Gran Tierra Energy Inc. (AMEX:GTE) Q4 2022 Earnings Call Transcript

Gran Tierra Energy Inc. (AMEX:GTE) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy’s Conference Call for Fourth Quarter and Year End 2022 results. My name is Andrea and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the initial remarks, we will conduct a question-and-answer session for securities analysts and institution. Instruction will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference call is being webcast and recorded today, Wednesday, February 22nd, 2023, at 11 A.M. Eastern Time. Today’s discussion may include certain forward-looking information, oil and gas information, and 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. 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 like to 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, Andrea. Good morning and welcome to Gran Tierra’s fourth quarter and year end 2022 results conference call. My name is Gary Guidry, Gran Tierra’s President and Chief Executive Officer. And with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer; and Rob Will, our Vice President of Asset Management. Yesterday, we issued a press release that included detailed information on our fourth quarter and year end 2022 results. In addition, Gran Tierra’s 2022 annual report on Form 10-K has been filed on EDGAR and is available on our website. Ryan and Rob will make a few brief comments, and then we will open the line for questions. Ryan, please go ahead.

Ryan Ellson: Thanks Gary. Good morning everyone. We are very pleased to announce that Gran Tierra achieved several company financial records in 2022. Our excellent performance in 2022 was driven by our successful development and exploration drilling, water flooding programs, field performance, and disciplined cost management, combined with strong oil prices. Our many achievements during the year resulted in year-over-year production growth of 16%, strong reserves replacement ratio well above 100%, and the highest annual figure in the company’s history for net income, funds flow from operations, and free cash flow. After reduced exploration activity during 2020 and 2021, the company made several key exploration discoveries during 2022, which provide confidence in our geological understanding of the basins.

Through our successful results from development and exploration drilling, waterflooding programs, and fuel performance, we’re able to increase reserves in 1P, 2P, and 3P categories, which Rob will describe. During 2022, our net income was $139 million, the highest on record as a result in our earnings per share on both the basic and diluted basis coming in at $0.38 per share. Our adjusted EBITDA was $490 million and was $1.34 on a basic per share basis. Funds flow from operations were $366 million, resulting in free cash flow of $129 million, both of which were also records for the company. Funds flow from operations for the year was $1 on a basic per share basis. Gran Tierra’s on budget capital spend totaled $237 million for the year and was balanced between exploration and development activities, which resulted in reserves and profitable production growth year-on-year.

In 2022, Gran Tierra continued its commitment to reduce debt resulting in a reduction of $88 million in debt and $173 million in net debt. The company finished the year with $127 million in cash and net debt to adjusted EBITDA of 0.9 times. The company also achieved a return on average capital employed of 27% during 2022. Gran Tierra’s strong operating netback of $48.43 per barrel for the year, was up 43% from $33.75 in 2021. Before I hand it over to Rob, I want to mention some of our Beyond Compliance initiatives, where Gran Tierra identifies significant opportunities and benefits in environment communities. We voluntarily strive to go beyond what is legally required to protect the environment and provide social benefits because it’s the right thing to do.

We’re very proud of the company’s track record in all aspects of our environmental, social, and governance stewardship. In 2022, Gran Tierra in partnership with the World Women’s Corporation, carried out an anti-personnel demining investigation across approximately 4,300 hectares of land situated within four indigenous communities in several municipalities in the Putumayo Basin of Colombia. As part of the company’s commitment, the United Nations Guiding Principles for Business and Human Rights, 95 human rights training sessions were held in Colombia and Ecuador in 2022, which include almost 500 employees, contractors, and suppliers. Gran Tierra strives to maximize local employment and development opportunities, which meet or exceed government requirements for local employment.

Since 2015, Gran Tierra has created approximately 26,000 labor opportunities in Colombia. The company also created roughly 470 labor opportunities in Ecuador in 2022. Gran Tierra has also committed to work with the Colombian, Ecuadorian national and local governments and local communities to further their peace-building efforts. In 2022, the company invested over $4.6 million locally in projects in Colombia and Ecuador identified by the communities themselves to meet their needs. The projects include the improvement of agriculture production capabilities, entrepreneurship support, community strengthening programs, and infrastructure improvements to schools, homes, and community centers. These are just some of the initiatives we completed in 2022, and I highly recommend that you take a look at our 2022 Sustainability Report, which will be available on our website in the second quarter of this year.

I’ll now turn the call over to Rob Will to discuss some of the highlights of our current operations.

Rob Will: Thanks Ryan. Good morning everyone. I’ll briefly cover a few operational highlights from yesterday’s press release, as well as our recent press release regarding 2022 year-end reserves. Operationally, we are building off a successful year in 2022 to start off 2023. Down in the Putumayo Basin of Colombia and the Chaza Block, we have commenced our Moqueta drilling campaign with the first well being drilled in late 2022, which was the first well drilled in the field since 2016. Moqueta-25, the second development well in the 2022-2023 Moqueta drilling campaign reached its planned total depth on January 15th, 2023. This well has been completed and was put on production on February 1st. Producing on jet pump, the well has averaged 383 barrels of oil per day unstimulated.

We plan to stimulate the well during Q2 of this year. The third Moqueta development well, Moqueta-26, was spud on February 9th, 2023 and is expected to reach its planned total depth before the end of February. In addition to Moqueta-25 and 26, the company plans to drill and complete one to two more development wells in Moqueta over the next four to five months. Also, in the Chaza Block, the first well, the Costayaco six-well 2023 development drilling program was spud on January 25th, 2023 and reached its planned total depth on February 2nd. Reservoir quality was as expected in this planned down-dip water injection well. The second well was spud on February 7th, 2023 and reached its planned total depth. All wells in the Costayaco drilling program are expected to be drilled by late second quarter 2023 and completed — and put on production or injection before the end of third quarter 2023.

In the south of the Putumayo Basin, the Suroriente Block’s production averaged approximately 8,620 barrels of oil per day growth in January 2023, marking the second highest monthly production average since the second quarter of 2015. This was achieved despite the fact that we’ve not drilled a well in Suroriente since the first quarter of 2018. Up in the Middle Magdalena Valley Basin of Colombia, the first well, the Acordionero’s 10 to 12 well 2023 development drilling program, Acordionero-111 was spud on January 27th, 2023 and reached its planned total depth on January 30th. Well logs indicate that the reservoir pay zone came in as expected. The company plans to complete this well and put on production before the end of February 2023. The second well, a planned injector was spud on February 5th and has reached its total depth.

The third well was spud on February 12th. All the planned wells in this year’s Acordionero development program are expected to have been drilled, completed, and placed on production or injection by the end of second quarter 2023. Finally, we also plan to continue to focus on the appraisal of new discoveries and new exploration drilling during 2023, all while generating free cash flow to strengthen our balance sheet and return capital to shareholders through potential share buybacks. As for our 2022 year-end oil reserves, the company achieved significant growth in its 2022 year-end 1P NPV10 before tax, which increased by 26% compared to 2021 year-end. As well, we achieved significant growth in our 2022 year-end 2P NPV10 before tax, which increased by 25% compared to year-on-year.

These increases were driven by the company’s successful development and exploration programs and a strong recovery in oil prices. After reduced exploration activity during 2020 and 2021, the company made several key exploration discoveries during 2022, which helped the company achieve excellent reserve replacement ratios. The ratios are as follows. 126% 1P with 1P reserve additions of 14 million BOE; 148% 2P with 2P reserve additions of 17 million BOE; 280% 3P with 3P reserve additions of 31 million BOE. The material 1P reserve additions were largely driven by success with development drilling and water flooding results at Acordionero and Costayaco in addition to several exploration discoveries. Material 2P and 3P reserve additions were a large measure due to the success of the company’s 2022 exploration program, which made several independent discoveries.

By continuing to focus on a combination of reductions in combination of reductions in depth and per well capital costs, maintaining low operating costs, and completing share buybacks, Gran Tierra was able to achieve net asset values per share before tax of $4.62 for 1P, up 77% from 2021 and $7.36 for 2P, up 56% from 2021. With the significant growth in our net asset values per share in 2022, we believe Gran Tierra is well-positioned to offer exceptional long-term stakeholder value. We believe our success on multiple fronts during 2022 demonstrates Gran Tierra’s ability to be a full-cycle oil and gas exploration, development, and production company, focused on value creation for all our stakeholders. I will now turn the call back to the operator, and Gary, Ryan, and I will be happy to take questions.

Operator, please go ahead.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session for securities analysts. Our first question comes from Adam Gill with Paradigm Capital. Please go ahead.

Adam Gill: Good morning. Two questions for me. First off, on operating costs. We’ve seen escalation over 2022 given power costs rising and increased workover activity. That said, do you believe you’ve hit a plateau on OpEx? And what drivers could lower OpEx going forward?

Ryan Ellson: Yes, thanks Adam. I think we have hit a plateau. We think our operating costs on a gross basis will be similar in 2023 compared to 2022. Our production will be higher, so on a per unit basis, we’ll see those costs come down.

Adam Gill: Okay, great. And the second question was just on Suroriente and the contract expiring mid-year 2024, is there any precedence on contract renewal? And what could the upfront commitments look like to ensure that this asset stays in the portfolio?

Gary Guidry: Yes, there are multiple precedents in the country of contract renewal. We do have clauses in our contract for renewal and we are in discussions with Ecopetrol on trying to achieve that before the expiry.

Adam Gill: Any thoughts on timing of when that could be completed?

Gary Guidry: No, no real — just before expiry. We’re working as diligently as we can and it’s mutual with Ecopetrol because both companies see benefits of continuing the programs that we’ve started over the last couple of years.

Adam Gill: Okay, great. Thank you, gentlemen.

Gary Guidry: Thank you.

Operator: Thank you. Our next question comes from Oriana Covault with Balanz. Please go ahead.

Oriana Covault: Hi, good morning. This is Oriana Covault with Balanz. I had three questions, if it’s okay to go one-by-one, that would be great. First, with regards to the Vasconia and Castilla pricing discounts, I noticed that they remained at big levels through the fourth quarter. So, just wondering what are you observing so far during the year? And what is driving the wider discounts? And how are you including this in your 2022 — 2023 guidance?

Gary Guidry: Yes. Thanks. And I’ll take that. On the Vasconia and Castilla, they started to widen at the end of last year as pointed out and it’s continued into January. It’s starting to tighten a little bit in February. And the main driver is really just a lack of heavy oil demand, especially with China. And I think with China reopening, we started to see those differentials narrow and it’s right around what we have budgeted right now. We expect them to be wide in Q1, Q2, and then narrow into Q3 and Q4. And that’s really what we forecasted.

Oriana Covault: Got it. Thank you. And following — I noticed in the introduction of a new risk factor in your 10-K regarding the adverse impact that certain acquisitions may have in the business. So, just wondering if you could further elaborate on this? And more precisely, if you’re looking into new jurisdictions aside from Ecuador and what type of transactions would make sense for Gran Tierra?

Ryan Ellson: Yes, I think that’s just a risk factor. I think most E&P companies do have that within their disclosure. And I think for us, we’re — part of our job is always to optimize the portfolio. So, we are very happy to either acquire new assets portfolio or sell assets that are in our portfolio. We’re always looking to optimize. So, it could be within Colombia or outside of Colombia, again, that will give either buyers or sellers.

Oriana Covault: Perfect. And just one final one. We noted that ending cash position came a bit shy of the $190 million that you had guided with the third quarter report. So, if you could share any additional color on this?