Fitch Ratings has affirmed
In addition, Fitch has affirmed Frontera's senior unsecured notes at 'B'/'RR4'. The Rating Outlook is Stable.
Frontera's ratings and Outlook reflect its small and concentrated production profile, fixed production costs, and gross leverage, which is defined as total debt to EBITDA, of 0.8x as of the LTM
Key Rating Drivers
Small Production Profile and Reserve Life: Frontera's ratings are constrained by its production size. Fitch expects Frontera's production to be close to 42,000 boed in 2022, and average increase to 50,000 boed between 2023-2025, approximately evenly split between light and heavy crude. The increase in production will be supported by the company's development and near-field exploration portfolio in
The ratings incorporate Frontera's weak PDP reserve life of 2.3 years as of YE 2021, the lowest among Colombian peers, and its concentrated production profile, where Quifa represents nearly 40% of daily production (16,150 boed), followed by Guatiquia at almost 22% (8,949 boed) and CPE-6 12% (4,916 boed). The company operates all three blocks and owns 100% of both Guatiquia and CPE-6, and has a joint venture, working interest of 60%, with
Fixed Cost Production Profile: Frontera has a fixed production profile that limits its financial flexibility. The company's half-cycle cost is estimated at USD29boe in 2022, in line with 2021 and 2020. The high production cost is mostly due to its fixed transportation cost, which is estimated to average
Leverage Profile: Frontera's gross leverage, defined as total debt/EBITDA, is strong for its rating category. Fitch estimates gross leverage will be 0.7x in 2022, assuming an EBITDA of
Free Cash Flow Negative: Frontera is expected to be free cash flow negative throughout the rating horizon, due to its high capex costs. Capex is estimated to average
Derivation Summary
Frontera's production profile compares favorably with other 'B' rated Colombian oil exploration and production companies. Over the rated horizon, Fitch expects Frontera's production will average 48,000boed in line with
Frontera's half-cycle production cost was
Fitch expects Frontera's strong capital structure's gross leverage will average 1.0x over the rated horizon and total debt/PDP of
Key Assumptions
Fitch's price deck for Brent oil prices of
Vasconia discount of
Gross Production of 41,600boed in 2022; average of 50,300boed between 2023-2025;
Gross Production costs averaging
Gross Transportation costs averaging
Gross SG&A cost averaging
Average annual capex of
No dividends payments over the rated horizon;
Annual dividends received from ODL of
Stock repurchase of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Net production maintained at 45,000boed or more, while maintaining a 1P reserve life of seven years or greater and PDP reserve life of at least four years;
Maintain a conservative financial profile with gross leverage of 2.5x or below and total debt/1P reserves of
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustainable production size declines to below 30,000boed;
1P reserve life declines to below seven years on a sustained basis;
A significant deterioration of credit metrics to total debt/EBITDA of 3.0x or more;
A persistently weak oil and gas pricing environment that impairs the longer-term value of its reserve base;
Sustained deterioration in liquidity and operating profile, particularly in conjunction with more aggressive dividend distributions than previously anticipated.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: Fitch views the company's liquidity position as strong, supported by cash on hand and a manageable debt amortization profile. As of
Issuer Profile
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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