Frontera Energy Corporation (FEC) Earnings Call Transcript

Good morning. I'm Sergio, and I'll be serving as your conference facilitator today. Welcome to Frontera Energy's First Quarter 2025 Operating and Financial Results Conference Call. <<operator_script>>. I'd like to remind everyone that today's conference call is being recorded and can also be accessed via an 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 <<email_hidden>>. 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 current expectations, assumptions, and beliefs, based on information currently available to it. While the company considers these 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 March 31, 2025, along with the Company's annual information form dated March 10, 2025, and other documents it has filed from time to time with securities regulatory authorities, describe the risks and uncertainties, material assumptions, and other factors that could affect actual results.

Whatever forward-looking statements are provided are valid solely as of the moment they are given, and the company rejects any plan or duty to revise such information unless the law demands it. At this point I'd like to hand things over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy. The floor is yours.

Thank you, operator. Good morning, everyone, and welcome to Frontera’s first quarter 2025 operating and financial results conference call. On the line with me today are Orlando Cabrales, Frontera’s CEO, and Rene Burgos, Frontera’s CFO. Also on hand to take questions at the end of the call are Victor Vega, VP, Field Development, Reservoir Management and Exploration; Alejandra Bonilla, General Counsel; Ivan Arevalo, VP, Operations; and Renata Campagnaro, VP, Marketing, Logistics and Business Sustainability. Thanks for being with us. Frontera continues to concentrate on delivering its strategic objectives and creating value for shareholders. During the first quarter, the company brought in $83.5 million in operating EBITDA, posted $27.5 million in net income, $13.6 million in income from operations, generated $28.6 million of adjusted infrastructure EBITDA and kept a strong balance sheet. We closed the quarter with a total cash balance of $199.8 million. The board is moving forward on the strategic path toward maximizing shareholder value, including with regard to the infrastructure assets. The next step involves the recapitalization of its investments in the LDL pipeline through a new $220 million non-recourse secured loan and the development of key growth projects at Puerto Bahia. That recapitalization will deliver approximately $115 million in process to Frontera today.

Following the refinancing of existing debt, all while preserving future offsite potential from this key transportation asset in Colombia. Importantly, Puerto Bahia is not included in the security package under the financing, which gives Puerto Bahia more flexibility to secure independent financing for new strategic growth projects. We would like to thank Goldman Sachs for their advice. As the Board reviewed various alternatives. Frontera remains open to consider all options to surface the value of its assets and enhance shareholder value, including potential future strategic transactions involving its infrastructure business, which include a potential LNG import facility in Puerto Bahia. With respect to the ODL recapitalization, Frontera announced that it intends to commence a substantial issue bid to purchase up to $65 million of the company's outstanding shares. In addition, the company has also launched this morning a $65 million capped, tender and solicitation for its 2028 senior and secure notes. These efforts are consistent with the company's strategy of returning capital to its safe stakeholders. The company is also declaring its quarterly dividend of $0.625 cents per share, or $3.5 million in aggregate and plans to commence its NCIB program once they announced substantial issue bid is completed. Assuming full uptake of this SAB and Capped tender, the company will have returned $190 million to its stakeholders since 2024.

We’ve done this via normal course issuer bids, substantial issuer bids, declared dividends, and bond buybacks. Going forward, in 2025 and beyond, Frontera will keep looking at similar investor-focused initiatives, including possible extra dividends, distributions, and share or bond buybacks. That will be based on how the business performs overall, all prices, and the company’s cash flow generation. In addition, the company will weigh every option to increase the value of its common shares in the short term, and in doing so it may look at other strategic initiatives or transactions. I’d now like to hand the call over to Orlando Cabrales, Frontera, CEO; and Rene Burgos Frontera, CFO, who will give their views on our first quarter results. Orlando?

Thanks, Gabriel. Morning, everyone, and I appreciate you being on today's call. Frontera's Q1 financial results for our onshore upstream business in Colombia and Ecuador match what we expected, even with a few unanticipated issues. Those issues led to quarterly output coming in below forecast because of hold-ups in the drilling program on the heavy oil assets, less water handling than anticipated at SAARA, natural declines, and a bigger requirement for well interventions in our light and medium blocks — which are being dealt with. Even with those issues, our Q2 production has been solid, with estimated average daily volumes of roughly 42,400 BOE per day in May, helped in part by raising water handling volumes to 130,000 barrels of water per day at our SAARA water treatment plant. The company is still confident it will meet its full-year average production guidance of 41,000 to 43,000 BOE per day. In Q1, the company drilled 13 development wells at our Quifa and CPE-6 blocks in Colombia and completed well work orders at 36 orders. On exploration, our attention stayed on the Lower Magdalena Valley and Llanos Basins in Colombia in Q1. At the Cachicamo block, we finished drilling the Papilio-1 well, and it is currently producing approximately 130 BOE per day, and we also finished drilling the Greta Norte-1 well in February, which was not commercial, and the well will be plugged and abandoned.

At the VIM-1 block, talks with authorities and local communities are ongoing as we get ready to drill the Hidra-1 well during the second half of this year. Beyond that, the company is carrying out pre-seismic and pre-drilling work tied to social and environmental studies at the Jan Llanos-99 and VIM-46 blocks. Turning to Ecuador, at the Espejo block, the Espejo Sur-B3 well is still on long-term tests and is producing 380 barrels per day gross. The company keeps assessing development options. Despite the current environment of lower oil prices and volatility in global markets, we stay focused on what we can control. Our strategy makes sure we have a company that is stronger, profitable and more resilient. Proterra takes a proactive approach by finding further operational improvements, cutting capital spending and pursuing greater cost and process efficiencies throughout our business, while still delivering our production targets and optimizing cash flow generation. In our standalone and growing Colombian infrastructure business, which includes the company's interest in ODL, we generated adjusted infrastructure EBITDA of $28.6 million during the quarter. ODL transported over 236,000 barrels of oil per day and declared a $151 million dividend, $52.9 million net to Frontera, paying 50% of this amount in March 2025. These results highlight the strong cash generation capacity of our strategic infrastructure investments.

When it comes to Puerto Vallarta, our attention stays on getting the Reficar connection project started up — construction is essentially finished — and we're targeting moving our first volumes via that connection during the third quarter of this year. Investment at the port continues, including the LPG JV with Gasco and Prefer Gasco, and those efforts are moving forward as planned. On top of that, we're examining fresh investment possibilities that would make use of the ports, the extra key location, the facilities already in place, and infrastructure build out options for profitable long-term growth, such as a potential LNG import facility. Turning to our Guyana exploration business, on March thirteen of this year, the company and CGS announced they had received a communication from the government of Guyana indicating that the government was terminating the petroleum agreement and canceling the PPL for the quarantine block, Offshore Guyana. On March 26, 2025, Frontera sent a notice of intent to the government of Guyana alleging breaches of The United Kingdom Guyana Bilateral Investment Treaty and the Guyana Investment Act by the government of Guyana. That notice of intent started a three-month period for consultations and negotiations between the parties to resolve the dispute amicably. The JV holds firmly to the view that its interest in the quarantine block remains in place and in good standing.

If the parties can't find a solution both sides accept, the JV and its remaining stakeholders are ready to exercise their legal rights. Also, as this quarter wrapped up, we signed a commitment letter covering $220 million in nonrecourse secured financing, backed by Frontera's indirect stake in ODL, and we expect to finalize definite agreements soon. This real capitalization lets us return value to our investors while keeping the upside from this key Colombian asset. At this point I'd like to hand the call to Frontera's CFO, Rene Burgos.

Thanks, Orlando, and thanks, Gabriel, and good afternoon, everyone. As always, I appreciate your interest in and support of the company. I want to spend a moment highlighting a few key financial aspects of our quarterly results. In the first quarter, the company recorded net income of $27.5 million, or $0.35 per share. The company's fed income includes roughly $13.6 million of operating income and $15.1 million from share of income from associates, the ODL investment. These were offset primarily by our approximately $26.6 million in deferred income tax expense and $17.3 million in finance expenses. Operating EBITDA for the quarter was approximately $83.5 million, compared to $113 million in the prior quarter. This is primarily a result of lower sales volumes, partially offset by slightly higher prices. We'd like a moment to talk about our key per barrel indicators associated with our realized prices and costs. During the quarter, our weighted average spread sales price was $74.35. During the quarter, the company also witnessed a lower average that's going to differential on export sales of $4.38, as compared to $5.44 the prior quarter, and over $1 per barrel reduction. Looking ahead, we continue to see a healthy appetite for the company's screws, seeing differentials for the company's barrels lower by over $2 from the Q1 levels.

The net crude purchase margin tied to our dilution and transportation programs came in at $3.81, up from $3.42 in the per quarter. This quarter-over-quarter difference stemmed from greater demand for diluent and fuel used for energy, along with lower volumes coming out of our life and medium crude or production. Looking more closely at operating costs, production energy and transportation cost per barrel for the quarter came to $27.74. That compares with $24.30 for the per quarter and $26.87 in Q1 2024. The quarter-over-quarter rise in production cost mainly reflected the impact of lower quarter-over-quarter production, as well as more well intervention activities during the quarter. Energy costs also went up in the quarter, chiefly due to carbon credit purchases — an important part of our ESG strategy for offsetting our carbon footprint — and higher energy prices. Transportation costs rose as a result of increased tariffs for the Ocensa pipeline and trucking. Turning to our infrastructure business, as Orlando highlighted, adjusted EBITDA for the quarter was $28.6 million, compared with $27.5 million in the fourth quarter. The quarter-over-quarter increase was driven by positive results in the ODL segment thanks to the pipeline tariffs increase and lower cost during. ODL volumes transported were 236,000 barrels per day, consistent with the previous quarter's volumes.

On the capital expenditure front, total CapEx came in at $46.7 million for the quarter, which is below where we were in both Q4 2024 and Q1 2024. That CapEx figure covers drilling 13 development wells across Quifa and CPE-6 and Wovens to Riches at 36 others, plus two exploration wells in Colombia and the Cachicamo block at this cost per annum. As of March 31, 2025, the company's total cash position stood at $199.8 million, and that includes $170.1 million in unrestricted cash and cash equivalents. Moving on to risk management now. The risk management strategy we have in place currently backs our operations and our planning. Frontera makes use of derivative instruments in order to manage exposure to oil prices and FX volatility. On the oil side, the company has put hedges in place, and it has successfully secured a hedging ratio of up to 40% through June 2025, along with a 20% hedging ratio for its July and August net production at a $70 Brent strike price, which protects against the drop in its own process. Ultradacos recovered 40% of the company's expected peso exposure through the third quarter of 2025 and 20% of its exposure to the fourth quarter, with floors above the MXN4,200 level. Both of these hedges give the company cash flow visibility and help mitigate the impact of price fluctuations, while also letting the business deliver on its 2025 targets.

Regarding the 2025 financial targets we've set, we want to remind investors that our MD&A materials contain a thorough breakdown of our guidance, which covers how operating EBITDA would be affected under various oil price scenarios. Moving to the strategic review of our infrastructure, we'd also like to point out several specifics of the ODL interest recapitalization transaction. As Orlando mentioned, the company has signed a commitment with the Macquarie Group, which is expected to raise $220 million in non-recourse secured financing backed by cash flows stemming from Frontera's direct interest in ODL. Through this recapitalization, Frontera will obtain roughly $115 million in proceeds, and Puerto Vallarta will be removed from the security package. As I stressed in that term, with this first significant step—the ODL recapitalization—now complete, Frontera's focus continues to be on surfacing the value of its infrastructure assets. Frontera is still open to weighing every option, among them a possible future separation of the infrastructure business and other strategic transactions, which might involve a potential LNG import facility in Puerto Vallarta. We want to express our gratitude to Goldman Sachs for its advice while the Board reviews these various alternatives. Last, I'd like to give an update on our investor value initiatives.

So far in 2025, the company has bought back 1 million of its 2028 unsecured notes. As we noted in the press release, Frontera has also distributed roughly $7 million in dividends during the year to date. Alongside this results announcement, the Board declared a quarterly dividend of CAD6.25 per share, payable to shareholders of record on July 03, 2025, with payment expected on or around July, 17, 2025. Turning to the company's substantial issuer bids, or SIBs, from TerraPay in January, CAD42 million in SIBs. That SIB drew broad participation and succeeded, with a participation rate above 90%. We also announced today — subject to closing of the financing tied to the ODR recapitalization — the intention to launch a new substantial issuer bid, under which the company would offer to purchase up to 65 million of its common shares for cancellation at a fixed price per share. The terms of the new SIB, including pricing, will be settled in the course, and the company's credit participant is now exiting. It will be completed in July 2025. The SIB will not be conditional on any minimum number of shares being tendered and will be subject to conditions customary for transactions of this nature.

Frontera still views this structure as the most efficient way to return capital to every one of our shareholders, and we look forward to kicking off that process over the coming weeks. In addition, we announced the start of a cash tender offer, cap and consensual solicitation targeting the 2028 senior notes. Frontera is offering to buy back as much as $65 million of those notes. Together with the tender, the company launched a consent solicitation aimed at securing certain proposed changes to the indenture that governs the notes. The purpose behind the tender offer and the solicitation is to achieve greater financial and operational flexibility while at the same time cutting the company's total outstanding debt. The company also believed the proposed amendment would allow it to take certain actions that restrictions in the notes and venture had previously limited, including but not limited to permitting additional receipt payments, including those tied to unrestricted subsidiaries, giving added flexibility in managing working capital to support operational efficiency and financial resilience, raising the amount of its indebtedness and liens, and lowering the conditions and requirements that limit the company's ability to pursue strategic transactions that could enhance the issuer's growth and value. In each case without breaching the provisions of the Note Indenture.

This tender offer, along with the consistent expectation, is going to be subject to a range of conditions — including, without limitation, that the company shall have obtained debt financing on terms and conditions, and with net cash proceeds, that are reasonably satisfactory to the company. Anyone who needs documentation for this transaction should direct their request to the information and tender agent at the offer website, projects.sodali.com/frontera. If you have questions about the offer orders solicitation, please direct them to the dealer managers and to the solicitation agents, City group or Itaú. Additional details are available in this morning's press release. At this point I'd like to hand the call back to Orlando.

Thank you, Renee. Before we wrap up today's call, I want to point out that Frontera was once again recognized by Ethisphere on March 11th of this year as one of the world's most ethical companies. This marks the fifth year in a row that the company has earned this distinction from Ethisphere, a global leader in defining and advancing the standards of ethical business practices. In addition, we released our 2024 sustainability report, which highlights the progress we have made over the last years against our sustainability goals as we work towards a culture of corporate consciousness that allows us to state that we are committed to developing a sustainability strategy throughout our business to drive operational efficiency. Notably, we successfully achieved 100% of our 2024 sustainability goals, which is a test payment to <<inaudible>> commitment by all Frontera employees to responsibly manage our business. Thank you. With that, I would like to conclude by saying thank you to Gabriel and Renee for the 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.

We'll take our first question from Peter Pauley at Jefferies. Go right ahead.

Hello, and thanks for taking the call and giving me a chance to ask something. Could you clarify what portion of ODL's yearly dividend stream will go—or is anticipated to go—toward servicing the fresh debt being incurred in the recapitalization, taking into account the expected interest rate on the new loans and the AMORT profile? Thank you.

Hey there, Peter. How's it going? Appreciate you being on the call. Basically, through this financing, we're securitizing the flows that come from ODL. So every cash flow tied to the old dividend is going to go toward servicing that new recapitalization financing.

Alright, thanks.

Thanks. The following question is from Thomas Klimka at Gramercy. You have the floor.

Morning, gentlemen. Could you expand a bit on the infrastructure recap plan? As I recall, the initial approach involved selling those infrastructure assets, and at this point you're pursuing this asset financing instead. Could you walk us through the thinking behind that?