Gran Tierra Energy Inc. (NYSE:GTE) Q1 2024 Earnings Conference Call May 2, 2024 11:00 AM ET
Company Participants
Gary Guidry – President and Chief Executive Officer
Ryan Ellson – Executive Vice President and Chief Financial Officer
Sebastien Morin – Chief Operating Officer
Conference Call Participants
Anne Milne – Bank of America
Phil Skolnick – Eight Capital
Sadena Covault – Balanz Capital
Roman Rossi – Canaccord Genuity
Alejandra Andrade – JPMorgan
Darsha Lima – Bloomberg Intelligence
Operator
Good morning, ladies and gentlemen. Welcome to Gran Tierra Energy’s Conference Call for First Quarter 2024. My name is Shannon, and I’ll be your coordinator for today. At this time, all participants are on a listen-only mode.
Following the initial remarks, we will conduct a question-and-answer session for securities analysts and institutions. Instructions will be provided at that time for you to queue for your questions. I would like to remind everyone that this conference call is being webcast and recorded today, Thursday, May 2, 2024 at 11:00 a.m. Eastern Time.
Today’s discussion may include certain forward-looking information, as well as certain non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important advisories and disclaimers with regard to this information and for reconciliations of any non-GAAP measures discussed on today’s call.
Any production volumes are based on working interest sales before royalties. Finally, this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.
I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.
Gary Guidry
Thank you, operator; good morning and thanks for joining Gran Tierra’s first quarter 2024 results conference call. My name is Gary Guidry, President and Chief Executive Officer, and with me today are Ryan Elson, our executive Vice President and Chief Financial Officer, and Sebastian Moran, our Chief Operating Officer. On Wednesday, May 1, 2024, we issued three press releases that included detailed information about our first quarter 2024 results, which are available on our website.
Ryan and Sebastian will now make a few brief comments and we’ll open the line for questions immediately following this earnings call at 10:00 a.m. Mountain time, noon eastern time, we will be holding our annual general meeting of shareholders. During that meeting, I will give a brief overview of Granterra and where the company is heading.
I invite you to join us for this call. Dial in instructions can be found on our website. I’ll now turn the call over to Ryan to discuss key financial highlights from our first quarter results.
Ryan Ellson
Thank you Gary. Good morning everyone. Grant Tierra had a great start to 2024 during the first quarter.
We have completed a substantial portion of our development plan and are now focused on our 2024 exploration campaign along with the development of the Soriente block. During the quarter, Grand Tierra delivered $74 million of funds flow, up 24% from the first quarter of 2023, which resulted in $2.34 of funds flow per share.
After incurring approximately $55 million in capital expenditures, the company generated free cash flow of approximately $19 million. Adjusted EBITDA was $95 million for the quarter, up from $93 million in the prior quarter. As at March 31, 2024, the company had a cash balance of $127 million and net debt of $510 million.
The twelve month trailing net debt to adjusted EBITDA was 1.3 times and is expected to be less than one times by year end from a combination of increased adjusted EBITDA and lower net debt. During the quarter, the company issued an additional $100 million of 9.5% senior notes and received cash proceeds of $88 million. With a portion of the funds, we fully repaid the outstanding balance on the company’s credit facility of $36 million and the facility was terminated.
Grand Tierra generated oil sales of $158 million, up 9% from the first quarter of 2023 due to higher sales volumes and lower Castilla, Vasconia and Oriente differentials. Looking at pricing during the quarter, Brent averaged $81.76 per barrel, up 1% from the prior quarter.
The company’s quality and transportation discounts per barrel during the quarter were $15.36, which significantly narrowed from $18.45 from the first quarter of 2023. The company’s operating netback was $35.37 per barrel, up 1% from the first quarter of 2023.
Grand Tierra has repurchased approximately a million shares during the quarter. Since January 1, 2023, the Company has repurchased approximately 3.3 million shares, or 10% of the shares issued outstanding as at January 1, 2023 from free cash flow.
We are very pleased how we have started 2024 and we are having excellent results in our core assets under water flood. The balance sheet is in excellent shape and we are very excited about the Eraone exploration well which Sebastian will highlight.
I’ll now turn the call over to Sebastian to discuss our operational highlights from our first quarter results.
Sebastien Morin
Thanks Ryan. Good morning everyone. As Ryan mentioned, capital expenditures of $55 million were higher than the prior quarter of $39 million and down from $71 million compared to the first quarter of 2023. During the quarter, we completed our accordion aero drilling program and the majority of our Kosciusko program, achieving approximately a 16% reduction in drilling costs, a savings of approximately $3.8 million between both programs.
Total average working interest production during the quarter was 32,242 barrels of oil per day, an increased of 3% over the prior quarter. Despite deferred production of approximately 1000 barrels of oil per day as a result of social disruptions at the accordion Arrow field post disruption, the field was rapidly ramped back up without issue and is now back producing over 17,000 barrels of oil per day per expectations.
In particular, we are very pleased about the successful drilling program in Kosciusko that confirmed the company’s reservoir interpretation and extended the field significantly to the north and to the south. The four wells drilled in the north had a combined initial 30 day production rate of 5707 barrels of oil per day un-stimulated and on jet pump. Currently, work has commenced to install the final selective completions, conduct zonal testing and stimulation as well as installation of the final optimized artificial lift which we expect will increase production further.
To note, Kosciusko was originally discovered in 2007. Our 2024 program has increased production to the highest level since 2017. As highlighted in the press release, we initiated our high impact exploration program with the Arowana one well which was spud on the Chenangay block in early April.
We are very excited about the initial open hole logging results of the well which is drilling to a bottom hole location 1.5 km away across the fault from the Boca Chica one well. Boca Chica one had an initial 90 day production rate in the basal tenna of greater than 1100 barrels of oil per day and continues to produce at approximately 850 barrels of oil per day, 20 degree API oil at less than 1% water cut and has recovered over 330 thousandths of barrel of oil since June 2023.
The basal tenna is the geologic equivalent to the Ensen in Kohimbe located 20 north. Our map area of closure and rock properties observed in Arowana one compares well to the Kohimbe field at the end of 2023. The Kohembe field has produced 28 million barrels of oil and has remaining reserves of 25,000,001 p, 54,000,002 p and 95,000,003 p.
Given these observations, we are very excited to finalize drilling operations at Arowana one run casing and start testing in the next few weeks. Looking to financial metrics, Gran Tierra operating expenses increased by 2% to 48 million compared to the prior quarter, primarily due to higher workovers offset by lower lifting costs, primarily related to power generation optimizations. In Casiaco, accordionero and Cohimbe fields, the company’s transportation expenses increased by 16% to 4.6
million when compared to the prior quarter. During the quarter, Gran Tierra utilized longer distance delivery points due to low river levels in Colombia caused by dry El Nino conditions resulting in higher transportation costs. Today, we are excited to also announce the release of our 2023 sustainability report.
I will go through some key highlights below. However, I invite you to visit our website and go through the report in its entirety. 2023 was the safest year in company history with over 17 million work hours without any incidents causing lost time.
Since June 9, 2022, through Gran Tierra’s reforestation efforts, the company has planted over 1.6 million trees and has conserved, preserved or reforested approximately 4500 land since 2018. This is equivalent to sequestering 20 years of our current greenhouse gas emissions.
Gran Tierra is reducing greenhouse gas emissions at its facilities through gas to power projects that conserve excess natural gas that would otherwise be flared. Using the gas instead to power generation. In 2023, Granterra’s gas to power projects generated approximately 70% of the total energy used in all of the company’s operations.
Gran Tierra has started 2024 on a strong footing and we look forward to continuing to ramp production through our ongoing water flood optimization initiatives, new well completions and exciting near field exploration program.
I’ll now turn the call back to the operator and we will be happy to answer any questions. Operator please go ahead.
Question-and-Answer Session
Operator
Thank you, ladies and gentlemen, we will now conduct a question-and-answer session for securities analysts. [Operator instructions]. Our first question is from the line of Anne Milne with Bank of America. Your line is now open.
Anne Milne
Morning everyone and congratulations on your good first quarter. My questions have to do with your outlook for the rest of 2024 on in terms of your OpEx expenses and transportation expenses, and possibly some information on the social disruptions that you mentioned at do you think that’s just one time? Is it something that could come back just to have a little bit of a sense of what we could expect for the rest of the year? Thanks.
Ryan Ellson
So Anne, I’ll start from bottom up in response. So at accordion Arrow, we actually had a lot of mere changes in Colombia and we don’t expect this to come back because the way that the social disruption was handled actually created relationships.
And so I think we’re back on track on that side of things at accordion Arrow, from a workovers perspective, that’s what really impacted our OpEx the most and as we go throughout the year, those will reduce. So looking really forward to that. And then on the lifting side, our power generation costs are coming down as we implement these optimization projects. So we should see an improving trend there as well.
Operator
Our next question comes from the line of Phil Skolnick with Eight capital. Your line is now open.
Phil Skolnick
Yeah. Thanks. Good morning. Just on the Arowana discovery, how should we think about it in terms of — It looks like in terms of size, it’s like Cohenbi, but I guess in terms of how many wells, kind of timelines and ultimately productivity potential and kind of cost, how we think about the cost going over the years when you develop this
Gary Guidry
Yeah. Thanks, Phil. I think why we’re so excited is it is a direct analog to Kohimbe in terms of closure size, in terms of fault trapping, in terms of deposition. And so the thickness of this reservoir, very similar to what Kohembi is, very prolific wells, as you’ve seen at Kohembe, just as Sebastian mentioned, a kilometer and a half away, we have a well on production in the same formation. That’s 1000 barrel a day.
Well, that’s still producing 850 barrels a day. It’s cumed almost 400,000 barrels. So it is not without that is the information that we’re basing this off of. If you look at the closure on this structure, as we talked about pre drill, it’s about 11,000 acres of closure, very similar to Kohimbe. And when we look at this, that’s why we’re excited. The volumes that we would expect water flooding.
It’s very similar geology. We would water flood. I think the way you would look at this is 50 well type development in terms of recoveries. We’re using that same analog of 50 to 100 million barrels that you’re seeing at Kohembe on a reserve basis. It’s near infrastructure. And so we’re excited because we can very rapidly start appraising this field and go on production as we’re appraising. And so it’s very exciting.
Phil Skolnick
Yeah, that sounds like, I guess, just on the 50 wells, how many of those would be water injection?
Gary Guidry
Yeah, I think you would have something, because this is a reservoir that’s 20-30ft thick, very continuous, as we’re seeing at Kohimbe. We’re getting quick reservoir response from our injection.
The one thing that we’re not sure of that we’re going to look at very, very closely is can we use horizontal wells in a reservoir like this And that might end up being less wells. But 11,000 acres, 50 wells, that’s going to put you on 160 to 200 acres spacing. The viscosity here that we’re seeing at Boca Chica is better than Kohimbe.
So everything about it is exciting to us in terms of the analog, the analog reservoir continuity. We’re excited to get on with testing. All right, thanks.
Operator
Our next question comes from the line of Oriana Covault with Balanz Capital. Your line is now open.
Sadena Covault
Hi, thanks for taking my questions. This is Sadena Covault with Balanz. I have two questions, if we may go one by one. The first one is that you mentioned you plan to reduce net leverage towards the one time on the back of increased adjusted EBITDA and lower net debt. Remind us, what are you targeting in terms of net debt and how do you expect it to reduce it from current levels? Any buybacks or doing something with the shorter bonds? But that would be helpful. Thanks.
Ryan Ellson
To understand. Yeah. On the net debt, we just expect, if you look at the free cash flow generation throughout the year, we just expect our cash balance to build, and we would expect our cash balance to build another probably $50 million from where we’re at right now, and our adjusted EBITDA increase. So that get us to that. Around that one x net debt to EBITDA ratio.
Perfect. And just picking up on that last note, in terms of higher cash position and increased free cash flow generation, seeing that it looks like a more favorable pricing backdrop, do you, in terms of any excess cash uses? Any updates from the m and a front in Canada or where do you expect to use these incremental cash? Yeah, I think we continue to look at just in capital allocation in general, from buybacks to debt reduction to m and a, we continue to look at all those options. And then as things progress, we’ll look at the best way to allocate that capital.
And we always like to make sure that we actually have the cash before we spend it. So once money’s in the door, then we’ll talk about it.
Operator
Our next question comes from the line of Roman Canaccord. Rossi with Canaccord Genuity. Your line is now open.
Roman Rossi
Good morning, and thanks for taking my questions. Congrats on this great quarter. So, the first one is regarding the share buybacks. Right. I just wanted to understand what you’re expecting in the coming quarters, because your share has appreciated significantly. So do you have any specific price where you would stop buying back shares? Maybe, I don’t know, the PDP value or the one per value per share?
Ryan Ellson
Yeah, I think the share price has performed well, but that’s from a low starting point. So we’ve gone from trading at 50% of PDP up to 70% to 80%. And so we think it’s still great value to continue to buy back stock. Okay, sounds good. And a second question regarding tax.
I think you will be paying the week of 2023 taxes next quarter. Can you give us a sense on what you’re expecting? Oh, as far as cash outflow, yeah, it’s fairly. Remember, because we do prepay a lot of tax just through withholding tax in 2020. In 2023, we paid a lot of the withholding tax, so the tax outflow will be around $20 million.
Operator
Our next question comes from the line of Alejandra Andrade Carrillo with JPMorgan. Your line is now open.
Alejandra Andrade
Hi, thanks for taking my questions. I had two questions. First on the power generation cost. Just clarifying, you said, so 70% is now coming from gas. In your case, your own gas? And the remainder, it would be spot just a reminder of that breakdown.
And then on M&A drilling a little bit more in terms of opportunities. So you’ve been discussing Canada and Colombia. Could Argentina also be of interest to you guys?
Gary Guidry
So the remaining 30% of power generation comes from either diesel run generation on our facilities or actually connected to the power grids in Columbia.
And so we’re trying to displace the diesel from our power generation facilities. We buy about 500 mcf of gas for CNG supplement, but most we don’t have the exposure to the spot pricing, I think probably is where the question was. Yes.
And then on the M&A front. Yeah, Argentina, it’s not on our radar right now.
Operator
Our next question comes from the line of Darsha Lima with Bloomberg Intelligence. Your line is now open.
Darsha Lima
Hi, thank you for taking my questions. Just a couple from me, please. Could you talk about the protests, specifically the timeline, how long did they last?
Gary Guidry
Yeah, the blockade was around ten days. Ten days.
Darsha Lima
So that’s in March, right?
Gary Guidry
Correct, correct.
Darsha Lima
Perfect. Thank you. And another one is on water optimization program. Are you in any way impacted by the drought currently in Colombia?
Gary Guidry
No, because we take the majority of our makeup water from deep sources. So we actually produce the water from different reservoirs and bring them up into our water floodable reservoirs.
Operator
There are no further questions at this time. Please. Continue.
Thank you. I would again like to thank everyone for joining us today. We look forward to speaking with you next quarter for update. And if you’re able, please call in for our annual general meeting at 10:00 a.m. Mountain time.
Operator
Thank you.
