Frontera Energy Beats 2018 Guidance, Declares Dividend, Ups Stake In CGX

Frontera Energy (TSX:FEC) achieved or exceeded its original 2018 guidance targets, with the exception of production guidance where it achieved revised guidance. Average production before royalties of 71,032 boe/d (within guidance range of 70,000 to 72,000 boe/d), operating EBITDA of $422.5 million (within guidance range of $400 to $450 million), capital expenditures of $446.1 million(within revised guidance range of $440 to $460 million, below original guidance of $450 to $500 million) and G&A expenses of $93.0 million (below revised guidance range of $95 to $105 million).

Richard Herbert, Chief Executive Officer of Frontera, commented: “Frontera stabilized its core production base in 2018 as Frontera Energy began enhancing the portfolio to deliver growth. As planned, we replaced over 100% of produced reserves in 2018, which was enabled by the completion of the Quifa water handling expansion project, as well as exploration successes at Alligator and Coralillo in the Guatiquia block and Jaspe in the Quifa North area. Significant investment in Colombia in 2018 has contributed to a strong start in 2019, particularly in the Quifa SW field with new water handling facilities in operation. In addition, after last year’s interruptions, production from Block 192 in Peru has recently restarted. As it returns to peak levels, total company production is the strongest it has been in over a year. With solid production and cash flow generation, we are executing a number of initiatives to drive production and reserves growth including; successfully being awarded two highly prospective blocks in an exploration bid round in Ecuador, and testing the deliverability of natural gas production from our Z-1 block, offshore Peru. We are also very excited by upcoming drilling on the VIM-1 block in Colombia and on the Corentyne block offshore Guyana later this year.”

The Toronto based company with significant petroleum assets in Colombia and other parts of South America, also announced last week that it has acquired 101,316,916 common shares of CGX Energy Inc. (TSXV:OYL) in connection with the rights offering previously announced by CGX on February 1, 2019. The aggregate purchase price for the common shares was $25,329,229 (or $0.25 per common Share). As consideration for providing a standby commitment in connection with the rights offering, the company also received 15,009,026 5-year warrants to purchase up to 15,009,026 common shares at an exercise price equal to $0.415 per common Share.

Prior to the issuance of the common shares and the warrants, Frontera owned or exercised control over 56,066,213 common shares on a non-diluted basis (representing approximately 48.29% of the issued and outstanding common shares on a non-diluted basis) and 96,066,213 common shares on a partially-diluted basis, assuming the conversion of the US$8,800,000 bridge loan, but excluding the rights to acquire common shares under the Rights Offering then held by Frontera (representing approximately 61.54% of the issued and outstanding common shares on a partially-diluted basis).

Immediately after the issuance of the common shares and warrants, Frontera owns or exercises control over 157,383,129 common shares on a non-diluted basis (representing approximately 67.78% of the issued and outstanding common shares on a non-diluted basis) and 212,392,155 common shares on a partially-diluted basis, assuming the exercise or conversion of the warrants and the US$8,800,000 bridge loan (representing approximately 73.95% of the issued and outstanding common shares on a partially-diluted basis), resulting in a 12.41% increase in Frontera’s holdings of common shares on a partially-diluted basis.

Dividends

• On December 5, 2018, Frontera Energy’s Board of Directors declared a dividend, payable on January 17, 2019 of C$0.33 per share (approximately $25 million in aggregate), to common shareholders of record on January 3, 2019.
• On March 13, 2019, Frontera Energy’s Board of Directors declared a dividend, payable on or about April 16, 2019 of C$0.165 (approximately $12.5 million in aggregate), to common shareholders of record on April 2, 2019.

Gabriel de Alba, Chairman of the Board of Directors of Frontera Energy, commented: “Thanks to substantial progress by the Frontera team in 2018, Frontera Energy is better positioned than ever to deliver returns to shareholders. With improved capital allocation and a plan to sustain production and reserves from our existing production base at current levels for the next five years – both of which we’re already delivering on – Frontera can generate sufficient cash flow to drive growth initiatives in the upstream business, as well as take steps to further enhance shareholder returns, as oil prices permit. Continuing on our progress in reducing G&A in 2018, we are pursuing additional opportunities to improve the efficiency and cost structure of the business, especially in the field, and to monetize non-core assets.  These actions will generate additional cash flow and capital for growth and enhanced equity returns. Frontera is off to a positive start in 2019. Production is strong, Brent oil prices are averaging close to $63.00/bbl, in line with our guidance, and Frontera Energy is currently benefiting from narrow oil price differentials.”

FOURTH QUARTER AND FULL YEAR 2018 HIGHLIGHTS

Strong Fourth Quarter Operational and Financial Results

• Production averaged 71,924 boe/d, an increase of 8% compared to the third quarter of 2018 and a 3% increase compared to the fourth quarter of 2017.
• Oil production represented over 95% of total company production in the fourth quarter of 2018, compared to 94% in the third quarter of 2018 and 92% in the fourth quarter of 2017.
• Net loss of $116.6 million ($1.17/share) in the fourth quarter of 2018 includes $143.9 million of non-recurring charges relating to payments under terminated pipeline contracts, impairments on infrastructure investments, oil and gas assets and on the carrying values of investments in associates offset by the benefit of the reversal of provisions related to high-price clause. This compares to a net loss of $32.5 million ($0.33/share) in the fourth quarter of 2017 which included a net benefit $63.8 million from the reversal of a provision related to high-price clause, offset by impairments on oil and gas assets and transmission line assets. Refer to notes 7 and 26 of the consolidated financial statements for more detail.
• Operating EBITDA of $118.4 million was 27% higher than the prior quarter and 13% higher than the prior year quarter.
• General and administrative expenses (“G&A“) of $21.8 million in the fourth quarter of 2018 declined 5% from the third quarter of 2018 and 11% from the fourth quarter of 2017, reflecting the benefit of Frontera Energy’s ongoing focus on efficiency and cost reduction projects throughout the organization.
• Capital expenditures of $156.4 million were 26% higher than in the third quarter of 2018 and 41% higher than the fourth quarter of 2017, as anticipated, reflecting the completion of the Quifa SW water handling expansion project which has added over 3,000 bbl/d to Company production so far in 2019.
• Cash used by operating activities of $3.5 million in the fourth quarter of 2018 reflected the normalization of timing of accounts receivable and payable through the cash management process.
• Frontera Energy repurchased for cancellation 1.3 million shares at a cost of $13.3 million (C$13.87/share) under its normal course issuer bid during the fourth quarter of 2018. To date Frontera Energy has repurchased for cancellation 2.4 million shares at a cost of $24.9 million (C$13.96/share), representing 47% of the authorized buyback under the normal course issuer bid.
• Total cash, including restricted cash, was $588.4 million as at December 31, 2018, down 25% from the third quarter of 2018 and down 9% compared to December 31, 2017.
• Hedged on approximately 27% of expected 2019 production after royalties using put options with a Brent price of $55.00/bbl.

2018 Operational and Financial Results

• Frontera’s 2P Reserves as at December 31, 2018, were 154.9 MMboe after royalties, which was 0.4% higher than at the end of 2017.
• Frontera Energy achieved a 2P Reserves Replacement Ratio of 103% based on 2018 production after royalties of 23.6 MMboe.
• Frontera Energy’s 2P Reserve Life Index increased to 6.8 years in 2018 from 6.1 years in 2017.
• Net present value of 2P reserves discounted at 10%, before taxes, was $2.2 billion at the end of 2018, a decrease of 13% compared to 2017. The decrease reflects lower heavy oil price assumptions of $3.00/bbl over the first 10 years, partially offset by an increase of $0.80/bbl in light oil price assumptions. Heavy oil represents 62% of proved plus probable reserves, light oil 36% and natural gas 2%.
• Net present value of proved plus probable reserves discounted at 10%, after taxes, was $1.9 billion, a decrease of 1% compared to 2017.
• 2018 production averaged 71,032 boe/d before royalties (63,187 boe/d after royalties) within the annual guidance range of 70,000 to 72,000 boe/d before royalties (63,000 to 65,000 boe/d after royalties).
• Net loss of $259.1 million ($2.59/share) in 2018 includes $327.0 million of non-recurring charges relating to payments under terminated pipeline contracts, impairments on infrastructure investments, oil and gas assets and on the carrying values of investments in associates offset by the benefit of the reversal of provisions related to high-price clause. This compares to a net loss of $216.7 million ($2.17/share) in 2017 which included $27.2 million of non-recurring charges relating to impairments offset by the reversal of a provision related to high-price clause. Please refer to notes 7 and 26 of the consolidated financial statements for more detail.
• Operating EBITDA in 2018 increased by $28.7 million, or 7%, to $422.5 million compared to the prior year.
• Oil and gas sales and other revenue of $1.4 billion in 2018 were 15% higher compared to the prior year. Net sales for the year (including the impact of realized losses on risk management contracts, royalties, and diluent costs) decreased by 2% compared to 2017.
• Operating netback for 2018 was $25.98/boe, 14% higher than $22.79/boe in 2017.
• Frontera Energy generated $312.0 million in cash provided by operating activities in the year compared to $314.4 million in the prior year, contributing to a strong balance sheet with a total cash position, including restricted cash, of $588.4 million as at December 31, 2018.
• Capital expenditures during 2018 were $446.1 million compared to $236.4 million in the prior year.