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Operator
Morning, ladies and gentlemen. Welcome to Grand Tiers Energy's conference call for fourth quarter and year-end 2023 results. My name is Livia, 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 with securities analysts and institutions. Instructions will be provided at that time for you to queue up for your questions. I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, February 20, 2024, 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 Grand Tierra Energy Inc. Any copying or re-broadcasting of this call is expressly forbidden without the grant consent of Grand Tierra Energy. I will now turn to the Chief Executive Officer of Grand Tierra. Mr. Guidry, please go ahead.
Livia
Thank you, operator. Good morning and welcome to Grand Tierra's fourth quarter and year-end 2023 results conference call. My name is Gary Guidry, Grand Tierra's President and Chief Executive Officer, and with me today are Ryan Elson, our Executive Vice President and Chief Financial Officer, and Sebastian Morin, our Chief Operating Officer. This morning we issued a press release that included detailed information about our fourth quarter and year-end 2023 results. In addition, Grand Tierra's 2023 annual report on Form 10-K has been filed on EDGAR, and is available on our website. Ryan and Sebastian will make a few brief comments and then we will open the line for questions. I'll now turn the call over to Ryan to discuss our financial results. Ryan, please go ahead.
Gary Guidry
Good morning, everyone. We're delighted to announce that Grand Tierra successfully achieved its targets for 2023 in terms of production, fund flow from operations, and free cash flow. These milestones underscore the quality of our assets and our unwavering commitment to operational excellence. Our focused efforts on asset development have yielded strong performance across various key metrics. Additionally, in 2023, we showcased our confidence in Grantiere's future prospects by repurchasing 6.8% of our outstanding shares through our Normal Course Issuer Bid, or NCIB, program, demonstrating our dedication to creating long-term shareholder value. We're currently trading at a discount to our approved, developed, producing, or PDP net asset value per share by about 46%. Our average cost of each share purchase was $7 per share. Our many achievements during the year result in year-over-year production growth of 6%, strong reserves replacement ratios well above 100%, and the highest 1P, 2P, and 3P year-end reserves in the company's history. In another major milestone in 2023, Grand Tierra issued $488 million of new 9.5% senior secured advertising notes due 2029 in exchange for its existing notes to improve our balance sheet, reduce overall leverage, and provide additional financial flexibility by extending the maturity schedule to better align with expected future cash flows. Approximately 92% of holders' bonds were exchanged, highlighting the support from bondholders. Subsequent to year-end, Grand Tierra issued an additional $100 million of 9.5% senior secured advertising notes due 2029. The company used a portion of these proceeds to repay $50 million of borrowings outstanding under our current facility, which subsequently was terminated. Despite a net loss of $6 million in 2023, Grand Tierra achieved a return on average capital employed of 15%, showcasing solid performance in capital utilizations. Grand Tiers capital expenditures were at the low end of our guidance at $219 million, fully funded by funds flow from operations of $277 million, or $8.27 per share, resulting in free cash flow of $58 million, or $1.73 per share, demonstrating effective financial management and positive cash generation. Although in 2023 adjusted EBITDA decreased by 17%, the company realized adjusted EBITDA close to $400 million, indicating substantial operational resilience amid challenges with volatile oil prices. Grantier's net sales for the year were $637 million compared to $711 million in 2022. This decrease was primarily driven by a 17% decrease in Brent price and higher Castilla and Vascone differentials, partially offset by 7% higher sales volumes and lower transportation discounts in 2023. Despite higher operating expenses in 2023, Grantier effectively managed inflationary pressures, showcasing resilience in cost control and maintenance activities. One final item I would like to highlight was the successful completion of the Soriente Continuation Agreement. By securing the continuation, Grantier is committed to long-term capital projects and development programs with plans of optimizing oil recovery and value for the Soriente block. We believe the combination of Grand Tierra's robust operational expertise in the Putamayo Basin and Equipatrol's technical knowledge will continue our joint success in the development of our Soriente block. I'll now turn the call over to Sebastian Morton to discuss some of the highlights of our current operations.
Grantier
Thanks, Ryan. Good morning, everyone. I'll briefly cover a few operational highlights from today's press release, as well as our recent press release regarding 2023 year-end reserves. Operationally, we are building off a successful year in 2023 to start off 2024 on a strong note. Since December 2023, Grand Tierra has drilled four oil wells in the Cossiaco field in which we are seeing excellent initial production results. The first well, Cossiaco 56, has been on production since early January and has been producing a stable average rate of around 1,900 barrels of oil per day and a 2% water cut. A second well, Cossiaco 57, was spud on January 6 and brought on production in late January. It has been producing at a stable average rate of around 1,100 barrels of oil per day and a 10% water cut.
Ryan
The third well, Ladies and gentlemen, pardon the interruption.
spk03
Speaker has been disconnected. Please hold while we reconnect the speaker.
Grantier
being drilled and will be followed by the final well, Accordionero 128. All wells from this development program are expected to be drilled, completed, and on production before the end of the first quarter of the year. Back down in the southern Putumayo Basin, Grand Tierra intends to commence development drilling in the Kohimbe oil field located in the Soriente block during the later half of the year. We plan to expand the block's production facilities, increase gas power generation, construct new development well pads, and make social investments in the area, all with the goal of substantial production growth in 2025 and 2026. From an exploration perspective, around 40 to 45% of Grand Tierra's 2024 capital program will target high impact, near field, and low risk exploration activities, including the drilling of six to nine exploration wells in Colombia and Ecuador, signifying our dedication to unlocking potential new reserves and fostering sustainable production growth. Building on promising results from the 2022 Exploration Program, we plan to focus on short cycle time prospects in proven basins with established transportation infrastructure. In addition, as part of our 2024 Capital Program, we are currently in the early phases of execution to acquire 238 km2 of 3D seismic over the Tarapa Block in Ecuador. and to pre-invest in advancing drilling licenses, building pads for the 2025 exploration program in Colombia and Ecuador, which will set the stage for future growth opportunities for the company. On January 23rd, 2024, we were pleased to release our 2023 year-end reserve report as evaluated by McDaniel. 2023 saw the highest year-end reserves in our company's history. 90 million barrels of oil equivalent, 1P, 147 millions of barrel oil equivalent, 2P, and 207 million barrels of oil equivalent, 3P, and we achieved excellent reserve replacement of 154% 1P, 42% 2P, and 303% 3P. This also represented the fifth consecutive year that we achieved the 1P reserve growth. These results were driven by success with development, drilling, and water flooding results in the Chazza Block, which contains the Costiaco and Moqueta fields, and the Soriente Continuation Agreement, as outlined by Ryan. During 2023, a combination of our strong reserves growth, ongoing reductions in debt, and share buybacks allowed Grand Tierra to achieve net asset values per share before tax of $44.48 one P, up 288% from 2020, and $79.13 2P, up 144% from 2020. With this significant growth in our net asset values per share over the last three years, we believe Grantiera is well-positioned to offer exceptional long-term stakeholder value. The success we achieved in 2023 also reflects our ongoing conversion of reserves from the probable to the proved category. With 147 booked, proved, plus probable undeveloped future drilling locations, Grand Tierra is well positioned to continue to grow the company's production and reserves in 2024 and beyond. I will now turn the call back to the operator, and Gary and Ryan and I will be happy to take questions. Operator, please go ahead.
Operator
Thank you. Ladies and gentlemen, we will now conduct a question and answer session for securities analysts. If you have a question, please press the Start key followed by 11 on your touch-tone phone. You will then hear an automatic message advising your hand is raised. Your questions will be called when you enter the seat. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment, please, for your first question.
Grantier
Operator?
Operator
One moment for our first question.
Livia
Okay, well, we'll proceed. Thank you, ladies and gentlemen, and we'll now conduct a question and answer test with the security analyst. If you have any questions, please press star, the star key, followed by 1-1 on your touch-tone phone. You will then hear an automated message advising your hand is raised. Your question will be polled in the order they are received. Please ensure that you lift your handset when you're using a speakerphone before pressing any keys. One moment, please, for the first question.
Operator
First question coming from Roman Rossi with Canaccord Genuity. The line is open.
Roman Rossi
Good morning, and thanks for taking my questions. I have a couple if I can go one by one. The first one is regarding the quality and transportation discounts. We saw a 30% increase quarter over quarter. I just wanted to know what's the main reason behind this increase and where you're taking it for 2024. Yeah, I think the... Roman, can you hear me okay?
Gary Guidry
Yes. Can you hear me now?
Roman Rossi
I can hear you, but there is a little echo.
Gary Guidry
Okay. Yeah, with the quality differentials, that mostly is just from the quality. Vasconia and Castilla did widen during the fourth quarter. And so we have seen that fairly consistent in the Q1. There hasn't been a substantial change from Q1 to Q4. Currently, the Castilla differential is around $9, and Vasconia is around $5, which is effectively what we budget for this year.
Roman Rossi
Okay, and do you think that the widening is related to the Venezuelan crew entering the market? And do you think that could change if the standards are improved in April?
spk11
You have reached the voicemail box of...
Gary Guidry
Sorry, Robin, can you hear me? I think the question was, you know, is the result of Venezuela? Yes, that's part of it. I think there's two issues, is Venezuela, additional potential crude from Venezuela, as well as, actually three, as well as OPEC starts releasing some of their cuts, we expect more of the heavy sours come to the market. as well as the start of the TMX line in Canada, which will get more Canadian heavy crude to tidewater. So I think it's a combination of those three factors. But it's really no surprise to us, and it's right around in our budget numbers.
Roman Rossi
Okay, thank you. And one last question. Regarding OPEX, there was an increase on a perivariate that because of the lower production or there were additional inflationary or expression there?
Gary Guidry
Yeah, it was just driven by the lower production. And so we expect our gross operating costs to be flat to come down slightly in 2024, coupled with increased production. So we expect the per unit cost to drop.
Roman Rossi
Okay, thank you very much, Ryan. Okay, thank you very much, Ryan.
Gary Guidry
Thank you.
Operator
Thank you. One moment. One moment.
spk03
Our next question.
Operator
And our next question coming from the line of Oriana. Hi, this is Oriana with Balance. With Balance.
Oriana
I believe that there's a bit of a . I'm going to try to put, I have two questions. So the first one is regarding your . What would it take or ?
Gary Guidry
Yeah, with respect to hedging, we did have 15,000 barrels hedged with a floor, or we do still actually until the end of Q1. We have 15,000 barrels hedged with a floor of $80 with the put premiums around $3, which is really part of our physical contract with the offtaker. We are looking at adding additional puts in for the remainder of the year. We're just in the process of doing that right now.
Oriana
So that would take, what are you thinking in terms of production?
Gary Guidry
Yeah, sorry, I missed the question. It broke up a little bit on this side.
Oriana
Yeah, like in some, like what are your thoughts on production hedge this year?
Gary Guidry
Yeah, we'd like to have, you know, looking out six to nine months, we'd like to have 30% to 50% hedged. And then after six to nine months, 25% hedge on a rolling basis using puts and really just looking for the downside protection. And your call, too, is one of the things we have is a very strong operational hedge. given that we operate all of our production. So we have a lot of flexibility on our capital expenditures. To the extent that prices were decreased substantially, we very quickly cut our capital program. So that's another way we protect the business.
Oriana
Got it. Well, just one last one from my side. Yeah, I think, you know, our guidance out there, we're targeting year-end net net EBITDA of 0.8 to 1.2 times.
Gary Guidry
So if we take the one times, which is fairly consistent with what we've had in the past as a target, we continue to target that. And we'd like to have cash on the balance sheet of anywhere between $50 and $100 million. And that will fluctuate throughout the year just with payments to governments, capital program, et cetera. But over the course of the year, we expect to average in that $50 to $100 million range.
Oriana
Got it. Thank you very much. Thank you very much.
Gary Guidry
Thank you.
Operator
Thank you. One moment, please, for our next question. One moment, please, for our next question. And our next question comes from the line-up. From the line-up. Joe Sector with- Joe Sector. Let us open. Let us open.
Joe Sector
Good morning, everyone. This is going to be- Good morning, everyone. This is going to be a challenging call. A challenging call. If it breaks up, Brian, if you could call me later. If it breaks up, Brian, if you could call me later.
Brian
Absolutely.
Joe Sector
First question. First question. You have in your guidance 5,000, and you had a very good supporter. You add in the volume of success in Q1, you get another 36,000. Are you expecting to be lower than that?
Gary Guidry
Yeah, on that, yeah, I think it's, you know, the production is, you know, the Acostiaco wells have done, you know, exceeded our expectations. And that's one reason why we give a range. And so it's still early days on the wells. So, you know, we'll see how these wells progress over the next, a couple quarters before providing additional guidance, but we're still comfortable with the range right now.
Joe Sector
Okay. How many locations do you still have in an area for drilling?
Grantier
Sorry, just to clarify that question, in which area?
Joe Sector
We're talking about the Putnamaya Basin where you had the... The CYC discovery. CYC discovery. Talk about the south and Costiaco.
Grantier
Yeah, so out of the 147 2P locations that we have, there is still 26 locations identified for Costiaco Moqueta, for example. And then at Soriente, we've got an additional 30.
Joe Sector
Okay, good. That's good. That's good. That's good. Okay.
Livia
One of the things, Joseph, One of the things that Sebastian and the team are looking at on Costiaco, we've got some very good results with our reservoir modeling and targeting unswept areas. That's what's outperforming at Costiaco in the north. We have another area in the southern part of the reservoir, along Stripe, that we're going to try to target this year. So that's why we're excited about Costiaco.
Joe Sector
Okay, good. One last one. One last one. One last one. For me, with the flow in the modern, in the modern, you're going to have some fun in the past. You've talked about maybe a new area in MENA to analyze everything and fix the right regime.
Livia
have you had any have you had any thought for here the new ad you're the new app company yeah i that the answer to that is is that we are always looking for opportunity we don't see anything specific at the moment but our our our business development initiatives are all long term and so we're we're looking um always for ways to increase value of the company. But we don't have anything specific on the horizon.
Joe Sector
OK. That's it for me. Thanks very much. Thanks very much. And with the successes in the drilling . Thank you.
Operator
Thank you, one moment please for our next question.
Ryan
Ladies and gentlemen, please stand by while the speakers reconnect.
Operator
Again, ladies and gentlemen, pardon the interruption. A speaker has been disconnected. Please hold while we reconnect the speakers.
spk03
Ladies and gentlemen, please continue to spend by speaker has been disconnected, please hold while we reconnect the speakers.
Ryan
Hello?
Operator
Yes, speakers, you're now back connected. We have a question from Yolande Blair. Alexandra Simondini, Yolande is open.
Alexandra Simondini
Hi, thanks for taking my question. So you mentioned that $36 million of the $100 million was used for the credit facility. Where will be the balance used?
Gary Guidry
Yeah, out of the $100 million, the net proceeds were around $88 million. $35 went to repay the facility, as you pointed out, and the remainder would be cash on the balance sheet right now.
Alexandra Simondini
Okay, thank you.
Gary Guidry
Thank you.
Operator
Thank you. One moment, please, for our next question. And our next question coming from the line of Alejandra Andretti with GPM. Your line is open.
Alejandra Andretti
Hi. Thanks for taking the question. Just a quick one for me. Confirming that after you've repaid the committed line, you don't have any available lines at the moment, correct?
Gary Guidry
Correct. Correct. We repaid it and then terminated it. We are looking at you know, a working capital facility, you know, which coincides better with the business and some of the ebbs and flows of our cash outflows and inflows. But right now we have nothing in place. And we're comfortable just with our free cash flow and cash on the balance sheet.
Alejandra Andretti
Great. Thank you.
Gary Guidry
Thank you.
Operator
Thank you. And gentlemen, there are no further questions at this time. Please continue.
Livia
Thank you, everyone, for joining us today. We look forward to speaking with you over the next quarter and update you on our ongoing progress. I would like to thank the entire Grand Tierra team for their hard work in 2023, the fantastic results, and to our shareholders for their continued support.
Brian
Thank you.
Operator
Thank you. Ladies and gentlemen, that's the conference for today. Thank you for your participation. You may now disconnect.
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