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Gran Tierra Energy Inc (NYSEMKT:GTE)
Q4 2020 Earnings Call
Feb 25, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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. [Operator Instructions] 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. Finally, this earnings call is the property of Gran Tierra Energy, Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.

I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.

Gary S. Guidry -- President and Chief Executive Officer Rob Will

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 -- Chief Financial Officer and Executive Vice President, Finance

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. We were also able to achieve significant reductions in operating and G&A costs. We reduced Gran Tierra's gross cash G&A cost 32% in 2020 to $23 million, down from $33 million in 2019. On an aggregate basis, total operating and G&A costs decreased $92 million from $237 million in 2019 to $145 million in 2020, a 39% reduction. The majority of these cost reductions represent structural improvement in operations, which we expect to maintain as oil prices continue to recover. Furthermore, in Q4, as a result of ongoing cost-saving initiatives, GTE was -- has successfully reduced per-well drilling capital costs and completion costs at Acordionero by approximately 18% and 52%, respectively, compared to 2019.

The company also expects future per-well drilling and completion costs to reduce by approximately 20% at Costayaco compared to 2019. We were also very pleased that the company achieved material proved developed producing, or PDP, reserve additions in 2020, in particular in the company's core assets as a result of continued positive reservoir responses from waterflooding. Our excellent PDP reserve replacement ratio was 133%, with PDP reserve additions of 11 million barrels. Our total proved, or 1P, additions of 8.3 million barrels gave us a strong 1P reserve replacement ratio of 100%, resulting in 79 million barrels of 1P reserves at year-end 2020. At December 31, 2020, our 1P net present value discounted at 10% was $1.2 billion before tax, and our 1P before tax net asset value, NAV, per share was $1.15 per share.

While our total proved plus probable, or 2P, before tax NAV was $3.25 per share, all of that in U.S. dollars. Looking to 2021, our capital budget is a balanced, returns-focused program, which prioritizes free cash flow generation and debt reduction. We have allocated a modest amount of -- to advanced exploration-related activities for our high-impact exploration portfolio, which we'll also accelerate in 2022. Our 2021 program will continue to focus on optimizing our four core assets under waterflood, while maximizing the long-term value of all of our assets. We see a clear path to lowering our net debt-to-EBITDA to under two times given our annualized Q4 EBITDA of over $300 million, our free cash flow, VAT and tax refunds.

We also reiterate our 2021 guidance. Even if Brent stays at $60 to $65 or goes higher, well above our 2021 budget of $49 per barrel, we plan on remaining disciplined and applying extra free cash flow to debt reduction instead of ramping up our capital program. We entered into Brent oil hedges on 15,000 barrels per day during the first half of 2021 with a weighted average floor of $45 and a ceiling of $51.38 to provide downside protection since 70% to 80% of the company's 2021 capital investment is projected to occur during the first half of 2021. Gran Tierra has 7,000 barrels a day hedged for the second half of 2021 with a weighted average floor of $55.75 per barrel and a ceiling of $63.18.

With increasing production and a lower percentage hedged in the second half of 2021 allows us to continue to lock in higher prices at levels we did not anticipate even a few months ago and participate in potentially much higher commodity prices. Subsequent to Q4, on January 21, we announced the sale of 109 million shares in PetroTal for proceeds of approximately $15 million. Proceeds were applied to general working capital. Gran Tierra still owns 137 million shares, which are worth approximately USD37 million. 2020 was certainly a challenging year for Gran Tierra and the industry, but at Gran Tierra, we took decisive actions and are a stronger and leaner company going forward. The impressive reserve replacement ratio and the 2P net present value reserves discounted at 10% of approximately $2 billion despite a significant decrease in the price forecast used by the reserve evaluator is a testament to the quality of the assets and the excellent reservoir management and cost optimizations by the team.

I'll now turn the call over to Rob Will to discuss some of the highlights of our current operations.

Rob Will -- Vice President, Asset Management

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 eight 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 one year. Moving on to operations. We are reiterating our 2021 guidance of 28,000 to 30,000 barrels of oil per day, which delivers annual growth of 24% to 33%.

At Acordionero, Grand Tier is utilizing two workover rigs and continues to work over oil wells that went offline during the decline in oil prices during 2020 in order to restore them to production in connection with the improving oil price environment. I'd also like to highlight that year-to-date, ESP failures at Acordionero are down 50% versus last year's failure count. We restarted development drilling at Acordionero on November 30, 2020, and have since drilled eight wells comprised of six producers and two injectors out of the 10-well program at the new southwest pad. All six producers are currently on production, and all 10 southwest pad wells are scheduled to be drilled by the end of February. I'd like to highlight that the Acordionero 69 well achieved a record cycle time from spud to on production of 11.5 days at a total drill and complete cost of only $1.9 million.

The combination of the workover and drilling programs has resulted in Acordionero's total working interest production averaging approximately 13,000 barrels of oil per day during February 2021 month-to-date. I also want to mention that Acordionero's working interest production dipped below 10,000 barrels of oil per day in the early part of the second half of 2020 due to last year's temporary suspension of workover development drilling activities. Acordionero's production has now returned to the production levels realized in February 2020 with minimal capital spend. At Costayaco, efforts are under way to restart development drilling during early second quarter 2021 with a 3-well program. The rig is currently stacked on location over the plan Costayaco 42 infill oil well location.

I'll now turn it back to the operator, and Gary, Ryan and I will be happy to take questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Gavin Wiley from Scotiabank. Your line is now open.

Gavin Wylie -- Scotiabank Global -- Analyst

Thank you. Good morning, guys. 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 -- Chief Financial Officer and Executive Vice President, Finance

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.

Gary S. Guidry -- President and Chief Executive Officer Rob Will

And then just on the workover front?

Ryan Ellson -- Chief Financial Officer and Executive Vice President, Finance

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 one 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 -- Scotiabank Global -- Analyst

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 -- Vice President, Asset Management

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 toward 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 S. Guidry -- President and Chief Executive Officer Rob Will

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.

Gavin Wylie -- Scotiabank Global -- Analyst

Appreciate the additional details. Thank you.

Operator

Next question comes from the line of Josef Schachter from Schachter Research. Your line is now open

Josef I. Schachter -- Schachter Energy -- Analyst

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 one 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 five producers from Pad six Can you go into a little more detail of when you expect those to be on?

Gary S. Guidry -- President and Chief Executive Officer Rob Will

Rob, do you want to...

Rob Will -- Vice President, Asset Management

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 eight this year, all those wells will be on production by, say, middle of March. And then our Pad six -- five-well drill program at Pad six 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 six, the five well program there, all those wells on production by mid-May. And then of course, as Ryan mentioned before, we do -- we still have two workover rigs operating at Acordionero. Obviously, one primarily focused on the new drills, but one 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 -- Chief Financial Officer and Executive Vice President, Finance

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 I. Schachter -- Schachter Energy -- Analyst

Okay. Second question for me. The debt repayment, with the commodity prices where they are, you're probably generating an extra USD20 million, USD30 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 -- Chief Financial Officer and Executive Vice President, Finance

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 six 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 I. Schachter -- Schachter Energy -- Analyst

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

Ryan Ellson -- Chief Financial Officer and Executive Vice President, Finance

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

Josef I. Schachter -- Schachter Energy -- Analyst

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 S. Guidry -- President and Chief Executive Officer Rob Will

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.

Josef I. Schachter -- Schachter Energy -- Analyst

Okay. Thanks very much for that clarity. Much appreciated and I appreciate you taking my questions. Have a good day, guys.

Gary S. Guidry -- President and Chief Executive Officer Rob Will

Thanks, Josef. Thanks.

Operator

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

Gary S. Guidry -- President and Chief Executive Officer Rob Will

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

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Gary S. Guidry -- President and Chief Executive Officer Rob Will

Ryan Ellson -- Chief Financial Officer and Executive Vice President, Finance

Rob Will -- Vice President, Asset Management

Gavin Wylie -- Scotiabank Global -- Analyst

Josef I. Schachter -- Schachter Energy -- Analyst

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