Though the Toronto-based company continues a difficult adjustment to its new reality since the expiration of its holdings in Colombia’s Rubiales oilfield in mid-2016, the New York-based “big three” rating agency upgraded Frontera Energy’s issuer default ratings (IDRs) from B to B+ with a stable outlook.

The improvement applies to both the company’s long-term foreign current IDR and long-term local currency IDR. Fitch also upgraded the company’s $250 million USD of senior secured notes from B+/RR3 to BB-/RR3.

Assessing the Improvement for Frontera Energy

“The rating upgrade reflects Frontera’s ability to stabilize its operational and financial performance over the last year after completing a significant debt restructuring towards the end of 2016,” stated Fitch in a statement. “The debt restructuring materially improved the company’s capital structure, which is strong and not a constraint for the rating category.”

In the restructuring, Frontera Energy’s creditors converted some $5.4 billion USD of financial debt into a 56.6% equity stake in the company. The Catalyst Capital Group Inc. and others injected some $250 million USD into the company as part of the arrangement.

In addition to these moves, and other efforts to rein in the breadth of operations, Frontera Energy recently sold off what it calls a “non-core asset” in order to focus on primary operations. It is now using $56 million USD from the sale of Petroelectrica de los Llanos in Colombia to help fund its recent full acquisition of Pacific Midstream Limited in a move aimed at reducing transportation costs.

This is part of an overall “plan to reduce costs, rationalize our portfolio, and allow for a dedicated focus on high return opportunities on our core [exploration and production] assets in Colombia and Peru,” CEO Barry Larson, who assumed the position in February, said earlier this year in a statement.

Ongoing Challenges for Frontera Energy

Though Fitch Ratings’ assessment does praise the company’s improved capital structure, liquidity, and leverage position, it also acknowledges that “Frontera’s cash flow generation may remain neutral as a result of the slower than expected oil price recovery and its increasing average production costs after the expiration of its main concession, Piriri-Rubiales, in June 2016 and the decrease in production.”

Overall, Fitch Ratings expects Frontera’s free cash flow to end the year negative, although this should “gradually improve” if oil and gas prices continue to recover. The company reported free cash flow of negative $196 million USD in June, according to Fitch.

The B rating also reflects that Frontera’s short reserve life, “low” asset diversification, and “small-scale oil and gas production profile,” stated Fitch. The company’s production is now currently down to less than 75,000 barrels of oil equivalent per day — well below the roughly 150,000 barrels per day it managed at its peak before the expiration of its marquee oilfield concessions in Colombia.

“Frontera’s production and reserves are concentrated in a few blocks, most of which are in Colombia, and its proved reserve life is short at 4.3 years, which is considered…a concern for the company’s credit quality,” stated Fitch. “The company’s reduced investment capacity due to the low-price environment has forced it to reconsider its investments in international assets, and its concentration in Colombia could increase.”

Frontera Energy has just 117 million barrels of proved reserves and 171 million barrels of probable reserves. Upwards of 95% of these are located in Colombia.

Frontera Energy will primarily use the cash received from the sale as an initial payment in a previously announced agreement to acquire International Finance Corporation’s (IFC) shares in Pacific Midstream Limited. The deal to buy the 36.36%interest held by IFC, and related parties, was agreed to earlier this month for a total of $225 million USD and will give Frontera Energy full control over Pacific Midstream Limited.

According to the company, $50 million USD of the incoming $56 million USD in proceeds will be used in the first payment to IFC. Frontera has up to 36 months to pay off the full sum, plus accrued interest.

Gabriel de Alba, chairman of Frontera Energy, which was previously known as Pacific Rubiales, called the move to fully acquire Pacific Midstream a “very strategic acquisition” that will support the firm’s push “to reduce our corporate transportation costs, provide long-term transportation flexibility, and reduce fixed-cost transportation obligations.”

He says both deals align with the company’s ongoing strategy to sell off non-core assets in favor of “more strategic initiatives while maintaining a strong cash position on our balance sheet.”

In the past 12 months, Frontera Energy has now secured nearly $150 million USD in cash from asset sales. These sales, according to the company, have also resulted in a roughly $147 million USD “reduction in exploration or environmental commitments” and the elimination of around $52 million in “stand-by letters of credit commitments.”

A key asset of Petroelectrica de los Llanos is its 260-kilometer power transmission line, with 192 megawatts of authorized electricity demand, that supplies power to the both the Rubiales and Quifa oil fields as well as the Oleoducto de los Llanos pipeline.

The purchase will be completed with $225 million USD in cash that will be paid in installments over a 36-month period, plus accrued interest over unpaid amounts, according to Frontera Energy.

Now, with 100% control of Pacific Midstream, the Toronto-based company, which was formerly known as Pacific Rubiales with extensive operations in Colombia, says it will “pursue initiatives related to the reduction of, and unwinding of, various transportation commitments, including fixed rate take-or-pay arrangements.”

Gabriel de Alba, chairman of Frontera, called the move a “very strategic acquisition” that will support the firm’s push “to reduce our corporate transportation costs, provide long-term transportation flexibility, and reduce fixed-cost transportation obligations.”

After closing on the deal, Pacific Midstream will a “100% consolidated entity of Frontera” that includes the following entities: Petroelectrica de los Llanos (which it has a 100% ownership stake in), Oleoducto Bicentenario de Colombia S.A.S. (43% ownership), and Oleoducto de los Llanos Orientales S.A. (35% ownership).

The transaction will be subject to various considerations, said Frontera Energy in a statement. “The completion of the transaction,” said Frontera, “is subject to obtaining modifications to Frontera’s take-or-pay contracts, which are expected to reduce tariffs, and other customary conditions of closing. In addition, the consent of the company’s note holders and secured lenders is required to complete the transaction.