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spk07: Good afternoon. My name is Julie and I will be your conference call facilitator today. Welcome to Frontera Energy's first quarter 2024 operating and financial results conference call. All lines are currently on mute to prevent any background noise. 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 speaker's 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.fronterraenergy.ca. This call contains forelooking information within the meeting of applicable Canadian securities laws relating to activities, events, or developments the company believes or expects will may occur in the future. Forelooking information reflects the current expectations, assumptions, and beliefs of the company based on the information currently available to it. Although the company believes the assumptions are reasonable, forelooking information is not a guarantee of future performance. Forelooking information is subject to a number of risks and uncertainties that may cause the actual results of the company to different from those discussed in the forward-looking information. The company's MD&A for the quarter ended March 31, 2024, and the company's annual information form dated March 7, 2024, and other documents it files from time to time with securities regulatory authorities described the risks, 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 conference over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy.
spk08: Please go ahead.
spk00: Thank you, operator. Good morning, and welcome to Fronteras.
spk02: FIRST QUARTER 2024 EARNINGS CALL. JOINING ME ON TODAY'S CALL ARE ORLANDO CABRALES, FRONTERRA'S CEO, AND RENE BURGOS, FRONTERRA'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 ARREBALO, VP OPERATIONS. Thank you for joining us. Frontera is focused on delivering on its strategic objectives and generating value for its stakeholders. In the first quarter, the company generated $97.2 million in operating EBITDA, $25.7 million of adjusted infrastructure EBITDA, and maintained a robust balance sheet. finishing the quarter with a total cash balance of $182 million. During the quarter, Odeon declared a $157 million dividend, $54.9 million net to Frontera, highlighting the strong cash generation capacity of this strategic infrastructure investment. The company also achieved an agreement in principle with Ecopetrol for the use of the company's reverse of Moses Water Treatment Facility, FARA, through a two-year contract. This is a significant ESG and a strategic milestone, which will drive greater produce, water disposal, and crude oil production capacity at the Kifa block. So far this year, the company has returned nearly $13 million of capital to our stakeholders, including $7.8 million in declared dividends, 3 million of common share purchases, and 1.5 million of buybacks of its 2028 unsecured notes. Moreover, the company, with support from Goldman Sachs, has launched a strategic alternative process for its standalone and growing Colombian infrastructure business, which may include a spin-off, a total or partial sale, or other business combinations. With over $1 billion of capital invested, Frontier's infrastructure assets are a unique investment opportunity in some of Colombia's most relevant infrastructure assets. The LDL pipeline connects the most prolific oil reserves areas in Colombia. The Meta and Casanare departments, which together hold 70% of the national 1P crude oil reserves, is the rest of Colombia's midstream network and transports 30% of the total country oil output. ODL has paid over $1.3 billion in distributions since inception. Completed in 2015, Puerto Bahia is a state-of-the-art liquid and dry cargo port terminal. It's strategically located in the heart of the Bay of Cartagena. Rating on their maritime concession, the port owns over 150 hectares of freehold land, which includes 2.4 million barrels of oil and all product storage capacity, over 50 hectares of dry cargo storage capacity, and an additional 75 hectares of expansion capacity to develop a strategic initiative. The recently announced connection agreement with the Refrica Refinery plans to come online this year and is expected to drive additional hydrocarbon volume and strengthening Cartagena's role as a regional leader and economic hub for the hydrocarbon space. Looking ahead, the company will 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 will now turn the call over to Orlando Cabrales, Frontera's CEO, and our CFO, René Burgos, who will share their views on our first quarter results. Orlando.
spk05: Thank you, Gabriel. Good morning, everyone, and thank you for joining us this morning. Frontera's first quarter results were in line with our expectations despite some unforeseen challenges. First quarter production declined approximately 3% on a quarter-over-quarter basis, impacted primarily by light and medium natural decline and expected world failures partially offset by our resilient heavy oil operations. During the quarter, our heavy crude oil production grew 2% on a quarter-over-quarter basis, reaching approximately 23,400 barrels per day. We also experienced an average daily production record of 7,000 barrels at the CTE6 block. The growth in our heavy oil business came despite several challenges, including the impact of community blockades, as well as delays associated with our strategic water disposal initiatives, including Sahara. If these events had not materialized, we would have expected an increase on production of approximately 725 barrels per day. We expect activities in Sahara to start up during the second quarter and to continue ramping up during the rest of the year, supporting our heavy oil production operation in Kifa with the objective of processing more than 250,000 barrels of water per day for the KIFA block once stabilized. Additional activities supporting our growth outlook for our heavy oil also include a new water injector well in KIFA coming online this month, expected to provide an additional 100,000 barrels of water per day. Also, we continue our efforts to expand our water handling capacity in CP6 to continue to capitalize on our production goals. In the end of 2022, we have increased water handling at the CP6 block from 120,000 barrels per day to 240,000 during 2023 and growing to $360,000 of water per day through this year. Our drilling campaign on these blocks has also started strong and is meeting expectations. After today, we have drilled 20 development wells in the Kepa and 66 blocks. In our light-medium operations, we suffered some unanticipated setbacks that resulted in lower levels of production than planned, including some unexpected world failures. We will continue to invest in work-over and world service activities in these blocks to recover production. Additionally, we continue to invest in our B1 block, including gas compression facilities that will aid in the reinjection of close to 20,000 to 30,000 NCF and is expected to increase production at the D1 block. On the exploration side, we are excited about spotting the high-impact Evita 1 well on the D1 block schedule for June of this year. The company completed important civil works activities including platform and work construction in advance of Drilling the Well. We reiterate our production and capital guidance for 2024. With these activities, along with our drilling program, we expect improved production and profitability throughout the rest of the year as we advance our development portfolio in Colombia and Ecuador. Along with our active pursuit of strategic alternatives for our interest in the quarantine block in Guyana, which is still ongoing, and our recently announced strategic alternative review for our growing Colombian infrastructure business, the company remains focused on unlocking value from the sum of its parts.
spk00: I would now like to turn the call over to Rene . Thank you, Orlando. Thank you, everyone, for joining us today.
spk04: I'd like to take a moment to highlight a few key financial aspects of our first quarter results. For the first quarter, the company recorded a net loss of $8.5 million, or 10 shares per share. This quarter's net loss follows approximately $44 million in income from operations plus share of income from associates, which includes $14 million of share income from ODF, offset by roughly $17 million in finance expenses, $9 million in losses related to risk management contracts, and approximately $27 million in income tax expenses, including almost $22 million in deferred income taxes, primarily due to the impact of non-deductible expenses and differences related to foreign currency fluctuations. During the quarter, the company assumed an income tax rate of 50%, inclusive of the 15% surtax associated to the 2022 Colombian tax reform. Moving to operating EBITDA, operating EBITDA for the quarter was approximately $97 million, During the quarter, we saw weighted average rent sales prices for Frontera of 82.35, an average that's going to differential on our export sales of 4.7. Compared to the prior quarter, our EBITDA performance was impacted by lower sales volumes, as well as sustained high energy costs and inflationary effects on our operating costs. Taking a closer look at our operating costs, Our production, energy, and transportation cost per barrel for the quarter totaled $10.21, $5.29, and $11.33, respectively. This compares with $9.69, $5.06, and $11.02 in the prior quarter. The increase in production costs quarter over quarter was primarily a result of higher wealth of activity, inflationary pressures on services, and wage indexation that typically occurs at the beginning of the year. Regarding energy prices, we continue to see the effect of sustained domestic high energy prices and the impact of FX fluctuations. We saw higher energy costs driven by higher activity in the CP6 block and the startup of the additional water handling capacity, For the first quarter, electricity costs accounted for 30% of our energy consumption and 46% of our total energy costs. Gas generation for the quarter was strong, with gases from operations totaling $65.6 million, thanks in part to a strong Brent oil price environment, innocent working capital related to lower sales volumes, offset partially by lower income tax withheld. It was worth highlighting that during the quarter, Colombian tax authorities reduced the overall tax withholding rate on oil export sales from 9.9% to 5.6%. Capital expenses for the quarter were roughly $70 million, including primarily cost-associated water drilling campaigns of 21 development wells at Quipa, Cahua, Cepese, and the Perico blocks for roughly $35 million. On the infrastructure side, adjusted EBITDA in the first quarter was $25.7 million, compared with $27.3 million in the prior quarter. The over-quarter change was due to lower general cargo revenues for Puerto Vallarta, lower transported volumes at ODL, lower palm oil sales from Aguayanos as a result of lower palm oil prices and higher operating costs across the segment due to inflationary pressures on services and negative impact from foreign exchange rates. More specifically, and with respect to ODL, EBITDA for the first quarter was $7.8 million, down 9% on a quarter-over-quarter basis due to lower transported volumes and inflationary pressures driving higher operating costs as compared to the prior. Additionally, ODL declared $167 million in dividend, including approximately $55 million net-to-frontera and a net And a return of capital close to $23 million or $8 million net to conceder. These capital payments are payable in installments to 2024. In April 2024, the company received the first installment equal to 50% of the total capital distributions declared. As of March 31st, 2024, the company reported a total cash decision of $182 million, including $155 million of unreserved cash. Turning now to risk management, our current risk management strategy continues to show how our hedging discipline supports our operations and planning. Convira uses derivative instruments to manage exposure to oil price and FX volatility. On the oil side, during the first quarter of 2024, the company successfully secured a 40% hedging ratio for the April to August 2024 period and introduced new hedges that protect a portion of our expected production for September 2024, protecting us of the potential drop in oil prices at average strike prices of $72 and $76 for the second and third quarter respectively. Sontera has also entered into foreign exchange rates totaling $39, approximately protecting the facial exposure above $39.70 for the third quarter. Sontera also entered into forwards to protect the ODL capital distribution and the repayment of the Bancolombia thanks to the nominated working capital loan. These stages provide the company with stability and will help mitigate future fluctuations in all the business to deliver on this market. Finally, I'd like to provide an update on our shareholder value initiative. Under the company's current NCAB, which commenced on November 21st, 2023, the company repurchased approximately 840,000 shares, or just over 1% of our total common shares outstanding. for cancellation for approximately 5.8 million as of March 8th, 2024. Frontera is authorized to repurchase up to 3.9 million shares as part of its program. With respect to our announced dividend on April 16th, Frontera paid approximately 3.9 million or 6.25 cents per share of Canadian and will pay 6.25 cents per share of Canadian to shareholders of record as of July 3rd, 2024 on or around July 17th, 2024. I would like to now turn the call back to Orlando.
spk05: Thank you, Rene. Before I wrap up today's call, I would like to highlight that during the quarter, Frontera offset nearly 50% of its CO2 emissions from the production and consumption of energy in our operations through carbon credit purchases. The company also achieved a total record oil incident rate of 0.72, and reuse 20% of its water production and 37% of its operating waste. The company also invested $0.5 million in social projects in communities near its operations in Colombia, Ecuador, and Guyana. On February 22nd, Frontera was recognized by Episphere as one of the world's most ethical companies for the fourth consecutive year. Frontera was also recognized for the second time as one of the 20 best workplaces for women in Colombia by the Great Place to Work Institute. And finally, a few thoughts on our strategic review processes. The company with support from Julian Lottie continues to actively pursue strategic alternatives for its interest in the quarantine block in Guyana, including a possible fund-raising. And as Gabriel mentioned, the company launched a strategic alternative review for its standalone and growing infrastructure business. Frontera's infrastructure business is comprised by the company's 35% equity interest in the ODL pipeline and its 99.97% equity interest in the Porto Valle pool. Infrastructure business has generated $120 million of adjusted infrastructure EBITDA and $47.3 million in capital distributions in 2023. Lotera has retained Goldman Sachs as financial advisor and may retain other advisors to assist the Board in evaluating the various strategic business and financial alternatives. These processes are part of the company's effort to streamline the business portfolio and unlock value from the sum of its parts. Rontera believes the value of these assets is not reflected in the current stock price and these processes aim to drive value for shareholders. There can be no guarantee that the strategic review process will result in a transaction. With that, I would like to conclude by saying thank you to Gabrielle and Rene for your comments, and thank you, everyone, for attending our call. I will now turn the call back to our operator.
spk07: Thank you. At this time, for those wishing to ask a question, please press Start, then a number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
spk08: Your first question comes from Anne Mao from Bank of America. Please go ahead.
spk09: Hi, good afternoon. Thank you very much for the call today and thank you for outlining some of your strategic initiatives that you're focusing on. I have two questions. One is sort of a broad question and the other is a little bit more specific. The first one has to do with, I guess, the strategy towards your bonds. They are one of the cheapest ones among the independents in Latin America and in Colombia. which sort of mystifies me because you have a good diversified asset base and you have good cash flow and relatively low leverage. At some point, would you consider doing either more of a buyback or an exchange for something maybe more amortizing or something just so you can be more in line with your peer group? I think that could also eventually help your equity valuation if people are less concerned about about the debt and that there might not be any hidden problems. So that's sort of a very generalized question. The second one I think has to do with the initiative that you outlined in your press release, which is for looking at alternatives for your infrastructure assets. And just wondering if you have any idea of what the range of multiples are for this type of business in Latin America. Thanks very much.
spk04: Hi, Anne. Thank you very much for your question. I think I'll tackle the first one. First, our bond strategy, I think that we've been in tune with very upfront that we are going to continue to seek out alternatives for us to maximize value to all of our stakeholders. You know, right now we're very comfortable with our bonds at 2028 maturity. We're certainly disappointed with the overall trading levels, but we're going to keep an eye and, you know, proactively kind of do what's in the best interest of the company, shareholders and stakeholders. So as far as this year, we've acquired roughly 1.5 million in Notional. And, you know, looking forward, we will continue kind of just, as our chairman laid out, seek out opportunities to see where our best dollar is invested to maximize that value. As it relates to the infrastructure initiative, that is a very good question. And look, and one that we believe, which is what Orlando highlighted in his portion of the call when he said, that the value of these assets are not reflected in our stock price today. These are assets, and perhaps when I compare to where our companies trade in the oil and gas field, we see oil and gas players trading to cash flow anywhere from two to three times, depending on the oil price cycle. We believe that these are assets that trade much higher than that, and we believe through this exercise we're going to be able to unlock some of that value. I think that you can probably help me better by giving me some indications as to what you really think about if you actually follow a lot of these market players. But what we can say confidently is that these assets, their predictability to relate to their cash flows should merit a much higher multiple than what from 10 of the other ones have.
spk05: Yes, and maybe if I may just to build on what Rene says, and I think Gabriel emphasized this in his remarks, If that's looking ahead, we will consider different shareholder initiatives, including for 2024 and beyond, of course, including potential additional dividends, distributions, or bonds buybacks. So your companies will take it. And the other common need is we believe that the infrastructure assets has a significant cash generation and different catalysts for long-term growth in those assets. So we're excited about it and ready to start working on this process.
spk00: Okay, thank you.
spk08: Your next question comes from Oriana Kovolt from Balance. Please go ahead.
spk06: Hi, thanks for taking my questions. This is Arianna Coles with Balance. I have two questions mainly. The first one is a follow-up on your announcement on this evaluation of strategic opportunities. So we read about these plans to monetize or spin up these assets, and we agree that it seems like a great way to unlock value for shareholders, given the different valuation multiples. We were just wondering if, in the case of a sale of these assets or even a portion of the equity to be spun off the vehicle, does the indenture of your bonds or other debt documents mandate you to use the proceeds to repay debt, at least partially, or would this be something that you'd consider doing voluntarily, applying any eventual proceeds to bond buybacks?
spk00: Thanks. Thank you, Oriana.
spk04: on the potential proceeds from a sale of these assets and the ability to repay that bond. It's a terrific question. I'll remind you that these are unrestricted subsidiaries of our bond. So there is no obligation of the company to use these proceeds to repay the bond. However, as I alluded earlier, we are looking at ways, and I think our chairman said it, our CEO said it, of generating value for all of our stakeholders. So certainly it would be a consideration, but it's certainly not an obligation.
spk06: Perfect. That's completely clear. Thanks, Rene. And just on the quarterly performance, Just turning more on the production side of the angle, we noticed that it's running a tad below the low end of guidance. So if you could perhaps share some more color on the catalyst to drive production with the guidance in the upcoming quarters. Thanks.
spk05: Yes. Well, as I said in my remarks, we are reiterating today our production and capital guidance. And basically, the additional production that we are seeing coming up in the following months are, as I mentioned, many, many ones. I mean, the first one is the new injector well in Kepa, which is coming online very, very soon, in the following days. We are also increasing the water handling capacity of CP6 from $240,000 to $360,000 in the following months as well. And as I mentioned, just to reiterate, we are seeing, again, record productions in CP6. And we are starting, we expect to start up the Sahara facility in the second quarter after reaching an agreement in principle with Ecopetrol on a two-year contract. So that will allow us to increase water handling capacity for kefir to 250,000 barrels per day. So that is another one. The other one is in V1. As I said, we are increasing our gas project compression facilities in V1. So that means more liquid production and some gas production. And we are also doing work over on world services activities in our light and medium blocks. So, with those activities in mind, we feel comfortable today that we can reiterate our production guidance.
spk00: Perfect.
spk06: That's completely clear.
spk00: Thanks very much again, guys.
spk01: Thank you.
spk08: Your next question comes from Ronan Rossi from Canaccord Unity. Please go ahead.
spk03: Good morning, guys, and thanks for taking the questions. I have a couple. So the first one is regarding the wealth failures you mentioned.
spk04: Roman, sorry to interrupt you. Roman, sorry to interrupt you. I'm having really trouble hearing you. You either have to back away from your phone. You sound muffled.
spk00: Or speak louder. Okay.
spk03: Okay, can you hear me better now?
spk00: That's better, thank you.
spk03: Okay, so regarding the well failures you mentioned in your disclosure, just wanted to get a sense on the quantity of barrels that you lost and if all the production is back online.
spk00: Yes, the production is back online.
spk05: Those were unexpected failures. And with this additional activity that I mentioned earlier, work over on world services, we are expecting to increase production goals in that asset.
spk03: Okay. And the second is regarding the Reficar connection. When are you expecting to complete? And can you give us a sense on topics on a quarterly basis, given that you still have like 40 million to deploy during this year?
spk05: I didn't get that. Can you read that? You asked about the replica connection, but you asked another thing, which I didn't understand.
spk03: The second part is regarding quarterly capex, as you have $40 million to deploy yet.
spk05: Okay. Let me start with the replica connection. The Reficar connection is going very well. We are still planning to end the construction of the connection by the end of this year, as we have mentioned before. So that is on track, consistent with our plan. We have been making progress on different fronts, right-of-way negotiations, awarding of the EPC contract, So we are on track to finalize the connection by the end of the year.
spk04: On the other question, you usually need to look at the bulk of our CapEx because I think you're focusing on the drilling campaign. And the drilling campaign, as it was alluded to, is going on strong. But a significant part of our drilling campaign is the associated facilities. And some of those just require that interconnection, flow lines, et cetera. to get everything to properly connect and to produce. So to date, we've invested roughly $54 million out of the $180 to $210 million of the total program. I hope that was your question.
spk00: We can get more clarity if you would like. Thank you.
spk08: Your next question comes from Cameron Ross from Mangrove Partners. Please go ahead.
spk00: Good afternoon.
spk03: I was hoping you could talk about the tax implications of a spin versus asset sale of the infrastructure asset in light of assets in light of the NOLs at the company.
spk00: That's a very good question. Look, we're exploring the different alternatives.
spk04: Ultimately, there is a, I don't have a set response to you. To be very transparent, that's the reason why we're doing this review today. where we're launching this review today. Ultimately, we're capable of distributing money to our shareholders. One, the second part of that answer is that every single asset has a certain tax basis. So it really does depend on the price on which it's struck and the value generated at that and then how that money is mobilized up and distributed. But in the coming quarters, we're hoping to give all of our investors a better picture of how that will look like. What I can say is that to the extent that we do have a cash transaction for any of our assets, we do not see an impediment to be able to deliver value associated with our cash to our investors.
spk00: Okay, thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1. And there are no further questions at this time.
spk08: Should you have any further questions, please email IR at fronterraenergy.ca. This concludes the call. Thank you for joining, and you may now disconnect.
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