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Operator
Good morning, my name is Tracey and I'll be your conference facilitator today. Welcome to the Frontiera Energy's third quarter 2021 operating and financial results conference call. All lines are currently on mute to prevent any background noise. 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 the audio webcast on the company's website. After the speaker's remarks, there will be time for questions. Analysts and investors are reminded that any additional questions can be directed to the company at ir.fronterienergy.ca. This call contains forward-looking statements which reflect the current expectations or beliefs of the company based on the 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. certain material assumptions were applied in formulating such forward-looking statements. These assumptions and factors could cause actual results or events to differ materially from current expectations as disclosed in the company's Q3 MD&A, released November 3rd, 2021, under the Heading Risks and Uncertainties and under the Heading Risk Factors and elsewhere in the company's annual information form dated March 3rd, 2021. 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 call over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy.
Tracey
Thank you, Operator, and thank you, everyone, for joining today's conference call to review Frontera's third quarter operating and financial results. Joining me on today's call are Orlando Cabrales, Frontera's Chief Executive Officer, Alejandro Pinheiros, Frontera's Chief Financial Officer. Also available to answer questions at the end of the call, we have Victor Vega, VP of Field Development, Reservoir Management and Exploration, and Ivana Arevalo, VP of Operations. Let me begin my remarks by highlighting that Frontera continues to make significant progress on its key strategic and operating priorities. Frontera is tightening and increasing its full-year operating EBITDA guidance from 325 to 375 million to now 360 to 380 million dollars. The company saw positive production growth momentum throughout and subsequent to the end of the quarter. Frontera is also reaffirming its year-end exit rate of over 40,000 barrels of oil equivalent per day. Frontera's production on November 2, 2021, was approximately 38,400 barrels per day. Frontera and its majority-owned subsidiary and joint venture partner, CGX, has put the Kiowa 1 well in the quarantine block in offshore Guyana. As of November 1, 2021, close to 78% of the plant footage has been drilled, and we will be moving to the three main geological targets. The joint venture continues to progress towards the total debt target in one of the most exciting exploration wells of 2021 and a potentially transformational catalyst for Frontera and CGX. Talking about other key strategic developments, subsequent to the end of the quarter, the conciliation agreement between Frontera, Senate, and Bicentenario was approved pending formalities. The approval fully resolves all outstanding transportation disputes in Colombia. It also removes the company's largest contingent liability. This opens the door for other strategic opportunities as we look to unlock value. The signators to the conciliation agreement are awaiting formal notification and documentation from the administrative tribunal of their decision. Once received, Frontera, Senate, and Bicentenario will complete the final steps and implement the settlement agreement. These are extremely positive developments for Frontera and its shareholders and reflect the significant progress that the company continues to make. Frontera is working to unlock some of the parts value from its production, exploration, and infrastructure assets. I will now turn the call to Orlando Cabrales, Frontera's CEO, and our CFO, Alejandro Pinheiros, who will share their views on our third quarter results. Orlando, please.
Frontera
Thank you. Thank you, Gabriel, and good morning, everyone. Frontera delivers solid financial and operational results in the third quarter, including delivering net income of $38.5 million. Compared to the second quarter, Frontera production increased 2%, Our operating net back per barrel increased 15%. Our net sales realized price increased 7%. The majority of the company's hedge ceilings from the second quarter have now rolled off, providing upside exposure to brand pricing. Transportation costs per barrel also decreased 8%. and production costs per barrel decreased 2.4%. Frontera also repurchased for cancellation 3.1 million shares for approximately $17 million. Operationally, the company drilled 15 wells and completed 27 work orders and well services during the quarter. At Kifan, the company drilled a new injector well, which increased water handling capacity and production. At CP6, we grew production to approximately 5,000 barrels per day. At the La Belleza discovery on BIM-1, the joint venture expects early gross production of 2,400 BOE per day to start in November of this year. In Ecuador, environmental licensing is complete. and road construction is underway in advance of spotting the Handaya One Exploration Well in the Perico Block in early December of this year. Subsequent to departure, Frontera sold its interest in Maureo and Prom Colombia, reducing work commitments by $17.2 million, streamlining its portfolio and exploration commitments and focusing on its core assets. Frontera also acquired approximately 45 million CGX common shares in connection with CGX rights offering, increasing Frontera's ownership in CGX to 76.98% on a non-diluted basis. I will talk about all these activities in more detail in a minute. But first, let me spend a few moments discussing the potentially transformational Kawa 1 well in offshore Guyana. Frontera, a majority-owned subsidiary and co-venture CGX, commenced drilling operations on the Kawa 1 exploration well on August 22nd of this year. Operations have proceeded on schedule and comprehensive planning by the joint venture has resulted in effective contingency planning and a final well plan and design that has allowed the well to progress without a major individual setback to date. Close to 78% of the plan footage has been drilled and the three main geological targets of the Kawawan well remain to be drilled. case and evaluated with current expectations on reaching total death consistent with the previous public disclosure of December 2021. Frontera and CGX hold over 1.4 million gross acres in the Guyana-Suriname Basin. Additional drill-ready prospects have been identified in the North Quarantine Area, and several exploration leads are being matured. Now I would like to discuss our Colombian operations. As Gabriel mentioned earlier, production average is 36,422 BOE per day, up to 2% compared to the prior quarter. The company continues to expect a year-end exit rate of over 40,000 barrels per day. Frontera's daily production on November 2nd was approximately 38,400, and the company's year-to-date average to November 2nd is approximately 37,600. IGAR production quarter over quarter was a result of production growth in the CP6 and KIFA blocks resulting from water handling improvements during the third quarter. Currently, the company has three drilling rigs and six work-over rigs active at its KIFA, Coralillo, and Abanico operations. In the third quarter of the year, the company drilled 15 wells and completed 27 work-overs and well services. Year-to-date, the company has drilled 28 wells and completed 86 work-overs and well services. At Kefa, current production is approximately 16,300 barrels per day, including both Kefa and Kahua. Frontera drilled one new injector well at Kefa and converted one inactive well into an ejector well, which the company expects will contribute to increased production volumes from the block through year end as water disposal volumes increase. Year to date, Frontera has drilled 13 development wells at Kefa, and the company expects to drill an additional 10 development wells in the fourth quarter. At CP6, current production is approximately 5,000 barrels per day due to continued drilling and construction of additional water handling facilities. At Guayaquil, the company successfully completed the Coralillo 4 and Coralillo 5 wells in the field, which are producing over 720 barrels per day. A third well in Coralillo, Coralillo 9, is currently being completed. On bin 1, the Planadas 1 exploration well has been drilled to a measured depth of 13,700 feet. Gas shows were encountered during drilling, and a detailed logging program is now underway to identify zones for testing. At La Belleza Discovery on BIM-1, the JV expects early gross production of 2,400 BOE per day, consisting of 1,400 barrels per day of light crude oil and 6 million cubic feet per day of conventional natural gas to commence in November of this year. In Ecuador, environmental licensing is complete and road construction is underway in advance of spotting the Handaya One Exploration Well in the Perico Block in early December 2021. This is the first well to be drilled in a block awarded in the Intracampus Bit Round back in 2019. Also in the Espejo Block, 3D seismic acquisition of 60 square kilometers is expected to start also in the fourth quarter of the year. I would now like to turn the call over to Alejandro Piñeros, Frontera Chief Financial Officer, to discuss our third quarter financial results.
Gabriel
Thank you, Orlando. As Gabriel mentioned, the company is tightening and increasing its full year operating EBITDA to $360 to $380 million compared to its prior $325 to $375 million guidance range. Operating EBTA was $72.6 million in the third quarter, compared with $84.8 million in the prior quarter and $52.1 million in the third quarter of 2020. The decrease in operating EVTA quarter over quarter was primarily a result of one less cargo sold during the third quarter, which was sold early in the fourth quarter, and the corresponding increase in inventory. This was partially offset by a decrease in realized loss on risk management contracts and a $7.2 million reversal of prior period cash royalties provisions. Frontera expects to sell seven cargoes in the fourth quarter of 2021. At September 30, 2021, the company had a total inventory balance of approximately 1.4 million barrels compared to approximately 970,000 barrels at June 30, 2021. The increase in inventory balance in the third quarter is a result of one less cargo sold during the third quarter compared to the previous quarter and no sales in Peru. The company reported a total cash position of $419.5 million at September 30, 2021, compared to $486.6 million at June 30, 2021. Cash utilization during the quarter included $66 million from the prepayment related to the prior quarter refinancing of the company 350 million 9.7 senior unsecured notes due 2023 with a lower cost 400 million 7.875% senior unsecured notes due 2028. Cash provided by operating activities was $79.1 million compared with $87.4 million in the prior quarter and $35.9 million in the third quarter of 2020. Under the company's current NCIP, which commenced on March 17, 2021, the company repurchased for cancellation 1,078,600 common shares during the quarter at a cost of approximately $6.1 million. Year-to-date to November 2, The company repurchased approximately 3.12 million common shares for a calculation for approximately 17 million. Capital expenditures were 103.2 million in the third quarter of 2021 compared with 61.2 million in the prior quarter and 2.9 million in the third quarter of 2020. Year-to-date to September 30, 2021, the company has executed $178.8 million in total capital spending. The increase in capital expenditures in the third quarter compared to the prior quarter was primarily due to increased operational activity as the company drilled 15 development wells and increased its exploration activity in Guyana and Colombia. The company recorded net income of $38.5 million or $0.40 per share compared with a net loss of $25.6 million or $0.26 per share in the prior quarter. The net gain in the current quarter was mainly due to $40 million of income from operations during the quarter. The company's operating net back was $37.79 per VOE at 15.2% compared with $32.8 per VOE in the prior quarter and $17.84 per VOE in the third quarter of 2020 due to higher net realized price and a reduction in production and transportation costs during the third quarter. The majority of the company's hedged ceilings from the second quarter have now rolled off, providing additional upside exposure to Brent pricing. The company's net sales realized price was 59.47 per VOE in the third quarter, up 7% or 3.8 per VOE, compared to 55.67 in the prior quarter. The increase was primarily driven by the increase in the benchmark oil price and lower losses on risk management contracts, partially upset by higher royalties as a result of a reversal of a previously recorded provision during the second quarter of 2021 and wider differentials during the third quarter of 2021. Production costs averaged $11.44 per VOE, down 2.4% compared with $11.72 per VOE in the prior quarter. Transportation costs averaged $10.24 per VOE, down 8.2% compared with $11.15 per VOE in the prior quarter. The company recorded a net realized loss on risk management contracts of $6.6 million in the third quarter of 2021 compared to a realized loss of $24.8 million in the second quarter of 2021 and a loss of $6.8 million in the third quarter of 2020. The realized loss on risk management contracts was primarily due to cash settlement on three-way and food spreads contracts paid during the quarter at an average price of 62.85 per barrel. The company's four-quarter hedges do not materially cap upside price potential. The company has various uncommitted bilateral letters of credit lines. As of September 30, 2021, the company has increased its uncollateralized credit lines to 78.8 million. Subsequent to the quarter, the company increased its uncollateralized credit lines to 90.3 million. The company's restricted cash position as of September 30, 2021 was $100.7 million compared to $128.3 million in the second quarter of 2021, a release of approximately $27.6 million. The company's restricted cash position was $168.9 million at December 31, 2020. Year to date, Frontera has released approximately $68.3 million of restricted cash. This decrease in restricted cash is primarily due to $31.6 million released due to the reduction in cash collateral requirements of exploration commitments, and the release of 22.3 abandonment funds that were replaced with letters of credit. $13.9 million of closed legal processes, and a new agreement with Citibank with reducing cash collaterals of letters of credit and foreign exchange fluctuations. The company anticipates releasing additional restricted cash in the fourth quarter of 2021 as the company continues to optimize its credit lines. I would like now to turn the call back over to our CEO, Landon.
Frontera
Thank you, Alejandro. As you have heard, Frontera had a very busy and successful third quarter, and things haven't slowed down so far in the fourth quarter. On October 22nd, 2021, Frontera signed and closed a sale and settlement agreement Transferring to Maurel and Prong 49.99% of all issue and outstanding shares of the Maurel and Prong Colombia BB, an entity that holds 100% interest in the Core 15 and MUSCA exploration licenses in Colombia. Following the transaction, Maurel & Prom and Frontera settled all mutual obligations, removing an estimated $17.2 million in Frontera minimum work commitments subsequent to September 30th of this year and providing certain indemnities to Maurel & Prom. Completion of this transaction supports Frontera's ongoing efforts to streamline its portfolio, reduce exposure to liabilities and exploration commitments, and focus on its core assets. On November 1st, Frontera announced that the Administrative Tribunal of Cundinamarca had approved the conciliation agreement between Frontera, Senate, and Bicentenario pending formalities. Also on November 1st, Frontera announced that it had acquired 45 million CGX common shares in connection with the previously announced rights offering by CGX on September 21. Looking ahead, we will continue to deliver value-focused production and cash flow, advance our exciting exploration and development portfolio, deliver continuous operational improvements, maintain a strong balance sheet, and enhance shareholders' returns. With that, I would like to conclude by saying thank you to Gabriela and Alejandro for the comments, and third, thank you everyone for attending our call. I will now turn the call back to our operator, who will open the call up for questions.
Operator
Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Ezequiel Fernandez from Balance. Please go ahead.
Ezequiel Fernandez
Hi, good morning, everybody. Thank you for the very complete presentation. materials and congratulations on the work being done. I have a couple of questions I would like to go one by one, if you don't mind. The first one is related to the drilling activity during the quarter. Well, actually during the year. Out of the 28 wells that you drilled, none were dry.
Victor
Is that correct? None were dry. Ah, okay.
Frontera
We, yes, as we said, we were, we had 20, huh? Do you want to ask the second question?
Ezequiel Fernandez
No, I was just checking that none of the 28 wells were dry.
Frontera
Yes, in Kifa we have two dry wells, but with the other 13 wells and the ones that we are drilling in the 4Q, and in addition to increasing water injection capacity in the field, we have been able to increase production at Kifa.
Ezequiel Fernandez
Okay, great. And my other question regarding drilling is on the exploration activity that you have been conducting at VIM-1. What do you expect in terms of the gas-oil mix for that area in the new wells, and what could be the initial production there?
Frontera
Yes, I think Victor Vega can take that question, Victor.
Victor Vega
Yeah. Thank you for your question, Ezequiel. I think, as you know, a well has been drilled to a measured depth of 13,700 feet. We encountered some gut shows during, but a detailed logging program as indicated by Orlando is now underway to identify zones for potential testing. So at this point, we don't have all the details, so we will have more information as we get additional information.
Ezequiel Fernandez
Okay, I get you. Thank you. Another question that I have is related to the implied guidance for the fourth quarter. Basically, I guess that assumes a reduction in the inventory of oil barrels that you have right now at 1.4 million. To which level should we go down roughly by year end?
Gabriel
I think that, you know, by year end, we will be around 400,000 to 500,000 barrels of inventory. Mainly, you know, it's the federal inventory that we have in place in the Global 192 field that once the new operator comes in, we will be able to monetize that inventory. We also mentioned that we're expecting to sell seven cargoes in the fourth quarter, so we expect an improved EVDA, which is also supporting our increase in EVDA guidance and the updated range that we have provided.
Ezequiel Fernandez
Great. And my final question, if I may. Are you already looking at possible 2022 hedges or not yet?
Gabriel
Yes, we have started to put in place hedges for the first quarter. You can see in our financial statements. We have put places mainly for the... Quarter of 2022, and we're starting to look also into the second quarter of 2022. In line with our hedging policy, we aim to cover at least 40% of our production. We go above that, sometimes go to 60 or 70. And we aim to provide protection for the downside and aiming to leave the upside potential open. And that is what is happening also in the fourth quarter of this year as some of the hedges that had a filling rolled out. And now most of the production is, you know, most of the hedges are uncapped.
Ezequiel Fernandez
Got you. That was very clear. That's all from my side. Thank you very much.
Victor
Thank you, Ezequiel.
Frontera
Ezequiel, just one quick comment, just to make sure that my previous answer on the two wells in Kifa, dry wells, There were two at Kepha, and as I said, I mean, the other wells, 13 already drilled, and 10, too, in the process of being drilled, have helped us to increase production with the increasing also in the water injection capacity of the field, just to make sure that that was clear enough in my response.
Victor
Yeah, yes, perfect. That was clear. Thank you very much.
Operator
As another reminder, to ask a telephone question, please signal by pressing star 1. We will now take our next question from Rebecca Constanton from SK Investments. Please go ahead. Good morning.
Rebecca Constanton
I had two questions. My first question is, if Cotwell 1 is successful, is it Frontera's intent to farm out its acreage or become a deepwater operator? And the second question is, what is the planned second well location for Kawa, if it's successful? Is it gonna be an offset or is it gonna be something more exploratory? Thank you.
Frontera
Let me start by saying, I will ask Victor to compliment here, but of course we, I mean, our focus now is to get the Kawa One well drilled. as we have mentioned during the call. Of course, we still look into different strategic options to continue with the program in Guyana. It is certainly an exciting opportunity, one of the most exciting basins right now in the world. So we are considering different options as well, do the planning accordingly. But we don't have nothing else to announce at this point in time. I don't know, Victor, if you want to make a quick comment on that.
Victor Vega
Yeah, I think I can make a comment on that on the second one, if that's okay with you. So on that one, I think we are, as Orlando said, focused on the operational side, trying to reach our TV, as indicated by Orlando earlier. And once we have the results of the well, then we will look at the options and what are the scenarios that we would like to consider at that point. As per the question on the second well. The second question on the second well, what we would like to say is that CGX has exercised its contractual right to use the MRCS discovery to drill an additional well. The decision by the joint venture to exercise the option is an important step in maintaining the continuity in the exploration program in a period of high demand in the region, and its consistency in working with the team familiar with the rig, and important from a HSC efficiency and operational perspective. The decision on the specific timing on the second one will be decided in the upcoming months to capitalize on the joint ventures to each set of exploration opportunities. So at this point, I think Orlando, that's what I would like to say.
Sunita
Thank you, Victor.
Victor
Thank you. That answers my question.
Sunita
Thank you, Rebecca.
Operator
As another reminder, to ask a telephone question, please signal by pressing star one. We'll pause for just a moment to allow everyone an opportunity to signal.
spk08
We will now take our next question from Hudson Bacera from Mondea. Please go ahead.
Victor
Hi, everyone.
spk04
Thank you. Thank you for the call. I just have two questions. The first one, if you can give us a little bit more color on the increase on the royalties and this reverse of the provision that you mentioned. Also, how does it look, the royalty per barrel of oil, excluding these effects? And the second question, now that you have reached the agreement with Sunita and Bicentenario, if you can give us some guidance or an update on how are the negotiations for the tokens on constructing your pipeline of fuel that you mentioned in the past in order to boost these Puerto Vallee assets.
Sunita
Thank you. Alejandro, can you take the first one and I can take maybe the second one?
Gabriel
Sure, Orlando. I think the reference to the royalties is in the second quarter, we reversed a provision on royalties. So basically in the second quarter, our royalties expense was minimal. The expense in the third quarter reflects a more normalized level of royalties. So we mentioned in connection with the comparison between the second quarter and third quarter results, but to answer the second part of your question, going forward you can assume that the level of royalties of the third quarter to be a more regular, normal level. The second quarter was an outlier given that we had a larger provision.
Frontera
Okay. On the second one, yes, as we disclosed on Monday, the official webpage of the judicial branch in Colombia reported sorry for the background noise, reported that the tribunal in Cundinamarca approved the conciliation agreement. We are awaiting basically formal notification. As soon as we receive those notifications, we will complete, Frontera, Senate, and Bicentenario will complete the final steps over the next few weeks to conclude and implement the conciliation arrangement. I think just to reiterate what we have previously indicated, this will allow to settle all the disputes between the parties related not only to Bicentenario but also to the Caño Limone-Coveñas pipeline. Certainly that has facilitated all the relationship with Ecopetrol on different areas. You asked about the possible connection between the Puerto Aria and the refinery in Cartagena, which is owned by Ecopetrol. We don't have nothing to announce at this point in time. We are progressing that opportunity as part of the business plan of Puerto Bahia, which also includes other business opportunities. Certainly, the connection to the refinery is an important one. And we will be happy to announce as soon as we have something concrete. Okay, thank you.
Operator
As another reminder, to ask a telephone question, please signal by pressing star one. We'll pause for just a moment to allow Evan an opportunity to signal. We will now take our next question from Joe D'Anonto from CGX. Please go ahead.
Evan
Hi, I just had a question regarding the forward-looking statements in the report, and it mentions not only the Kawa One Well, but the Wai One Well, W-E-I One Well. Where would that be located? Is that in the other prospect to the northwest of Kawa, or where exactly are we looking for that well?
Victor
Yeah, thank you for your question, Joe.
Victor Vega
As indicated before in the previous question that we answered to Rebecca, who was asking us about the second well, we are at this moment, you know, keeping our options open, and then we are going to decide, you know, on the second location once we have the results of the carbon one well.
Evan
But it has been, so I just was wondering if you had a more definitive location for the prospect.
Victor Vega
Not at this point, but it works in progress, and we are basically evaluating all the options as I stated, and with the option that we have now to do the second and additional well with MERS, then we will look at which is the best location and the option, and then we'll land the specific locations on all the blocks that we have in VTAN.
Victor
Okay, thank you.
spk08
This concludes today's call. Thank you for your participation. You may now disconnect.
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