- Generated EBITDA of $173.2 Million
- Delivered Production of 41,033 Boe/d, Up 12.7% From Q3'21,
- Delivered Another Record Quarterly Average Production at CPE-6 of 5,070 boe/d
- Achieved a Total Recordable Incident Rate of 1.01,
- Best Safety Performance in Frontera History
- Revised Wei-1 Well Spud Window to Between December 2022 to Late January 2023
- Invested Over $100 Million in Shareholder Value Generating Initiatives
- Including $86.6 million in Share Buybacks YTD and Acquisition of Additional Interest in ODL Pipeline
-- Outlook Upgraded By S&P Global Ratings From 'Stable' to 'Positive',
- B+ Issuer Credit and Issue-Level Ratings Affirmed
Frontera Energy Corporation released financial and operational results for the third quarter ended September 30, 2022. All financial amounts in this news release are in United States dollars, unless otherwise stated.
Gabriel de Alba, Chairman of the Board of Directors, commented:
"Frontera's third quarter results underscore the Company's continued focus on cash flow generation, operational excellence and unlocking value for shareholders. Year to date, the Company continues to deliver on its guidance with over 41,200 barrels per day in production - representing about 10% year-over-year growth, generating close to $500 million in EBITDA and a strong focus on cost control, including a 9.5% decrease in quarter over quarter production costs. Additionally, the Company continues to deliver on its shareholder value initiatives. Year to date, the Company has invested over $100 million, including $87 million in share buybacks through its SIB and NCIB programs, while retiring more than 8.5 million shares. Further, with the Company's purchase of IFC's interest in ODL, Frontera has strengthened its midstream cash flows and created a self-sustained and growing midstream business. As a result of its continued focus on performance and value, during the quarter S&P Global Ratings upgraded its outlook for Frontera from 'stable' to 'positive' and affirmed the Company's B+ issuer credit and issue-level ratings. The Company, through its joint venture with CGX, looks forward to building on the light oil and condensate discovery at Kawa-1 with the spudding of the Wei-1 well, offshore Guyana in between December 2022 and late January 2023, subject to rig release by the third-party operator."
Orlando Cabrales, Chief Executive Officer, Frontera, commented:
"Frontera delivered solid operational and financial results during the third quarter. The Company generated EBITDA of $173.2 million and almost $500 million of EBITDA year to date to the end of the third quarter. Frontera also produced 41,033 boe/d in the third quarter, averaging 41,238 boe/d year to date to the end of the third quarter. We remain on track to deliver our 2022 production guidance of 41,000-43,000 boe/d as production ramps up in the fourth quarter due to additional water disposal capacity in Quifa via the new Battery 4 facility (which came on-line in October) and increased pumping capacity at the CMA water treatment facility in November, as development drilling grows record production at CPE-6 and as liquids recovery increases at VIM-1.
We're delivering on our production and EBITDA targets so far this year while controlling our operating costs, despite industry-wide inflationary pressures and we anticipate achieving our production and transportation cost guidance for the year. I'm proud to say that we are delivering these results while achieving a total recordable injury rate of 1.01 - the best safety performance in the Company's history - and a credit to everyone at Frontera.
In the fourth quarter, we expect to continue generating strong free cash flow from our oil-weighted production and efficient operations, advance our significant development and high-impact exploration growth prospects in Colombia, Ecuador and Guyana while maintaining a strong balance sheet, healthy leverage levels and returning value to shareholders through our NCIB."
Third Quarter Operational and Financial Results:
• Production averaged 41,033 boe/d, compared to 41,586 boe/d in the prior quarter and 36,422 boe/d in the third quarter of 2021. The slight decrease in production quarter over quarter was mainly due to a delay in the initiation of new Battery 4 water disposal facilities at the Quifa block (which came on-line in October 2022), operational challenges in some of the Company's natural gas and light and medium crude oil fields, partially offset by record quarterly CPE-6 production of 5,070 boe/d due to positive development drilling, successful Jandaya-1 well stimulation and the reactivation of the Sabanero block on July 1, 2022. The Company's year-to-date average production to September 30, 2022 was 41,238 boe/d. The Company remains on track to deliver its tightened 2022 production guidance of 41,000-43,000 boe/d. See the table above for production by product type for the third quarter of 2022, the prior quarter and third quarter of 2021.
• Operating EBITDA was $173.2 million in the third quarter of 2022 compared with $190.7 million in the prior quarter and $77.3 million in the third quarter of 2021. The decrease in operating EBITDA quarter over quarter was primarily a result of a decrease in the benchmark oil price compared to the previous quarter, partially offset by lower differentials, lower royalties and inventory drawdowns which resulted in one more cargo sold during the third quarter.
• Cash provided by operating activities was $120.8 million in the third quarter of 2022, compared with $246.6 million in the prior quarter and $79.1 million in the third quarter of 2021. The decrease in cash provided by operating activities quarter over quarter was primarily due to the variance in working capital resulting from the timing of cargo sales and payments received, a decrease in the benchmark oil price compared to the previous quarter partially offset by inventory volumes sold in the third quarter.
• The Company's total cash position at September 30, 2022, was $309.1 million compared to $353.1 million at June 30, 2022. During the quarter, the Company invested $61.1 million in exploration, production and development facilities in Colombia and Ecuador, returned $57.9 million in capital to shareholders through the its SIB and NCIB share repurchases, paid $21.2 million as part of the acquisition of the 40.07% direct interest in PIL, spent $11.8 million in Guyana in support of pre Wei-1 well drilling activities and $9.3 million on debt service obligations, leases and foreign exchange impacts to cash and cash equivalents.
• The Company's restricted cash position was $55.6 million as at September 30, 2022, compared to $58.0 million as at June 30, 2022. The Company anticipates releasing additional restricted cash in the fourth quarter of 2022 as the Company continues to optimize its credit lines.
• The Company has various uncommitted bilateral credit lines. Subsequent to the quarter, the Company increased its uncollateralized credit lines to $113 million, compared to $107.8 million at June 30, 2022.
• As at September 30, 2022, the Company had a total inventory balance of 1,137,913 bbls, compared to 1,423,695 bbls as at June 30, 2022.
• Capital expenditures were $76.0 million in the third quarter of 2022, compared with $93.8 million in the prior quarter and $103.2 million in the third quarter of 2021. Capital expenditures during the quarter included $44.1 million on development drilling at Quifa, CPE-6 and VIM-1, $9.9 million on development facilities at CPE-6 and Quifa and reactivation of the Sabanero block, $7 million on exploration drilling at the Espejo block and $9.5 million mainly related to pre-Wei-1 exploration well activities in Guyana.
• The Company recorded a net loss of $26.9 million or $0.30/share in the third quarter of 2022, compared with net income of $13.5 million or $0.14/share in the prior quarter and net income of $38.5 million or $0.40/share in the third quarter of 2021. The Company's third quarter net loss included $93.8 million in deferred income tax expenses resulting from the devaluation of the COP during the quarter and the utilization of deferred tax assets to offset higher profits in 2022, $38.7 million in foreign exchange losses and $13.9 million in finance expenses partially offset by $118.2 million in operating income.
• The Company's net sales realized price was $81.93/boe in the third quarter of 2022, compared to $91.50/boe in the prior quarter and $59.47/boe in the third quarter of 2021. The decrease in net sales realized price quarter over quarter was driven by a decrease in the benchmark oil price partially offset by better differentials and lower royalties.
• The Company's operating netback was $59.78/boe, compared with $68.01/boe in the prior quarter and $37.79/boe in the third quarter of 2021. The decrease in operating netback quarter over quarter was primarily due to lower net sales realized price, partially offset by decreased production costs mainly due to lower well services and energy costs, as well as a decreased transportation costs.
• Production costs averaged $11.45/boe in the third quarter of 2022, compared with $12.65/boe in the prior quarter and $11.44/boe in the third quarter of 2021. The decrease in production costs quarter over quarter was mainly due to lower well services and energy costs, and lower internal field transport. The Company remains on track to deliver 2022 production cost guidance of $11-$12/boe.
• Transportation costs averaged $10.70/boe in the third quarter of 2022, compared with $10.84/boe in the prior quarter and $10.24/boe in the third quarter of 2021. The decrease in transportation costs quarter over quarter was mainly due to the positive impact of foreign exchange fluctuations in COP-denominated costs partially offset by a contractual increase in regulated pipeline tariffs in Colombia. The Company remains on track to deliver 2022 transportation cost guidance of $10-$11/boe.
• The Company recorded a realized loss on risk management contracts of $4.4 million in the third quarter of 2022 compared with a realized loss of $3.5 million in the prior quarter and a loss of $6.6 million in the third quarter of 2021. The realized loss on risk management contracts resulted from cash paid for put options settled during the period. Frontera did not enter into any new hedges during the third quarter. Frontera has hedged 40% of its 2022 production at $70/bbl floors with full price upside exposure. Subsequent to the quarter, the Company entered into new put hedges totaling 230,000 bbls to protect a portion of the Company's January 2023 production at a $80/bbl strike price. See the Hedging Update section below for more information
• On September 22, 2022, S&P Global Ratings upgraded its outlook for Frontera from 'stable' to 'positive' and affirmed its B+ issuer credit and issue-level ratings.
Frontera 2022 Environmental, Social and Governance (ESG) Highlights
The Company continues to deliver on its ESG goals. Through September 2022, Frontera achieved a Total Recordable Incident Rate (TRIR) of 1.01, the best safety performance in Company history and below its 2022 TRIR objective of 1.40. Frontera has also neutralized 52% of its 2022 Colombian emissions through the purchase of carbon credits and has protected 458 hectares of important biodiverse ecosystems.
The Company is focused on bridging diversity, inclusion and gender equity gaps and is advancing training of community women in its oil and gas technical programme - Crece con Frontera. To date, Frontera has invested US$2.3 million in 105 social projects, benefiting more than 21,000 people in Colombia, Ecuador and Peru. The Company purchased $32.3 million from local suppliers and will accomplish its goal of purchasing $41 million locally in 2022.
In October 2022, Frontera was recognized by the Society of Petroleum Engineers Win Awards for its commitment to sustainability. The awards highlight leading corporate and individual practices in the hydrocarbons sector. Frontera was recognized in the 'Equity, Diversity and Inclusion' and 'Sustainability' categories and two Frontera women were also recognized in the 'Leadership' category.
Update on Key Shareholder Value Initiatives
Frontera is committed to generating and returning value to shareholders. During the quarter, the Company completed two key initiatives: (i) a substantial issuer bid ("SIB") and (ii) the PIL acquisition, totaling $71 million. Year to date, Frontera's total investments for shareholder value initiatives, including its normal course issuer bid ("NCIB"), exceed $100 million.
In August 2022, the Company completed its C$65 million (equivalent to USD$50 million) SIB taking up for cancellation at a price of C$12.00 per share approximately 5.42 million of its common shares or approximately 5.84% of the total number of Frontera's issued and outstanding common shares as of August 8, 2022. As at September 30, 2022, Frontera had 86,575,175 common shares outstanding.
Through the Company's current NCIB, the Company has repurchased 3,183,600 common shares for cancellation for approximately $32.5 million as of November 1, 2022. Frontera may purchase up to 4,787,976 common shares, representing approximately 10% of the Company's public float through its current NCIB.
In September 2022, the Company acquired the remaining 40.07% interest it did not already own in Pipeline Investment Ltd. ("PIL") for an aggregate cash consideration of approximately $47.4 million, including $21 million immediately following the closing of the transaction. The transaction represents an important milestone for the Company as it increases Frontera's direct interest in the ODL pipeline to 35%, strengthens Frontera's midstream cash flows, and creates a self-sustaining and growing midstream business.
The ODL pipeline is a 260-kilometre, 24-inch pipeline with throughput capacity of 300,000 bbl/d at 18° API that transports Frontera's heavy crude oil from the Quifa SW and Cajua fields and part of the CPE-6 field, as well as other third-party production from the Llanos basin, including from Ecopetrol, Hocol, Geopark and Parex, and connects the OCENSA pipeline at Cusiana and Monterrey to the export terminal in Coveñas. Ecopetrol's Cenit Transporte y Logística de Hidrocarburos S.A.S. owns the remaining 65% of ODL. For further information related to the PIL acquisition, please refer to page 5 of the Company's Interim Financial Statements in the "Statements of Changes in Equity'' section.
Wei-1 Well Spud Window Revised
Due to unforeseen challenges to the exploration activities of a third-party operator, the release of the NobleCorp Discoverer drilling unit to CGX has been delayed. This situation is beyond the reasonable control of the Joint Venture. Frontera and CGX have communicated the revised spud window for the Wei-1 well to the Government of Guyana; expected to now be between December 2022 and late January 2023, subject to rig release by the third-party operator.
Final preparations are complete in advance of spudding the Wei-1 well on the Corentyne block, and follows the discovery of light oil and condensate at the Kawa-1 well earlier this year. The Wei-1 well will be located approximately 14 kilometres northwest of the Kawa-1 exploration well in the Corentyne block, approximately 200 kilometres offshore from Georgetown, Guyana and will be drilled in water depth of approximately 1,912 feet (583 metres) to an anticipated total depth of 20,500 feet (6,248 metres). Wei-1 will target Maastrichtian, Campanian and Santonian aged stacked channels in a western channel complex in the northern section of the Corentyne block.
Demerara Block Relinquishment
On September 20, 2022, the Government of Guyana provided CGX a surrender deed to formalize relinquishment of the Demerara block. Subsequent to September 30, 2022, the Joint Venture signed the surrender of the Demerara PPL. The Joint Venture's relinquishment of the block allows the people of Guyana to benefit from exploration activities under the stewardship of interested parties. As of October 31, 2022, the Deed of Surrender was in the process of being finalized.
Update on the Joint Operating Agreement Amendment
On July 22, 2022, CGX and Frontera announced that the companies had entered into an agreement to amend the Joint Operating Agreement originally signed between CGX and a subsidiary of Frontera on January 30, 2019, as amended (the "JOA Amendment"), effectively farming into the Corentyne block and securing funding for the Wei-1 well, subject to satisfaction of certain conditions precedent. On October 3, 2022, CGX and Frontera announced that the parties had agreed to (i) extend the maturity date of the previously announced US$19 million convertible loan to CGX dated May 28, 2021, as amended (the "Loan Agreement") to November 30, 2022; and (ii) amend the JOA Amendment to extend the outside date by which the conditions precedent to such agreement must be fulfilled to November 30, 2022, as the Joint Venture continues to await the satisfaction of all conditions precedent. Once all conditions precedent have been satisfied, as a result of the JOA Amendment, CGX will hold a 32.00% participating interest and Frontera will hold a 68.00% participating interest in the Corentyne block.
During the quarter, Frontera produced 39,829 boe/d from its Colombian operations (consisting of 20,945 bbl/d of heavy crude oil, 16,224 bbl/d of light and medium crude oil, 9,969 mmcf/d of conventional natural gas and 911 bbl/d of natural gas liquids). The Company currently has 5 drilling rigs and 3 workover rigs active at its drilling and well workover operations in Colombia. In the third quarter of 2022, the Company drilled 16 development wells and completed 18 workovers and well services. Through the third quarter 2022, the Company has drilled 50 development wells and completed 78 workovers and well services in Colombia.
At Quifa, year to date to September 30, 2022 production averaged approximately 16,150 bbl/d of heavy crude oil (including both Quifa and Cajua). The Company drilled 10 development wells at Quifa in the third quarter of 2022. Subsequent to the quarter, the Company brought its new Battery 4 water disposal facility on-line in October which is expected to increase the Company's water disposal capacity. The Company expects to add additional water disposal capacity in November.
At Guatiquia, year to date to September 30, 2022 production averaged approximately 8,949 bbl/d of light and medium crude oil.
At the CPE-6 block in the Llanos Basin, year to date to September 30, 2022 production averaged approximately 4,916 bbl/d of heavy crude oil.
During the quarter, the Company drilled 5 successful development wells and delivered record quarterly production of 5,070 boe/d in the third quarter and record monthly production of 5,220 boe/d in October. The Company is undertaking civil works in the northern exploratory area of the CPE-6 block in advance of spudding the Hamaca Norte-1 exploration well. Frontera plans to drill the Hamaca-107D appraisal well in the southern portion of the block in November 2022.
At the VIM-1 block (Frontera 50% W.I., and non-operator) in the Lower Magdalena Valley, year to date to September 30, 2022 production averaged approximately 1,250 boe/d, including approximately 2,980 mmcf/d of conventional natural gas and approximately 727 bbl/d of light crude oil. During the quarter, the La Belleza-2 horizontal development well was drilled to its total depth with encouraging results. The well is expected to be completed in the fourth quarter of 2022. Once the horizontal well is completed, La Belleza-1 well will be used for gas reinjection.
The operator intends to grow long-term liquids recovery by reinjecting gas for enhanced oil recovery. The operator estimates that there is potential to double the liquids recovery factor.
At the El Dificil block, the Company drilled two development wells during the quarter which are currently suspended due to operational issues which are expected to be resolved by the first quarter of 2023. Frontera is currently defining near-field opportunities in the Ciénaga de Oro and Porquero formations.
At the VIM-22 block, pre-drilling activities including civil works will begin in the fourth quarter in advance spudding the Chimi-1 exploration well in January.
At VIM-46, Llanos 99, and Llanos 119 blocks, pre-seismic activities related to social and environmental impact studies continue.
In Ecuador, current gross production is approximately 2,600 bbl/d of medium crude oil. Frontera's share of production in Ecuador for the three months ended September 30, 2022 was 1,204 bbl/d of medium crude oil compared to 610 bbl/d in the prior quarter. The increase in production quarter over quarter was due to stimulation operations in the Jandaya-1 well and the stabilization of the Yin-1 well. Operations remain under long-term test as the Company prepares an environmental impact assessment in order to obtain a production environmental license. Additional appraisal activities will be conducted in the near future to confirm size and mid- to long-term production levels. The Company has drilled three out of four wells required as part of its work commitment on the Perico block. Additional prospects on the Perico block have been identified and are being analyzed for future drilling.
At the Perico block, Frontera is evaluating subsequent exploratory & development activities in the block. An update of the exploration potential was finalized, a full field development plan for Jandaya is ongoing, and an information acquisition plan was defined for Tui.
At the Espejo block (Frontera 50% W.I. and non-operator), the operator spud the first exploration well on the block, Pashuri-1, in September and reached total depth in October 2022. Preliminary logging information and other relevant data indicated the presence of hydrocarbons in the M1 and Lower U sandstones in the Napo formation. Testing activities are expected to start in November 2022. Based on the preliminary success at Pashuri-1, the operator anticipates spudding the Caracara-1 well in the fourth quarter.
As part of its risk management strategy, the Company uses derivative commodity instruments to manage exposure to price volatility by hedging a portion of its oil production. The Company's strategy aims to protect 40%-60% of the estimated production to protect the revenue generation and cash position of the Company while maximizing upside. In 2022, Frontera is only using put options, which allow the Company to capture the full upside price benefit while offering efficient downside hedging. Subsequent to the quarter, the Company entered into new put hedges totaling 230,000 bbls to protect a portion of the Company's January 2023 production at a $80/bbl strike price. The following table summarizes Frontera's hedging position as of November 1, 2022.