From Fedesarrollo this week we had two reports:

Firstly, their monthly financial sector for February survey saw a sense of calm. The expectations for 2023 inflation rose slightly (from 8.89%-9.00%) as did the terminal interest rate (13%-13.25%) but growth for the same 2023 fell from 1.5% to 1.1% – although that remains above many other estimates, including the Central Bank (0.3%). In terms of the COLCAP, Ecopetrol and Bancolombia remain the top picks, but amidst a pessimistic view for the overall market.

Briefly on interest rates, the Central Bank head Villar stated on Thursday that Colombia was close to the end of the tightening cycle and that the impact on inflation should come soon.

Also from Fedesarrollo we had the Retail ($29.7%) and Industrial (3.6%) confidence data for January and both came in better than expected and significantly higher than December – a surprise given the poor Consumer Confidence number (-28.6%) for the same month.

Within the construction sector there is something of a confusing picture. There was a 50% drop in new home sales in January and with mortgage rates, which have never been low anyway, rising sharply, that is understandable. That said, anecdotally, at least here in Medellin – prices continue to rise sharply, that is if you can find anything to buy ! On the public side the 4G projects are largely into the home straight but the 5G works will be coming on line towards the back end of 2023 which will compensate and move that sector forward.

Solid news from the oil sector again as Campetrol reported January production of 773k bpd – down slightly on December’s 784k bpd however it was still 4.6% higher YoY and part of a gradual improvement in the trend which began to manifest itself in October.

Sticking with oil – Brent has had a complicated week and this has been reflected in the Peso which has been struggling. DXY has also largely moved against the Peso due to a mix of interest rate concerns and geopolitical events.

Within the equity market, the MSCI Colcap is still playing with a dangerous support level. In the meantime, Grupo Argos has joined Celsia & Cementos Argos in announcing continued buyback programs, between the three entities approvals are sought for US$200mn.

Wishing you all a peaceful weekend.

Roops

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 15^th 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

Capital Program

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

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).

Colombia Update 

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.

Ecopetrol reports sales down 23.6% year-on-year for the 4^th quarter of 2020, to 14,190 trillion Colombian pesos, or 3.95 billion USD. Full year sales are down 29.4% to 13.8 billion. The company was able to report net income of 1.7 trillion pesos, or $471 million USD.

The financial summary income statement follows below

“2020 was a challenging year for the industry, due to the collapse in oil prices stemming from the oversupply caused by disagreements within OPEC+ and later due to the challenges associated with the Covid-19 pandemic. This pandemic was a health emergency at global and local level that was accompanied by a sharp contraction in demand for crude oil and products with multiple social and economic challenges,” said Ecopetrol CEO Felipe Bayón Pardo (above).

Ecopetrol was able to face this unprecedented challenge demonstrating its resilience and capacity to adapt to an adverse and volatile environment, always prioritizing life and the care of our employees.”

“Our financial results prove it: we closed the year with a COP 16.8 trillion EBITDA and net income of COP 1.7 trillion, being Ecopetrol one of the few companies of the global oil industry with profit for the year. The crisis response plan, which assured operational continuity and led to decisive interventions in costs, prioritization of investments, maximizing revenue and timely financing, allowed to benefit from the recovery of supply and demand of crude oil worldwide in the second half of the year. Thus, leveraged in the business strategy of the Ecopetrol Group (EG) focused on diversifying export destinations and anticipating sales of our crude, we managed to achieve recuperation of realization prices in our export portfolio, which increased 6% between the Q3 and Q4 2020, from 38.4 USD/bl to 40.7 USD/bl.,” Bayón continued.

Some investors fear that Ecopetrol is being pressured by the cash strapped Colombian government to purchase ISA, benefitting the Duque administration at the expense of investors. Bayón defends the pending purchase saying: “The eventual acquisition of the stake in ISA responds to Ecopetrol’s strategic interest of entering into new businesses aligned with the opportunities for electrification and decarbonization, dictated by the energy transition, and which in turn leverage the Group’s profitable growth and improve its business risk profile.”

Bayón’s full comments follow:

2020 was a challenging year for the industry, due to the collapse in oil prices stemming from the oversupply caused by disagreements within OPEC+ and later due to the challenges associated with the Covid-19 pandemic. This pandemic was a health emergency at global and local level that was accompanied by a sharp contraction in demand for crude oil and products with multiple social and economic challenges.

Ecopetrol was able to face this unprecedented challenge demonstrating its resilience and capacity to adapt to an adverse and volatile environment, always prioritizing life and the care of our employees.

Our financial results prove it: we closed the year with a COP 16.8 trillion EBITDA and net income of COP 1.7 trillion, being Ecopetrol one of the few companies of the global oil industry with profit for the year. The crisis response plan, which assured operational continuity and led to decisive interventions in costs, prioritization of investments, maximizing revenue and timely financing, allowed to benefit from the recovery of supply and demand of crude oil worldwide in the second half of the year. Thus, leveraged in the business strategy of the Ecopetrol Group (EG) focused on diversifying export destinations and anticipating sales of our crude, we managed to achieve recuperation of realization prices in our export portfolio, which increased 6% between the Q3 and Q4 2020, from 38.4 USD/bl to 40.7 USD/bl.

Ecopetrol conducted a disciplined monitoring on its costs and expenses, achieving a balance between optimizations and the availability of resources to guarantee a safe and reliable reactivation of the operation. Thus, the total unit cost for the year 2020 was close to 27 USD/bl, a 23% decrease as compared to the previous year, and cost savings of around COP 700 billion.

In the middle of this challenging environment, during 2020 Ecopetrol Group’s maintained a steadfast commitment to the well-being of Colombians and the strengthening of the local economy, in the framework of the health emergency caused by COVID-19. Over COP 88 billion were committed through our social investment program “Apoyo País” (Countrywide Support), of which we allocated 86% as of year-end, benefiting about 252,000 families and 250 institutions. We have supported the strengthening of the health system with medical equipment, personal protection and cleaning items; we have delivered humanitarian and solidarity aid at the national level, promoted innovation and research initiatives and provided technological support to the National Government. Furthermore, Ecopetrol Group has joined Governmental programs such as “Comparto mi Energía” (Sharing my Energy) and “Ayudar nos hace bien” (Helping does us good). Similarly, the Group designed and implemented different commercial flexibility and liquidity programs for suppliers and customers.

Reserves balance reached 1,770 million barrels of oil equivalent (mboe) reflecting a 6.5% reduction, a lower outcome than the initial forecast of a decrease in the range of 15% to 20%, due to fall in prices and less activity during the period. The result reflects the addition of new drilling projects, positive revisions due to good performance in production, recovery, and the optimization of technical-economic variables.  Gas reserves represented 29% of the total balance.

In exploration, Ecopetrol completed the drilling of 18 wells, 3 of which were successful, 9 ended the year under evaluation and 6 were dry. The commercial viability for discoveries Andina (in Colombia) and Esox (in the Gulf of Mexico) was approved in 4Q20. The National Hydrocarbons Agency, ANH, approved the transfer of Ecopetrol’s 50% stake to Shell in three blocks in which the Gorgon and Kronos gas discoveries are located. This association will allow progress the development of these discoveries in the offshore gas province of the Colombian Caribbean.

In regard to production, a cumulative average of 697 mboed was reached in 2020, in line with the goal of achieving levels close to 700 mboed. Compared to 3Q20, production in 4Q20 increased thanks to higher sales of LPG and gas, as well as to better performance at Chichimene and Piedemonte fields, despite the impacts by public order and the closure of Castilla’s water discharge in December.

With respect to natural gas, a strategic priority for Ecopetrol Group, represented 17 % of the total equivalent production. The EBITDA margin for the year was north of 50% and had a contribution by over 30 % of the segment’s EBITDA. The foregoing is supported by the stability of prices in dollars and the good commercial dynamics observed during the period.

In turn, the production of unconventional hydrocarbons in Permian contributed an average of 5.2 Mboed in 2020, increasing its share in the total EG’s production. We closed the year with 22 wells in production and 22 additional wells drilled, which are expected to be completed and put to work during 1Q21.

Regarding the execution of the Comprehensive Research Pilot Projects – PPII for unconventional hydrocarbons, the first Special Contract for Research Projects – CEPI , was signed with the ANH on December 24, for the Kalé project. This enables the start of the licensing and preparation stage for the execution of Ecopetrol’s PPII’s in Colombia. In 2021, we will be focused on obtaining environmental licenses and complying with other requirements as established in the robust regulations in force before starting to operate, always informing, and including our stakeholders and highlighting the scientific and technical nature of the project.

The annual EBITDA of the upstream segment was COP 6.7 trillion, equivalent to an 18% margin. The midstream segment obtained results in line with our expectations, with volumes transported in the amount of1,017 mbd, according to the country’s production. Also noteworthy are the lower maintenance times for repairing the Caño Limón-Coveñas pipeline, which allowed it to operate more days and without any reversal cycles being necessary in Bicentenario pipeline. The segment reported an EBITDA in the amount of COP 9.3 trillion, equivalent to a 76 % margin.

The downstream segment reached a consolidated throughput load of 355 mbd in 4Q20, the highest of the year. Advancing on the path of fuel quality, in December gasoline production with an average sulfur content of maximum 50 ppm, was achieved, which is lower than the levels requited under current regulations. The operational and commercial performance of the refineries enabled competitive margins in a negative environment for the sector. Likewise, Esenttia records in production and sales, stood-out in 2020. The segment reported an EBITDA of COP 0.9 trillion, equivalent to a 3.3% margin.

Despite the challenges faced in 2020, our commitment to TESG was strengthened on different fronts. Accumulated reductions of 1.8 MtCO2e were achieved in energy transition, resulting from the implementation of projects which have been running since 2010, thus achieving in advance the goal that was initially set for 2022. On the front of renewable energy, an agreement was signed for the construction of the San Fernando Solar Eco Park, which will have a capacity up to 59 MW and is expected to start operations in 2Q21. In turn, Castilla Solar Eco Park reported savings in operating costs close to COP 3.8 billion in 2020. On the other hand, GHE emissions produced by routine gas flaring were reduced by 19 % as compared to 2019, thus contributing to the commitment to reduce CO2e emissions.

Digital transformation was a fundamental pillar in the operational continuity during the pandemic. It ensured remote connections for more than 15,000 employees, and to hold more than 8,000 virtual meetings, per day, during the year.

Regarding the commitment of strengthening corporate governance, we adhered to the World Economic Forum’s Stakeholder Capitalism Metrics (SCM) coalition, a global group of more than 61 companies seeking to harmonize sustainability metrics to facilitate comparisons across companies and industries, on various key issues related to people, environment, prosperity, and governance.

In November, Ecopetrol received a 66-point rating on the Dow Jones Sustainability Index (DJSI) scale, ranking 13th in the global integrated oil and gas industry. This score allowed the company to enter the DJSI Latin American Integrated Market – MILA, being the only company in the sector in Latin America to achieve it. In addition, the company received a rating from the CDP Climate Change report in December with a C rating, ranking above the region’s overall average performance.

Reflecting our ability to adapt and to react to the changing conditions of a particularly complex market, we updated our 2021-2023 Organic Business Plan, which aims at ensuring a profitable growth for Ecopetrol on a Brent price path of USD 45 per barrel by 2021, and USD 50 per barrel onwards. The plan also seeks to increase competitiveness, to strengthen the energy transition agenda and to deepen TESG as one of the strategic pillars for our operation.

The following elements stand out within the organic component of the new plan: i) an investment ranging from USD 12,000 to USD 15,000 million, funded mainly with internal cash generation; ii) profitable production levels close to 750 Mboed by 2023 maintaining focus on the development of fields with the greatest impact on our value chain in Colombia, the growth of Permian, the drilling of more than 40 exploratory wells and the continuity of our successful enhanced recovery program; iii) volumes transported in excess of one million barrels per day reflecting positive expectations of economic growth; iv) joint throughput of refineries ranging from 340 to 365 thousand barrels per day in 2021, seeking to reach around 420 thousand barrels per day in 2023, with the IPCC ; v) reduction of 3 MtCO2 as of 2023 and redefining  medium and long term emission reduction goals during 2021; vi) increasing generation capacity with renewable energies  around 400 MW by 2023; and vii) social and environmental investments for COP 1.7 trillion between 2020 and 2024. Similarly, we will invest between USD 100 and USD 150 million in innovation and technology to accelerate the digital transformation. This plan is aligned with our cultural principles: life first, ethics, passion for excellence, making the impossible possible, leadership and inclusion, as well as teamwork. Similarly, it responds to the challenges of the environment with a focus on sustainability and ensures a strategy that adds value to EG and the country.

On the other hand, on January the 27, 2021, the Company announced its interest in acquiring 51.4% of the outstanding shares of ISA, currently owned by the Ministry of Finance and Public Credit.

The eventual acquisition of the stake in ISA responds to Ecopetrol’s strategic interest of entering into new businesses aligned with the opportunities for electrification and decarbonization, dictated by the energy transition, and which in turn leverage the Group’s profitable growth and improve its business risk profile.

The stake in ISA would allow Ecopetrol’s stockholders to achieve a material position in an established company, leader in a strategic sector for the energy transition, with a world-class portfolio, a first-rate leadership team, and proven corporate governance. Through a single transaction, Ecopetrol would position itself in a key link in the electricity business with clear prospects for future growth. Furthermore, a business with similar characteristics to the oil infrastructure one, in which Ecopetrol already participates through its subsidiary Cenit, could also be added to EG’s portfolio.  These businesses are capital intensive, regulated, with significant entry barriers, and margins and competitive capital returns that provide stability to the cash flow, relative to hydrocarbons price volatility.

The acquisition would be partially financed with a stock issuance whose specific purpose is to fund this opportunity of growth and consolidation. This would allow Ecopetrol to undertake a transformational opportunity without changing the investment plans in its core oil & gas business, and without impacting the debt ratios that support its investment grade.

Moving forward, in case of succeeding in the transaction, we envision a more robust Ecopetrol, with a solid position in oil, gas, energy infrastructure and low-emission energy. The Company will continue to focus on the hydrocarbons business, with a growing share of gas. Renewable generation for self-consumption will continue to be key for reducing operating costs and emissions footprint. We will increase our level of ambition in decarbonization in terms of reducing emissions, and we will move forward with the evaluation of new technologies and business models, such as natural climate solutions, CCUS (Carbon Capture, Use and Storage) and green hydrogen.

That said, we have started 2021 with a solid financial position, strengthened after the crisis, with expectations of profitable and sustainable growth on all fronts of the business, and with the clear aspiration to materialize a transformational opportunity for the Company through the potential acquisition of the stake in ISA. This plan addresses the challenges and opportunities of the environment, keeping our promise to create value for our shareholders and stakeholders, leveraged on the pillars of growth, capital discipline and cash protection, all supported on TESG.

Felipe Bayón Pardo

CEO

Ecopetrol SA

* Excluding the effect of expenses associated to the Voluntary Retirement Plan, EBITDA amounts to COP 4,629 billion in 4Q20 and COP 17,471 billion as of year-end.

Gross Leverage, defined as total debt to EBITDA, is expected to be 2.3x in 2020, with a single $331 million debt maturity due in 2023. Total debt to 1P is expected to remain less than $3.00 per 1P of reserves, and the 32% drop in production will result in an increase in 1P reserve life to 6.5 years, assuming the same level of 1P reserves reported in 2019 of 115 million barrels of equivalent, up from 4.4 years in 2019, should reserves not be revised downwards as a result of the lower price environment.

Debt service coverage, FFO to interest expense, is projected to be 5.1x in 2020. On May 7, 2020, the company announced cost cutting initiatives aimed to maintain profitability while weathering the volatile pricing environment. The announced reduction of $30 million-$35 million from SG&A, $100 million in operating costs, $30 million in transportation and adjusted down capex to $80 million-90 million, from its original guidance of $325 million-375 million. Collectively these measures along with having 21,000bbls of its production hedged through 3Q20 can stabilize cash flow and preserve its liquidity profile, as Brent’s price recover.

Frontera Energy is rated ‘B-‘ on Rating Watch Negative. The rating reflects the company’s rigid cost structure associated with fixed transportation costs. These costs limit its flexibility when coping with the low oil price environment, given its full-cycle costs and relatively short reserve life. Fitch estimates Frontera’s half-cycle cost of $26.9bbl and full-cycle cost averages $40.4bbl. EBITDA margins are expected to decrease to 27% in 2020 from 35% in 2019. The lower EBITDA margin, compared to peers, is explained by the company’s fixed transportation cost, which averages $11.5-12.50 per barrel, representing roughly 25%-30% of revenues historically.

Photo courtesy Frontera Energy

According to the most recent ACP economic report “Double covid-19 crisis and price war industry: impact for Colombia and the hydrocarbon sector,” with the current crisis it will be necessary to severely curtail investments and production of oil budgeted for 2020, and the group projects a daily drop of 35,000 barrels, which could reach 100,000 if the Brent reference crude price remains below $25 USD a barrel the rest of the year. This situation, added to the already high costs of operating in Colombia, means that the revenues per barrel fail to cover the average costs to produce oil in the country.

The ACP report, prepared based on information provided by the managers of a representative group of the private production companies, indicates that the national average of operating costs is between $20 – $25 dollars per barrel. For its part, the “break-even” or balance point to cover costs of production in Colombia is located between $40 and $45 dollars a barrel, that is, below this range, companies earn revenue that barely covers their current cost of production.

“The price crisis and high uncertainty have led companies to reduce investments, closing wells and fields, with a serious impact on employment, the contracting of goods and services and in the economic dynamics of the producing regions; this without counting the effect on the collection of royalties, taxes and contractual economic rights, and their impact on the finances of the nation,” said Francisco José Lloreda Mera, president of the ACP on a morning conference call with reporters today.

• A daily drop of around 35,000 barrels of oil is expected, which could reach 100,000 if Brent remains below $25 a barrel the rest of the year.
• ACP says that regulated oil transportation rates for pipelines represent around 45% of the total cost of operation.
• Tax revenues of the central government and the regions could fall more than 75% due to the petroleum crisis.

“The national government is aware of this, important measures have been taken, but an urgent intervention in pipeline transportation rates, as they are excessively high compared to the cost of production, are not internationally competitive, and are the main obstacle to companies in this difficult situation,” said Lloreda.

The industry leader further explained that “pipeline transportation is the only link in the chain of the sector whose cost in recent years has remained practically the same, representing around half of production costs, is not manageable by E&P companies because it is regulated by the Ministry of Energy, and various studies show that it is excessive; so it is essential that the tariffs are reviewed not only for the moment of price crisis and for the sustainability of the industry in the short term, but the current methodology should be structurally reformulated towards the future,” added Lloreda.

Measures taken to date

In order to mitigate the double crisis caused by Covid-19 and the fall in international prices, the Colombian government has advanced in actions for E&P (Exploration & Production) contracts with the National Hydrocarbons Agency (ANH) related to extension of terms and reduction of bank guarantees. Likewise, for all taxpayers, progress was made in the refund of VAT balances and flexibility in the tax schedule. Finally, additional measures were announced to defer payment of economic rights.

According to ACP, these decisions are extremely important to the industry and are expected to help preserve E&P contracts, future investment and to partially alleviate the burden on companies to support their sustainability during the crisis.

“The reduction of contributions of this sector to the national economy, which is projected at more than 75% compared to 2019, is critical at this time when more income is required to help the population more vulnerable to the economic and social emergency caused by Covid-19. We hope to continue advancing in the search for effective measures with the government that allows us to continue operating and mitigate the crisis in the sector, while preventing a devastating effect on employment and the regional & national economy,” emphasized Lloreda.

Photos courtesy ACP

“In light of the recent rapid decline in oil prices and the impact of the COVID-19 pandemic on the world economy, Frontera is taking swift and decisive measures to protect our people, balance sheet and cash flow in order to best position ourselves when we emerge from the current environment. By virtue of our strong capital discipline, we started this year with a robust cash position, which we are protecting through reduced capital expenditures, additional savings and efficiency improvements, thus managing the risk of an extended period of weaker commodity prices, said board chairman Gabriel de Alba.

Frontera Energy announced that it is currently reducing planned 2020 capital expenditures by around 60% to a range of $130 to $150 million. Those expenditures will be primarily focused on development and maintenance activities in the company’s core assets of Quifa SW, CPE-6 and its light and medium oil business unit in Colombia. Consistent with the company’s long-time focus on disciplined investing, this revised capital plan has been developed with the goal of optimizing production while maximizing the cash balances of the company during this period of lower oil prices. Frontera indicated that it will remain flexible with respect to capital allocation as events unfold in the coming months.

With these changes, revised average annual production in 2020 is expected to be in the range of 55,000 to 60,000 boe/d, a decrease of only 8% compared to 2020 guidance despite the significant decrease in capital expenditures. Frontera has deliberately shut-in a number of wells that are not economic to operate at current prices and will monitor operations continuously to optimize cash generation.

“I’m proud of our team’s accelerated actions to significantly reduce our planned capital expenditures in 2020 and identify further opportunities to decrease operating expenditures across our production portfolio. As a first step, planned 2020 capital expenditures are being reduced by around 60%, focusing on activities that generate positive cash returns at current oil prices. Our investment priorities will be essential well workovers and critical maintenance until market conditions improve and prices have recovered,” said CEO Richard Herbert.

“Frontera is absolutely committed to maintaining its focus on health, safety and the environment. We continue to monitor the rapidly changing COVID-19 outbreak. We have internal protocols and procedures in place and are following national health guidelines to ensure the safety and well-being of our employees in our fields and offices. I would like to join with Gabriel in thanking David for all his contributions to Frontera.”

Frontera is also actively working to reduce production, transportation and G&A costs, and will provide further information on the results of those initiatives as the financial goals are achieved.

Hedging Program

Frontera has continued to hedge its production for the remainder of the current year. For the period of March to December 2020, Frontera has, to date, hedged 7.31 million barrels with a combination of Brent oil price-linked purchased put options, zero cost collars, put spreads, and three-way collars. Assuming a flat Brent oil price of $30.00/bbl, the current value of the hedge position is approximately $77 million.