Description

Frontera Energy Corporation’s 9.700% Senior Notes due 2023

Current Price: 98.842

Current YTW: ~10%

Principle: $350mm

Pro forma Cash (US$ mm): $760mm

Thesis

We believe Frontera Energy Corporation’s 9.700% Senior Notes allow you to earn a ~20% return in one-year while being covered two times by cash. If you dislike Exploration & Production assets, Frontera also owns a stake in Puerto Bahia, a port located in Cartagena, and other midstream assets with asset value in excess of $350mm.

Capital Structure

Frontera closed on a new US$100mm Revolving LC Facility in May 2018. The new Revolving LC Facility required Frontera refinance the existing 10.000% Senior Secured Notes. As a result, the US$350mm 9.700% Senior Notes was subsequently priced just 30 bps tight of the Secured Notes in a volatile emerging markets environment. The pro forma capital structure is shown below.

Cash Generation

During 2017, Frontera’s cash flow from operations was $356mm versus $225mm spent on capital expenditures. This occurred during a year in which Brent was ~$55. At the current strip, with Brent over $70, we expect Frontera to generate a significant amount of free cash flow during 2018 and 2019 in addition to growing production.

Expected Return

We believe Frontera’s 9.700% Senior Notes due 2023 should trade at most 300 bps wide of the benchmark Colombian 5-year. This would lead to the issue trading up to 108.56 from its current price of 98.842. Along with the 9.700% coupon, this would result in a ~20% return over one-year with minimal risk.

Catalyst

Q2 Results

Hedges rolling off