Frontera Energy Corporation reported financial and operational results for the first quarter ended March 31, 2021. All financial amounts in this news release are in United States dollars, unless otherwise stated.
First Quarter Operational and Financial Results:
• Production averaged 40,599 boe/d, in line with production guidance, compared to 41,945 boe/d in the prior quarter and 63,572 boe/d in the first quarter of 2020. See the table below for product type and prior quarter and year over year production information.
• The Company recorded a net loss of $14.1 million ($0.14/share), compared with net income of $48.6 million ($0.50/share) in the prior quarter and a net loss of $387.8 million ($4.04/share) in the first quarter of 2020. The net loss in the current quarter was primarily driven by a loss of $19.8 million on risk management contracts, foreign exchange loss of $18.5 million and a non-cash charge of $9.3 million from legal contingencies offset by operating income of $51.5 million due to the improvement in oil prices and higher margins earned on oil and gas sales volumes.
• Cash provided by operating activities was $47.4 million, compared with $42.1 million in the prior quarter and $46.5 million in the first quarter of 2020.
• Capital expenditures were $14.4 million, compared with $24.9 million in the prior quarter and $64.7 million in the first quarter of 2020. The decrease in capital expenditures in the first quarter compared to the prior quarter was primarily due to delays in ramping up development activities early in the quarter to protect the Company's cash position until clarity on improving oil prices emerged. As of May 4, 2021, operational activity was back to normal levels with five rigs running across Frontera's operations. The company expects this current level of activity and increased capital spending in line with guidance ranges for 2021 to continue through to the end of 2021.
• Operating EBITDA was $69.2 million, up 94% compared with $35.6 million in the prior quarter and $47.0 million in the first quarter of 2020.
• Production costs averaged $10.54/boe, down 22% compared with $13.46/boe in the prior quarter and $12.48/boe in the first quarter of 2020.
• Transportation costs averaged $10.89/boe, essentially flat compared with $10.93/boe in the prior quarter and down from $12.44/boe in the first quarter of 2020.
• Operating netback was $29.13/boe, up 114% compared with $13.59/boe in the prior quarter and $16.84/boe in the first quarter of 2020.
• Under the Company's current Normal Course Issuer Bid ("NCIB") program, 262,000 Common Shares were purchased for $1.3 million for cancellation during the quarter.
• The Company's total cash position at March 31, 2021 was $409.5 million of which $161.2 million is restricted cash, compared to $401.2 million total cash and $168.9 million restricted cash as at December 31, 2020. Frontera's restricted cash position decreased by $7.7 million from December 31, 2020, primarily due to impacts of foreign exchange.
• At March 31, 2021, the Company had a total inventory balance of 1,183,035 bbls compared to 1,115,377 bbls at Dec 31, 2020. Frontera's oil inventory in Peru was 580,499 bbls at the end of Q1 2021 compared to 995,585 bbls at the end of Q4 2020.
Gabriel de Alba, Chairman of the Board of Directors, commented:
"Frontera continues to make significant progress in delivering value-focused production and cash flow from the Company's Colombian operations, achieving continuous operational improvements and greater cost efficiencies across the business and advancing the Company's exciting exploration portfolio in Colombia, Ecuador and Guyana. Frontera's solid first quarter operating and financial results demonstrate these efforts are achieving excellent results. We delivered production within our guidance range, generated strong operating EBITDA and free cash flow, and ended the quarter with a strong cash position of $409 million including restricted cash."
Orlando Cabrales, Chief Executive Officer (CEO), Frontera, commented:
"Since joining the Frontera Board in November 2018 and becoming CEO in mid-March of this year, I have been proud to play a part in the Company's evolution into a stronger, more competitive, returns-focused business. Over the past eight weeks, I have had the privilege of working side-by-side with Frontera's leadership, operational and administrative teams, whose professionalism, and business and operational acumen are truly impressive. Our first quarter results, including increasing our operating EBITDA by 94% to $69.2 million compared to Q4 2020, decreasing production costs by 22% per barrel compared to Q4 2020 and increasing our operating netback by 114% compared to Q4 2020 demonstrate our team's continued progress in delivering value-focused production and operational efficiency. I'm also pleased with the progress we've made to strengthen relationships with the banking community, which supports our efforts to optimize our balance sheet and efficiently manage cash levels.
Looking ahead, we are excited about the advances we're making to realize our substantial exploration opportunities. Through our majority-owned subsidiary and joint venture with CGX Energy, we are preparing to drill the Kawa-1 well offshore Guyana early in the third quarter of this year. Through our joint venture partnership with Parex Resources in Colombia, we will execute a two-well program at VIM-1 to develop this exciting greenfield opportunity. We continue to grow production in the CPE-6 block and progress our exploration program in the Espejo and Perico blocks in Ecuador with our joint venture partner GeoPark."
As previously announced, during the first quarter of 2021, Frontera continued to evolve its leadership structure to ensure it has the best combination of skills and experience among its senior leadership team. Effective March 15, 2021, Board Member Orlando Cabrales Segovia was appointed as CEO, replacing Richard Herbert who had served as CEO for the last three years.
Effective March 29, 2021, Alejandra Bonilla became Corporate Vice-President, Legal & Secretary. Ms. Bonilla has extensive industry experience in addition to previously serving over nine years in the Company's legal department, and will lead Frontera's legal, compliance and internal audit functions.
Update on Credit Lines
During the first quarter of 2021, the Company increased credit lines with Bancolombia and Banco BTG Pactual S.A. to $39.0 million. These new uncommitted credit lines do not require cash collateral and Frontera expects that these increased limits will enable the Company to release additional restricted cash amounts in the second quarter of 2021.
Favorable Opinion on Conciliation Agreement from Procuraduría General de la Nación
On March 24, 2021, the Procuraduría General de la Nación recommended that the previously announced conciliation agreement (the "Conciliation Agreement") between Frontera, Cenit Transporte y Logística de Hidrocarburos S.A.S. ("CENIT") and Oleoducto Bicentenario de Colombia S.A.S. ("Bicentenario") be approved. The favorable opinion represents the first of two stages of review of the Conciliation Agreement. If approved by the Administrative Tribunal of Cundinamarca, the second stage of the process will be completed, and the parties will be able to complete the settlement arrangement, resolving all the disputes between the parties related to the Bicentenario Pipeline and the Caño Limón – Coveñas Pipeline. There can be no assurance that the required approval will be received on a timely basis or at all.
Production in the first quarter averaged 40,599 boe/d, down 3% compared with 41,945 boe/d in the prior quarter due to natural declines in some of the Company's mature fields and reductions of water disposal volumes at Quifa, partially offset by an increase in production at CPE-6 from a new well drilled on the block.
At the end of the first quarter, the Company voluntarily and temporarily reduced production at Quifa as it seeks to identify additional water disposal options in the block. The Company anticipates lower production in the second quarter of 2021 but returning to prior planned levels in the third quarter of 2021. Frontera expects to meet its full year guidance forecast of 40,500-42,500 boe/d.
On the VIM-1 Block, the joint venture (Frontera 50% W.I., Parex 50% W.I. and operator) anticipates starting a two well exploration drilling program to further assess the block. The wells, Basilea and Planadas are located 2.6 and 6.3 kilometers respectively from the La Belleza-1 discovery. The joint venture is currently evaluating development plans for the La Belleza discovery that include the possible reinjection of gas to increase liquids recovery and maximize project value.
On April 16, 2021, Frontera and majority-owned subsidiary and joint venture partner CGX Energy Inc. ("CGX"), joint venture partners in Petroleum Prospecting Licenses for the Corentyne and Demerara blocks offshore Guyana, announced that they had entered into a term sheet for a $19 million loan that will enable CGX to continue to finance its share of costs related to the Corentyne, Demerara and Berbice blocks, the Berbice Deepwater Port, and other budgeted costs as agreed to by Frontera.
On April 21, 2021, Frontera and CGX also announced that CGX Resources Inc., operator of the Corentyne Block, entered into an agreement with Maersk Drilling Holdings Singapore Pte. Ltd., a subsidiary of The Drilling Company of 1972 A/S, for the provision of a semi-submersible drilling unit, the Maersk Discoverer, and associated services to drill the Kawa-1 well (the "Drilling Contract"). The joint venture is targeting an early third quarter spud for the Kawa-1 well.
In conjunction with the Drilling Contract between CGX Resources and Maersk, Frontera has entered into a separate Deed of Guarantee (the "Deed") with Maersk for certain obligations in connection with the day rates under the Drilling Contract on behalf of CGX Resources, up to a maximum of $25 million subject to a sliding scale mechanism in connection with payments made under the Drilling Contract. Frontera and CGX anticipate entering into an agreement pursuant to which all amounts drawn under the Deed that are attributed to CGX Resources' share of the joint venture costs, shall be guaranteed by CGX.
The primary target for the Kawa -1 well is a Santonian age, stratigraphic trap, interpreted to be analogous to the discoveries immediately to the east on Block 58 in Suriname. The Kawa-1 well is anticipated to be drilled to a total depth of approximately 6,500 meters in a water depth of approximately 370 meters.
In Ecuador, seismic acquisition planning and other preliminary activities are underway in advance of drilling in the Espejo block (Frontera 50% W.I., GeoPark 50% W.I. and operator) and the Perico block (Frontera 50% W.I. and operator, GeoPark 50% W.I.) in the second half of 2021 or early 2022.
On February 5, 2021, Frontera's service contract for Block 192 expired as per its terms and the Company is no longer operating on the block. During the quarter, the Company began remediation work in Block 192 and the Z-1 block as it pursues its exit from Peru. Frontera's oil inventory in Peru was 580,499 bbls at the end of Q1 2021 compared to 995,585 bbls at the end of Q4 2020.
On March 17, 2021, Frontera commenced an NCIB for its common shares (the "Common Shares"). Pursuant to the NCIB, Frontera may purchase up to 5,197,612 Common Shares during the twelve-month period commencing March 17, 2021 and ending March 16, 2022, representing approximately 10% of the Company's "public float" as of March 11, 2021. On this date, there were 97,466,224 Common Shares issued and outstanding of which 51,976,116 constituted the "public float", calculated in accordance with the rules of the TSX. Under the Company's NCIB program, as of March 31, 2021, 262,000 Common Shares had been purchased for cancellation for $1.3 million. As of May 3, 2021, the Company had repurchased for cancellation a total of 768,800 Common Shares for $4.0 million with an additional 4,428,812 Common Shares available for repurchase under the NCIB.
Frontera uses a combination of Brent oil price linked purchased put options, zero cost collars, put spreads and three-way collars to protect the Company's balance sheet and capital program within hedging limits set by the Board of Directors. The following table summarizes Frontera's hedging position as of May 5, 2021.