Gran Tierra Energy Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to Gran Tierra Energy Conference Call for Fourth Quarter and Year-End 2020 Results. My name is Mary, and I will be your coordinator for today. . I would like to remind everyone that this conference call is being webcast and recorded today, Thursday, February 25, 2021, 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.

[Gary Guidry:]

Thank you, Mary. Good morning, and welcome to Gran Tierra's Fourth Quarter Year-end 2020 Results and Conference Call. My name is Gary Guidry, Gran Tierra's President and Chief Executive Officer; and with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer; and Rob Will, our Vice President of Asset Management. We issued a press release yesterday that included detailed information on our fourth quarter and year-end 2020 results. In addition, Gran Tierra's 2020 annual report on Form 10-K has been filed on EDGAR and is available on our website. Ryan and Rob will make some brief comments, and then we will open the line for questions. I'll now turn the call over to Ryan for discussion of our financial results.

[Ryan Ellson:]

Thank you, Gary. Good morning, everyone. With the unprecedented impact of the COVID-19 pandemic and the crash in world oil prices, Gran Tierra took decisive actions during the first half of 2020 to shut in minor fields, curtail drilling activity and defer workovers in order to protect the company's balance sheet and liquidity while still achieving the 2020 average production of approximately 23,000 barrels a day. In the low-price environment, we made the prudent decision not to maximize production but to defer production till oil prices began to rebound in the second half of 2020 and now into 2021. We did this while maintaining proper reservoir management and protecting the long-term value of our assets, as evidenced by our strong reserve replacement in 2020. Gran Tierra's Q4 capital spend totaled $40 million, which was significantly up from $7 million in Q3, which reflected the reserve activities primarily in Acordionero field. We also accelerated certain budgeted first half 2021 capital expenditures into the fourth quarter to maximize operational efficiencies. At the end of the year, $190 million was drawn on our credit facility compared to a balance on the credit facility of $200 million at the end of Q3. Our next RBL redetermination will be in May, and prices have significantly increased since our last redetermination. During 2020, both -- through both direct tax refunds and value-added tax on oil sales, we collected total VAT and income tax receivable of approximately $114 million, which was an important source of liquidity during last year, which allowed us to strengthen our balance sheet.

[Rob Will:]

Thanks, Ryan. Good morning, everyone. I'll briefly cover a few operational highlights from yesterday's press release and provide some updates on current activity. We are very proud to announce that the company achieved its first year with the lost time incident, or LTI, frequency of 0, during which the company logged 15 million LTI-free person hours. A perfect LTI rating 0 is a remarkable achievement in any year, and particularly in 2020 while activity levels included field suspensions in the first half of 2020, followed by the restarts of these fields during the second half of 2020, all while abiding by our strict, world-class COVID-19 safety protocols. GTE's LTI rating 0 was well below both industry averages of 0.42 for Latin America and 0.3 for North American exploration production companies in 2019, as reported by the International Association of Oil & Gas Producers, and was in the top percentile in any region globally. Early in 2020, we implemented enhanced COVID-19 preventative measures with a focus on reducing the spread of COVID-19 to protect our employees, contractors and communities living near our operations. I'd also like to touch on our partnership with the international nongovernmental organization, Conservation International. We have committed to reforesting 1,000 hectares of land and securing and maintaining 18,000 hectares of forest through the NaturAmazonas project in the Putumayo Basin. Gran Tierra's total NaturAmazonas investment in the Andes Amazon rainforest corridor through this project is forecasted to be $13 million over 8 years. Gran Tierra has planted 830,000 trees and has conserved, preserved or reforested 1,624 hectares of land through all of its environmental efforts. The NaturAmazonas project alone is expected to sequester approximately 8.7 million tons of CO2 over its lifetime, which is equivalent to 215 billion passenger miles driven or the energy use of 10 million typical homes during 1 year.

[Operator:]

. Your first question comes from the line of Gavin Wiley from Scotiabank.

[Gavin Wylie:]

Just I had a couple of questions. Just looking at capital spending profile through the year, I wanted to know how that looks. I mean is it weighted to either the first half of the year, or perhaps by quarter, just kind of how the breakdown looks? And I guess, in connection with that is how do you see production evolving through 2021 to meet your guidance that you've put out here at the 28,000 to 30,000 BOE a day? Is there a pretty balanced growth sort of profile, steady state? Or is there actually a step change that you're expecting at some point that we can be looking for? And then just the last question is as we look into Q1 and Q2, do you have a rough sense of how many workovers you're looking to perform on those individual quarters?

[Ryan Ellson:]

Thanks, Gavin. With respect to capital expenditures, yes, we expect about 70% to 80% of our capital expenditures to occur in the first half of the year, and about 50% of that to be in Q1. Q1 is the heavy capital program just with the expenditures in Acordionero as we do the drilling program. The team, as Rob mentioned, has done a great job of accelerating the speed that we're drilling the wells, but that really accelerates the capital spend, as you know, into Q1 as well. So Q1 will be the most heavy program. With respect to production, it really will be a step change in the second half of Q2, just as we bring the additional Acordionero wells on as well as start to bring -- both the new drills as well as the workovers, but also the Costayaco wells as well.

[Gavin Wylie:]

And then just on the workover front?

[Ryan Ellson:]

And workovers, yes, our target for workovers is 0. We're hoping we don't have any well failures. But most of the workovers are going to happen, the 1 we have, as Rob mentioned, some wells down in Acordionero, and those will be on by the end of this quarter or first part of next quarter. So then -- we're expecting just to be normal course after that.

[Gavin Wylie:]

And if I can ask a follow-up on the Acordionero side. I think you mentioned something that's quite impressive is the drilling time that you guys have been able to reduce to and bring those costs down. Is that going to allow you to potentially keep the same budget level but actually end up drilling a couple more wells this year? I mean is it too early to make that call? Or are you starting to build confidence around potentially adding more drilling at the same cost?

[Rob Will:]

Gavin, it's Rob. Yes, definitely. We did -- obviously, we did forecast into our 2021 budget cost savings in drill and completion of our wells this year, but we're definitely doing better than we had budgeted. So the guy that heads up the team that's responsible for developing these pools, yes, I would love to see some additional wells drilled. But as Ryan mentioned, the focus this year will be on using excess cash flow towards strengthening our balance sheet debt reduction. But if Ryan and Gary allowed us to drill a few additional wells there with additional -- with the money we're saving, that would be great as well.

[Gary Guidry:]

I think what you saw, Gavin, in our reserves release last month, very strong reserves additions in terms of moving into proven and held the line on probable. A lot of that is the Acordionero field, the waterflood performance. We have quite a bit of emphasis on that. And I think Rob and the team have done a great job of optimizing that waterflood, even during 2020 in terms of conformance of where we're injecting water. And what we're working on now is better performance on our pumps. You'll see in our press release, we're trying some different pumps to try to get longer run life. So Ryan is exactly correct, our target is 0 on workovers. And we're getting very comfortable that we're getting the right equipment in place. We're getting water in the right places. And I believe you would have seen that, that's reflected in our reserves last month.

[Operator:]

Next question comes from the line of Josef Schachter from Schachter Research.

[Josef Schachter:]

A few areas for me. Just wanted to go a little more on the production side. You did $19.511 million in Q4. You've shown the write-up average production for January 1 to 25 of 23,428. And then there was a couple of wells still to come on from the 10-well southwest pad and then potentially another 5 producers from Pad 6. Can you go into a little more detail of when you expect those to be on?

[Gary Guidry:]

Rob, do you want to...

[Rob Will:]

Yes. As far as our drilling program, so yes, so the southwest pad drilling, the 10 wells that we drilled, two in late 2020 and the 8 this year, all those wells will be on production by, say, middle of March. And then our Pad 6 -- 5-well drill program at Pad 6, which is forecasted to be complete by the end of April, you'd expect that all those wells will be on production by mid-May. As we said, our cycle times are really getting tight now, like 11.5 days from spot to on production. So there's not a big lag between finishing drilling a well and getting to production. So yes, so all the southwest pad wells on production by mid-March, all the Pad 6, the 5-well program there, all those wells on production by mid-May. And then of course, as Ryan mentioned before, we do -- we still have 2 workover rigs operating at Acordionero. Obviously, 1 primarily focused on the new drills, but 1 is focusing on bringing wells back up. And so we still have about 2,500 barrels per day of oil production behind pipe at Acordionero just waiting on a workover rig to get to them. And we expect all that to be up and back on production, as Ryan mentioned, by about -- in early April.

[Ryan Ellson:]

And Josef, as you can imagine, as you know, it's never a straight line. I think if you look at our production alone in February, it's gone anywhere from 23,500 to as high as 25,500, depending on the day. And so we are comfortable in our annual guidance. But when we look at individual months and certain time periods, it looks more choppy.

[Josef Schachter:]

Okay. Second question for me. The debt repayment, with the commodity prices where they are, you're probably generating an extra USD 20 million, USD 30 million of cash flow above your budget, and you're looking at debt repayment. Is the choice to go and pay down the committed credit facility? Or are there the bonds of the -- 2025, 2027 bonds, are they trading at such a discount that you'd end up doing better buying bonds in the open market? How do you approach that? What's your thinking there?

[Ryan Ellson:]

Yes. It's a good question. And something, obviously, that we always have to weigh as far -- as you know, the credit facility and really the RBL market has been changing a lot. And so it is complex, I mean, as the industry has seen more challenging having an RBL that gets redetermined every 6 months as opposed to longer-term source of capital. So it is something that when we do look at reducing debt -- as I have mentioned before, Q1 is the most capital-intensive program just with the drilling program. But when we do look at repaying debt, you're spot on that there's a number of variables that we need to consider.

[Josef Schachter:]

Okay. And the RBL is good. The next time of renegotiation is?

[Ryan Ellson:]

Renegotiation by the end of May of this year, yes.

[Josef Schachter:]

At the end of May. So May of this year? So Q2 -- excess Q2 cash flow is going to probably be used to pay that down to hopefully get better to play along again. My last question is do you have -- you haven't talked much about exploration. While again, it's not that time given the financial -- the price of oil and where the balance sheet debt to cash flow is, but do you have any obligations that are within 2021, 2022? And have you had success negotiating with the government to get those extensions so that you don't lose those opportunities?

[Gary Guidry:]

Yes. The short answer to that is we are still moving all of our projects forward in terms of regulatory approvals to drill the tough part of our portfolio, and it's a very exciting portfolio, both in the Middle Mag and the Putumayo and the extension into Ecuador. And as you might imagine, the regulatory process has slowed down in both Colombia and Ecuador over the last year. But we are not facing any imminent deadlines on our exploration. Our plans are to resume drilling -- to finish all of the regulatory approvals and access and resume drilling in early 2022. And so the short answer, Joseph, is we are not facing any deadlines, and we are still moving everything forward.

[Operator:]

Gentlemen, there are no further questions at this time. Gary Guidry, do you have any closing remarks?

[Gary Guidry:]

Yes. Thank you, operator. I just want to thank everyone. It's been a difficult year. I think as both Rob and Ryan summarized, the team did a great job of managing through that. We put on hedges at the end of the fourth quarter of last year and resumed our field production. And we're quite excited about what 2021 is bringing. So I thank you for your patience and your support, and we will keep you posted as the quarter advances. So thank you for your time. Goodbye.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.