Strong Cash Position Supported by Lower Field Break-even Costs and Hedging Program
Reopening of Select Fields Stabilizing Production in Current Oil Price Environment
Acquisition of Infrastructure Assets Adds to Portfolio of Opportunities
TORONTO, Aug. 6, 2020 /CNW/ - Frontera Energy Corporation (TSX: FEC) ("Frontera" or the "Company") today 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."
Operational and Financial Summary:
Oil production - Colombia
Oil production - Peru
Natural gas production - Colombia
Operating Netback (1)
Net sales realized price
Net sales (1)
Net (loss) income (2)
Per share – basic
Per share – diluted
General and administrative
Operating EBITDA (1)
Cash provided by operating activities
Total cash, including restricted cash (3)
1. These metrics are Non-IFRS financial measures. Refer to the Advisories - "Non-IFRS Financial Measures" section below for further details.
2. Net (loss) income attributable to equity holders of the Company.
3. Includes $256 million of cash and cash equivalents, $66 million of short-term restricted cash and $73 million of long term restricted cash.
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.
The table below shows the Company's actual results for the six months ending June 30, 2020, against the revised full-year and second half of 2020 guidance metrics.
Jan 1, 2020 -
Jun 30, 2020
Jul 1, 2020 to
Jan 1, 2020 to
Average Daily Production (1)
40,000 - 43,000
46,000 - 48,000
Production Cost (2) (3)
$8.0 - $9.0
$9.5 - $10.5
Transportation Cost (2) (4) (5)
$13.5 - $14.5
$13.0 - $14.0
Capital Expenditures (2) (6)
$20 - $40
$100 - $120
1. Does not include production from Peru for July 1, 2020 through December 31, 2020
2. Does not include the consolidation impact from IVI.
3. Calculated using production before royalties in the denominator as this most accurately reflects per unit production cost and is consistent with our peers.
4. Calculated using production after royalties in the denominator as this most accurately reflects per unit transportation costs.
5. Includes non-cash charges that are under dispute related to unused ancillary facilities of approximately $2/boe
6. Includes Frontera's estimate of its share of costs of the 2020 Guyana exploration program, as joint venture partner, but does not include the consolidation impact of CGX Energy Inc.'s share of those exploration costs.
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.
The following is the current hedging portfolio as of the date of this release:
Type of Instrument
Notional Amount /
Total Average 2021
Second Quarter 2020 Conference Call Details
The Company will host a conference call for investors and analysts to discuss its results on Friday, August 7, 2020 at 8:00 a.m. (MST) and 10:00 a.m. (EST/GMT-5). Participants should use the following dial-in numbers:
Participant Number (Toll Free North America):
Participant Number (Toll Free Colombia):
Participant Number (International):
A replay of the conference call will be available until 11:59 p.m. (EST/GMT-5) Friday, August 14, 2020.
Encore Toll free Dial-in Number:
International Dial-in Number:
Frontera Energy Corporation is a Canadian public company and a leading explorer and producer of crude oil and natural gas, with operations focused in South America. The Company has a diversified portfolio of assets with interests in more than 40 exploration and production blocks in Colombia, Peru, Ecuador and Guyana. The Company's strategy is focused on sustainable growth in production and reserves. Frontera is committed to conducting business safely, ethically in a socially and environmentally responsible manner. Frontera's common shares trade on the Toronto Stock Exchange under the ticker symbol "FEC".
If you would like to receive News Releases via e-mail as soon as they are published, please subscribe here: http://fronteraenergy.mediaroom.com/subscribe.
Cautionary Note Concerning Forward-Looking Statements
This news release contains forward-looking statements. All statements, other than statements of historical fact, that address activities, events or developments that the Company believes, expects or anticipates will or may occur in the future (including, without limitation, statements regarding the impact of the reduce price of oil and natural gas, the impact of the COVID-19 pandemic on the Company's operations, the effectiveness or adequacy of the Company's program to manage the COVID-19 pandemic and current oil price environment, estimates and/or assumptions in respect of the Company's capital expenditure program (including Company's guidance), production, costs, future income generation capacity, cash levels, the Company's exploration and development plans and objectives, including its drilling plans and the timing thereof, regulatory approvals, the impact of shut-ins and other work in the field on future field performance, ability to reduce production, transportation and G&A costs and defer certain payments and the impact thereof, and the Company's hedging program and its ability to mitigate the impact of lower oil prices) are forward-looking statements. These forward-looking statements reflect the current expectations or beliefs of the Company based on information currently available to the Company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the Company to differ materially from those discussed in the forward-looking statements, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on, the Company. Factors that could cause actual results or events to differ materially from current expectations include, among other things: volatility in market prices for oil and natural gas (including as a result of demand and supply shifts caused by the COVID-19 pandemic and the actions of OPEC and non-OPEC countries and the procedures imposed by governments in response thereto; the duration and spread of the COVID-19 pandemic and its severity, the success of the Company's program to manage COVID-19; uncertainties associated with estimating and establishing oil and natural gas reserves; liabilities inherent with the exploration, development, exploitation and reclamation of oil and natural gas; uncertainty of estimates of capital and operating costs, production estimates and estimated economic return; increases or changes to transportation costs; expectations regarding the Company's ability to raise capital and to continually add reserves through acquisition and development; the Company's ability to access additional financing; the ability of the Company to maintain its credit ratings; the ability of the Company to: meet its financial obligations and minimum commitments, fund capital expenditures and comply with covenants contained in the agreements that govern indebtedness; political developments in the countries where the Company operates; the uncertainties involved in interpreting drilling results and other geological data; geological, technical, drilling and processing problems; timing on receipt of government approvals; fluctuations in foreign exchange or interest rates and stock market volatility and the other risks disclosed under the heading "Risks and Uncertainties" in the Company's MD&A dated August 5, 2020 and under the heading "Risk Factors" and elsewhere in the Company's annual information form dated March 5, 2020 filed on SEDAR at www.sedar.com. Any forward-looking statement speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Company disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or results or otherwise. Although the Company believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and accordingly undue reliance should not be put on such statements due to the inherent uncertainty therein.
This news release contains future oriented financial information and financial outlook information (collectively, "FOFI") (including, without limitation, statements regarding expected average production, production costs, transportation costs, capital expenditures, total cash and cash and cash equivalents), and are subject to the same assumptions, risk factors, limitations and qualifications as set forth in the above paragraph. The FOFI has been prepared by management to provide an outlook of the Company's activities and results, and such information may not be appropriate for other purposes. The Company and management believe that the FOFI has been prepared on a reasonable basis, reflecting management's reasonable estimates and judgments, however, actual results of operations of the Company and the resulting financial results may vary from the amounts set forth herein. Any FOFI speaks only as of the date on which it is made and the Company disclaims any intent or obligation to update any FOFI, whether as a result of new information, future events or results or otherwise, unless required by applicable laws.
Non-IFRS Financial Measures
This news release contains financial terms that are not considered in the International Financial Reporting Standards ("IFRS"): Operating EBITDA, Operating Netback, and Net Sales. These financial measures, together with measures prepared in accordance with IFRS, provide useful information to investors and shareholders, as management uses them to evaluate the operating performance of the Company. The Company's determination of these non-IFRS measures may differ from other reporting issuers, and therefore are unlikely to be comparable to similar measures presented by other companies. Further, these non-IFRS measures should not be considered in isolation or as a substitute for measures of performance or cash flows prepared in accordance with IFRS. These financial measures are included because management uses this information to analyze operating performance and liquidity.
Management believes that EBITDA is a common measure used to assess profitability before the impact of different financing methods, income taxes, depreciation and impairment of capital assets and amortization of intangible assets.
EBITDA is a commonly used measure that adjusts net income (loss) as reported under IFRS to exclude the effects of income taxes, finance income and depletion, depreciation and amortization expense.
Operating EBITDA represents the operating results of the Company's primary business, excluding the items noted above, restructuring, severance and other costs, certain non-cash items (such as impairments, foreign exchange, unrealized risk management contracts, and share-based compensation) and gains or losses arising from the disposal of capital assets. In addition, other unusual or non-recurring items are excluded from operating EBITDA, as they are not indicative of the underlying core operating performance of the Company.
A reconciliation of Operating EBITDA to net income (loss) is as follows:
Three Months Ended
Net (loss) income
Income tax expense
Depletion, depreciation and amortization
Restructuring, severance and other costs
Share of income from associates
Foreign exchange loss (gain)
Unrealized loss (gain) on risk management contracts
Other loss (income), net
(in thousands of US$)
Financial and Operational results:
Management believes that Netback is a useful measure to assess the net profit after all the costs associated with bringing one barrel of oil to the market. It is also commonly used by the oil and gas industry to analyze financial and operating performance expressed as profit per barrel. Operating Netback represents realized price per barrel plus realized gain or loss on financial derivatives, less production costs, transportation costs, royalties, and diluent costs, and shows how efficient the Company is at extracting and selling its product. Refer to the "Operating Netback" section on page 6 of the MD&A.
Net sales is a non-IFRS subtotal that adjusts revenue to include realized gains and losses from risk management contracts while removing the cost of dilution activities. This is a useful indicator for management as the Company hedges a portion of its oil production using derivative instruments to manage exposure to oil price volatility. This metric allows the Company to report its realized net sales after factoring in these risk management activities. The deduction of diluent cost is helpful to understand the Company's sales performance based on the net realized proceeds from production net of dilution, the cost of which is partially recovered when the blended product is sold. Net sales do not include the sales and purchases of oil and gas for trading as the gross margins from these activities are not considered significant or material to the Company's operations. Refer to the reconciliation in the "Sales" section on page 7 of the MD&A.
Please see the MD&A for additional information about these financial measures.
Oil and Gas Information Advisories
Reported production levels may not be reflective of sustainable production rates and future production rates may differ materially from the production rates reflected in this news release due to, among other factors, difficulties or interruptions encountered during the production of hydrocarbons.
Field break-even reflects the estimated Brent oil price per barrel required to generate an asset level Operating Netback of US$0 per barrel of oil equivalent, excluding gains or losses on risk management and excluding non-cash ancillary transportation costs related to ongoing arbitration. Alternatively, it is calculated with the pricing differential, cash royalties, production costs, transportation costs and blending costs, excluding non-cash ancillary transportation costs related to ongoing arbitration. Break-even is used to assist the impact of changes in Brent oil prices on the Operating Netback of an asset and could impact future investment decisions. Field break-even is calculated on an average basis weighted according to production and is therefore impacted by changes in well and field production volumes. Break-even does not have any standardized meaning and therefore should not be used to make comparisons to similar measures presented by other issuers.
The term "boe" is used in this news release. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of cubic feet to barrels is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In this MD&A, boe has been expressed using the Colombian conversion standard of 5.7 Mcf: 1 bbl required by the Colombian Ministry of Mines and Energy.
Barrel(s) of oil
Barrel of oil per day
Refer to "Boe Conversion" disclosure above
Barrel of oil equivalent per day
Thousand cubic feet
Net production represents the Company's working interest volumes, net of royalties and internal consumption
SOURCE Frontera Energy Corporation