Frontera Energy Corporation (TSX: FEC) last week announced the appointment of current director and Colombian citizen, Orlando Cabrales Segovia as Chief Executive Officer while also providing an update on its 2021 Strategic Plan, including its growth opportunity in Guyana, its full year 2021 guidance, and its plans to implement a normal course issuer bid.
Frontera says it intends to invest approximately $200-$295 million (USD) during 2021, with $110-$130 million in development capital focused on the company’s Colombian base, with$30-40 million to drill two exploration wells in the VIM-1 block, and to complete seismic and preparatory work in Ecuador in advance of potential drilling in 2022.
In Guyana, the company plans to spend $40-90 million in total, principally for the Kawa-1 exploration well on the Corentyne block during the second half of 2021 and $15-25 million for Berbice Port construction.
Frontera is forecasting full year Colombian production of 40,500 – 42,500 boe/d and 2021 exit production of approximately 43,000 boe/d while anticipating operating EBITDA of $275-$325 million.
Board Member Orlando Cabrales Segovia is the new Chief Executive Officer, effective March 15, 2021, replacing Richard Herbert who has served as Chief Executive Officer for the last three years. Frontera said in a statement that the appointment of Mr. Cabrales reflects the significant progress that the company has made to shape its operations as a focused Colombian producer with strong local partnerships, significant regional exploration projects, and material infrastructure assets serving the broader industry and communities. After March 15th Mr. Herbert will continue acting in an advisory capacity to ensure an orderly transition with a focus on Guyana.
“I am very pleased to pass the leadership baton to Orlando, who I have known for many years and deeply respect. I have every confidence that the future prospects for Frontera under his leadership are bright. I look back upon the achievements of the Frontera leadership team, supported by our Board, over the past three years since I became CEO with genuine pride. We have enhanced the culture of Frontera as evidenced by its improved health and safety performance and ethical reputation; Colombian upstream operations have been transformed by reducing costs and focusing on value over volumes; and the acquisition of CGX and joint venture interests in key exploration blocks including the Corentyne and Demerara blocks offshore Guyana, the VIM-1 block in the Lower Magdalena Valley, Colombia and exploration blocks in Ecuador has given Frontera a strong portfolio of renewal options for the future. I wish Orlando every success in taking Frontera forward in the next phase of its development,” said outgoing CEO Richard Herbert.
Mr. Cabrales joined Frontera’s Board of Directors in November 2018 and has over 30 years of experience in the public and private energy sector in Colombia, including serving as Vice Minister of Energy of the Ministry of Mines and Energy in Colombia between 2013 and 2014 and as the President of the ANH from 2011 to 2013. Mr. Cabrales held senior roles at BP in Latin America and has been on the boards of numerous companies in Colombia including Isagen S.A., Tuscany Drilling, Cenit and ISA. Mr. Cabrales earned an undergraduate degree in Law from Pontifical Javeriana University and a Master’s degree in Philosophy from Boston College. Concurrent with his appointment as CEO, Mr. Cabrales will continue as a director of Frontera.
“Since the new Frontera emerged in November 2016, Frontera has made tremendous progress. The team has improved Frontera’s performance and reputation, exited underperforming assets and agreements, driven down costs, and maintained a strong production and financial profile throughout this transformation,” said incoming CEO Orlando Cabrales.
“Today, Frontera is a more streamlined business with a sustainable portfolio of value-producing assets in Colombia and a highly prospective exploration portfolio in Guyana, Colombia and Ecuador. Combined with a relentless focus on operational efficiency, our goal is to create maximum value for shareholders. Our 2021 plan has been developed with these strategic goals in mind. I very much look forward to being a direct part of the management team in the next exciting phase of Frontera.”
“Both personally and on behalf of the Board, I want to thank Richard for all that has been achieved on his watch as CEO. Great progress has been made over the past three years, and Frontera has many great opportunities before it,” said Chairman of the Board Gabriel de Alba.
“As Frontera enters the next stage in its evolution, the Board sought a leader with the deep Colombian-based leadership experience, extraordinary reputation and relationships, and the ability to forge strategic partnerships with international oil and gas and infrastructure companies. The Board believes that Orlando brings these strengths and many others, which will help realize Frontera’s full value potential. We are extremely proud of the advances this Company has already made over the past three years to right-size itself, relentlessly drive down costs, and create an operating culture that has been recognized this year as one of the world’s most ethical. Frontera is a company with significant value across its assets and we look forward to the contributions of our leadership team as we execute our plan for 2021.”
Frontera also announced last week that the company intends to file with the TSX a notice of intention to commence a normal course issuer bid for its Common Shares (the “NCIB”). If accepted by the TSX, Frontera would be permitted under the NCIB to purchase, during a 12-month period, up to 5,197,612 Common Shares, representing approximately 10% of Frontera’s “public float” (as calculated in accordance with TSX rules). The NCIB will be made in accordance with the rules of the TSX through the facilities of the TSX or alternative trading systems, if eligible. Frontera believes that, from time to time, the market price of its Common Shares may not fully reflect the underlying value of its business and future prospects and financial position. In such circumstances, Frontera may purchase for cancellation outstanding Common Shares, thereby benefitting all shareholders by increasing the underlying value of the remaining Common Shares. At the present time, the Board believes that an NCIB is a more effective way to deliver value to shareholders when compared to cash dividends.
Under its normal course issuer bid that expired on October 17, 2020, Frontera was authorized to repurchase for cancellation 6,532,400 Common Shares and Frontera purchased for cancellation 2,941,128 Common Shares between October 18, 2019 and October 17, 2020 at a volume weighted average price of C$9.788 per share. Purchases were made on the open market.
Frontera’s 2021 Guidance
While preparing its 2021 Guidance, Frontera considered options to increase production in Colombia this year. Frontera has a stable 2P reserve base and a large pool of assets, from which Frontera identified the best combination of wells and drilling to deliver the highest capital efficiency. Various production and capex scenarios were reviewed that would have seen increased production and EBITDA through higher development capex, particularly in its key heavy oil field Quifa. The Company believes its 2021 capital plan optimizes both capital efficiency and free cash flow after development capex in 2021 and beyond.
Frontera developed its 2021 guidance using an average 2021 Brent price of $60/bbl and an exchange rate of 3,500 Colombian Pesos per US dollar. Given the current oil price environment above $60/bbl Brent, every one dollar average annual increase to our $60/bbl Brent price assumption for 2021 would increase Operating EBITDA by approximately $10 million (including hedging).
2021 Guidance Metrics
|Guidance Metrics||Unit||2020 Full Year
|2021 Full Year Guidance
|Average Daily Production||boe/d||47,800||40,500 – 42,500|
|Production Costs(1)||$/boe||$11.10||$10.00 – $11.00|
|Transportation Costs(2)||$/boe||$11.30||$10.50 – $11.50|
|Operating EBITDA(3)||$MM||$172||$275 – $325|
|Colombia & Ecuador Exploration||$MM||$30-$40|
|Total Exploration Capex||$MM||$70-$130|
|Total Capital Expenditures4||$MM||$108||$200 – $295|
|1 Calculated using production before royalties in the denominator as this most accurately reflects per unit production cost and is consistent with our peers.|
|2 Calculated using production after royalties in the denominator as this most accurately reflects per unit transportation costs.|
|3 Operating EBITDA calculated at Brent $60/bbl and COP/USD exchange rate of 3500:1.|
|4 Capital expenditures do not include decommissioning. The Company expects to execute $10 million of decommissioning in 2021 including $4 million in Peru.|
Frontera expects its total 2021 capital program to be approximately $200-$295 million on a consolidated basis. This total includes approximately $110-$130 in development capital to maintain Frontera’s production volumes – a significant reduction on a per barrel basis compared to previous years. Development costs for the 2021 budget are expected to be approximately 40%-50% lower than 2019 due to cost efficiencies and process improvements Frontera achieved in 2020.
The Company expects based on presently available information that the total cost of the Guyana exploration program in 2021 will be approximately $90 million, principally to drill the Kawa-1 well offshore Guyana, with its share of that cost depending on whether or not it elects to pursue strategic options, and $15-25 million for Berbice Port (Guyana) construction. Frontera anticipates spending $30-$40 for exploration in Colombia including drilling two exploration wells in VIM-1 and to complete seismic and preparatory work in Ecuador in advance of potential drilling in 2022. The Company anticipates generating operating EBITDA of $275-$325 million.
Production and Production Costs
Frontera’s 2021 Plan anticipates a production exit rate of approximately 43,000 boe/d and average annual production of 40,500 – 42,500 boe/d, all from Colombia. Production costs are expected to average $10-$11 per boe, below full year 2020. Included in this guidance, Frontera may recognize a portion of its post-termination remediation costs in Peru as 2021 operating costs with an impact of approximately $0.50/boe.
Transportation costs are expected to average $10.50 – $11.50 per boe in 2021, in line with full-year 2020. This includes the impact of the sale of the oil inventory in Peru of approximately $0.50 per boe and the expected impact of additional take or pay contracts stemming from the pipeline settlement announced on November 17, 2020 (approximately $0.20 per boe on a full year basis assuming the settlement is approved around mid-year).
In the VIM-1 block, in the Lower Magdalena Valley, Frontera (50% W.I.) and Parex (Operator, 50% W.I.), completed the permitting and approval process and progressed the development plan concept including gas commercialization and infrastructure requirements for the exciting La Belleza-1 light oil and natural gas discovery.
Regulatory approval to extend the current VIM-1 block boundaries by approximately 32,000 acres was recently received. Building on the success of the La Belleza discovery, the Joint Venture anticipates drilling two additional exploration wells in the VIM-1 block in 2021. In addition, Frontera plans to begin additional preliminary work in the VIM-22 block ahead of drilling in 2022.
In 2021, Frontera plans to drill at least 19 wells in Quifa and 15 wells in CPE-6. At this activity level, development costs at Quifa, its largest field, have been lowered to $8/boe in 2021, down 60% from $20/boe in 2019. The Company expects steady production volumes in the heavy oil business unit, backstopped by production from CPE-6 that is expected to increase by approximately 40% this year due to further drilling and construction of additional water-handling facilities. In Frontera’s light and medium oil business unit, Frontera plans to drill two wells in the Coralillo field as part of the continued development of the Guatiquia block.