(Frontera Energy, 3.Nov.2021) — Frontera Energy Corporation (TSX: FEC) reported financial and operational results for the third quarter ended 30 September 2021. All financial amounts in this news release are in United States dollars, unless otherwise stated.
Third Quarter Operational and Financial Results:
- The company is tightening and increasing its full-year operating EBITDA to $360-$380mn, compared to its prior $325-$375mn guidance range. Operating EBITDA was $72.6mn in the third quarter compared with $84.8mn in the prior quarter and $52.1mn in the third quarter of 2020. The decrease in operating EBITDA quarter over quarter was primarily a result of one less cargo sold during the third quarter (which was sold early in the fourth quarter) and the corresponding increase in inventory. This was partially offset by a decrease in realized loss on risk management contracts and a $7.2mn reversal of prior period cash royalties provision. Frontera expects to sell six cargoes in the fourth quarter of 2021.
- The company saw positive momentum in production growth throughout and subsequent to the quarter as progress was made to address water-handling and community challenges. Frontera reaffirms its year end exit rate of over 40,000 boe/d. Production averaged 36,422 boe/d, up 2% compared to 35,682 boe/d in the prior quarter and 43,202 boe/d in the third quarter of 2020. Frontera’s daily production on 2 November 2021 was approximately 38,400 boe/d and the company’s year-to-date average to 2 November 2021 was approximately 37,600 boe/d. See the table below for product type and prior quarter production information.
|Q3 2021||Q2 2021||Q3 2020|
|Heavy crude oil production (bbl/d)||18,168||17,241||21,997|
|Light and medium crude oil production (bbl/d)||17,371||17,535||19,820|
|Conventional natural gas production (mcf/d)||5,033||5,164||7,895|
|Total production (boe/d)||36,422||35,682||43,202|
- At 30 September 2021, the company had a total inventory balance of 1,423,321 bbls compared to 969,028 bbls at 30 June 2021. The increase in inventory balance in the third quarter is a result of one less cargo sold during the third quarter compared to the previous quarter and no sales in Perú.
- The company reported a total cash position of $419.5mn at 30 September 2021 compared to $486.6mn at June 30, 2021. Cash utilization during the third quarter included $63.4mn for the pre-payment related to the prior quarter refinancing of the company’s $350mn 9.7% senior unsecured notes due 2023 with the lower cost $400mn 7.875% senior unsecured notes due 2028. The company’s restricted cash position was $100.7mn at 30 September 2021 compared to $128.3mn in the second quarter of 2021, a release of approximately $27.6mn. Year to date, the company has released approximately $68.3mn of restricted cash.
- Cash provided by operating activities was $79.1mn, compared with $87.4mn in the prior quarter and $35.9mn in the third quarter of 2020.
- Under the company’s current Normal Course Issuer Bid (NCIB) which commenced on 17 March 2021, the company repurchased for cancelation 1,078,600 common shares during the quarter at a cost of approximately $6.1mn. Year to date to 2 November 2021, the company repurchased approximately 3.12mn common shares for cancelation for approximately $17mn.
- Capital expenditures were $103.2mn in the third quarter of 2021, compared with $61.2mn in the prior quarter and $2.9mn in the third quarter of 2020. Year to date to 30 September 2021, the company executed $178.8mn in total capital spending. The increase in capital expenditures in the third quarter compared to the prior quarter was primarily due to increased operational activity as the company drilled 15 development wells and increased exploration activity in Guyana and Colombia.
- The company recorded net income of $38.5mn ($0.40/share) compared with a net loss of $25.6mn ($0.26/share) in the prior quarter and a net loss of $90.5mn ($0.93/share) in the third quarter of 2020. The net income in the current quarter was mainly due to $40mn of income from operations during the quarter.
- The company’s operating netback was $37.79/boe, up 15.2% compared with $32.80/boe in the prior quarter and $17.84/boe in the third quarter of 2020 due to higher net sales realized price and a reduction in production and transportation costs during the third quarter. The majority of the company’s hedge ceilings from the second quarter have now rolled off, providing upside exposure to Brent pricing.
- The company’s net sales realized price was $59.47/boe in the third quarter, up 7%, or $3.80/boe, compared to $55.67/boe in the prior quarter and $36.63/boe in the third quarter of 2020. The increase was primarily driven by the increase in the benchmark oil price and lower losses on risk management contracts, partially offset by higher royalties as a result of a reversal of a previously recorded provision during the second quarter of 2021 and wider differentials during the third quarter of 2021. Beginning in the second quarter of 2021, the company moved from using a third-party diluent service to buying its own diluent at the corresponding fields (mainly Quifa), using it for blending to meet pipeline specifications and other services, and then selling the blended oil at the sales point. The dollar difference between the cost of the purchases versus sales is approximately equivalent to how the company accounted for the diluent costs in the past, or lower, considering the company’s ability to secure better prices than a third-party diluent service. The decrease in diluent costs since the second quarter reflects decreased usage of the diluent service as the company adopts this more efficient approach.
- Production costs averaged $11.44/boe, down 2.4% compared with $11.72/boe in the prior quarter and $8.55/boe in the third quarter of 2020.
- Transportation costs averaged $10.24/boe, down 8.2% compared with $11.15/boe in the prior quarter and $10.24/boe in the third quarter of 2020.
- The company recorded a realized loss on risk management contracts of $6.6mn in the third quarter of 2021 compared to a realized loss of $24.8mn in the second quarter of 2021 and a loss of $6.2mn in the third quarter of 2020. The realized loss on risk management contracts was primarily due to cash settlement on 3-ways and Put Spreads contracts paid during the quarter at an average price of $62.85/bbl. The company’s fourth quarter hedges do not materially cap upside price potential. See the Hedging Update section below for more information.
- Frontera continues to advance its ESG Strategy and expects to achieve its 2021 ESG goals. The company has planted 110 hectares of biological corridors to preserve biodiversity and ecosystems, and has purchased carbon credits to offset 40% of the Company’s emissions. See below for more information.
Gabriel de Alba, Chairman of the Board of Directors, commented:
“Frontera continues to make significant progress on its key strategic priorities. The company is tightening and increasing its full year operating EBITDA range to $360-$380 million.
The company saw positive production growth momentum throughout and subsequent to the end of the quarter. Frontera also reaffirms its year end exit rate of over 40,000 boe/d.
Frontera and majority-owned subsidiary and co-venturer CGX, spud the Kawa-1 well in the Corentyne block, offshore Guyana. As of 1 November 2021, close to 78% of the planned footage has been drilled and the three main geological targets remain to be drilled. The Joint Venture continues to progress towards its total depth target in one of the most exciting exploration wells of 2021 and a potentially transformational catalyst for Frontera and CGX.
Subsequent to the quarter, the conciliation agreement between Frontera, CENIT and Bicentenario was approved, pending formalities, fully resolving all outstanding transportation disputes in Colombia and removing the Company’s largest contingent liability and opening the door for other strategic opportunities.”
Orlando Cabrales, Chief Executive Officer (CEO), Frontera, commented:
“The company delivered solid financial and operating results in the third quarter including delivering net income of $38.5 million. Compared to the second quarter, Frontera’s production increased 2%, operating netback increased 15.2% and net sales realized price increased 7%. The majority of the company’s hedge ceilings from the second quarter have now rolled off, providing upside exposure to Brent pricing. Transportation costs also decreased 8.2% and production costs decreased 2.4% quarter over quarter. Frontera also repurchased 1,078,600 common shares for cancelation at an approximate cost of $6.1 million.
The company drilled 15 wells and completed 27 workovers and well services during the third quarter. At Quifa, the company drilled a new injector well which increased water handling capacity and production. At CPE-6, we grew production to approximately 5,000 bbl/d. At the La Belleza discovery, the Joint Venture expects early gross production of approximately 2,400 boe/d to commence in November 2021. In Ecuador, environmental licensing is complete and road construction is underway in advance of spudding the Jandaya-1 exploration well in the Perico block in early December 2021.
Subsequent to the quarter, Frontera sold its interests in Maurel and Prom Colombia, reducing work commitments by $17.2 million, streamlining its portfolio and focusing on its core assets. “Frontera also acquired approximately 45 million CGX common shares in connection with their rights offering, increasing Frontera’s ownership in CGX to 76.98% on a non-diluted basis.”
Effective 1 October 2021, Victor Vega became Vice-President, Field Development, Reservoir Management, and Exploration, replacing Duncan Nightingale. Mr. Vega has more than 30-years industry experience with Amoco, BP, Talisman and Shell in various technical and managerial positions and will lead Frontera’s Exploration, Reserves and Technical Support, Reservoir Development functions.
On 22 August 2021, Frontera and majority-owned subsidiary and co-venturer CGX commenced drilling operations on the Kawa-1 exploration well and CGX exercised its option to drill a second well with Maersk Drilling Holdings Singapore Pte through the use of the Maersk Discoverer rig. Operations at Kawa-1 have proceeded on schedule and comprehensive planning by the Joint Venture has resulted in effective contingency planning and a final well plan and design that has allowed the well to progress without a major individual setback to date. Four of five planned casing strings have been landed and cemented in place with two contingency casing strings still available for use if required. As of 1 November 2021, close to 78% of the planned footage has been drilled and the three main prospective targets of the Kawa-1 well remain to be drilled, cased and evaluated with current expectations on reaching total depth consistent with the previous public disclosure of December 2021.
The Kawa-1 well will test the easternmost channel/lobe complex on the northern section of the Corentyne block. The primary target at Kawa is a Santonian age channel/fan, with secondary targets in the Campanian and deeper Santonian. The primary target has the best and brightest amplitudes in the Santonian, and most definitive trap definition.
Frontera and majority-owned subsidiary and co-venturer CGX hold over 1.4 million gross acres in the Guyana-Suriname basin. Additional drill-ready prospects have been identified in the North Corentyne area and several exploration leads are being matured. CGX continues to advance its development of its Berbice deep water harbor project to support the rapidly expanding local oil and gas industry including its own activities.
Production averaged 36,422 boe/d, up 2% compared to 35,682 boe/d in the prior quarter and 43,202 boe/d in the third quarter of 2020. Higher production quarter over quarter was a result of production growth in the CPE-6 and Quifa blocks resulting from water handling improvements during the third quarter.
Currently, the company has three drilling rigs and six workover rigs active at its Quifa, Coralillo and Abanico operations. In the third quarter of 2021, the company drilled 15 wells and completed 27 workovers and well services. Year to date, the company has drilled 28 wells and completed workovers/well services and other activities at 86 others.
At Quifa, current production is approximately 16,300 bbl/d (including both Quifa and Cajua). Frontera drilled one new injector well and converted one inactive well into an injector well, which the company expects will contribute to increased production volumes from the Block through year-end as water disposal volumes increase. Year to date, Frontera has drilled 13 development wells at Quifa and the company expects to drill an additional 10 development wells in the fourth quarter.
At CPE-6, current production is approximately 5,000 bbl/d due to continued drilling and construction of additional water-handling facilities.
At Guatiquia, the company successfully completed the Coralillo-4 and Coralillo-5 wells in the Coralillo field, which are producing over 720 bbl/d. A third well in Coralillo (Coralillo-9) is currently being completed.
On the VIM-1 Block (Frontera 50% W.I., Parex 50% W.I. and operator) the Planadas-1 exploration well has been drilled to a measured depth of ~13,700 feet in Cretaceous aged crystalline basement. The well was drilled 6.3 kilometers west of the La Belleza-1 discovery well targeting the limestones and sandstones of the CDO Formation as well as the fractured basement section. The well was positioned 1,425 feet (true vertical depth) down dip of the La Belleza-1 well and 1,140 feet above the regional structural closure in order to test the possibility of a continuous hydrocarbon column existing across the large Apure High on the VIM-1 block. Gas shows were encountered during drilling and a detailed logging program is now underway to identify zones for potential testing.
At the La Belleza discovery on VIM-1, the Joint Venture expects early gross production of ~2,400 boe/d (consisting of 1,400 bbls/d of light crude oil per day and 6 mmcf/d of conventional natural gas) to commence in November 2021.
In Ecuador, environmental licensing is complete and road construction is underway in advance of spudding the Jandaya-1 exploration well in the Perico block (Frontera 50% W.I. and operator, GeoPark 50% W.I.) in early December 2021. In the Espejo block (Frontera 50% W.I., GeoPark 50% W.I. and operator) 3D seismic acquisition of 60 sq km is expected to start in the fourth quarter.
Remediation work in Block 192 and the Z-1 block continues as the company pursues its exit from Peru. At the end of the third quarter, Frontera’s oil inventory in Peru was 480,200 bbls. The company expects to sell the remaining oil inventory in Peru in 2022.
Administrative Tribunal of Cundinamarca Approves Conciliation Agreement Between Frontera, CENIT and Bicentenario, Pending Formalities
On 1 November 2021, Frontera, announced that the official webpage of the Colombian judicial branch reported that the Administrative Tribunal of Cundinamarca had approved the conciliation agreement between Frontera, Cenit Transporte y Logística de Hidrocarburos S.A.S. and Oleoducto Bicentenario de Colombia S.A.S. Formalities are required in order for the mentioned decision to be in full force and effect. Consequently, the parties agreed to extend the deadline until 30 November 2021, to allow for the formalities to be completed.
The approval of the “Conciliation Agreement” by the Administrative Tribunal of Cundinamarca fully resolves all outstanding disputes between the parties related to the Bicentenario Pipeline and the Caño Limón – Coveñas Pipeline and terminates all pending arbitration proceedings related to such disputes.
Frontera and Etablissement Maurel & Prom S.A. Complete Share Transfer
On 22 October 2021, Frontera signed and closed a Sale and Settlement Agreement, transferring to Etablissement Maurel & Prom (EMP) 49.999% of all issued and outstanding shares of the Maurel & Prom Colombia B.V. (M&P), an entity that holds 100% interests in the COR-15 and Muisca exploration licenses. As a result, Frontera committed to fund $1.6mn in Muisca cash calls. In addition, Frontera will provide M&P up to $6mn to be disbursed in 2022 in relation to outstanding commitments at COR-15, subject to certain conditions. Following the transaction, EMP and Frontera settled all mutual obligations, removing an estimated $17.2mn in Frontera minimum work commitments subsequent to 30 September 2021, and providing certain indemnities to M&P. With the closing of this transaction, Frontera terminated a revolving loan agreement, which required the company to support 100% of any future development costs in the COR-15 license. Completion of this transaction supports Frontera’s ongoing efforts to streamline its portfolio, reduce exposure to liabilities and exploration commitments and focus on its core assets.
Update on Credit Lines
The Company has various uncommitted bilateral letters of credit lines. As of 30 September 2021, the company had increased its uncollateralized credit lines to $78.8MN. Subsequent to the quarter, the company increased its uncollateralized credit lines to $90.3mn.
Update on the Company’s Restricted Cash Position
As of 30 September 2021, Frontera’s restricted cash position was $100.7mn compared to $128.3mn in the second quarter of 2021. Year to date, the Company has released approximately $68.3mn of restricted cash. The decrease in restricted cash is primarily due to the release of $22.3mn abandonment funds that were replaced with letters of credit, $13.9mn of closed legal processes, and $31.6mn released due to the reduction in cash collateral requirements of exploration commitments and the new agreement with Citibank regarding cash collateral of letters of credit and foreign exchange fluctuations. The company anticipates releasing additional restricted cash in the fourth quarter of 2021 as the company continues to optimize its credit lines.
Update on the Normal Course Issuer Bid
During the third quarter of 2021, the company repurchased for cancelation, 1,078,600 common shares at an approximate cost of $6.1mn. Year to date to 2 November, the company has repurchased approximately 3.12 million common shares for cancelation for approximately $17mn with an additional 2,076,612 common shares available for repurchase under the NCIB. Under its NCIB, Frontera may purchase up to 5,197,612 common shares during the twelve-month period commencing 17 March 2021 and ending 16 March 2022, representing approximately 10% of the company’s “public float”, calculated in accordance with the rules of the Toronto Stock Exchange as of 11 March 2021.
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 using a combination of instruments, capped and non-capped, to protect the revenue generation and cash position of the company, while maximizing the upside. This diversification of instruments allows the company to take a more dynamic approach to the management of its hedging portfolio. In 2021, the company executed a risk management strategy using a variety of derivatives instruments, including 3 – ways, puts and put spreads primarily to protect against downward oil price movements. The following table summarizes Frontera’s hedging position for the fourth quarter of 2021 and first quarter of 2022.
Update on Frontera’s ESG Strategy
Frontera continues to advance its ESG Strategy and expects to achieve its 2021 ESG goals. In the environmental focus area, the company has planted 110 hectares of biological corridors to preserve biodiversity and ecosystems, and has purchased carbon credits to offset 40% of the company’s emissions. In the social focus area, the Company is strengthening its local suppliers program, developing a training program aimed at improving competitiveness and increasing local purchasing. In the governance focus area, the company is integrating ESG-related risks within its existing risk management framework to improve measuring, monitoring and reporting.