Frontera Energy Corporation (FEC) Earnings Call Transcript
August 14, 2025
Earnings Call Speaker Segments
Good morning, everyone. I'm Sergio, and I'll be the conference facilitator for you today. Welcome to Frontera Energy's Second 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, we'll have time for questions. Analysts and investors should note that any further questions can 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, relating to activities, events or developments that the company believes or expects will or may occur 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 believes these assumptions are 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 June 2025, the company's annual information dated March 10, 2025, and the documents it files from time to time with securities regulatory authorities describe the risks, uncertainties, material assumptions and other factors that could affect actual results.
Anything forward-looking reflects information only as of the moment it is stated, and the company rejects any plan or duty to refresh such information, unless the law demands it. At this point I'd like to hand the call to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy. Mr. de Alba, the floor is yours.
Thank you, operator. Good morning, everyone, and welcome to Frontera's Second Quarter 2025 Operating and Financial Results Conference Call. . Joining me on today's call are Orlando Cabrales, Frontera's CEO; and Rene Burgos Diaz, Frontera's CFO. 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; Ivan Arevalo, VP, Operations; and Renata Campagnaro, VP, Marketing, Logistics and Business Sustainability. Thank you for joining us. Throughout the second quarter, despite ongoing volatility in the global economy and oil markets, Frontera remained focused on executing its strategic priorities. The company achieved strong operational results and completed important initiatives aimed at creating value for its shareholders and bondholders. The company delivered $76.1 million in operating EBITDA, generated $27.1 million in adjusted infrastructure EBITDA and ended the quarter with a strong cash balance of $197.5 million. Additionally, the company prioritized returning capital to all investors via a successful $80 million tender offer and consent solicitation of its senior notes due in 2028. Through the consent solicitation, the company strengthened its financial flexibility and reduced outstanding debt obligations, reducing its upstream net debt by 20%. The amendments to the indenture aligns Frontera's indenture with industry standards and offer targeted operational flexibility, supporting the delivery of sustainable business and reserve growth, including growth from inorganic transactions.
After that quarter ended, Frontera finished a CAD 91 million substantial issuer bid — the biggest such move in its history. Participation in that SIB reached 92.6%, which shows the capital distribution approach has worked and shareholders have welcomed it. The company also declared a quarterly dividend of $0.0625 per share, roughly $3.5 million in total, and began daily stock buybacks through a non-course issuer bid program. Across the last 12 months, Frontera gave back more than $144 million to shareholders via dividends and share buybacks, and it cut the principal on its senior unsecured notes by over 20%, underscoring its dedication to returning capital to every investor. In Guyana, the 90-day consultation and negotiation period — set in motion after the notice of intent was sent to the Government of Guyana — has come to an end. On July 23, the company got a letter restating the government's position as of when the license lapsed, though it said it might weigh a final meeting with the investors on a without prejudice basis in October 2025, and the joint venture will be told in September 2025 whether that meeting will take place. After the 90-day consultation and negotiation period stemming from the notice of intent ran out, and given the uncertainty the Government of Guyana has created, we recorded an impairment of more than $430 million on our investment in the Corentyne block, consistent with prudent accounting standards.
The joint venture’s position is still firm: its interest in the Corentyne block and the license for it stay valid and in good standing, and the petroleum agreement has not been ended. We are still dedicated to resolving these matters cooperatively with the Government of Guyana. As needed, we are getting ready to assert and defend our legal and contractual rights through every legal remedy available. Going forward, Frontera will keep weighing every option to unlock the full worth of its assets and boost shareholder value. In that effort, we will keep evaluating initiatives in 2025 and after, such as extra dividends, distributions, and share or bond buybacks, depending on the business’s overall results, oil prices, and how much cash the company generates. The company will also weigh every option to raise the value of its common shares over the short term and, in doing so, may evaluate other strategic initiatives or transactions. I’d now like to hand the call to Orlando Cabrales, Frontera’s CEO, and Rene Burgos, Frontera’s CFO, who will give their views on our first quarter results. Orlando?
Thank you, Gabriel. Good morning, everyone, and I appreciate you being with us on today's call. Frontera delivered strong financial and operating results for the second quarter, and we achieved them even with the market's continued volatility. Those results show the effective steps we've taken to create value for stakeholders, keep both financial and operational flexibility, and bring down long-term leverage. Our total production rose quarter-over-quarter to 41,055 barrels per day, and the drivers were greater processing capacity at SAARA, investments in new flow lines across our heavy oilfields, a successful well intervention program in our light and medium blocks, and newly commercialized volumes of natural gas production from the VIM-1 block. Throughout the quarter, we stayed focused on operational improvements, cutting capital spending and achieving cost and process efficiencies throughout our business. That lowered our production costs by 10.3% to $9.1 per barrel quarter-over-quarter, which came from fewer well interventions and the rollout of new production technologies in the fields. We also brought our transportation cost down by 5.7% to $11.62 per barrel quarter-over-quarter, thanks to higher domestic wellhead sales. In the second quarter, the company drilled 26 development wells, primarily at our Quifa and CPE-6 blocks in Colombia, and completed 22 well workovers in other areas. On the exploration side, our attention has now shifted to the Guapo-1 well, where preparation and permits were secured, and drilling is expected in the second half of the year.
Our Colombian infrastructure business, which is stand-alone and growing and includes the company's interest in ODL, produced adjusted infrastructure EBITDA of $27.1 million. At Puerto Bahia, the Reficar connection was finished by the close of the quarter, and our target is for the first volumes to move during the third quarter of 2025. That connection is a strategic asset for Cartagena Bay, delivering higher hydrocarbon throughput along with the lowest transportation cost and superior logistics for the refinery of Cartagena. Other strategic investment at the port, including the LPG JV with Empresas Gasco, is moving forward on schedule. The port is also chasing further investment opportunities that draw on its facilities and infrastructure for sustainable long-term growth. After the quarter ended, the company announced it had reached an agreement to divest its interest in the noncore Perico and Espejo fields in Ecuador. The transaction aligns with our strategy of maximizing value over volumes and supports a stronger focus on our higher-impact Colombian upstream operations. The divestment will give the company total cash consideration to Frontera of $7.8 million plus additional contingent consideration of $750,000 upon Perico achieving cumulative production of 2 million barrels as from January 1, 2025.
We expect the deal to close in the second quarter of 2026, subject to regulatory approvals. Because of that, our 2025 production guidance is being adjusted to reflect the effect of the Ecuador sale, and now stands at 39,500 to 41,000 BOE per day. Given where oil prices stand right now, we are also lowering our capital expenditure guidance by roughly $20 million, bringing development facilities CapEx down to $45 million to $65 million and exploration CapEx down to $25 million to $35 million — a reflection of our disciplined approach to capital spending and our ability to identify ongoing operational efficiencies. In addition, we are providing operating EBITDA guidance at a $70 Brent price with a target of between $320 million to $360 million, and we are revising our adjusted infrastructure EBITDA guidance to between $110 million to $125 million. At this point I would like to hand the call over to Rene Burgos, Frontera's CFO.
Thank you, Orlando, and thank you, Gabriel. Good morning, everyone, and thanks, as always, for the support and interest you show in our company. I'll move through this quite fast, since I want to spend just a moment drawing attention to several key financial points from our quarterly results. In the second quarter, the company posted a net loss of $455.2 million, or $5.89 per share. That quarterly net loss came mainly from noncash impairment charges of $477 million in total, tied to the company's interest in the Corentyne license and to our Ecuador asset divestment. If you set those impairment charges aside, the company's net income for the quarter would have come in at roughly $48 million. Operating EBITDA for the quarter was about $76.1 million, versus $83.5 million in the prior quarter, a 9% reduction. The main driver was lower Brent prices, which declined 11% on a quarter-over-quarter basis, partly offset by reduced production and transportation costs, which speaks to our operational discipline. Turning to our key operational performance indicators: during the quarter, average Brent fuel prices stood at $66.71. Demand for the company's heavy crude barrels remains strong, and that has in turn produced a lower average differential on export sales of $1.69.
That compares with $4.38 in the previous quarter — an improvement of more than $2 per barrel. For our purchased crude net margin tied to dilution and transportation equipment, we recorded $3.53, down from $3.81 in the prior quarter. Those figures stem from gains in our VIM-1 purchasing strategy. Turning to operating costs: production, energy and transportation cost per barrel came to $25.34 for the quarter. That compares with $27.74 in the previous quarter — a reduction of over $2 — driven mainly by better results across every one of our cost categories. The quarter-over-quarter drop in production cost largely reflected lower volume ratio activities, as Orlando pointed out, along with adoption of new fuel technologies aimed at cutting water production at the wellhead. Energy costs likewise fell during the quarter, chiefly because of lower market prices and reduced consumption per barrel. Transportation costs came down too, the result of smaller transported volumes stemming from higher domestic wellhead sales prices. In our infrastructure business, adjusted EBITDA reached $27.1 million for the quarter, versus $28.6 million in the prior quarter. The quarter-over-quarter decline was mainly attributable to higher operations in SAARA. That reflects our continued ramp-up of its operations, with water processing volumes at SAARA rising more than 50% quarter over quarter, partly offset by positive results in the ODL segment.
By June 30, 2025, total cash stood at $197.5 million, of which $184.9 million was unrestricted cash and cash equivalents. After that quarter ended, the company did finish its SIB and made a payment of roughly $66 million to shareholders, and we will see that reflected in the following quarter. We will go into more detail on that shortly. Moving on to risk management: our present risk management approach underpins both operations and planning. Frontera employs derivative instruments in order to manage exposure to volatility in oil prices. On the oil side, hedges have been put in place by the company, successfully locking in a hedging ratio of up to 40% through December 2025 at Brent prices ranging from $65 to $70, which guards against a decline in oil prices. So far this year, we have realized gains of approximately $6 million from our hedging activities, excluding premium costs, which strengthens financial stability amid month-to-month marketing fluctuations. Frontera has likewise covered 40% of the company's expected peso exposure through the third quarter and 20% of its exposure through the fourth quarter, with floors above the MXN 4,200 level. That gives the company visibility into cash flow and helps mitigate the impact of future fluctuations, while letting the business deliver on its 2025 targets.
Lastly, I want to give you an update on the initiatives we have for investor value. During Q2, the company bought back $80 million of its 2028 notes via a cash tender and consensual solicitation. So far this year, Frontera has paid out roughly $10.5 million in dividends. Also, alongside the second quarter results, the Board declared a quarterly dividend of CAD 0.0625 per share for shareholders of record on October 2, 2025, payable on or around October 16. As for the company's substantial issuer bid, the SIB, Frontera repurchased CAD 91 million, or USD 66 million, of its common shares through the SIB completed in July — which comes on top of the CAD 42 million, or USD 30 million, of common shares bought back through the SIB that closed in January of this year. The company is also buying back shares every day right now through the automatic share purchase program, the NCIB, which we launched recently in July. With that, I'd like to hand the call back to Orlando now for some thoughts.
Thank you, Rene. Before we wrap up today's call, I want to point out that the company keeps moving forward on its 2028 sustainability goals and on the 2025 plan, with progress achieved on nearly every goal in the second quarter. On the sustainability side, at Frontera we are dedicated to respecting and advancing human rights across our operations, and we have set up the Business Network for Responsible Business Conduct to encourage and exchange best practices around human rights, due diligence and training. During the second quarter of 2025, local suppliers made up more than 11% of total purchases, which shows our continued commitment to fostering local economic development. In addition, we sustained solid results on health and safety metrics, posting a total recordable incident rate of 0.71 and reaching a water reuse rate of 37.6% in our operational activities. With that, I would like to close by thanking Gabriel and Rene for their remarks, and thanking all of you for joining our call. I will now hand the call back to our operator, who will open it up for questions.
<<operator_script>> Our first question is from Sara Konstantine at SMC.
I've got a couple of questions for you. First one's about Ecuador. I was hoping to get some detail on the purchase price, because it looked a bit on the low side — it came out to $8,000 per flowing barrel. Could you walk through how you got to that number? Then my second question is about the NCIB. From what I can see, we bought back roughly 80,000 shares. I'm curious why we haven't been more aggressive with the NCIB, especially with the stock sitting around $6. I was expecting double that amount. We did a buyback at $12 a share. My hope was that we'd be repurchasing the maximum possible to build value for all shareholders.
Sara, my apologies—our line dropped for a moment. Could you say your first question again? I can answer the second one right away. But please, would you mind restating that first question?
Yes. On the Ecuador sale, the first question — I was somewhat taken aback by the price, since it came out to $8,000 per flowing barrel. I was wondering why it went for $8 million. Is there some further rationale behind that? Or is that simply the prevailing rate for assets in Ecuador, because that strikes me as rather low when you stack it up against U.S. market comps.
Understood. I’ll take the first question first, then the second one. On the first question regarding the NCIB, there are two rules tied to the NCIB that govern how much we’re able to purchase. One is constrained by our float, and the other is constrained by our daily volume. Historically, our daily volume has been near — I’d say, roughly — 100,000 to 150,000 shares, and we can buy no more than 20% of that volume each day. We’ve directed BMO, our adviser, in the NCIB process to purchase shares daily in an effort to reach that limit. But essentially, the nature of the NCIB program itself leaves us somewhat restricted in how many shares we can buy. That’s also why we do see — and what we do, for the benefit of all our shareholders, is carry out the significant SIBs, where size isn’t a constraint; instead, we simply make an offer allowing every shareholder to participate on an equivalent basis. Regarding the Ecuador sale, what I’d say is, look, I think this helps us concentrate on our core operations, our higher-impact operations, which is Colombia.
When we went into Ecuador, the objective was for it to become a meaningful part of the business. The truth is that, even with all our efforts, it never got to that level. What I mean is that we were targeting an operation of more than 5,000 barrels, yet holding it above 2,000 was a struggle for us. Because of that, we decided to move on and concentrate on the assets in our portfolio that are performing. I want to point out that, excluding our Ecuadorian operations, over the last 6 months versus last year, our production in Colombia is actually higher by roughly 4%, 5%, excluding Ecuador, correct? So we keep working to reinforce the economic value of our Colombian assets, pursuing significantly more cost savings in order to really drive that value.
And that aligns with how we prioritize value rather than volume. So I'd say — that divestiture fits with that approach and, as Rene mentioned, is focused on the Colombian assets.
Peter Bowley with Jefferies has the next question.
During the MD&A, you noted that the company might be looking at additional strategic initiatives or transactions aimed at boosting value. So with Ecuador now divested, could you give us a little more detail on the types of initiatives or transactions you could be weighing? Are we talking acquisitions, divestments, JVs? And would the geographic emphasis stay primarily on Colombia, or might you be looking at other geographies as well?
Thanks for that question. Let me begin by noting that the portfolio we hold today offers several truly significant opportunities. Take the Quifa block alone: we've been advancing the SAARA project, which will boost the field's water handling capacity — it's in implementation right now — and that opens up further growth potential both in Quifa and in the CPE-6 block, where we've likewise been raising the field's water handling capacity to as much as 380,000 barrels of water per day, which will let us sustain additional production there. Then there's the Sabanero field, another heavy oilfield situated in a comparable, close-by location to Quifa, where output has actually come in above our expectations. So those heavy oilfields represent solid opportunities that support growth. The other one, as we've mentioned, is the Guapo well in the GU-1 block — that's a very strong opportunity. As we noted, during the quarter we resumed selling gas to the market, capitalizing on the window of opportunity in Colombia's gas market, where prices are climbing quite substantially.
We're collaborating with our partner Parex to push development further in that region. So that's another item that I believe opens up an opportunity. And as you mentioned, when it comes to any other possible acquisitions or M&A opportunities, we're constantly on the lookout for chances to boost value for all our stakeholders, and we'd evaluate any opportunities that make sense for our shareholders and stakeholders.
<<operator_script>> The following question is from Sergey Bolshakov at Stifel.
I have a few things I'd like to ask about. It appears receivables have built up during the quarter, and that has had a negative effect on working capital. Could you expand on that a bit? We'd also find it helpful if you would share the cash taxes for the first quarter and the second quarter. With such a sizable cash balance, what do you intend to do with it — is buying back some bonds a possibility? And please tell us a little more about how you're thinking regarding the outstanding bond, since it's trading at quite low levels. When it comes to cash prices, refinancing that bond looks highly unlikely today, at least.
Okay, I believe I have a few questions to address there. Regarding receivables, we have a VAT receivable of roughly $20 million that we anticipated collecting during this quarter. We also hold additional income tax receivables tied to our deferred tax asset values, which we expect to collect later this year. That explains why working capital appears to be moving in a positive direction. The change was approximately $50 million quarter over quarter. Those 2 assets by themselves largely account for that movement, I would say. On your question about our cash position, we hold approximately $197 million in cash, and $184 million of that is unrestricted. Keep in mind that from that $184 million, you deduct approximately $66 million, since we only just closed the SIB in July. So those figures do not yet reflect the SIB program. As for the bond and our plans regarding it, we've had genuinely productive discussions with our bondholders over roughly the past 3, 4 months, I'd say. We laid out our strategy to them. Orlando just mentioned a few of the opportunities available, and of course there are others beyond those that could arise from the current market environment.
At the moment, we're concentrating on executing for the business. There are still 3 years remaining before our bond matures. We'll keep watching for opportunistic bond purchases. However, right now our attention is on fulfilling what the business has promised, namely maximizing value for our stakeholders.
And on top of that, naturally, that's something we'll look at. Any call we make would rest on how the business performs overall, what oil prices are doing, and the cash flow the business generates. But for sure, as Rene put it, we've shown this and we've followed through on it, so we would be quite open to weighing further moves of that kind.
Thanks, that's helpful. And what about cash taxes for Q1 and Q2 of this year?
Okay, so if you look at our — there's one specific line item. Sergey, we handle taxes in two different ways. One is basically settling up at year-end, and then on a monthly basis we've got withholding taxes. I think the clearest way to put it is that we pay roughly 5%, 6% of gross sales. So if you total up the year — and I think our release shows close to, let's say, $400 million, $500 million — you multiply that by that 5%, 6%, and that gives you the figure. But it sits inside our cash flow statement. So it should be somewhere around $30 million or so that we paid. And that's gross, before returns.
That brings us to the end of the question-and-answer session. I'll now hand things back to management for any closing comments.
Thanks, everyone, for joining us on this call, and I hope you have a good day. Thanks, operator.
That wraps up today's conference call, everyone. We appreciate each of you joining in. You're free to disconnect at this point.
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