Gran Tierra Energy Inc. announced the Company's financial and operating results for the quarter ended June 30, 2020 ("the Quarter"). All dollar amounts are in United States ("U.S.") dollars and production amounts are on an average working interest before royalties ("WI") basis unless otherwise indicated. Per barrel ("bbl") of oil equivalent ("BOE") amounts are based on WI sales before royalties. For per BOE amounts based on net after royalty ("NAR") production, see Gran Tierra's Quarterly Report on Form 10-Q filed August 4, 2020.
Key Highlights:
- Production: The Quarter's production averaged 20,165 BOE per day ("BOEPD"), down 32% from first quarter 2020 ("the Prior Quarter"); with the unprecedented impact of the COVID-19 pandemic and the related crash in world oil prices, Gran Tierra took decisive actions during the Quarter to protect the Company's balance sheet and liquidity; as a result, oil production was impacted by deferred development drilling, shut-in of higher cost production and wells that were left off-line awaiting routine mechanical workovers; the suspension of production at the Suroriente and PUT-7 Blocks in the southern Putumayo region due to force majeure related to a local farmers' blockade also reduced volumes; current production is approximately 19,000 BOEPD
- Achieved Significant Reductions in Costs: Since March 2020, in response to the global economic downturn and lower commodity prices, Gran Tierra rapidly implemented cost saving initiatives throughout the Company; significant progress has been made on lowering costs through the renegotiation of vendor contracts and optimization of personnel and rental equipment; as a result, Gran Tierra has reduced operating costs and cash general and administrative ("G&A") costs by 43% and 30%, respectively, from the Prior Quarter; the majority of the cost reductions are structural reductions in the Company's operations, which are expected to be maintained even if oil prices recover further; as a result of ongoing cost saving initiatives, the Company also expects per well drilling and completion capital costs to be reduced by approximately 30% at Acordionero and 18% at Costayaco compared to 2019
- Successful Redetermination of the Credit Facility & Covenant Waiver Until October 2021: During the Quarter, Gran Tierra successfully completed the semi-annual redetermination of the Company's bank-syndicated credit facility; the borrowing base limit was re-determined to $225 million from the prior limit of $300 million and the Company was granted relief under certain financial covenants until October 1, 2021 (the "Covenant Relief Period"), including relief from compliance with the ratio of Total Debt* to EBITDAX* during the Covenant Relief Period
- VAT & Income Tax Refunds Received: at the end of the Prior Quarter, Gran Tierra had total value-added tax ("VAT") and income tax receivables of $138 million; during the Quarter, the Company collected a total of $25 million in VAT and income tax refunds; during July 2020, the Company received another $21 million in tax refunds and expects to collect another $30 to $40 million before the end of 2020; therefore, Gran Tierra forecasts total collection in the range of $76 to $86 million in VAT and income tax refunds during 2020
- Capital Expenditures: With 2020's oil price volatility and logistical challenges due to COVID-19, Gran Tierra elected to significantly reduce the Quarter's activities; the Quarter's capital expenditures were only $5 million; while the Quarter's net loss was $371 million (including oil and gas property impairment of $398 million), funds flow from operations(1) was a positive $6 million, which more than covered capital expenditures
Operations Resumption: Gran Tierra forecasts the following activities during the course of second half 2020:
With the recent recovery in oil prices and tightening of differentials, Gran Tierra has initiated the required activities to safely resume several operations throughout the Company's Colombian portfolio, in strict accordance with COVID-19 protocols; the evolving situation with the COVID-19 pandemic may impact the timing of the planned activities and the resulting amount and timing of incremental production additions
Acordionero Workover and Development Activities to Resume (100% WI):
Workovers: plans call for a restart of the routine workover program, with the first workover rig to begin operations during third quarter 2020, and a second workover rig starting up in fourth quarter 2020; a total of 8-10 offline wells are expected to be worked over to restore production by 2020 year-end; the wells can only be worked over one at a time in sequence; the total combined productive capacity of the 10 highest priority wells for workover is estimated to be approximately 3,500 bbl of oil per day ("BOPD") with weighted averages for water cut of 13%, gas-oil ratio of 639 standard cubic feet per bbl and API oil gravity of 17 degrees (based on 30-day averages prior to each well going offline earlier this year)
Development Drilling: one drilling rig is expected to restart development drilling operations during fourth quarter 2020 to drill 1-2 new oil wells by 2020 year-end; these new wells are expected to begin production during first quarter 2021; the drilling rig is forecast to continue drilling new development oil wells at Acordionero throughout 2021; the next four planned wells are scheduled to be drilled from the new southwest pad; each of these new wells is expected to have an initial oil production rate of approximately 550 BOPD (initial 30-day average rate), in line with the strong performance of wells drilled in the field over the last year
Costayaco/Vonu Workovers to Resume (100% WI): a workover rig is expected to start operations during fourth quarter 2020 to workover 2-4 wells; the wells can only be worked over one at a time in sequence; the total combined productive capacity for the four priority wells for workover is estimated to be approximately 1,000 BOPD with weighted averages for water cut of 44%, gas-oil ratio of 811 standard cubic feet per bbl and API oil gravity of 29 degrees (based on 30-day averages prior to each well going offline earlier this year)
Suroriente Block (52% WI) to Resume Production: restart of this block is expected during second half 2020; the block's WI productive capacity is estimated to be approximately 3,600 BOPD (based on the 30-day average prior to the block being shut-in earlier this year)
Majority of Minor Fields to Resume Production: the restart of the these fields is expected during second half 2020; these fields' combined WI productive capacity is estimated to be approximately 1,900 BOPD (based on 30-day averages prior to the shut-ins earlier this year, which were done to reduce costs and preserve value and liquidity)
Financial Guidance for Second Half 2020 (based on the resumption of operations described above):
- Brent Oil Price: $41.00-45.00/bbl
- Capital Expenditures: $25-35 million (new Acordionero southwest drilling pad & 1-2 new wells)
- Operating Netback(1): $55-75 million
- EBITDA(1): $45-65 million
- Funds Flow from Operations(1): $25-35 million
Gran Tierra Positioned to Thrive in 2021: The Company's initiatives during the severe downturn of 2020 were focused on portfolio optimization, deferring short-cycle investments, and pacing projects to allow the safe resumption of operations when oil prices recovered and strict COVID-19 safety protocols were implemented; the Company is analyzing multiple scenarios focused on maximizing returns and free cash flow in 2021, and to optimize the ultimate oil recovery, free cash flow and long-term value from all assets; Gran Tierra believes its robust asset base will resume average production in excess of 30,000 BOEPD in 2021, based on current assumptions, including commodity prices remaining at current levels and that there is minimal global economic disruption from the COVID-19 pandemic next year
Key Financial Metrics for the Quarter:
- Net loss was $371 million compared with a net loss of $252 million in the Prior Quarter, primarily due to a non-cash impairment on the Company's oil and gas properties as a result of significantly lower oil prices ($398 million)
- Adjusted EBITDA was $18 million, compared with $35 million in the Prior Quarter
- Funds flow from operations(1) of $6 million ($0.02 per share, basic) decreased by 73% compared with the Prior Quarter, as a result of lower production and a 34% decrease in the Brent oil price, as well as a widening of differentials; capital expenditures totaled $5 million, a decrease of 89% compared to the Prior Quarter
- Oil and gas sales were $34 million, down 61% from $86 million in the Prior Quarter, due to the decreases in production and oil prices
- Operating netback decreased to $5.65 per BOE, which was caused mostly by the 34% drop in the Brent oil price from the Prior Quarter, while other cost components such as transportation expenses and the quality and transportation discount remained relatively unchanged; the drop in the Quarter's royalties to $1.63 per BOE, down from the Prior Quarter's $5.61 per BOE, partially offset the negative impact of the crash in oil prices
- Operating expenses of $9.62 per BOE were down 21% from $12.17 per BOE in the Prior Quarter due to lower power generation costs, reduction in rental equipment and cost savings attributed to the lower activities
- Workover expenses were $0.71 per BOE, down 85% from $4.64 per BOE in the Prior Quarter due to lower activity
- Transportation expenses were $1.68 per BOE, up from $1.52 per BOE in the Prior Quarter, due to higher pipeline sales
Operations Update
Acordionero (100% WI and Operator)
During the Quarter, no development wells were drilled, however production from the remaining wells stabilized at approximately 11,000 BOPD during the Quarter, with downtime of only approximately 1%; the low downtime reflects excellent reliability from the field's gas-to-power generation; the stabilization of production is indicative of effective waterflood response due to proactive pattern balancing; this base production response provides an excellent platform to grow production and cash flow from future workovers and development drilling
At the end of the Quarter, a total of 14 oil wells require workovers to restore production; given the recent strong recovery in the Brent oil price, the Company is planning on restarting a workover program during third quarter 2020
Suroriente (52% WI and Operator)
Gran Tierra plans to restart production from Suroriente during second half 2020.
The Cohembi and other oil fields in the Suroriente Block were producing at approximately 3,600 BOPD (WI) prior to the blockades, as the field was continuing to positively respond to increased water injection and pump optimizations.
Prior to the blockades in late February 2020, activities were underway to expand the Cohembi water treatment, injection and processing facilities under a two-phased expansion program; the combined phased expansion would be expected to boost gross water injection capacity from 19,000 to 60,000 bbl of water per day.
Ayombero-Chuira (100% WI and Operator)
Gran Tierra remains encouraged by results from the Ayombero-1 well, which continues to show stable production which averaged 158 BOPD for the Quarter on natural flow and has total cumulative oil production to date of 124,000 bbl.
Ayombero-2 and -3 remain suspended and ready for the next phase of operations to recover the wellbores; Gran Tierra continues detailed planning for the next phase of operations but plans to await further recovery in oil prices before restarting development activities.
Moqueta (100% WI and Operator)
During the Quarter, Gran Tierra continued to optimize the waterflood at Moqueta, where oil production and water injection were in-line with expectations.
On June 21, 2020, Moqueta was shut-in immediately after a leak was detected in the pipeline that transports the field's production to Costayaco; repairs were made during July 2020 and the field was brought back on production on July 27, 2020; the temporary shut-in of Moqueta is expected to cause an immaterial reduction in the Company's total 2020 average production of approximately 400 BOPD; Moqueta is currently producing approximately 3,000 BOPD.
Message to Shareholders
Gary Guidry, President and Chief Executive Officer of Gran Tierra, commented: "With the unprecedented volatility facing our industry during the COVID-19 pandemic and the related imbalance in world oil supply and demand, Gran Tierra took decisive action to protect our balance sheet and cash flows. We swiftly reduced our 2020 capital program and implemented cost saving initiatives throughout the Company. The team has made significant progress on lowering operating and G&A costs, and done a great job managing the crisis on all fronts. We believe we are well-positioned to withstand the current volatile environment with our low base decline, conventional oil asset base and the operational control for capital allocation and timing, while maintaining a low cost structure. As we move forward, we remain agile in the execution of our strategy as we plan to resume development and workover activities in Acordionero and restart the majority of shut-in oil fields during the second half of 2020. We will safely and diligently commence operations with a key objective of finishing 2020 strong to set up for an exciting 2021. We believe that Gran Tierra is well-positioned to thrive in 2021 and beyond."
