Good morning, ladies and gentlemen. Welcome to Gran Tierra Energy's conference call for fourth quarter and year-end 2023 results. My name is Olivia, and I'll be your coordinator for today. At this time, all participants on a listen-only mode. Following the initial remarks, we will conduct a question-and-answer session with securities analysts, and institutions. Instructions will be provided at that time for you to queue up for your questions. I would like to remind everyone that this conference call is being webcast and recorded today, Tuesday, February 20, 2024, at 11:00 A.M. Eastern Time.
Today's discussion may include certain forward-looking information, oil and gas information, and non-GAAP financial measures. Please refer to the earnings and operational update press release we issued yesterday for important advisories and disclaimers with regard to this information and for reconciliations of any non-GAAP measures discussed on today's call. Finally, this earnings call is the property of Gran Tierra Energy Inc. Any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.
I will now turn the conference call over to Gary Guidry, President and Chief Executive Officer of Gran Tierra. Mr. Guidry, please go ahead.
Thank you, operator. Good morning, and welcome to Gran Tierra's fourth quarter and year-end 2023 results conference call. My name is Gary Guidry, Gran Tierra's President and Chief Executive Officer, and with me today are Ryan Ellson, our Executive Vice President and Chief Financial Officer, and Sebastien Morin, our Chief Operating Officer. This morning, we issued a press release that included detailed information about our fourth quarter and year-end 2023 results. In addition, Gran Tierra's 2023 annual report on Form 10-K has been filed on EDGAR and is available on our website.
Ryan and Sebastien will make a few brief comments, and then we will open the line for questions. I'll now turn the call over to Ryan to discuss our financial results. Ryan, please go ahead.
Good morning, everyone. We're delighted to announce that Gran Tierra successfully achieved its targets for 2023 in terms of production, funds flow from operations, and free cash flow. These milestones underscore the quality of our assets and our unwavering commitment to operational excellence. Our focus efforts on asset development have yielded strong performance across various key metrics. Additionally, in 2023, we showcased our confidence in Gran Tierra's future prospects by repurchasing 6.8% of our outstanding shares through our normal course issuer bid, or NCIB program, demonstrating our dedication to creating long-term shareholder value.
We're currently trading at a discount to our approved developed producing or PDP net asset value per share by about 46%. Our average cost of each share purchase was $7 per share. Our many achievements, achievements during the year result in year-over-year production growth of 6%, strong reserves replacement ratios well above 100%, and the highest 1P, 2P, and 3P year-end reserves in the company's history. In another major milestone in 2023, Gran Tierra issued $488 million of new 9.5% senior secured amortizing notes due 2029 in exchange for its existing notes to improve our balance sheet, reduce overall leverage, and provide additional financial flexibility by extending the maturity schedule to better align with expected future cash flows.
Approximately 92% of holders, bonds were exchanged, highlighting the support from bondholders. Subsequent to year-end, Gran Tierra issued an additional $100 million of 9.5% senior secured amortizing notes due 2029. The company used a portion of these proceeds to repay $50 million of borrowings outstanding under our credit facility, which subsequently was terminated. Despite a net loss of $6 million in 2023, Gran Tierra achieved a return on average capital employed of 15%, showcasing solid performance in capital utilization.
Gran Tierra's capital expenditures were at the low end of our guidance at $219 million, fully funded by funds flow from operations of $277 million, or $8.27 per share, resulting in free cash flow of $58 million or $1.73 per share, demonstrating effective financial management and positive cash generation. Although in 2023, Adjusted EBITDA decreased by 17%, the company realized Adjusted EBIT of close to $400 million, indicating substantial operational resilience amid challenges with volatile oil prices. Gran Tierra's net sales for the year were $637 million, compared to $711 million in 2022.
This decrease was primarily driven by a 17% decrease in Brent price and higher Castilla and Vasconia differentials, partially offset by 7% higher sales volumes and lower transportation discounts in 2023. Despite higher operating expenses in 2023, Gran Tierra effectively managed inflationary pressures, showcasing resilience in cost control and maintenance activities. One final item I would like to highlight was the successful completion of the Sur Oriente Continuation Agreement. By securing the continuation, Gran Tierra is committed to long-term capital projects and development programs with plans of optimizing oil recovery and value for the Sur Oriente block.
We believe the combination of Gran Tierra's robust operational expertise in the Putumayo Basin and Ecopetrol's technical knowledge will continue our joint success in the development of our Sur Oriente block. I'll now turn the call over to Sebastien Morin to discuss some of the highlights of our current operations.
Thanks, Ryan. Good morning, everyone. I'll briefly cover a few operational highlights from today's press release, as well as our recent press release regarding 2023 year-end reserves. Operationally, we are building off a successful year in 2023 to start off 2024 on a strong note. Since December 2023, Gran Tierra has drilled 4 oil wells in the Costayaco field, in which we are seeing excellent initial production results. The first well, Costayaco-56, has been on production since early January and has been producing a stable average rate of around 1,900 barrels of oil per day and a 2% water cut.
A second well, Costayaco-57, was spud on January 6th and brought on production in late January. It has been producing at a stable average rate of around 1,100 barrels of oil per day and a 10% water cut.
The third well-
Ladies and gentlemen, pardon the interruption. Speaker has been disconnected. Please hold while we reconnect the speaker.
Being drilled and will be followed by the final well, Acordionero-128. All wells from this development program are expected to be drilled, completed, and on production before the end of the first quarter of the year. Back down in the Southern Putumayo Basin, Gran Tierra intends to commence development drilling in the Cohembi oil field, located in the Sur Oriente block, during the later half of the year. We plan to expand the block's production facilities, increase gas power generation, construct new development well pads, and make social investments in the area, all with the goal of substantial production growth in 2025 and 2026.
From an exploration perspective, around 40%-45% of Gran Tierra's 2024 capital program will target high impact, near field, and low-risk exploration activities, including the drilling of 6-9 exploration wells in Colombia and Ecuador, signifying our dedication to unlocking potential new reserves and fostering sustainable production growth. Building on promising results from the 2022 exploration program, we plan to focus on short cycle time prospects in proven basins with established transportation infrastructure.
In addition, as part of our 2024 capital program, we are currently in the early phases of execution to acquire 238 square kilometers of 3D seismic over the Charapa Block in Ecuador, and to pre-invest in advancing drilling licenses, building pads for the 2025 exploration program in Colombia and Ecuador, which will set the stage for future growth opportunities for the company. On January 23, 2024, we were pleased to release our 2023 year-end reserve report as evaluated by McDaniel. 2023 saw the highest year-end reserves in our company's history.
90 million barrels of oil equivalent, 1P, 147 million barrels of oil equivalent, 2P, and 207 million barrels of oil equivalent, 3P, and we achieved excellent reserve replacement of 154%, 1P, 242%, 2P, and 303%, 3P. This also represented the fifth consecutive year that we achieved the 1P reserve growth. These results were driven by success with development, drilling, and water flooding results in the Chaza Block, which contains the Costayaco and Moqueta fields, and the Sur Oriente continuation agreement, as outlined by Ryan.
During 2023, a combination of our strong reserves growth, ongoing reductions in debt, and share buybacks allowed Gran Tierra to achieve net asset values per share before tax of $44.48, 1P, up 288% from 2020, and $79.13, 2P, up 144% from 2020. With this significant growth in our net asset values per share over the last three years, we believe Gran Tierra is well positioned to offer exceptional long-term stakeholder value. The success we achieved in 2023 also reflects our ongoing conversion of reserves from the probable to the proved category.
With 147 booked, proved, plus probable undeveloped future drilling locations, Gran Tierra is well positioned to continue to grow the company's production and reserves in 2024 and beyond. I will now turn the call back to the operator, and Gary, and Ryan, and I will be happy to take questions. Operator, please go ahead.
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session for securities analysts. If you have a question, please press the star key, followed by one one on your touch-tone phone. You will then hear an automatic message advising you when it's weight. Your questions will be followed by your proceeding. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment, please, for your first question.
Operator?
One moment for our first question.
Okay, well, we'll proceed. Thank you, ladies and gentlemen, and we'll now conduct a question-and-answer session with the securities analyst. If you have any questions, please press star, the star key, followed by one one, and on your touchtone phone. You will then hear an automated message advising your hand is raised. Your question will be pulled in the order they are received. Please ensure that you lift your handset when you're using a speakerphone before pressing any keys. One moment, please, for the first question.
First question coming from Román Rossi with Canaccord Genuity. Your line is open.
Good morning, and thanks for taking my questions. I have a couple. I can go one by one. The first one is regarding the quality and transportation discounts in the fourth quarter. So we saw a 30% decrease quarter-over-quarter. I just wanted to know what's the main reason behind this increase, and where are you taking that for 2024?
Yeah, I think, Roman, can you hear me okay?
Yep.
Can you hear me now?
I can hear you, but there is a little echo.
Okay. Yeah, with the quality differentials, that mostly is just from the quality. Vasconia and Castilla did widen during the fourth quarter, and so we have seen that fairly consistent into first quarter. There hasn't been a substantial change from first quarter to fourth quarter curently, the Castilla differential is around $9, and Vasconia is around $5, which is effectively what we budgeted for this year.
Okay. And do you think that the widening was related to the Venezuela crude entering the market? And do you think that, do you think that could change if the sanctions are imposed in April?
You have reached the voicemail box of Gianluca Di Tiberio.
Sorry, Roman, can you hear me? I think the question was, you know, a result of Venezuela. Yes, that's part of it. I think there's two issues, Venezuela, additional potential crude from Venezuela, as well as actually, three, as well as OPEC starts releasing some of their cuts, we'd expect more of the heavy sours come to the market, as well as the start of the TMX line in Canada, which will get more Canadian heavy crude to tidewater. So I think it's a combination of those three factors, but it's really no surprise to us, and it's right around in our budgeted numbers.
Okay, thank you. And just one last question. Regarding OpEx, there was an increase on a per barrel basis. That's because of the lower production in the fourth quarter, or there were additional inflationary pressures there?
Yeah, it was just driven by the lower production. So we expect our gross operating costs to, you know, be flat to come down slightly in 2024, coupled with increased production. So we expect the per unit cost to drop.
Okay, thank you very much, Ryan.
Thank you.
Thank you. One moment for our next question. Our next question coming from the line of Ariana. Ariana, the line is open.
Hi, this is Ariana Kobal with Balanz Capital. I believe that there's a bit of air, but I'm gonna try to put... I have two questions right now. So the first one is regarding your hedging. I just heard hedging in place by you guys. What would it take or are you planning to hedge the year?
Yeah. With respect to hedging, we did have 15,000 barrels hedged with a floor or we do still, actually, until the end of first quarter. We have 15,000 barrels hedged with a floor of $80, with the put premiums around $3, which is really part of our physical contract with the off taker. And we are looking at adding additional puts in for the remainder of the year. We're just in the process of doing that right now.
Perfect. So that would take just, how are you thinking in terms of your hedging policy for the rest of production?
Yeah, sorry, I missed the question. It broke up a little bit on this side.
Yeah, like, in sum, like, what are your thoughts in terms of production hedge for the year?
Yeah. We'd like to have, you know, looking out 6-9 months, we'd like to have 30%-50% hedged, and then after 6-9 months, 25% hedge on a rolling basis, using puts, and really just looking for the downside protection. And you'll recall, too, is one of the things we have is a very strong operational hedge, given that we operate all of our production. So we have a lot of flexibility on our capital expenditures. To the extent that prices were decreased substantially, we very quickly cut our capital program. So that's one way, another way we protect the business.
Got it. Well, just one last one from my side. You can comment on your debt target for 2024 and how you think of minimum cash value target? And how does this cash position in 2024?
Yeah, I think, you know, our guidance out there. We're targeting year-end net debt EBITDA of 0.8-1.2x. So if we take the 1x, which is fairly consistent with what we've had in the past as a target, we continue to target that, and we'd like to have cash on the balance sheet of anywhere between $50 million and $100 million. And that will fluctuate throughout the year, just with payments to governments, capital program, et cetera. But over the course of the year, we expect to average in that $50-$100 million range.
Got it. Thank you very much.
Thank you.
Thank you. One moment please for our next question. Our next question comes from the line of Josef Schachter with Schachter Energy Research Services.
Good morning, everyone. This is gonna be a challenging call. If it breaks up, Ryan, if you could call me later.
Absolutely.
First question, you have in your guidance pretty good 5,000, and you had a very good quarter. You add in the volume success in first quarter, you get a 37,000 barrels. Are you expecting depletion the lower half of the year? No more exploration in the
Yeah, on that, yeah, I think it's, you know, the production is, you know, the Costayaco wells have done, exceeded our expectations, and that's one reason why we give a range. And so it's still early days on the wells. So, you know, we'll see how these wells progress over the next couple quarters before providing additional guidance. But we're still comfortable with the range right now.
Okay. How many locations do you still have in that area for drilling?
Sorry, just to clarify that question, in which area?
We're talking about the CYC discovery.
Talk about the South and Costayaco.
Yeah. So out of the 147 2P locations that we have, there is still 26 locations identified for Costayaco Moqueta, for example. And then at Oriente, we've got an additional 30.
Okay. Good. That's good. That's good info. Okay.
One of the things, Joseph, that Sebastien and the team are looking at on Costayaco, we've got some very good results with our reservoir modeling and targeting unswept areas. That's what's outperforming at Costayaco in the north. We have another area in the southern part of the reservoir, along strike, that we're going to try to target this year. So that's why we're excited about Costayaco.
Okay, good. One last one, one last one, one last for me. With the FFO in the models, you're gonna have some, some, in the past, you've talked about maybe new area in China to analyze everything and fix the right regime. Have you had any progress regarding the new head, the new chairman of the company?
Yeah, the answer to that is that we are always looking for opportunity. We don't see anything specific at the moment, but our business development initiatives are all long term, and so we're looking always for ways to increase value of the company, but we don't have anything specific on the horizon.
Okay. That's it for me. Thanks very much, and good luck with the successes in the drilling.
Thank you.
Thank you. One moment please for our next question. Ladies and gentlemen, please stand by while the speakers reconnect. Again, ladies and gentlemen, pardon the interruption. The speaker has been disconnected. Please hold while we reconnect the speakers. Ladies and gentlemen, please continue to stand by. Speaker has been disconnected. Please hold while we reconnect the speakers.
It's probably our side. Hello?
Yes, speakers, you're now back connected. We have a person from William Blair, Alexandra Symeonidi. Your line is open.
Hi, thanks for taking my question. So you mentioned that $36 million of the $100 million was used for the credit facility. Where will be the balance used?
Yeah, on the, so out of the $100 million, the net proceeds were around $88 million. $35 million went to repay the facility, as you pointed out, and the remainder would just be cash on the balance sheet right now.
Okay, thank you.
Thank you.
Thank you. One moment, please, for our next question. Our next question coming from the line of Alejandra Andrade with JP Morgan. Your line is open.
Hi, thanks for taking the question. Just a quick one for me, confirming that after you've repaid the committed line, you don't have any available lines at the moment, correct?
Correct. Correct. We repaid it and then terminated it. We are looking at, you know, a working capital facility to, you know, which coincide better with the business and some of the ebbs and flows of our cash outflows and inflows. But right now we have nothing in place, and we're comfortable just with our free cash flow and cash on the balance sheet.
Great. Thank you.
Thank you.
Thank you. And gentlemen, there are no further questions at this time. Please continue.
Thank you, everyone, for joining us today. We look forward to speaking with you over the next quarter and update you on our ongoing progress. I would like to thank the entire Gran Tierra team for their hard work in 2023, the fantastic results, and to our shareholders for their continued support. Thank you.
Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.