3/10/2025

speaker
Ina
Conference Facilitator

Good morning. My name is Ina and I'll be your conference facilitator today. Welcome to Frontera Energy's fourth quarter in year-end 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 forward-looking information within the meaning of applicable Canadian securities laws relating to activities, events or developments the company believes or expects will or may occur in the future. Forward-looking 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, forward-looking information is not a guarantee of future performance. Forward-looking information is 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 information. The company's MD&A for the quarter ended December 31, 2024 and the company's annual information form dated March 10, 2024, and other documents it files from time to time with securities regulatory authorities describe the risks and 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 call over to Mr. Gabriel De Alba, Chairman of the Board of Frontera Energy. Mr. De Alba?

speaker
Gabriel De Alba
Chairman of the Board

Thank you, operator. Good morning, everyone, and welcome to Frontera's fourth quarter 2024 and year-end operating and financial results conference call. Joining me on today's call are Orlando Cabrales, Frontera's CEO, Rene Burgos-Diaz, Frontera's CFO, And 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, Ivana Arevalo, VP Operations, and Renata Campanero, VP Marketing Logistics and Business Sustainability. Thanks again for joining us. In 2024, Frontera continued to demonstrate robust performance, focused on the execution over his strategic objectives and priorities. The company met its guidance targets, including key upstream operating and financial objectives, and delivered on its commitment to return capital to shareholders. The value-centered approach resulted in closing the year with a strong balance sheet, including $223 million cash position. The company also lowered its consolidated debt and leased liabilities by over $30 million. During the year, both S&P and Fitch reaffirmed the company's credit ratings of B plus and B, respectively, with a stable outlook, highlighting Frontera's strong credit quality and financial position, underpinning the company's low leverage. For the full year, the infrastructure business segment delivered strong results, generating a 2024 adjusted infrastructure EBITDA of over $107 million, at the midpoint of the company's 2024 guidance target. The company also received over $60 million in dividends and capital distributions from ODL. Frontera continues to make significant progress in its Puerto Valle operations, reaching several key important milestones, which we expect shall provide shareholders with significant upside potential, including the construction of the connection line with the Refinería de Cartagena which is expected to be operational by the second quarter of 2025. Additionally, the company announced the new LPE joint venture with Industrias Gasco. Both these projects are strategic for Frontera, but also supportive regionally and for the Colombian economy as a whole. As mentioned, during the December operational update, the infrastructure business strategic review is in its final stages. The company is analyzing various options and expects to announce results soon. In the Guyana exploration business, Frontera and its joint venture partner remain firmly of the belief that its interest in and the license of the current time block remain in place and in good standing. The joint venture is assessing all legal options available to assert its rights. The joint venture is committed to promptly resolving this matter and continuing its multi-year efforts and investments to realize value for the people of Guyana and its shareholders from the quarantine block. Frontera delivered on its commitment to return capital to shareholders. Supported by Frontera's strong financial position, from 2024 through today, we have returned approximately $83 million, including $15.1 million in declared dividends, $7.8 through the repurchase of its common shares through the NCIB, and completing two successful substantial issuer bids for over $60 million. The SIV saw an over 90% combined participation rate, validating the company's capital distribution strategy. Since 2022, the company has returned over $180 million to its shareholders through normal course issuer bids, substantial issuer bids, and dividends. Frontera will continue to consider future investor initiatives in 2025, including potential additional dividends distributions, or bond buybacks, based on all prices, the world results of our business, cash flow generation, and the delivery of the strategic goals. I'd now like to turn the call over to Orlando Cabrales, Frontera's CEO, and Rene Burgos, Frontera's CFO, who will share their views on our four-quarter and full-year results.

speaker
Operator
Call Moderator

Orlando? Thank you, Gabriel.

speaker
Orlando Cabrales
CEO

Good morning, everyone, and thank you for joining us for today's call. 2024 was a strong financial and operational year for Frontera. We have continued to execute our strategy and generated positive results, meeting all our guidance metrics for the year, and deliver additional value to shareholders. In our Colombian upstream business, we met our 2024 production targets. After completing successful drilling campaigns in CP6 and Sabanero blocks, expanding water handling capacity to 360,000 barrels in CP6 block, which reached another record daily production level of close to 9,000 BOE per day in the fourth quarter. And in Sabanero, where production reached approximately 2,400 DOE per day during the same period. At our Sahara project, water processing volumes reach an average of 79,000 barrels of water per day in the fourth quarter and an average for the year of 44,000 barrels of water per day. Frontera continues to optimize its Sahara operations in an effort to drive higher water handling and crude oil production volumes, and also as a tool to achieve our sustainability and green circular economy goals. I'm also pleased with our continued efforts to manage our cost structure. Despite inflation and other pressures, we've met all our cost guidance targets, including the production cost per barrel, which averaged 9.2%. $34 per barrel. On our 2024 year end reserves, we continue our commitment to sustain production and focus on value over volume in Colombia and Ecuador, closing the year with $106 million and $151.3 million barrels of 1P and 2P reserves, respectively. Our three-year average gross reserves replacement ratio of 60% for 1P reserves and 40% for 2P reserves and presented a reserve life index of 6.8 years for 1P reserves and 10.3 years for 2P reserves. The net present value before tax discounted at 10% Our NPV 10 for December 31st, 2024 of our 2P reserves was 3.4 billion or 21.6 per BOE. The NPV 10 presented a small decrease mainly due to the reserves decrease, however, the NPV 10 their borrow increase year over year, driven by operational efficiencies, optimization of development plans, and the reduction of future development costs. For 2025, we will invest between $30 and $40 million in exploration opportunities, led by the drilling of our high-impact ERA-1 exploration well in the BIM-1 block, originally postponed from our 2024 plan. We believe our new field exploration and exploration targets will help unlock reserves' growth potential. In our infrastructure business, ODL transported over 243,000 bars per day, generating $274 million in 2024 EBITDA and returning over $171 million to its shareholders. The company received over $60 million from its 35% interest in 2024 EBITDA. Puerto Bahia generated approximately $15 million in operating EBITDA for 2024 in line with our 2024 guidance, despite lower than expected liquids and cargo volumes and supported by effective cost controls in the operation. For 2025, our focus in Puerto Bahia shifts to the connection. as we look forward to a startup and ramp up of volumes via the Reficar connection. Turning to our year-to-date 2025 performance, gross production through March 9 was approximately 40,400 farms per day. Below our guidance range, mainly due to certain unexpected wealth failures within our light and medium assets. These issues are being addressed and we remain confident in meeting our 2025 production guidance. On the exploration side, the Greta Norte 1 well was drilled and the well is currently in evaluation phase. We remain focused on executing our recently announced capital and production plan for 2025. and continuing to deliver sustainable production, solid operational and financial results, and enhancing investor returns. I would now like to turn the call over to Rene Burgos, Fronteras CFO.

speaker
Rene Burgos-Diaz
CFO

Thank you, Fernando, and good morning, everybody. I will take a moment to highlight a few key financial aspects of our four-year results. For the full year, the company recorded a net loss of $24.2 million, or $0.29 per share. The company's net loss includes roughly $117 million of operating income and $54 million from shared income and associates, our OEL investment, offset primarily by approximately $93 million in deferred income tax expense and $74 million in finance expenses. Our deferred income tax expense amounts reflect our use of historical tax loss balances impacts of changes associated to the surtax rate and fluctuations in the Colombian peso tax rates. Our operating EBITDA for the year was approximately $424 million, in line with the 2004 guidance. I want to take a moment to talk about our key per barrel indicators associated to our real life prices and cost. During the year, our weighted average brand sales price was $79.33. The company also witnessed an average fiscal year differential on export sales of $5.51. Our purchase crude net margin associated to our dilution and transportation programs was $2.73 higher than the $2.23 for the prior quarter. The quarter-over-quarter variance was the result of higher dilution rates driven by higher production for more heavy oil assets. Taking a close look into our operating costs, our production energy, and transportation cost per barrel for the year totaled $9.34, $5.11, and $11.33, respectively.

speaker
Ivana Arevalo
VP Operations

In line . This compared to $18.69, or $4.99, and $11.31, respectively, for 2023.

speaker
Operator
Call Moderator

If 2023 means year-over-year economic costs,

speaker
Rene Burgos-Diaz
CFO

as well as the impact of FHA rates and inflationary pressures on services and wages. Energy costs were also higher, mainly related to higher heavy crude oil production levels and higher electricity prices. Transport issue costs had a slight increase as a result of annual increased tariffs, partially offset by lower volumes transported per milliliter attributed to improve domestic wall hub sales. On our infrastructure business, adjusted infrastructure EBITDA for the year was $107 million. This compares to $110 million in 2023. The year-over-year decrease was primarily due to more EBITDA from ODL, which resulted from higher costs due to inflationary pressures and indexation on wages. ODL volumes transported were 244,000 barrels per day, consistent with 2023 volumes. Frontier cast generation for the year was very strong. our cash flows from operations totaled $510 million. This was due to a healthy, bright, all-price environment during the year, a reduction in domestic withholding tax rates, the impact of our deferred tax asset recoveries, as well as dividends and capital distributions from our investment in the ODO pipeline. As of December 31, 2024, the company closed with a $63 million income tax receivable, which we expect to recover during 2025. With respect to our capital expenditures, total capex for the year was, along with our guidance, at $318 million. Our capex for the year included the drilling of 68 development wells in the Kifa, CP6, Salonero, and Perico blocks, as well as two exploration wells in Colombia. As of December 31, 2024, the company closed the year with a total cash position of $223 million, including $193 million in ownership cash. This was before the January SAB of $30 million. In addition, through 2024, the company also reduced e-consolidated balances by approximately $30 million. Turning now to risk management, our current risk management strategy continues to show how our hedging discipline supports our operations and planning. Frontera uses derivative instruments to manage exposure to oil prices and affects volatility. On the other side, the company entered into hedges, successfully securing a 40% hedging ratio until June 2025 at a $70 brand strike price. protecting against a potential drop in oil prices. Sentera has also entered into foreign exchange rate hedges totaling $180 million, covering roughly 40% of the company's expected peso exposure until the third quarter of 2025. These puts have strikes between the 4,150 peso rate and 4,200 peso rate. Both these edges provide the company with cash flow visibility and help mitigate impacts from future fluctuations while allowing the business to deliver on its 2025 targets. Finally, I'd like to provide an update on our investor value initiatives. On bond buybacks, the company reduced. We purchased 5 million notional of its 2028 senior unsecured notes in 2024. Year-to-date, in 2025, the company has repurchased an additional 1 million of its 2028 unsecured notes. Under the company's NCID program that expired on November 20th, 2024, the company repurchased approximately 1.3 million common shares for 7.8 million. As mentioned in our press release, the company intends to file with the TSX a notice of intention to commence a normal course, if forbid, for its common shares. This program will be subject to the acceptance of the TSX. With respect to our quarterly dividends, we have declared and paid approximately 15.1 million during the year. for a total of 25 cents per share Canadian to shareholders. Together with this results announcement, the board has declared a quarterly dividend of 6.25 cents per share Canadian, payable to shareholders of record as of April 2nd, 2025, and to be paid on or around April 16th, 2025. Regarding the company's substantial issuer bids, or SABs, the company announced two SABs in 2024 for a total of over $60 million. at a fixed price of $12 Canadian per share. The S&Bs were widely participated with an over 90% combined participation rate. The company believes this format is the most efficient means to distribute capital to all of our shareholders. In total, the company has returned over $83 million in capital to shareholders since 2024. Sentera shall continue to consider future investor initiatives for 2025 and onwards, including potential additional dividends, distributions, or bond buybacks based on our prices, the overall results of our businesses, gas regeneration, and the company's three goals.

speaker
Operator
Call Moderator

I would like to now turn the call back to Orlando. Thank you, Rene.

speaker
Orlando Cabrales
CEO

I wanted to provide some color to our 2025 production and capital program. We have a fully funded plan for 2025, delivering approximately $370 million to $415 million in consolidated operating EBITDA at $75 of rent prices. Our plan will leverage our transportation and logistics structure to maximize realized prices while also investing for future growth through facilities expansion and near-field and high-impact exploration. We expect to generate consolidated free cash flow of approximately 80 to $125 million at 75 average Brent prices. Despite lower expected oil prices, Frontera projects a strong cash flow generation driven by higher production, lower capital expenditures, and a focus on cost control. In our Colombian An Ecuador upstream business, we are targeting production of approximately 41,000 to 43,000 BOE, a 4% increase compared to 2024 production, and generate $350 to $380 million in upstream operating EBITDA. We will invest between $160 to $190 million in development activities and $18 decrease in development spending from 2024. We will also invest between $30 million to $40 million in exploration activities, and a $10 to $15 million in other investments related to HEC activities and new fuel production technologies. We will focus our drilling efforts in the most productive and profitable assets in the portfolio. building on the successful heavy asset drilling campaign in 2024 in the KIFA and CP6 blocks. Supplement our drilling activities with our low-cost well intervention program, partially offsetting our natural decline, as well as invest in development facilities primarily supporting activities in the KIFA and CP6 blocks. On the exploration side, we anticipate investing $30 to $40 million drilling the high-impact Idra-1 exploration well in the BIM-1 block, the Janera-1 well in the Janos-99 block, and carry out pre-seismic and pre-drilling activities in the BIM-46 block. We expect our upstream business to generate free cash flow between $65 to $95 million inclusive of 10 to 15 million in cash tax payments, net of recoveries, and debt service of 45 to 55 million dollars, which includes 32 million of bond interest and 13 to 23 million related to debt service for local bank facilities. For our growing and stand-alone infrastructure business, We are targeting an infrastructure EBITDA of approximately 20 to 35 million dollars for 2025, driven by the Replicar Connection Startup and additional revenues from SAR. Including 50 to 60 million dollars in distribution from ODL, the segment is expected to generate free cash flow of approximately 15 to 30 million dollars. We have prepared a slide bridging our current production and the buildup of the component supporting our 2025 production targets. Our starting point is the company's four-quarter 2024 average daily production rate of 42.4 thousand BOE per day. Assuming an asset decline rate of between 25 to 30 percent, To sustain production, the company would need to replace an annual average of 5.5 to 6.5 thousand DOE per day, or a rolling of 2 to 3 percent of production per month. Frontera's Development CapEx program was designed to fully replace our declining barrels via a combination of new wells, as well as low-cost decline management well interventions, new technologies, and strategic investment in facilities. Our 2025 new well capex program seeks to replace between 3,000 to 4,000 barrels, investing between $100 and $110 million in 60 to 65 new wells, focused primarily on our heavy oil assets. On average, each new well carries an estimated cost of approximately $1.5 to $2 million and targets an annualized production rate between 100 and 120 DOE per day. These wells have an average and attractive under one year payback period and a capital efficiency metrics of $16,000 to $18,000 per flowing barrel. Under our low-cost decline management well intervention program, the company invests in well interventions and work orders to reduce the impact of the natural decline and optimize the portfolio production rate. For 2025, the company expects to invest approximately $20 to $30 million in decline management activities, with average investment per intervention ranging between $200,000 and $500,000 per well, and generating an additional 30 to 40 BOE per day of annual production. Finally, we plan to invest $15 to $20 million in strategic projects, including at Sahara, Kahua water handling expansion, along with between $5 and $15 million in investments in new technologies to enhance production efficiency and reduce water production, and build a foundation for further expansion of these key assets for years to come. Overall, these capital projects will allow us to sustain production from last year at around 40 to 43,000 DOE per day. Before I wrap up today's call, I would like to highlight our sustainability strategy where we achieved 100% of our 2024 sustainability goals. Frontera restored, protected, and preserved 769 hectares of land as well as recirculated 35.2% of its operational water and utilized 43.4% of generated waste. In the health and safety side, Frontera achieved its best total recordable incident rate performance ever, with a 6% reduction compared to the previous year. On our efforts to maintain close relationship with all the stakeholders, including our employees and the communities where we operate, we invest approximately $4.1 million in social projects, benefiting 66,303 people near our operations, and increased local purchases from local contractors by 2% compared to last year. As well as in 2024, Frontera was recognized among the top 20 best companies to work in Colombia by Great Place to Work. We implemented an effective cybersecurity plan, maintaining a zero rate of material cybersecurity incidents. Additionally, for the four consecutive year, Frontera, during 2024, was recognized as one of the most ethical companies by Ethisphere. And finally, with that, I would like to conclude by saying thank you to Ariel and René for their comments, and thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open up for questions.

speaker
Ina
Conference Facilitator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please pass the telephone by the one on your telephone keypad. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press star for beta 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question.

speaker
Operator
Call Moderator

Once again, that is star and 1 to ask a question. The first question comes from the line of Peter Polly from Jefferson.

speaker
Ina
Conference Facilitator

Please go ahead.

speaker
Peter Polly
Analyst, Jefferson

Thank you. Thank you for the call and the opportunity for two questions. If it's okay, I'll go one by one. The 25 CAPEX guidance is down about 25% year on year with it looks like declines year on year in development facilities, other CAPEX and Columbia infrastructure. I just wanted to ask if you could share a little more color on what's driving those year-on-year declines, especially given the flattish production year-on-year? Like, is CapEx being spent more efficiently, or is the CapEx profile changed significantly versus 2024? And my second question, is there any level of rent price you would reconsider any elements of your CapEx plan or shareholder distributions and buybacks, all within the context of your hedges in place? Thank you.

speaker
Victor Vega
VP Field Development, Reservoir Management & Exploration

Thank you, Peter.

speaker
Orlando Cabrales
CEO

I can take the first question and you can take the second one. I think on your first question, Peter, I think the answer is our mantra has been value over volumes. Yes, certainly we are reducing the development topics if you compare it with last year. But our production actually is higher this year than last year in our guidance. So we have been much more efficient in the use of our capital. We are also very much concentrated also in bringing efficiency, further efficiency into our cost structure. And we are focusing this year in developing the dream campaign for our CP6 new facilities capacity, which was increased last year to 360,000. And so there is room to further optimize the use of that facility, which we already built it last year. And we are also working very hard, as I mentioned in my remarks, to increase production in Kifap through the Sahara facility, which we are still looking to improve there. So with that in mind, we believe the development cap is the right one for the company, and it will allow us to bring that maximum that we have of value over volumes with a higher target of production for this year.

speaker
Operator
Call Moderator

Peter, thank you also for your question.

speaker
Rene Burgos-Diaz
CFO

As to Brent price, you know, I think we indicated two Brent prices, 75 and 80. You know, 75 is the one that which we struck the plan. We're like, as Orlando highlighted, we have a range of potential free cash flow scenarios between 80 to 125. Our hedges today are through the middle of the year, around $70 Brent. So I think we're pretty well covered. It will depend how the rest of the year somewhat works out in our ability to actually enact some of those hedges for us to somewhat restrike or replan. But for now, I think we're sticking with that range of potential outcomes. But certainly, if prices continue in a downward trajectory, we would need to adjust our plans or perhaps rethink how our value maximization approach will take.

speaker
Operator
Call Moderator

But for now, I think we're pretty good, pretty covered. Great. Thank you.

speaker
Operator
Call Moderator

Thank you. And your next question comes from the line of Christian Ferra from KNG Securities. Please go ahead.

speaker
Operator
Call Moderator

Hello. Can you hear me? Yes, I think we can hear you. Thank you.

speaker
Christian Ferra
Analyst, KNG Securities

So I have two questions. The first one, if you could please provide some color on the expected shareholder distributions for 2025, including both share repurchases and dividends. And my second question is if you have any news to share regarding the infrastructure business divestment. Thank you.

speaker
Victor Vega
VP Field Development, Reservoir Management & Exploration

Okay. I can take Rene the second one and you can take the first one.

speaker
Orlando Cabrales
CEO

On the second one, as we announced it back in May of last year, I mean, we are working diligently to conclude this infrastructure process. We are analyzing various options that we have right now, and we believe that the process, as I think Gabriel mentioned in his remarks, is close, is nearing its final stage. So we hope to announce something soon.

speaker
Victor Vega
VP Field Development, Reservoir Management & Exploration

Rene, you can take the first one.

speaker
Rene Burgos-Diaz
CFO

Yeah, and thank you, Orlando. Look, color on distributions, I think that we've, as we laid out in our press release, our distributions are multi-pronged. You know, first we have NCABs, then we have our dividend, and then what we've done last year is also the substantial issuer bids. I think as far as direction, I think that the, you know, you should look at the dividend and the ACIB as a straightforward way of returning capital. And the other means of capital distribution, as Gabriel said, will be confirming to overall, you know, oil prices, business results, etc. So that's the best guidance that I can share with you right now. And again, you know, last year we distributed, or since 2024, we distributed over $83 million to shareholders. And since 2022, you know, close to $150 million. So we're, you know, we're really key and focused on shareholder distributions. So of course, you know, this year will be no different with us focusing depending upon our business execution.

speaker
Christian Ferra
Analyst, KNG Securities

Thank you, and if I may, a quick follow-up. Do you, maybe it's a bit too early, but do you already know what are your plans for the proceeds you're going to get of the infrastructure business divestment?

speaker
Operator
Call Moderator

Do you want to take that one? Yep.

speaker
Rene Burgos-Diaz
CFO

Look, I think as we said before in discussions with you all and in these conversations, capital allocation is the board's remit. So it really depends at the time and the form. Once this process is finalized, we will, you know, the board will determine the most optimal way for this capital to be distributed. So I think like as Orlando said, we're nearing the end of the process. We're analyzing various options, and as soon as we have better information, we'll communicate with the market in due course.

speaker
Operator
Call Moderator

Thanks. Thank you. Once again, that is star and one to ask a question.

speaker
Operator
Call Moderator

Your next question comes from the line of Alejandra Andrade from JP Morgan.

speaker
Ina
Conference Facilitator

Please go ahead.

speaker
Alejandra Andrade
Analyst, JP Morgan

Hi. I just wanted to follow up on the hedges. When you released guidance, I think only first quarter hedges were in place. I'm just wondering what is the percentage now that is hedged of the first six months of the year?

speaker
Operator
Call Moderator

You have that answer.

speaker
Rene Burgos-Diaz
CFO

Yeah, I'll take this one. So we've had roughly 40% of our net production around $70 spread, Alejandra.

speaker
Operator
Call Moderator

For the first six months?

speaker
Operator
Call Moderator

Okay, perfect. Thank you. The first six months, yes.

speaker
Operator
Call Moderator

Thank you.

speaker
Ina
Conference Facilitator

There are no further questions at this time. I will now hand the call back to Mr. Orlando Cabrales for any closing remarks.

speaker
Victor Vega
VP Field Development, Reservoir Management & Exploration

No, thank you. Thank you, operator. Thank you to Gabriel and René again. Thank you, everyone, for attending the call, and have a good day.

speaker
Ina
Conference Facilitator

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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