Frontera Energy Corporation reported financial and operational results for the second quarter ended June 30, 2020. All financial amounts in this news release are in United States dollars, unless otherwise stated.
Second Quarter Operational and Financial Results:
- Second quarter production averaged 42,597 boe/d, all from Colombia, compared to first quarter 2020 production of 58,187 boe/d in Colombia and 63,572 boe/d company wide. Production was lower in the second quarter due to the response to the COVID-19 crisis including voluntary shut-ins of higher cost production and the impact of declines from the curtailed capital program. In addition, in Peru Block 192, production remained offline through the second quarter, compared to Peru volumes of 5,385 boe/d in the first quarter of 2020.
- Production costs in the second quarter averaged $9.03/boe, compared to $12.48/boe in the first quarter of 2020, mainly due to lower production as a result of the voluntary shut-in of higher cost wells in Colombia including the highest water cut wells in Quifa, and the closure of Block 192 in Peru.
- Transportation costs averaged $13.61/boe, which includes $2.3/boe in non-cash charges that are under dispute related to unused ancillary facilities, compared to $12.98/boe in the first quarter of 2020.
- General & Administrative Expenses fell to $10 million in the second quarter, as compared to $15 million in the previous quarter. Year-to-date the Company has reduced office headcount by over one-quarter, reduced salaries and cash compensation for management and board members, and reduced hours for non-managerial office staff and field personnel. The Company also renegotiated the long-term contract on its Bogota office to reduce space by over 50%.
- The Company reported a net loss of $68 million ($0.70/share), compared to a net loss of $388 million ($4.04/share), in the first quarter of 2020.
- Operating EBITDA was $29 million compared to $44 million in the first quarter of 2020. Revenue was impacted by lower sales volumes, including the decision to build inventories for future sale in the third-quarter, and lower realized Brent oil prices. Offsetting the lower revenue, the Company's realized gains on risk management for the quarter were $40 million, including monetizing hedges that were fully in the money for the second half of the year for cash gains of $27 million.
- Capital expenditures in the second quarter were $16 million, versus $65 million in the first quarter of 2020 as the Company stopped development activity early in the quarter.
- The Company ended the second quarter of 2020 with total cash of $395 million, as compared to $361 million in the previous quarter. Of total cash, at the end of the second quarter, restricted cash totaled $139 million as compared to $96 million at the end of the first quarter of 2020.
Gabriel de Alba, Chairman of the Board of Directors, commented:
"Frontera has continued to demonstrate a disciplined approach to help weather the current oil price environment. We have implemented a decisive and proactive strategy, which has helped us preserve our strong financial position in the second quarter in light of continuing uncertainty and price volatility. This disciplined approach resulted in finishing the quarter with a stable cash position, and robust hedges for the next 12 months. In addition, we increased our ownership and rights in Puerto Bahia, the newest and most automated multi-purpose port in the Bay of Cartagena, improving access to crude oil storage, marketing alternatives, and eliminated the previous International Finance Corporation put agreements. Our focus now is to restart economic production from shut-in fields and maintain production through to year-end."
Richard Herbert, Chief Executive Officer of Frontera, commented:
"In the second quarter, we shut-in uneconomic production, halted capital spending, and accelerated cost rationalization initiatives, while ensuring that the health and well-being of our field and office staff and people in local communities remained a top priority. We implemented several savings initiatives in the second quarter, including working with our key suppliers to extend payables and lower costs, and utilized Colombian government programs that accelerated tax refunds.
In April, we voluntarily shut-in 14,000 - 15,000 boe/d of higher cost Colombian production in certain heavy and light/medium oil fields. In July and August, with stronger oil prices, we brought back online about 60% of the original shut-in volumes. Further shut-in volumes will be brought back into production as conditions permit.
We took advantage of our shut-in production to significantly reduce the cost structure both in the field and in the corporate overhead. Quarter over quarter, we lowered production costs per unit by 28% and total general & administrative costs by 35%. Importantly we expect these cost efficiencies achieved this year to be permanent, improving our cost structure and competitiveness going forward.
The significant reduction in capital spending this year along with the remaining shut-in production has reduced our current production level to around 43,000 boe/d. Despite limited planned capital investment, we intend to sustain production in Colombia in a range of 40,000 - 43,000 boe/d for the rest of the year, and continue to advance plans for our exciting exploration portfolio including in the Lower Magdalena Valley of Colombia, Ecuador, and offshore Guyana. This strategy is designed to give us greater flexibility to grow in the future, depending on oil prices, while maintaining the highest capital discipline."
In July, with Brent prices improving and stabilizing at $40 - $45/bbl, the Company made the decision to bring back online approximately 60% of the 14,000 - 15,000 boe/d of production that was previously shut-in for economic reasons. Frontera has now reactivated the CPE-6 and Sabanero blocks and Quifa satellite Cajua field in the heavy oil district. In the light and medium district, most shut-in production has been reactivated in the Cubiro, Casimena, and Canaguaro blocks. Certain shut-in wells, including the highest water cut wells in Quifa, are expected to stay offline for the time being to maintain reduced energy consumption and costs. As of July 31, 2020, corporate production was 43,000 boe/d. Following work done to drive down costs and shut-in higher cost wells, the Company has reduced average field break-evens from $33/bbl in 2019 to an estimated $27-$28(1)/bbl in the second half of the year.
In the second half of the year, the Company expects to maintain a disciplined approach to capital spending, with $20 - $40 million budgeted on activities that are expected to generate shorter-term economic returns and to advance certain exploration projects.
In the VIM-1 Block, Frontera (50% W.I.) with Parex (Operator, 50% W.I.) continue the permitting and approval process required for the development of the La Belleza-1 discovery, and work has also commenced on the development plan concept. Planning is underway for the scouting and permitting in preparation for drilling two exploration commitment wells in VIM-1 as early as 2021.
In Ecuador, Frontera continues working to obtain environmental permits to start exploration activities in the Perico block. The permit is expected to be received in late 2020 and the first well is expected to be drilled in late 2021.
Production in Block 192 in Peru remains offline due to Force Majeure. Once Force Majeure is lifted, Frontera has a six-month extension remaining on its service contract in the block.
In offshore Guyana, the processing of the new 3D seismic data over the northern portion of the Corentyne block is completed and Frontera is in receipt of the pre-stack depth migrated data set. Initial interpretation has identified two large potential channel complexes interpreted to contain numerous highly prospective leads. The Northern Corentyne block is located adjacent to nearby competitor discoveries, including the prolific Stabroek Block offshore Guyana and Block 58 offshore Suriname. The mapped leads are currently undergoing further analysis in order to prioritize and rank the best prospect to be drilled first. On the Demerara block, re-processing of the existing seismic data set will begin this fall in order to mature leads and prospects for drilling. Operational activities in Guyana are still affected due to restrictions on travel for key personnel related to operational planning, especially into and out of Guyana. Constructive collaborative discussions with the regulatory authorities in Guyana regarding work commitments in that country, in light of these restrictions, have been ongoing. The Company looks forward to continuing this discussion with the Government of Guyana.
(1) Field break-even estimated with assumed pricing differential of $4/boe, cash royalties of $1/boe, production costs of $8.5/boe, transportation costs of $14/boe less non-cash ancillary charges of ($2)/boe, and blending costs of $2/boe
In the second quarter, the Company worked closely with its major suppliers to extend certain payables into the second half of the year. In May, the Company made the decision to monetize second-half 2020 crude oil hedges (that were fully in the money) for a cash gain of $27 million and applied for and received accelerated second half 2020 tax refunds. Adversely affecting the liquidity position, the second quarter included a reclassification of $34 million of cash & cash equivalents into restricted cash due to additional cash collateral and guarantees required for exploration commitments. In addition, the second quarter included outflows for year-end 2019 dividends of $11 million and interest payments of $18 million. The Company ended the second quarter of 2020 with total cash of $395 million, as compared to $361 million in the previous quarter. Of total cash, at the end of the second quarter restricted cash totaled $139 million as compared to $96 million at the end of the first quarter of 2020.
On August 6, 2020, Frontera closed an agreement with the International Finance Corporation and related funds (the "IFC") to purchase all of IFC's equity interest in Infrastructures Ventures Inc. ("IVI") and all of their credit rights in IVI. IVI is the parent company of Sociedad Portuaria Puerto Bahia ("Puerto Bahia"), which owns and operates a multipurpose port facility in the Bay of Cartagena. Total cash consideration to be paid by Frontera is $7 million, of which $3 million was paid at closing and the remaining $4 million is payable on or before August 6, 2022. Upon closing, the existing put agreements with IFC expired. Frontera, through its wholly owned subsidiaries, now owns approximately 71.57% of the issued and outstanding shares of IVI.
On May 5, 2020, the Company withdrew its previously announced full-year 2020 guidance given the high uncertainty surrounding the duration and magnitude of COVID-19 and its related impact on oil and gas prices. Although uncertainty remains as to the risks arising from COVID-19, as well as the global economic consequences of the pandemic, the Company is releasing revised guidance for 2020, reflecting the measures taken to reduce its capital program and cost structure, a refreshed risk management portfolio providing greater stability for operational cash flows and current assumptions on the impact of COVID-19 and its related impact on oil and gas prices and the Company's operations. Our internal planning cycle for the second half of 2020, assumes oil prices remain relatively stable near Brent $45/bbl.
Frontera expects second half 2020 capital expenditures between $20 and $40 million, for total 2020 capital expenditures between $100 and $120 million. The additional capital will be invested in workovers, well services, and development activity to increase production for year-end 2020 and into 2021.
In the second half of 2020, the Company expects the working capital cycle to normalize, with some additional payments to catch up on deferred payables. For year-end 2020, the Company is targeting to have minimum total cash of $360 million, and minimum cash and cash equivalents of $225 million. These cash targets do not include proceeds from any external financing or acquisition & divestment initiatives.
New Executive Promotions:
The Company announces the promotion of Mr. Ivan Arevalo to Corporate Vice President, Operations effective July 1, 2020. Mr. Arevalo has more than 27 years of experience in the oil and gas industry and has been with the company for more than 14 years. Prior to his current role, he has held a number of positions with the Company, in Colombia managing heavy oil assets and leading the operation of Frontera in Peru and Ecuador during the last 4 years. Mr. Arevalo continues as the head of Frontera Energy in Peru and Ecuador.
Mr. Duncan Nightingale, Corporate Vice President, Field Development, Reservoir Management, Exploration and Business Development previously in charge of operations, has been assigned additional responsibilities for exploration and business development and continues to be responsible for field development and reservoir management. Mr. Nightingale has over 30 years of experience leading multi-disciplinary teams and has been with the Company since 2017.
Frontera benefited in the second quarter from hedges on approximately 85% of production volumes. In the quarter, the Company re-balanced the risk management position for the remainder of the year by unwinding the 2020 position completely, replacing it with new instruments to provide additional protection near current oil price levels.
The goal of the hedging program is to protect the revenue generation and cash position of the Company. The forward hedging position was also increased in part to support restarting production and protect the break-evens of the previously shut-in fields. The Company has now hedged approximately 7.5 million bbls at Brent $35/bbl for the second half of 2020 and 3.4 million bbls at Brent $35 - $37/bbl for the first half of 2021.