Frontera Energy Corporation (FEC) Earnings Call Transcript

Good morning. I’m Ina, and I’ll serve as the conference facilitator for you today. Welcome to Frontera Energy’s conference call on operating and financial results for the fourth quarter and year-end 2024. Right now, every line is muted so that background noise does not interfere. Please note that today’s conference call is being recorded and can also be accessed via audio webcast on the company’s website. After the speakers’ remarks, there will be an opportunity for questions. Analysts and investors should note that any further questions may be sent to Frontera after today’s call at ir@fronteraenergy.ca. This call includes forward-looking information as defined under applicable Canadian securities laws, concerning activities, events, or developments that the company believes or expects will or may take place in the future. Forward-looking information reflects the company’s present expectations, assumptions, and beliefs, based on information currently available to it. Even though the company considers those assumptions reasonable, forward-looking information does not guarantee future performance. Forward-looking information carries a number of risks and uncertainties that could cause the company’s actual results to differ materially from those discussed in the forward-looking information. The company’s MD&A for the quarter ended December 31, 2024, along with 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 affect actual results.

Any forward-looking statements are valid only as of the day they are given, and the company rejects any intention or duty to revise such information unless the law demands it. At this point I'd like to hand the call to Mr. Gabriel de Alba, who chairs the Board of Frontera Energy. Mr. de Alba.

Thank you, Operator. Good morning, everyone, and welcome to Frontera's conference call covering operating and financial results for the fourth quarter of 2024 and the full year. On the line with me today are Orlando Cabrales Segovia, Frontera's CEO, and René Burgos Díaz, Frontera's CFO. Also here to take questions at the end of the call are Victor Vega, VP Field Development, Reservoir Management and Exploration; Alejandra Bonilla, General Counsel; Iván Arévalo, VP Operations; and Renata Campagnaro, VP Marketing, Logistics, and Business Sustainability. Thanks again for joining us. Throughout 2024, Frontera kept delivering robust performance, concentrating on executing its strategic objectives and priorities. The company hit its guidance targets, including key operating and financial objectives, and followed through on its commitment to return capital to shareholders. That value-centered approach meant the year closed with a strong balance sheet, including a cash position of $223 million. The company also reduced its consolidated debt and lease liabilities by more than $30 million. During the year, both S&P and Fitch reaffirmed the company's credit ratings of B+ 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.

We also got more than $60 million from ODL in dividends and capital distributions. Frontera keeps making substantial headway at its Puerto Bahía operations, hitting a number of key milestones that we believe will give shareholders considerable upside potential — among them the building of the connection line to the Refinería de Cartagena, which should be up and running by Q2 2025. On top of that, the company announced its new LPG joint venture with Industrias Gasco. Both of these projects matter strategically to Frontera, and they also bring benefits to the region and to Colombia's economy overall. As we said in the December operational update, the strategic review of the infrastructure business is now in its final stages. The company is looking at a range of options and expects to share results shortly. Turning to the Guyana exploration business, Frontera and its JV partner stay firmly convinced that their interest in the current block, and its license, are still in place and in good standing. The joint venture is weighing every legal option it has to assert its rights. The JV is determined to settle this matter quickly and to carry on its multi-year efforts and investments aimed at realizing value from the current block for the people of Guyana and for its shareholders.

Frontera has followed through on its pledge to give capital back to shareholders. With the backing of Frontera's solid financial standing, starting in 2024 and continuing through today, we've returned roughly $83 million, which includes $15.1 million in declared dividends, $7.8 million from buying back common shares under its NCIB, and the completion of two successful substantial issuer bids totaling more than $60 million. That SIB drew a combined participation rate above 90%, which confirms the company's strategy for distributing capital. Beginning in 2022, the company has given back more than $180 million to its shareholders via normal course issuer bids, substantial issuer bids, and dividends. Frontera will keep evaluating future investor initiatives in 2025, among them possible extra dividend distributions or bond buybacks, depending on oil prices, the raw results of our business, cash flow generation, and how the strategic goals are delivered. I'd now like to hand the call over to Orlando Cabrales, Frontera CEO, and René Burgos Díaz, Frontera's CFO, who will offer their perspectives on our fourth quarter and full-year results. Orlando.

Thanks, Gabriel. Morning, everyone, and I appreciate you being on today's call. For Frontera, 2024 proved to be a robust year both financially and operationally. Our strategy keeps being executed, we've produced positive results, hit every guidance metric for the year, and given shareholders added value. Within our Colombian upstream business, we achieved the 2024 production goal following successful drilling campaigns at the CPE-6 and Sabanero blocks, lifting water handling capacity to 360,000 barrels at the CPE-6 block, which hit yet another record daily output level of nearly 9,000 BOE per day in Q4, and at Sabanero, output got to roughly 2,400 BOE per day over that same period. At the SAARA project, water processing volumes averaged 79,000 barrels of water per day during the fourth quarter, with a full-year average of 44,000 barrels of water per day. Frontera keeps optimizing SAARA operations as a way to push higher water handling and crude oil production volumes, and also as a means of reaching our sustainability and green circular economy objectives. I'm pleased as well with ongoing work to manage our cost structure. Even with inflation and other pressures, we achieved all cost guidance targets, among them production cost per barrel, averaging $9.34 per barrel.

Looking at our 2024 year-end reserves, we remain committed to sustaining production and prioritizing value over volume in Colombia and Ecuador, finishing the year with 100.6 million barrels of 1P reserves and 151.3 million barrels of 2P reserves. Our three-year average gross reserves replacement ratio came in at 60% for 1P reserves and 40% for 2P reserves, which 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 as of December 31, 2024 — for our 2P reserves was $3.4 billion, or $21.6 per BOE. That NPV 10 showed a small decrease, mainly due to the reserves decrease. However, the NPV 10 per barrel increased 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 million and $40 million in exploration opportunities, led by the drilling of our high-impact Ara-1 exploration well in the VIM-1 block, originally postponed from our 2024 plan. We believe our near-field exploration and exploration targets will help unlock reserves' growth potential. In our infrastructure business, ODL transported over $243,000 per day, generating $274 million in 2024 EBITDA and returning over $171 million to its shareholders.

In 2024, the company took in more than $60 million from its 35% stake. Puerto Bahía produced roughly $15 million of operating EBITDA for 2024, matching our 2024 guidance, even though liquids and cargo volumes came in lower than expected, and this was helped by effective cost controls in the operation. Looking at 2025, our focus at Puerto Bahía moves to the connection, as we anticipate the startup and ramp-up of volumes through the Reficar connection. Now for our year-to-date 2025 performance: gross production through March 9 averaged about 40,400 barrels per day, under our guidance range, primarily because of certain unexpected well failures within our light and medium assets. We are addressing these issues, and we remain confident about meeting our 2025 production guidance. On exploration, the Gaita Norte-1 well has been drilled, and it is currently in the evaluation phase. We stay focused on executing the capital and production plan for 2025 that we recently announced and on continuing to deliver sustainable production, solid operational and financial results, and enhanced investor returns. At this point I would like to hand the call over to René Burgos Díaz, Frontera's CFO.

Thanks, Orlando, and good morning, everyone. I'd like to spend a moment highlighting some key financial aspects of our full-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 $170 million of operating income and $54 million from shareholding government associates or ODL investment, offset primarily by approximately $93 million in deferred income tax expenses and $74 million in finance expenses. Our deferred income tax expense amounts reflect our use of historical tax loss balances, impacts of changes associated with the surtax rate, and fluctuations in the Colombian peso tax rate. Our operating EBITDA for the year was approximately $424 million, in line with the 2024 guidance. I will take a moment to talk about our key per barrel indicators associated with our realized prices and cost. During the year, our weighted average brand sales price was $79.33. The company also witnessed an adverse discounted differential on export sales of $5.51. Our purchase crude net margin associated with our diluent inventory rotation programs was $2.73, higher than the $2.23 for the prior quarter. The quarter-over-quarter variance was the result of higher dilution needs driven by higher production from revenue assets.

If we look closely at our production operating costs, energy and transportation costs per barrel for the year came to $9.34, $5.11, and $11.31, in that order, which matched what we had guided to. That compares with $8.73, $4.99, and $11.91, respectively, for 2023. The year-over-year rise in total costs stems mainly from greater water source activity on our part, along with the effect of FX rates and inflationary pressure on services and labor. Energy costs are up as well, largely tied to increased heavy crude oil production levels and higher electricity prices. Transportation costs rose slightly because of annual tariff increases, partly offset by fewer barrels transported, which is mainly attributable to better domestic wellhead sales. Turning to our infrastructure business, adjusted infrastructure EBITDA for the year reached $107 million. That compares with $110 million in 2023. The decline year over year came primarily from lower EBITDA at ODL, which resulted from higher costs driven by inflationary pressures and wage indexation. ODL transported volumes were 244,000 barrels per day, consistent with 2023 volumes. Frontera's cash generation for the year was very strong. Cash flows from operations totaled $510 million. That was driven by a healthy Brent oil price environment during the year, a reduction in domestic withholding tax rates, the impact of our deferred tax asset recoveries, and dividends and capital distributions from our investment in the ODL pipeline.

By December 31, 2024, the company had closed with a $63 million income tax receivable, and we anticipate recovering that amount during 2025. Regarding capital expenditures, total CapEx for the year came in at $218 million, consistent with our guidance. CapEx for the year included drilling 60 development wells across the Quifa, CPE-6, Sabanero, and Perico blocks, plus two exploration wells in Colombia. At December 31, 2024, the company ended the year with a total cash position of $223 million, which included $193 million of unrestricted cash. That figure came before the January SIB of $30 million. Additionally, during 2024, the company lowered its consolidated balances by roughly $30 million. Moving to risk management, our present risk management strategy continues to demonstrate how our hedging discipline underpins our operations and planning. Frontera employs derivative instruments to manage exposure to oil prices and influence volatility. On the other side, the company entered into hedges, successfully securing a 40% hedging ratio through June 2025 at a $70 Brent strike price, aimed at protecting against a potential decline in oil prices. Frontera has also entered into foreign exchange rate hedges totaling $180 million, covering approximately 40% of the company's expected peso exposure through the third quarter of 2025.

That places the strike price somewhere between 4,150 pesos and 4,200 pesos. Thanks to both of these hedges, the company gains visibility into its cash flow and is better shielded from the effects of future swings, while still being able to meet its 2025 targets. Last, I want to give you an update on the initiatives we have for investor value. Turning to bond buybacks, during 2024 the company bought back $5 million of its 2028 senior unsecured notes. So far in 2025, we have repurchased another $1 million of those 2028 unsecured notes. Through the company's NCIB program, which came to an end on November 20, 2024, roughly 1.3 million common shares were bought back at a cost of $7.8 million. As we noted in our press release, the company plans to file a notice of intention with the TSX to start a normal course issuer bid for its common shares. Acceptance by the TSX will be required for this program. Regarding the quarterly dividend, Frontera declared and paid out about $15.1 million over the year, which works out to CAD 0.25 per share for shareholders. Alongside this results announcement, the board has declared a quarterly dividend of CAD 0.0625 per share, payable to shareholders of record as of April 2, 2025, with payment expected on or around April 16, 2025.

On the subject of the company's substantial issuer bids, or SIBs, we announced 2 SIBs in 2024, totalling more than CAD 60 million, at a fixed price of CAD 12 per share. Participation in those SIBs was broad, with a combined participation rate above 90%. It's our belief that this format represents the most efficient way to distribute capital to all of our shareholders. Altogether, the company has returned more than CAD 83 million of capital to shareholders since 2024. Frontera will keep evaluating future investor initiatives for 2025 and beyond, including possible additional dividends, distributions, or bond buybacks, depending on our prices, the overall results of our businesses, cash flow generation, and the company's three-year goals. With that, I'd like to hand the call back to Orlando.

Thank you, René. I'd like to add some detail regarding our 2025 production and capital program. For 2025, we have a plan that is fully funded, and at $75 Brent prices it delivers roughly $370 million-$415 million in consolidated operating EBITDA. Through our transportation and logistics structure, the plan will work to maximize realized prices, while we also invest for future growth by expanding facilities and pursuing near-field and high-impact exploration. At an average Brent price of $75, we expect to produce consolidated free cash flow of approximately $80-$125 million. Even with oil prices anticipated to be lower, Frontera anticipates robust cash flow generation, supported by increased production, reduced capital expenditures, and an emphasis on cost control. In our upstream business in Colombia and Ecuador, we are aiming for production of roughly 41,000 to 43,000 BOE, which represents a 4% increase over 2024 production, and for $350 million-$380 million in upstream operating EBITDA. Development activities will receive between $160-$190 million, which is an $18 million reduction in development spending versus 2024. Exploration activities will also receive between $30-$40 million, along with $10-$15 million in other investments tied to HSE activities and new field production technologies. Our drilling efforts will concentrate on the most productive and profitable assets in the portfolio, extending the success of the 2024 heavy asset drilling campaign in the Quifa and CPE-6 blocks.

To complement our drilling work, we have a low-cost well intervention program that partially offsets natural decline, and we’re also putting money into development facilities—mainly to support activities in the Quifa and CPE-6 blocks. On exploration, we expect to spend $30 to 40 million drilling the high-impact Ara-1 exploration well in the VIM-1 block and the Llanera-1 well in the Llanos 99 block, and to carry out pre-seismic and pre-drilling work in the VIM-46 block. Our upstream business is expected to produce free cash flow of $65 to 95 million, including $10 to 15 million in cash tax payments, net of recoveries, and debt service of $45 to 55 million—which includes $32 million of bond interest and $13 to 23 million tied to debt service for local bank facilities. For the infrastructure business, which is growing and standalone, we’re aiming for infrastructure EBITDA of roughly $20 to 35 million for 2025, driven by the Reficar Connection startup and additional revenues from SAARA. With $50 to 60 million in distribution from ODL included, the segment should generate free cash flow of approximately $15 to 30 million. We’ve prepared a slide that bridges our current production and the build-up of components supporting our 2025 production targets.

We begin with the company’s average daily production for the four quarters of 2024, which came in at 42.4 thousand BOE per day. If we assume an asset decline rate ranging from 25 to 30%, then sustaining output would require replacing an annual average of 5.5 to 6.5 thousand BOE per day — equivalent to rolling over 2 to 3% of production each month. Frontera’s development CapEx program was built to fully offset those declining barrels through a mix of new wells plus low-cost decline management well interventions, new technologies, and strategic investment in facilities. Our 2025 new well CapEx program aims to replace 3,000 to 4,000 barrels, with $100-$110 million invested across 60 to 65 new wells, concentrated mainly on our heavy oil assets. Each new well carries an estimated cost of roughly $1.5-$2 million on average and is targeted to deliver an annualized production rate of between 100 and 120 BOE per day. These wells offer an attractive payback period of under one year on average, along with capital efficiency metrics of $16,000-$18,000 per flowing barrel. Through our low-cost decline management well intervention program, the company puts capital into well interventions and workovers to lessen the effect of natural decline and optimize the portfolio’s production rate.

Looking ahead to 2025, we anticipate spending roughly $20 to 30 million on decline management work. Each intervention should cost on average between $200,000 and $500,000 per well and deliver an extra 30 to 40 BOE per day of annualized output. Then there's $15 to 20 million earmarked for strategic projects, which includes work at SAARA and the Cajua water handling expansion, plus somewhere between $5 to 15 million going toward new technologies that boost production efficiency and cut water output, laying groundwork so these key assets can keep growing for years ahead. Taken together, these capital projects should let us hold production at last year's level, roughly 40,000 to 43,000 BOE per day. Before I close today's call, I want to touch on our sustainability strategy, under which we hit 100% of our 2024 sustainability goals. Frontera restored, protected, and preserved 769 hectares of land, recirculated 35.2% of the water used in its operations, and utilized 43.4% of the waste it generated. On health and safety, Frontera posted its strongest total recordable incident rate ever, a 6% reduction versus the prior year. As for keeping close ties with all stakeholders, our employees and the communities where we operate included, we put about $4.1 million into social projects that benefited 66,303 people living near our operations, and we raised local purchases from local contractors by 2% versus last year.

Also in 2024, Great Place to Work named Frontera one of the 20 best companies to work for in Colombia. We put in place an effective cybersecurity plan and kept our rate of material cybersecurity incidents at zero. In addition, during 2024 Frontera was recognized by Ethisphere as one of the most ethical companies for the fourth year in a row. And with that, I'd like to wrap up by thanking Rene and Rene for their comments, and thank you all for joining our call. I'll now hand the call back to our operator, who will open it up for questions.

Thank you. Ladies and gentlemen, we're now moving into the question and answer portion. If you'd like to ask something, simply press star then one on your phone's keypad. A prompt will confirm that your hand has been raised. To withdraw your request, just press star then two. When on a speakerphone, pick up the handset first before hitting any keys. Please hold for a moment while we take the first question. As a reminder, that's star and one to submit a question. Our first question is from Peter Bowley of Jefferies. Please go ahead.

Thank you. Thanks for taking the call and for giving me room for two questions. If you don't mind, I'll ask them separately. The 2025 CapEx guidance is roughly 25% lower year over year, and it appears there are year-over-year decreases in development facilities, other CapEx, and Colombia infrastructure. I'd just like to ask whether you could offer a bit more detail on what is behind those year-over-year reductions, particularly since production is fairly flat year over year. Is CapEx being deployed more efficiently, or has the CapEx profile shifted materially compared with 2024? My second question is whether there is any Brent price level at which you would revisit any parts of your CapEx plan or shareholder distributions and buybacks, all considered alongside the hedges you have in place? Thank you.

Thank you. Thanks, Peter. René, I’ll handle the first question, and you can take the second one. Regarding your first question, Peter, I’d say the answer is that our guiding principle has been value over volumes. Yes, of course, we are lowering development CapEx compared with last year. Our production this year is actually higher than last year in our guidance. We’ve become much more efficient in how we use our capital. We’re also very focused on driving efficiency, additional efficiency, into our cost structure. This year we’re concentrating on developing the drilling campaign for the new capacity at our CPE-6 facilities, which was raised last year to 360,000. There’s room to further optimize how that facility is used, which we already built last year. We’re also working very hard, as I mentioned in my remarks, to raise production at Quifa through the SAARA facility, which we still need to improve. With that in mind, we believe the development CapEx is the right one for the company, and it will let us deliver that maximum we have of value over volumes with a higher production target for this year.

Peter, thanks as well for that question. Regarding the Brent price, I believe we mentioned two levels, 75 and 80. 75 is the one on which we built the plan, as Orlando may have pointed out. We have a set of possible cash flow scenarios running from 80 to 125. Our hedges at present extend through the middle of the year at roughly $70 Brent. I think our coverage is fairly solid. It will hinge on how the remainder of the year unfolds and on our capacity to actually put some of those hedges in place, so that we can restrike or replan to some degree. For the time being, I think we are holding to that range of possible outcomes. Of course, should prices keep moving on a downward path, we will have to adjust our plans somewhat, or maybe reconsider how our value maximization approach will proceed. I think we are in pretty good shape, fairly well covered.

Excellent. I appreciate it.