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Gran Tierra Energy Inc.

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Msg  15269 of 15270  at  8/10/2022 1:53:39 PM  by


Canaccord reaction

Maintained Buy but lowered price target to C$2.80 from C$3.00

"Delivering a record quarter thanks to strong oil prices
After market close, Gran Tierra reported adjusted EBITDA of US$140M, up 17% QoQ,
thanks to high oil prices and a lower spread vs. Brent. Production averaged 30.6kbl/
d, 4% up QoQ and ~3% below our estimate, which we believe was the result of the
intermittent farmers' blockades in the Putumayo basin. GTE also delivered very positive drilling results and continued the deleveraging process, funded with internal cash flow generation. All in all, this was one of the best quarterly performances in the companys history.

Valuation and recommendation:
We maintain our BUY recommendation, but we are lowering our price target to C$2.80/
share (US$2.19/share) based on our 2022E DCFE and our 2022E 2P NAV estimates. This
new PT reflects a higher discount rate, considering the performance we have seen at the sovereign credit level, which we believe better reflects investors sentiment.
GTE is currently trading at 2.2x 2022E EV/EBITDA, significantly cheaper vs. historical
standards. Our PT maps to a 3.8x 2022E EV/EBITDA, in line with the LTM average, as we believe that there is significant value at current prices.

Production came slightly below projections:
Production for the quarter averaged 30.6kbl/d, below our estimate of 31.4kbl/d. We note that production has averaged ~30kbl/d during 1H22, still below the full year guidance of 30.5-32.5kbl/d. We have updated our forecasts for the remaining of the year, and we are now projecting an average output of 30.7kbl/d for FY22E.

Strong profitability even with hedging losses:
GTE booked US$140M of EBITDA, a 68% margin, even when the company realized ~US$18M in derivatives losses. Realized prices averaged US$99/bl after quality and transportation discounts thanks to strong Brent levels and a lower spread vs. our projections. We have recently updated our commodities forecasts, and we are now projecting realized prices of US$84/bl for 3Q22E and US$80/bl for 4Q22E. See Figure 1 for our updated commodities prices.

Promising perspectives for the rest of the year:
With our updated prices, we are currently projecting US$546M of EBITDA for FY22E at the lower end of the companys guidance as we are projecting a higher discount vs. Brent. Additionally, we are also forecasting a ~32% FCF yield that translates into significant cash accumulation. Tax reform and Ecuador: GTE management mentioned that it is still working to understand the impact of the proposed tax reform. We are currently not factoring any impacts, as the law needs to clear the congress. In addition, management mentioned that it could relocate further resources to Ecuador if it finds issues operating in Colombia.

Net Debt below US$500M for the first time since 2019:
Gran Tierra repaid its revolving credit facility, and thanks to a significant free cash flow, it ended the quarter with a net debt of US$481M (LTM Net Debt to EBITDA of 1.1x). Our model points to Net Debt to EBITDA falling to 0.8x by FY22E.
As we noted in previous notes, management indicated that share repurchases were
a possibility if net debt fell below US$500M. Furthermore, in todays release, the
company mentioned that it expects to maintain a cash balance in excess of US$75 to
US$100M and that it plans to deploy excess cash in share buybacks and other accretive
opportunities. We are currently projecting modest repurchases during 4Q22, but we
note that Gran Tierra could have almost US$60M in excess cash to spend. In that sense,
we would expect further announcements in the coming quarters around a buyback
program. Finally, we think that bond repurchases could be on the table, with the 2025
notes trading at ~US$85."

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