Fitch Ratings has affirmed its key ratings for Frontera Energy Corporation (TSX: FEC) at B and set its rating outlook for the Canadian oil and gas company as “stable.”
Specifically, the big three ratings agency is holding steady both the Calgary-based firm’s Long-Term Foreign Issuer Default Rating and Local Currency Issuer Default Rating, as well as affirming Frontera’s senior unsecured notes at B/RR4.
“Frontera’s ratings and outlook reflect its small and concentrated production profile and weak proved developed producing (PDP) reserve life of 2.6 years as of year-end 2022, below the peer average of 3.8 years,” stated Fitch Ratings. “Fitch forecasts gross leverage, defined as total debt to EBITDA, will be close to 1.0x by year-end 2023.”
In addition to this comment, Fitch included the following details in full in its ratings affirmation announcement:
Small Production Profile and Reserve Life
Frontera’s ratings are constrained by its production size. Fitch’s base case assumes Frontera’s production to be close to 42,000 boed in 2023, and remain at that level between 2024-2026. The ratings incorporate Frontera’s low PDP reserve life of 2.6 years as of YE 2022, although improved from 1.6 years in 2020 is still the lowest among peers. Production is concentrated in Quifa and represents nearly 43% of daily production, followed by Guatiquia at almost 17% and CPE-6 13%.
Fixed Cost Production Profile
The company has a fixed production profile that limits its financial flexibility. The company’s half-cycle cost, as calculated by Fitch, was $29 USD per boe in 2022, flat compared to 2021. The high production cost is mostly due to its transportation cost, that reflects the fact that Frontera delivers its production at the Colombian coast instead of delivering at wellhead as other peers do. Fitch expects the company to hedge a minimum 40% and peso-denominated costs to protect it from price volatility and offset the higher costs, respectively.
CFO Supports Capex
Frontera is expected to be FCF negative in 2023 as the company deploys its ambitious capex program, estimated at $32 per boe, of which $24 USD per boe correspond to capex at Wei-1 in Guyana. Going forward, Fitch assumes Frontera will finance its capex with internally generated cash flows, averaging $15 USD per boe and FCF will be mostly neutral, absent of dividends distributions, were CFO is forecasted to average $255 million USD per year between 2024-2026. Regarding Guyana discovery, Frontera is evaluating strategic options with an investment bank, including a potential farm-down.
Fitch estimates gross leverage will be 1.1x by YE 2023, strong for its rating category, assuming an EBITDA, including dividends from affiliates, of $481 million USD and total debt of $508 million USD. Fitch expects total debt to PDP to be $13.0 USD per boe by YE 2023, which is high for its rating category, and total debt/1P to be $4.6 USD in 2022. Fitch estimates EBITDA to interest paid to be above 5.0x over the rated horizon.
(Photo credit: Frontera Energy Corporation)