, or $2.27 per share. The company's full year net income included operating income of $154 million, a share of income from associates related to our ODL investment of $57 million, gains related to our hedging activities of $19 million, partially offset by net financial expenses of $45 million and income tax expense of $4 million.
During the year, the company benefited from its deferred tax position, helping reduce its overall tax exposure. We will touch base again on this a little bit later.
Operating EBITDA for the year was approximately $467 million, on the higher end of the guidance range presented for 2023. This was primarily as a result of better Brent oil prices as compared to our $80 budget, partially offset by higher differentials as well as higher-than-expected production-related energy costs.
Drilling down on our operating costs, our production and transportation cost per barrel for the year totaled $13.25 and $11.21, respectively, in line with our guidance. This compares to $12.14 and $10.44 in the prior year. The increase in production costs year-over-year was primarily a result of inflationary pressures, the impact of FX volatility, higher electricity costs and higher fuel consumption.
In particular, we have seen a significant increase in our energy costs related to electricity prices. Driven by the drier-than-expected weather, resulting from [indiscernible] phenomenon, this has actually resulted in a 34% increase in this line item. With us seeing particularly sharpened increase in the second half of the year as we see energy prices reaching the $5 per BOE mark.
Our guidance for 2024 provide additional clarity on energy prices, giving investors better insight into this key input. Today, electricity costs represent about 35% of our total energy costs. We will continue to update the market on developments related to this critical input. But as a point of reference, we would like to highlight total energy cost for 2022 is relatively more normal year, which were approximately $3.50.
Moving on to cash generation. Cash generation for the year was strong, with cash flow from operations totaling $411 million, remaining strong due to the strong Brent oil price environment, partially offset by an increase in [ holding ] taxes during the year. At year-end 2023, however, the company closed with a $128 million income tax receivable associated to [indiscernible] taxes and the company's [indiscernible] position. The company expects to recover approximately $100 million of the receivables during 2024.
Capital expenditures for the year were in line with our guidance at $443 million and included $157 million in investments related to our potentially transformational Guyana Exploration business.
As of December 2023, the company closed the year with a total cash position of $190 million, including $160 million of unrestricted cash.
Prior to wrapping up, I would like to provide an update on our [indiscernible] spending, our financing efforts, our risk management strategy, and an update on our shareholder initiatives.
Total costs associated with the Wei-1 well were $189 million. Cash outflows had been related with [indiscernible] CapEx as of the end of 2023 are now estimated at under $4 million. With well costs now finalized, Frontera has closed its direct working interest for the block at 72.52%, resulting in an indirect working interest of 93.42%.
On the financing front, and as alluded by both Orlando and Gabriel, the company has successfully secured committed funding from its existing lender group led by acquired Macquarie Capital to support its strategical connection project construction, and goal to have this connection completed this year. We appreciate all of our banks' efforts and support.
On our current risk management strategy, we continue to show how the impact of our hedging discipline has benefited us and supported our operations and planning. Frontera uses derivative instruments to manage exposure of oil prices and FX volatility. On the oil side, the company entered into new put hedges for 2.6 million barrels with put averaging $73.36 per barrel. This will help protect approximately 40% of the company's after royalty estimated production in June 2024.
Frontera has also entered into foreign exchange rate hedges totaling $120 million or approximately 40% of our estimated risk exposure, far above the [indiscernible] for the first half of 2024. These hedges provide the company with visibility and will help mitigate future fluctuations, allow the business to deliver on its targets.
Finally, on our shareholder value initiatives, under the current company's NCIB program, which commenced in November 21, 2023, the company has repurchased approximately 600,000 shares -- common shares for cancellation for approximately $3.7 million as of March 7, 2024. I would like to remind you that Frontera is authorized to repurchase up to 3.9 million shares under this program.
With respect to our recently announced dividend, Frontera will pay a quarterly dividend of CAD 6.25 per share to shareholders of record as of April 2, 2024, and again payable on or around April 16, 2024.
With respect to bond buybacks, the company has repurchased 1.5 million in notion of its 2028 senior secured notes. As the Chairman said, Frontera will continue to consider shareholder value enhancing initiatives in 2024 and beyond, including potential [ initial ] dividend, distribution, [indiscernible] buybacks based on the overall results of the business and strategic goals.
I would like to now turn the call back to Orlando.
Thank you, Rene. As you have heard, Frontera had a very busy and successful 2023, and we aim to build on that success in 2024. I want to provide some color to our 2024 capital program.
We have a fully funded plan for 2024, delivering approximately $400 million to $450 million in consolidated operating EBITDA at $80 Brent price. Our plan will leverage our advantaged transportation and logistics structure to maximize realized prices while also investing for future growth through facilities expansion and near field and high-impact exploration. We expect to generate consolidated free cash flow of approximately $65 million to $105 million from our core business.
In our Colombia and Ecuador Upstream business, we are targeting production of approximately 40,000 to 42,000 BOE, flat compared to 2023, and generate $400 million to $430 million in upstream operating EBITDA. We will invest between $180 million to $210 million in development activities, a 10% decrease in development spending. We will also invest $35 million to $45 million in exploration activities, and $15 million to $25 million in other investments, mainly in the reactivation of the Sabanero Block to be funded primarily from proceeds related to insurance claims.
We will focus on our inventory of near-field development drilling opportunities at our core heavy oil fields. Supplement our drilling activities with our low-cost well integration program, as well as invest in development facilities to increase water handling capacity and increase our gas processing at B1.
We expect our Upstream business to generate free cash flow between $60 million to $100 million inclusive of $10 million to $20 million in cash tax payments, net of recoveries and debt service of $60 million to $70 million which includes $32 million of bond interest and $30 million related to debt service for local bank facilities.
For our growing and a stand-alone Infrastructure business, we are targeting an adjusted Infrastructure EBITDA of approximately $95 million to $150 million for 2024, including $35 million to $45 million in distribution from ODL. The segment is expected to generate free cash flow of approximately $5 million to $10 million, inclusive of $30 million of net funding associated with the Puerto Bahia Reficar connection project CapEx.
Before closing, we have prepared a slide bridging our current production and the buildup of the components supporting our 2024 production targets. Our starting point is the company's fourth quarter 2023 average daily production rate of 39,200 BOE per day. Assuming an asset decline rate of between 25% to 30%, to sustain production, the company would need to replace an annual average 5,000 to 6,000 BOE per day, or a rolling 2% to 3% of production per month.
Frontera development CapEx program was designed to fully replace our declining barrels via combination of new wells, as well as low-cost decline management well interventions, and strategic investment in facilities. Our 2024 new well CapEx program seeks to replace between 80% to 85% of the expected decline, investing $105 million to $130 million in 60 to 65 new wells focused primarily on our heavy oil assets.
On average, each new well carries an estimated cost of approximately $1.5 million to $2 million, and targets an annualized production rate between 100 and 120 BOE per day. These wells happen an average -- sorry, have on average an attractive on the 1-year payback period, and capital efficiency metrics of $16,000 to $18,000 per [ BOE ].
Under our low-cost decline management well intervention program, the company invests in well interventions, workovers, overhauls and new technologies to reduce the impact of the natural decline and optimize the portfolio production rate. For 2024, the company expects to invest approximately $15 million to $20 million in decline management activities, with average investment per intervention ranging between $200,000 and $500,000 per well, and generating an additional 30 to 40 BOE of annualized production.
Finally, we plan to invest $45 million in strategic projects including SAARA, our reserve osmosis water treatment facility, commissioning the first phase of the project, which will enable the company to process a minimum of 250,000 barrels of water from the Quifa Block, subject to final JV approval. Increasing water processing at CPE-6 continue our strong growth trend in the block, and initiating Phase I expansion of La Belleza facilities and flow lines to increase gas processing capacity from 20,000 to 30,000 million cubic feet per day.
These strategic capital expenditures will not only increase production in 2024, but set the foundation for further growth and expansion of these key assets for years to come.
Overall, these capital projects will allow us to maintain production from last year at around 40,000 to 42,000 BOE per day with 10% less CapEx. We will advance our exciting exploration portfolio in Colombia and Ecuador, including investing $35 million to $45 million in exploration opportunities, including 3 in the high-impact [indiscernible] well in the P1 block and 2 wells in Ecuador.
We will mature our self-sustaining and growing infrastructure business, including the Reficar connection with Puerto Bahia.
In summary, in 2023, we continued to deliver on our operating and financial targets, and expect to continue the trend in 2024. We have a solid outlook, a strong balance sheet and excellent team.
With that, I would like to conclude by saying thank you to Gabriel and Rene, for your comments. And thank you, everyone, for attending our call. I will now turn the call back to our operator.
[Operator Instructions] Your first question comes from the line of Oriana Covault from Balanz.
I just had 3 brief questions if we get -- if we may go one by one, that would be great. The first one is related with quality discounts to brands, especially looking at the average numbers for 2023, it was well above what we are normally seeing. So just how are these quality discounts evolving thus far in the year? And what are your expectations for 2024?
Thank you for the question. Our discount -- our target discount last year was roughly $5. We realized was $5.16, that was 2023. In our guidance for 2024, we're seeing -- we start out the year better than we did last year. So we're expecting, we're guiding to $4.50 differential.
Okay. Maybe more on the Guyana side of the story. Just was wondering if there's any updates or additional comment that you could provide in terms of how you could process with Houlihan Lokey moving forward and in next steps and/or estimate time frame to hear more on this process?
As we told investors, this is a 2024 event. We have -- and like the Chairman said, we've had multiple management presentations, [ AUB ] are Open. And as soon as we have any news, we will look to very steadily share some day.
Got it. And just one final one. You mentioned that you bought back -- that you've carried bond buybacks for $1.5 million of notional value. So just with bonds that continue to trade at [indiscernible] have you considered moving more aggressively in this respect in terms of returning value to different stakeholders?
Ultimately, capital allocation is a discussion of the Board. I think that our shares are even more discounted there are current bond prices. However, we believe it's important to create value for shareholders on multiple fronts. So we were very happy that we're just acquired $1.5 million of notional this quarter.
[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. You may now disconnect.
Thank you.
Thank you.