Q3 2021 Alvopetro Energy Ltd Earnings Call
Please call I'm joined today by Al and Howard, our Chief Financial Officer, and we will be having a question and answer session. Following the presentation. So I encourage you to log your questions into the zoom platform using the Q&A button or Alternatively, you can email your questions to social media alcohol Petro.
Hum.
Yeah.
I'll, let you read our cautionary statements at your leisure.
So the third quarter was another great quarter for us it was a record quarter, both operationally and financially.
Our results are really underpinned by our strong production performance to date.
Third quarter, we averaged 20 459 barrels of oil equivalent per day, that's up 39% year over year and up 4% quarter over quarter. We had just a slight decrease in October that you can see just shy of 2400 Boe's a day.
But again.
Excellent production performance and with that I'll turn it over to Allison.
Thanks, and good morning, everyone I'll jump, bringing tears from financial highlights starting with our operating netback.
Our operating netback is our overall profitability per barrel of oil equivalent.
That's reflected in the green bars, and you can see a steady increase kind of similar to production of steady increase in our operating netback since we commenced operations last.
July.
At the top of the bar is our realized sales price. So you can see.
Q3 was a record I'm gonna lifestyles price per Boe as well at $44 just over $43 per Boe and that was up close to $6 from last quarter.
Explain to me, increasing our operating net back this quarter as well.
<unk> sales increased just over a dollar per M, which was about.
17% compared to Q2 and that was as a result of our natural gas sales price Redetermination on August 1st.
And condensate was up as well our production expenses are reflected in the yellow bar is there in the that was fairly consistent.
And overall has been under $4 per Boe.
Since we started production and our royalties were up marginally this quarter, just because our royalties for natural gas are tied to Henry hub and with increasing Henry hub prices are real our royalties as a percentage of sales has gone down.
Moving on to funds flow from operations, which is the green bar here our funds flow from operations is our cash flow from operating activities before adjusting for working capital.
And similar to our operating netback is keen on alert a steady increase in that as well.
This quarter it was up two and a half million dollars I'll walk through the details of that on the next slide but just touching briefly on capital expenditures, which we've just shown here just to show the percentage of our capital expenditures are percentage of our funds both spent on capital at all.
This quarter was just under $1 $3 million the bulk of that is for our go more merck's Q2.
High end pipeline that we're building right now but.
But overall as a percentage of funds flow we've been fairly low.
That's roughly 17% year to date and 16% this quarter.
So moving on to funds flow, we saw as you saw on the previous chart. We saw an increase of two and a half million dollars in our funds flow from operation. That's mainly due to increased revenues of $1 8 million with about 80% of that due to that realized price increase that I.
Spoke about earlier.
As I mentioned royalties were marginally higher this quarter.
Production and G&A were fairly consistent we did see a lower current tax expense in Q3.
As we noted in our Q3 financials, we did.
We received approval for the <unk> tax incentive which is E. S. C tax incentives on our natural gas profits and it reduces our inherent tax from the 34% statutory rates in Brazil to a $15 two 5%. So overall year to date, our current tax.
Is just under 4 million and is quite low relative to the earnings that we reported which is great.
The other the other item impacting funds flow was we did have recognition of just over 900000 of other income in the quarter. A large portion of that is nonrecurring and relates to a retroactive tax.
Tax legislation change that improve some tax credits that were eligible for so therefore, it's a bit of an increase there compared to like a large increase there compare to.
Last quarter.
So I just thought I would explain our net income and a bit more detail because despite that improve funds flow.
We did see a decrease in our in our net income and virtually all of that you can see there is due to foreign exchange. We do have some larger foreign exchange gains and losses that go through our income statement.
And it's it's all basically sort of an accounting phenomenon relating to inter company loans and and if you look at our statement of cash flows you'll see that the bulk of any foreign exchange loss or gain it is generally adjusted out around our cash position. So it just has to do with accounting for intercompany loans.
Because our our subsidiary in Brazil.
Or was that U S. Dollar U S. Dollar funds, there's an inherent foreign exchange fluctuation on that despite the fact that the eliminated on consolidation and it's noncash, but that's the main reason for kind of the the fluctuating net income that you see in our statements.
The other item with our depreciation and depletion did increase a bit this quarter with increased production levels. So that explains about there.
And then the other thing is turning to our balance sheet and our overall leverage position. So there's a chart here the height of the Orange bars reflects our net debts and we define net debt as our credit facility balance less any working capital surplus. So you can see.
Last year as of September 30th we had net debt of $13 1 million and what's happened as of September 30 of this year, our working capital surplus of $6 8 million actually exceeded our credit facility balance. So we end up with that.
Recovery there of 300000, you could think about it net cash overall, our actual cash balance has been increasing we ended the quarter with $8 1 million.
We have it.
$9 million of our credit facility balance and brought that balance outstanding to $6 5 million as of September 30th and as I mentioned, our working capital at $6 8 million is after some pretty significant.
Just something in Q3 for our share repurchase, which we spent $1 1 million on and then we declared our first dividend that was another $2 million and despite all of that our working capital surplus.
We're still above that credit facility balance, which is which is great.
Excellent. Thank you all.
So we have the most recent semiannual price the gas price Redetermination happen on August 1st of a 2021, our pricing increased about 24% over $7 U S per Mcf.
We see our third quarter results included two months of that new price in Q4, we'll have a full three months.
Then looking forward on February 1st of next year, So just less than three months away.
That's another much larger price increase.
46%, so that'll bring us up we're expecting over $10 U S per Mcf.
So in February that would be the first time.
Our price Formula uses the benchmark prices from the second half of this year and obviously we've had.
Pretty significant appreciation spanned all three of the benchmarks that are used in a price formula being Henry hub gas UK, MVP gas and Brent oil equivalent.
If we use our independent evaluators price forecast as of September 30th you can see in the dark Black line going forward.
We have several periods of pricing at our ceiling.
And it compares quite favorably to the price in Brown that you can see below that which was the price forecast used in our last reserve evaluation effective at the end of last year. So we've had certainly a nice uptick there.
Yeah.
Moving onto our capital program is also and I would like to do.
Had a pretty great first 15 months of production and cash flow are now extremely well positioned to execute our own organically funded growth plan and to be clear. Our next objective is to completely fill our midstream assets and take us up to a new production plateau of 18 million cubic feet per day.
It's kind of a multi pronged program first we have given notice to increase our gas plant capacity up to 18 million cubic feet, a day or half a million cubic meters a day, which is about a 25% increase from the current capacity.
On the conventional exploration side, we're getting close to spud our first two exploration wells starting with the 182 C. One location and then followed by the <unk> one location in the U S. You can see those say almost immediately north of our <unk> cap rate, which is our gas plant and they have with success we would.
Tie that in to a new pipeline connecting directly to the plants.
Next on our Merck at two two.
Development planning the sarcoma project.
The Red pipeline that you see on the eastern side of the map connecting from the hub area within the cap rate unit area.
To tie into 183, well is well underway, while we expect that along with the surface production facilities to be in place to allow that well to be tied in early next year and then we really have the infrastructure in place to start a broader development plan starting with the 197 one stim.
Stimulation and tie ins through that Orange pipeline.
The pipeline that you see there.
And then following that.
Plan to drill our first fit for purpose go more development well with the Mers one location.
The well pads sits just to the south of 183, one its right along the pipeline right away by the way.
All will be drilled in a DB fashion normal straight so and the nice thing about dislocation as we have some pretty interesting uphold conventional exploration potential that we can drill through all the way through to the to the global targets. So.
While the other nice thing is because it's along the right away as we can tie it in pretty much immediate.
So just in summary, obviously, we delivered some pretty strong results since coming on production I think certainly well ahead of expectations. Our funds flow from operations in the first 15 months has been $26 million U S. Obviously, our third quarter was our best quarter, yet with funds funds.
Flow from operations of close to $8 million.
On the debt side, not only did we extend the maturity we lowered the cost of that facility and we've been really aggressively repaying debt.
In their first year of operations.
Alison noted as of the end of the quarter, we actually flipped over into effectively a net cash position.
So despite having declared a dividend despite doing our share buyback.
Been able to basically eliminate our debt.
We ended the quarter, so pretty strong balance sheet.
As for the share restructuring not only was that I think an accretive transaction for us it really helped pave the way to go.
We're a much more cost effective dividend plan.
Only bought back about one 3% of our stock, but it eliminated close to I think 80% of our shareholder accounts.
All of this together allowed us to start our dividend program about six months ahead of schedule in the third quarter at <unk> <unk> per share, which is a current yield of just over 6%.
We're certainly looking forward to our next price Redetermination and just under three months time.
Like I said, we're really well positioned to start the second part of our balanced capital allocation model.
As also noted we've been significantly.
Under investing in the capital part of our business and doing a lot on returns to stakeholders focused on debt primarily in now shareholders, but we really I think not only have a lot of strong catalysts in the very near term, but we've really created a unique yield plus growth investment opportunity for our shareholders.
With that we're going to turn it over to the question and answer session. Just to remind you can click on the Q&A button or alternatively email your questions into social media Petro Dot com.
Okay.
Okay.
Okay. My first question is relating to the enter flex expansion notice what does that entail and when will it be on the stream.
Yes, so very simply it. It just involves this is something we had envisioned in our original contract. So it's it's one extra compressor theres also an overhead compressor.
And a dual path Thompson Bell.
You know very simply.
Expand plant capacity up to half a million cubic meters a day.
The fee is another $35000 U S per month under a pre existing agreement and we expect that to be on stream by June 1st of next year.
Yeah.
Can you give an update on the drilling status of the new gone well.
Yes.
So in order of what I talked about there the 183, well, which has already been drilled obviously.
The pipeline is getting very close to completion and then we have some surface production facilities that we're installing as well so that's well on track to be on stream in the first quarter.
The 197, well is also a pre existing wells that we drilled and then once we have that infrastructure in place or then positioned you know we need to get a permit for the additional pipeline which is underway.
And and then we would stimulate that well and tie that in.
Our target would be to have that happen some time.
Later in the first half of next year and at the same time, we were.
We have an application into drilling stimulate these numbers one location. So it's subject to permitting but ideally we would be spotting that well sometime.
Midnight mid next year.
And then when would you expect the volumes to come on.
Yes. So the volume is from 183, one in the first quarter.
We would have the volumes for 197, one for the second half of the year and then the.
The volumes for the Mers one location again all of this is subject to the permitting timing.
We're hoping to have that on for the fourth quarter.
Okay.
What sales price skus teacher, although petro into 2022.
Yes, so right now based on our <unk> and keep in mind, the benchmark pricing the way. It works is we use our.
Store call Blender average, where almost all the way through.
Five.
What four and a half months through the second half of the year here. So we've only got one.
One and a half months left of actual prices that will then dictate our February one price. So that's almost been determined and as you can see it's pretty much it.
The ceiling within our contract.
If you use our AR reserve evaluators price forecast that you saw on that prior slide we would expect to continue at the ceiling price through the entire period.
A period of 2022.
Yeah.
Sorry to be clear, that's the price above $10 U S per Mcf right.
Please expand on the volume and pricing both have been gradually increase increasing is the increase in volume due to demand.
Our capacity has numerous pretzel that sir.
Thank you.
So keep in mind, we originally had a gas sales agreement with with at all.
Al.
After <unk> units here, but roughly 5 million cubic feet. A day was our initial firm capacity. So we negotiated that up to basically 11 million cubic feet. A day, that's been the firm volume within our gas contracts.
But we do have a price advantage relative to Petrobras and there has been.
Growing demand on the on the electricity.
Thermal power generation side as well as overall demand.
And all of that together has allowed us to deliver not only firm volumes to riskier gas our off taker, but flexible or interruptible volumes as well and then in parallel credo, our initial capacity with enter flex under our gas processing facility was actually.
A similar level, so the 11 million cubic feet a day, what we did earlier in the year as we did a higher rate test and this is partly because of our gas composition and partly because the plant is performing I think quite well we were able to despite that contractual limit we were able to test the facility up to up to.
11, 11, or just over 11 million cubic feet a day of capacity so.
That's allowed us to increase that to go further obviously, we need this plant expansion that we're talking about so the limit lately has really been our gas plant capacity, but it's been pretty coincident with I think what works well for our gas sales agreement today as well as from our unit production perspective.
I'd say the units actually been our partners also been dispatched into their thermal power projects. So together with our partner, we've actually been able to produce well above the original plan production plateau from the unit so.
It's really those three things altogether.
And with the ramp up to 500000 cubic meters a day.
Enter flex facility will that occurred discretely all at the same time or increase in stats from now until mid twenties range. You know it should be all in one big step on on on June one.
Great. The next question is the total amount of dollar sales from condensate in the quarter and I I'll answer that one.
And so we had just under $10 million of total revenues in the quarter and just under 800000 of that for 779000, <unk> heme from our condensate sales.
The next question and are you currently selling gas at a floor price due to the changing variables FX rates et cetera can you provide the current ceiling prices as of October or September month.
And I think that you went through that in the slide and we expect to be at the sealing them early next year starting in February 1st.
Based on <unk> price forecast ceiling price actually extends for for past. The end of 2022. So encourage you to look back at that slide and if you have any remaining questions certainly feel free to reach hotels or myself.
With your improved balance sheet and strong cash flow do you see any M&A activity as possible in 2022.
Yeah.
I think M&A activity is always possible, but it's something that we don't talk about it until it's done.
To be fair there has been some very large petrobras packages that have been selling at very high prices.
So I would expect certainly in the onshore industry in Brazil is going to be.
Changing rapidly they all of a sudden you're going to have all independent parties.
No Petrobras involvement.
This will be a slow process, but over time, I think youre going to start to see.
More activity than you have historically, so something thats hard to comment on them, though.
We did have a question about our button and in Canada. It is Remembrance day Tomorrow November 11th and in November we were poppy remembering that she served on behalf of our country go about it.
Uh huh.
Yeah.
And we actually have no further questions.
Excellent well. Thank you everyone for attending look forward to our next call and if you think of any questions. Afterwards, certainly again reach hotel center myself and thanks again for your attendance.