2021 was a year of strong recovery for the energy industry following the many challenges that the world faced in 2020.
One company illustrating this rebound is Gran Tierra Energy Inc (TSX:GTE, LSE:GTE, NYSE-A:GTE, ETR:G1P), which recently reported financial and operating results for 2021 showing a jump in net income.
Gran Tierra Energy is an independent international energy company currently focused on oil and natural gas exploration and production in South America.
The company - which trades on the NYSE American, the Toronto Stock Exchange, and the London Stock Exchange under the ticker symbol GTE - is currently developing an existing portfolio of assets in Colombia and Ecuador and has also said it will continue to pursue additional new growth opportunities that would further strengthen its portfolio.
Following the strong 2021 results, Proactive caught up with Gary Guidry, president and chief executive officer of Gran Tierra Energy to find out more.
Proactive: Gran Tierra Energy recently reported 2021 net income at the highest level since 2018, what were the main factors driving this performance?
Gary Guidry: I think it's a combination of three things. One is our production. We've driven our production up, and that's really by developing the big waterfloods that we have. The second is our cost structure. We took advantage of the COVID downturn to take a look at our cost structure itself and do some structural cost-cutting that will stay intact going forward. And as production has resumed, with both operating costs and capital costs we've been able to implement some optimization. And then the third thing, of course, is price, we're back to a realistic oil price going forward.
So the waterflood optimization program has really driven your production growth as well. Could you explain that?
Yes. We have four major fields, plus some smaller, minor fields, and the most important thing is that we operate all of those ourselves, so we can control what we're doing, when we do it, and that includes pilot testing. All of these oil reservoirs are conventional sandstone at reasonable depths, and all are excellent candidates for enhanced oil recovery through water flooding.
The biggest field that we have, which is called Acordionero, is one that we acquired in 2016 that had just four wells in it at that time. But what we saw from those few wells is a fairly continuous stacked reservoir, and at a high dip. If you add up all of those things it's perfect for waterflooding. If you take something that normally you might get a 10% or 15% recovery factor, just by displacing oil with water and having the right spacing on your wells, you can go up to a 25% to 40% oil recovery factor. So it's a big jump.
Now that doesn't just happen, you don't just start injecting water. The important part is you have to put the infrastructure in place. And so between 2017 and 2019 we made all of our big investments in terms of power generation, facilities and gathering infrastructure. So now that all of that big capital spending is behind us, it has put us into the position we're in today where we’re able to optimize the water injection and drive those recoveries up. And so it's a great place to be.
For 2022, the company has planned development drilling programs in the Middle Magdalena Valley and Putumayo Basins in Colombia. Can you tell us more about this?
The Middle Magdalena Valley in Colombia is where our largest field is – the Acordionero field that I just mentioned, where we're water flooding. We generate all of our own electricity using natural gas and we're just in the process of ramping that up. We're also going to try a pilot test this year. Over the last couple of years, we've done a lot of lab work to enhance recovery even further than that previous range of 25-40% recovery. And so where we're at in the Middle Magdalena Valley is that we're drilling more wells and trying to get a tighter spacing to continue that water flooding.
In the Putumayo Basin, we have some very good fields that are our number two and number three fields. These have lighter oil and very continuous sandstone reservoirs, and again, are great candidates for enhanced recovery through water flooding. And so we're doing the same thing in those fields. We've spent the last couple of years planning and studying how to approach enhancing that recovery. We drilled a few wells last year in Costayaco and had better than expected results in those fields. So we're quite excited about what we're going to do in the Putumayo Basin as well.
Gran Tierra Energy also expects to drill its first exploration wells in Ecuador. What do you expect from this region?
The Putumayo Basin of Colombia is actually an extension of the Oriente basin in Ecuador - it's all one basin. So we have lots of information, lots of geological work that we've already done. And what we're really excited about in Ecuador is that there are some massive oil fields that have been discovered, which have produced about 6 billion barrels of oil out of them in total so far. So there is lots of opportunity to continue that exploration program.
This the first time in many years that the industry in Ecuador has been given access to lands under a contract very similar to our contract in Colombia - to go in and look for new reserves and explore those fields. And so we're really excited about moving these along as fast as we can considering the COVID downturn and slow down. But the governments, I would have to say, in Colombia and Ecuador, both are very helpful to us. They are quite keen to have capital investment in each of those countries and we're now at a point this year that we can actually start executing.
In the company's high oil case for 2022 guidance, which assumes a Brent oil price of $80 per barrel, you forecast that Gran Tierra could generate $100-120 million of free cash flow in 2022, which would allow it to completely pay down its bank credit facility before the end of the first half of 2022. Is this pretty likely as oil price volatility continues?
Yes, even if it is at $70 a barrel. We put some hedges in place for just the first half of this year, to make sure that we can pay down that credit facility by mid-year. At $80 and $90 a barrel, every $10 a barrel of Brent price increase, we add about $60 million of free cash flow to our income statement.
So we're in very good shape balance-sheet-wise. And by the end of this year, we certainly expect to have about $100 million of cash on our balance sheet, with our short-term debt credit facility paid off, putting us in great shape.
Gran Tierra Energy‘s 'Beyond Compliance Policy' identifies significant opportunities and benefits to the environment and communities. What is the significance of this for the company?
I think the big significance is that for the last five or six years we have had a relationship with Conservation International, a non-governmental organization out of Washington DC, which is very experienced in reforestation. The Putumayo region has had lots of clear-cutting due to illegal crops. As a result, we saw an opportunity to give back to the local communities in terms of reforestation. We've spent about $12 million and we are continuing that program. We're also working with the government on crop substitution to help farmers grow things like Cacao, chocolate, and coffee. And so the agriculture side is something that we're working very hard on.
We have also put in big power generation facilities at our fields in Costayaco and Moqueta, and we're now pushing that out to our smaller fields. Our objective is to get to 100% natural gas power generation at all of our facilities in Colombia, and we'll do the same thing in Ecuador. And so I think the philosophy for us as a company is that we follow the rules, and we follow the regulations but we also look for things like reforestation, where we can go above and beyond, just because it's the right thing to do. That permeates our entire company. We are always looking for things that we can do better and it's something that we're quite proud of as an organization.
So, what should Gran Tierra Energy shareholders expect in the near to medium term?
If you look at what we published for reserves at the end of 2021, we were quite excited that we increased our reserves on a Proved Developed Producing and a Total Proved basis. But we don't just look at our reserves volumes as a company, we are very focused on our net asset value and net asset value per share. So each investment that we make, we look at how does that positively impact us as a company in terms of long-term value creation for shareholders of the company. And you'll see at the end of 2021, we increased our Total Proved net asset value per share by over 100%.
We currently trade at a fraction of what that net asset value per share is and, certainly, we will grow into that in terms of where the share price trades. But more importantly, I think you'll see that we will continue to increase the underlying value of our assets. The reason I can say that confidently is because we've already invested the big capital, and now it's really a matter of optimizing those reserves. That's what we're really focused on.
The second thing is that we're spending about 30% of our capital program this year on exploration. We're in Colombia and Ecuador for a reason. These are mature and predictable basins with access to infrastructure to readily get our oil to markets. But with a lot of remaining exploration upside, we certainly expect to find more oil and gas in these basins. And that's why we're making these investments going forward. So, I think that those are the things that investors should expect from us - continued growth in our underlying value. We operate our assets, so our destiny is in our own control.
Contact the author at jon.hopkins@proactiveinvestors.com