Frontera Energy Corporation (FEC) ("Frontera") reported financial and operational results for the third quarter ended September 30, 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-$380 million, compared to its prior $325-$375 million guidance range. Operating EBITDA was $72.6 million in the third quarter compared with $84.8 million in the prior quarter and $52.1 million 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 $7.2 million 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 November 2, 2021 was approximately 38,400 boe/d and the Company's year-to-date average to November 2, 2021 was approximately 37,600 boe/d. See the table below for product type and prior quarter production information.
- At September 30, 2021, the Company had a total inventory balance of 1,423,321 bbls compared to 969,028 bbls at June 30, 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 $419.5 million at September 30, 2021 compared to $486.6 million at June 30, 2021. Cash utilization during the third quarter included $63.4 million for the pre-payment related to the prior quarter refinancing of the Company's U.S.$350 million 9.7% senior unsecured notes due 2023 with the lower cost U.S.$400 million 7.875% senior unsecured notes due 2028. The Company's restricted cash position was $100.7 million at September 30, 2021 compared to $128.3 million in the second quarter of 2021, a release of approximately $27.6 million. Year to date, the Company has released approximately $68.3 million of restricted cash
- Cash provided by operating activities was $79.1 million, compared with $87.4 million in the prior quarter and $35.9 million in the third quarter of 2020.
- Under the Company's current Normal Course Issuer Bid ("NCIB") which commenced on March 17, 2021, the Company repurchased for cancelation 1,078,600 common shares during the quarter at a cost of approximately $6.1 million. Year to date to November 2, the Company repurchased approximately 3.12 million common shares for cancelation for approximately $17 million.
- Capital expenditures were $103.2 million in the third quarter of 2021, compared with $61.2 million in the prior quarter and $2.9 million in the third quarter of 2020. Year to date to September 30, 2021, the Company executed $178.8 million 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 $38.5 million ($0.40/share) compared with a net loss of $25.6 million ($0.26/share) in the prior quarter and a net loss of $90.5 million ($0.93/share) in the third quarter of 2020. The net income in the current quarter was mainly due to $40 million 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 $6.6 million in the third quarter of 2021 compared to a realized loss of $24.8 million in the second quarter of 2021 and a loss of $6.2 million 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 November 1, 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."