Q1 2022 Alvopetro Energy Ltd Earnings Call
Operating netback is our operating profitability per unit of production and we used barrel of oil equivalent.
And we went to just under $54, which is the green bar that you see there in Q1.
Because of our sale realized sales price increased to $62 compared to $44. In Q4. So that's a significant increase in recall. This is only two months of production at that higher gas sales price. So you.
You should see an even further improvement in that in in.
Q2 going forward when we have a full quarter at those higher prices.
Our production expenses, we've maintained below $4, which came on production in July 2020.
So those overall, we have most of our production expenses are fixed in nature. So we're able to keep those costs low and royalties have been consistent as well. So overall very high operating netback margin.
87% being the highest one to date hereof and overall since inception over 80% I think it's over 82% actually.
Since inception and on the royalty front, we talk about it in our MD&A, but we did get approval for a reduction in our government royalty rate effective may 1st so so that should help.
Improved.
Our our results going forward as well.
So then moving on with those strong operating net backs, we have a record funds flow from operations this quarter.
Increasing to $10 $9 million, which is great.
$4 4 million from last quarter, and that's basically all due to that increase in our realized price because our our production we've been able to maintain close right around a 2500 barrels barrels per day barrels of oil equivalent per day and that's at the higher price and then a little bit lower G&A compared to Q.
For.
It was very strong funds flow from operations this quarter.
Similarly, net income increase.
Increased as a result of those.
Our funds flow from operations and then in addition recall that we continue to be subject to foreign exchange.
Fluctuations and and this quarter was a foreign exchange gain of 5 million compared to a loss of <unk>.
<unk> 9 million or so so a swing of six close to $6 million in our net income most of that is on our intercompany loan balances as they went into this a little bit last quarter about.
For accounting purposes, we were required to recognize foreign exchange gains and losses on intercompany amounts even though those are a limit the balances themselves are eliminated on consolidation. So that will continue to see fluctuations in net income for the for foreign exchange, but most of that if you look at our statement of cash flow is.
<unk> out in our statement of cash flows. So so it's all really non mostly noncash foreign exchange.
And then those were significant increases in our net income and then with the increased funds flowing in that foreign exchange gain in the period, our deferred tax was higher this period, which caused a bit of a reduction but overall net income increased $8 5 million compared to last quarter and again record net income.
And then moving on with these strong cash flows and our continued strong production levels well ahead of expectations.
Our working capital, which is our current assets less current liabilities and shown in that Green bar there has increased steadily since.
July 2020, and the Orange bar the Orange line is our credit facility and you can see starting in Q3 2021, our working capital actually started exceeding our credit facility bonds and that gap has grown.
And as of Q1, our working capital was $12 3 million and our credit facility balance of $5 million, So $7 3 million access there.
And with the strong cash position and strong working capital, we didnt noticed by our lender that would we would repay an additional $2 $5 million.
It's effective next week, so that's actually half of our balance that was outstanding at March 31, and it leaves us with an outstanding balance of $2 5 million.
And that's at least at these cash flow levels that well under one month of cash flow.
Okay.
Thank you Allison.
So obviously the record production and the higher gas prices made Q1 of our strongest quarter to date.
Funds flow from operations as I also highlighted.
Increased.
68% quarter over quarter, and 129% year over year up to close to $11 million in the first quarter alone.
Can see here on this graph just kind of where we've been allocating our capital resources since we came on production.
During the first year of operations.
We had a big chunk allocated towards repaying the credit facility is Allison highlighted relatively low amount in yellow related to capital expenditures.
The strong results, we were able to start our dividend.
Graeme about six months ahead of original plan starting in the third quarter.
You can see that in the greenway, because you're actually increased that this quarter by 33% up to eight cents per share.
And then in the first quarter of 2022, you can see us.
The commencement of our 2022 capital program, so certainly more allocation to that and I'll walk through kind of the early the early.
Impacts of that.
To put this in perspective, the first seven quarters of production. So since July 5th we came on production for Merck accounted for a project you can see we've had funds flow from operations in excess of $43 million.
Close to quarter Thats going on to the capital investments.
A little over a quarter of its credit facility and interest payments and about 16%.
Two dividends.
Yeah.
So.
Obviously, we're very focused on our next phase of growth to be clear our near term objective is to get to 18 plus million cubic feet. A day that would represent a 30% increase from where we are today our longer term target is to double the size of our plant in <unk>.
Roughly 50% of the city gate that sits right at our gas plant location.
Our growth is planned to come from a combination of areas. So first of all our gas plant expansion is on track to add back capacity, we expect to be able to produce and sell at least 18 million cubic feet a day.
Starting the middle part of this year.
Our cabaret asset continues to perform very well along with our partner there we do plan to draw one.
One additional well targeting both some shallow development potential but more importantly, some exciting.
Exploration potential on the western side of the fault targeting the same reservoirs, we're producing from today, so that could further expand the productive capability of the cap rate field and then we've got about 100% product projects that we're investing in our 2022 capital program. We just finished drilling the first of two conventional.
Exploration wells that are announced are success based on logs there at the 100 VTC one location.
Rig is now on the 183 B, one location and we should start drilling shortly.
As you recall.
Jay It independently assessed both of these prospects at four 6% and $5 9 million barrels of oil.
Perspective versus resource, respectively, with 47% to 40.
Yes.
44% chance of success.
Our plan here with the successes would be the time to tie these in directly to our gas plant directly to the sociopolitical involve building a new pipeline.
And then lastly, our America <unk> go more project.
It sits immediately north of our cap rate assets.
Walk you through what the capital plan looks like here, but we're I think well positioned to implement our broader scale of global development plan.
And we're very excited about our 2022 capital program.
Yeah.
So.
Just to talk about are 182 C. One results.
We drilled a nice.
Sorry, so if we reached total depth here in April this was a multi zone prospects. So we were targeting the Agua Grande and <unk> formations. What we encountered you can see on the well logs here on the left is a very continuous very thick 36 meter Agua Grande <unk> about 25 meters.
Of that you can see on the right hand side meets our net a cutoff thresholds, but it is a nice fit continue with sand that we've got here the well logs show average water saturation of about 34% and average cross the of eight 2%.
One of the things that did happen is as we drilled through the Agua Grande immediately almost immediately thereafter, we crossed over the main bounding fault on the eastern side of the prospect and we ended up not encountering the surgery.
<unk> formation, which was the second target in this well.
What happens is after we get our well logs, we go back and re calibrate our seismic and all the time desk relationships.
And once you have a well result, you can much better correlate the individual side.
Seismic sequences in the seismic character character to the actual reservoirs.
E validate based on the log it and we can also better image default. So what our plan here is to drill a follow up locations further to the east and it's kind of multi purpose. So the first objective is to help better define the lateral extent of our aqua garnering.
Discovery, we don't see any water later or any thinking on the logs. So we'll need to drill further to the east to really test the limits of this but it's pretty exciting.
The other thing that we think can happen because we're very close to default what can sometimes happens.
These cementation effects that can occur.
So we think as we move further away from default to the east that will get more typical Agua Grande proxy that we see in the analog fields all around us.
And then the third of effective obviously is we still expect to encounter the certainty formation in that more easterly location when we drill the follow up well.
So obviously pretty exciting to drill.
Our first exploration well and have a success here, we look forward to testing the well later this quarter.
So moving on to the 183 B one location like I said the rig is on location here now.
This is another 100% working interest prospect.
It sits immediately to the northeast up to 180 to sweep one locations. So you can see the fault block that we drilled in two four to 180 <unk>. This is our fault block immediately to the east that you see here and on trend with the analog kariba.
Again, it's a multi zone pre rift prospects targeting the same Agua Grande and <unk> sands.
On the cross section on the left here you can see the prospective reservoirs stacked up against basement on the other side of the bounding fault.
Again this was evaluated by T L J.
$5 9 million barrels of oil equivalent best estimate perspective resource with a 44%.
Covered.
So moving on to our go lower Mercury two project.
The cap rate field sits within this blue outline here. This was our original pipeline from cap rate flowing to the west to our gas plant location. We've completed the construction of the pipeline up to the 183, one location and we're in the final phases of.
Constructing the surface production battery and facilities, we expect to be able to have that well on production here later this quarter.
Then the next step will be to complete the tie in of the 197, one well stimulate that well and then tie that in we are waiting on permits to do that but we're lined up to execute that plan very quickly or immediately after receipt of the permits and then the next step will be to drill the first two fit for purpose go more development.
Wells off of these pads.
2022 capital program that you see here.
Targets the development of our <unk> reserves. So on the production chart here, it's the lower latest green color on the capital chart on the bottom right of the capital that we've allocated in the reserve report in 2022.
Have a multiyear development plan here targeting the contingent and prospective resource that sits.
To the north.
You can see on unrest best estimate basis with success here. This facet alone has the potential of contributing up to 20 million cubic feet a day for us. So we're pretty excited about having all this infrastructure in place and starting to drill wells here later this year as well.
Just to put this on the phone.
Again, it's hard to give you a sense.
When do you <unk>, one prospect, obviously drill test that later this quarter.
The 183 B one location.
We're getting ready to drill that right away. We will then move the rig back to the 182 C.
One location to drill the follow up well.
During that same period of time, we expect our joint.
Unit wells to be drilled with our partner here.
On the America to two projects like I said, we're very close to having the <unk> one well tied in and then subject to permitting the rest of this activity that I talked about will evolve through through the rest of this year because thats all pipeline connected we can bring this production on relatively quickly as you can see that highlighted by the.
The Green Flames here, because we have a pipeline to build.
For the two exploration prospects that the production adds actually wouldn't come until 2023.
And then the last part of this is just our gas plant expansion is on track for the middle part of this year, where we will have capacity of at least 18 million cubic feet a day available to us.
So just in summary, we continue to think elbow Petro off rate offers an attractive investment proposition no matter what youre investing focus is I think we've highlighted that we're continuing to deliver results well ahead of expectations Q1 was obviously, a new record for production and cash flow for us.
Our attack or <unk>.
<unk> prices are obviously very attractive, but also but also walked through our operating netback margins. These are industry, leading margins up to 87% in the first quarter. Our balance sheet continues to get even stronger we're almost debt free and certainly on a net cash position in an extremely good position.
That helps a underpinned underpin our balanced.
Reinvestment and stakeholder return model that we've talked about for some time, we're going forward, we're looking to basically allocate half of our cash flows to organic growth and half of our cash flows and returns to stakeholders.
If you look at it from a value perspective, we were trading at less than half of our two key asset value and thats before considering our most recent exploration success in any of the potential associated with that 2022 capital program that we've reviewed.
Were also trading at about three times annualized fund.
<unk> flow from operations. So certainly I think we're extremely attractively valued right now for yield of investors, obviously, delivering a dividend yield over seven 5% paying dividends quarterly paid in U S dollars and then for growth investors. Obviously I think we've got a very exciting 2022 capital program.
Significant near term catalysts, especially when you consider the potential value relative to our current market capitalization.
So with that.
I think we're ready for the question and answer period.
Before we get into that just a reminder for those on the webcast you can submit your question by hitting in the Q&A button.
Within within zoom.
Okay great.
I'll start with a few questions maybe I'll start with the 182 C. One well.
With that let me, just Australia, where the log calculations and net pay on 180, QC one comparable to other wells producing in that formation.
Yeah. So.
The thickness was actually probably at the very high end of the range that we would have expected I would say the porosity is certainly lower than what we expected but still.
For gas within a good range and I think on a combined basis certainly within our range of expectations for the Agua Grande and I think we feel like I highlighted we still expect to also encountered the certainty we do.
Just to reiterate do think as we move further east from felt that we're going to get the more typical Agua Grande frosty that's seen in the analogous pools.
To the north.
Eastern northwest of Us.
And when do you anticipate completion work on 180 <unk>.
So we're just in the final phases of contracting, but we do expect to have that work done later this quarter.
Is it possible to use the <unk>, one well as a producer or do you need to drill development wells before bringing the yield on production.
We've tested the first but yes, no way it can be a producer.
Because we have a pipeline that project between permitting and construction.
Roughly.
A year.
Between now and when the pipeline is committed are completed we can drill.
The delineation and development wells and bring on hopefully.
No.
Chunky production based but step one we need to test the well.
And the follow up well on block one into queue and appraisal or is there another interval you're now chasing.
Yes.
Again, just to kind of reiterate what we've reviewed on that slide as its kind of.
We're drilling that for three reasons, because we have got what looks like gas saturation from top to bottom which is fantastic.
It doesn't really constrained the limits.
Of what we see there so to really understand how big the Agua Grande formation could be we have to drill further to the east and further down dip to see how how far away the hydro hydro.
A hydrocarbon column actually extends so that's the first objective.
The second objective is to target the better porosity that we would normally see in the in the Agua Grande.
As we move further away from the fault and then the third objective, which gets to your question is yes, we absolutely still expect to encounter the <unk> formation.
And that's why we need to grow further to the east because we cross default rate below but below the Agua Grande formation. If we just move over we will encounter the certainty.
On the on the eastern side of the ball.
And has the success at <unk> de risked the chance of success at your second exploration well on block 183, but it should start 180 Threep Barnwell.
Yes.
Certainly certainly I feel great about it but I think technically they are all independent prospects.
Part of the reason <unk> assigned 44% to 47% chance of success in this area as we do have analog tools that show that these folks have good ceiling capacity, we talked about that before we drilled the well.
This just adds one more data point to Peru that these false have good ceiling capacity, but technically its a different bulk it's very close but technically still has.
Those typical type of exploration risks associated with it.
Yeah.
And can you review your drilling plans after 180 <unk> one.
So yes, we might have answered a couple of these questions.
As we went through but I think this slide is a good job of walking through the catalysts and the drilling timing. Obviously these things are always a little bit in flux in the America 202 program in particular here. We do have some permits that we think are in the final phases of getting.
But.
The timing of sequencing sequencing is drilling the 183 B one well next the rigs on location go back to the 182 C.
One pad and drilled a follow up well wishes.
Calling 180 to see too so that's the.
The well to follow up on the recent exploration success in the eastern location. We then moved that rig.
Merck or to do project drilled the first of two.
Development wells fit for purpose development wells into our go Moamer Q2 asset here.
The unit well will be drilled with a different rigs it will be happening.
<unk> with this other activity is our expectation.
Okay, and then how is the upgrade to the gas so to speak.
Switching gears, a little bit how is the upgrade to the gas processing facility coming along is it coming in on time.
Yes, I think within seven to 10 days of expectation, it's roughly on time. So we will have some commissioning work.
So we're preparing the production facilities in May here.
For receipt of all the vessels that will be received later in June .
So that will be able to very quickly tie those in.
In turn the extra capacity on in July there will be a short commissioning period at that time as well, but we expect a pretty quick ramp up right up to the 18 plus million cubic feet a day of capacity.
And is the 183, one well on a particular tied into the pipeline and producing.
So the 183, one well is tight in that that pipeline is complete.
We're just in the final phases of the production facility.
Being constructed so that's the last step once that's done we're ready to turn the well on production. So we expect to have that to happen.
By the end of this quarter.
Okay, and then shifting to sorry, maybe I'll just one other point to make here the merger one location that we have located here.
This location would actually be drilled off that same service production.
Least so when we drill that.
It would be immediately tied and tightened the EPS.
The 197, one well involves stimulating the well and building another roughly two kilometer pipeline. Once that's done that pipeline is right on the Mers one location. So that's why it.
All of these were expecting to be able to when we complete the capital activity fairly quickly turn them on production.
Okay.
Okay, and then maybe switching to some financial related questions production expense per Boe increased a bit versus the previous quarter. What are the causes behind the increase and what are your expectations for future quarters I can take that one if that's okay.
<unk> expenses did increased marginally compared to.
Q1, 2021 in Q4 2020.
Q4, 2021 part of that is most of our costs are fixed in nature.
With respect to our share of production cost from from the unit, where we have a 49% working interest that's based on our share of production allocations and we actually took a 100% of the.
Gas production from the unit in Q1 2022 compared to only 81% in Q1 2021 for that part of it we do pay in addition to some additional fees right now for.
Capacity above the nameplate.
Processing capacity at the <unk>.
The PGN.
When we complete the facility expansion that <unk> is working on right now that will shift to a capital lease and it will actually come out of our operating expense.
But that's part of the reason for the indications as well and then lastly, the foreign exchange rates that Brazil currency the AI.
Improved on average relative to both Q4, and Q1 about six 6% and 5% respectively. So that causes our U S dollar equivalent prices to go up a little bit.
Going forward I think.
We're still targeting to be in that $4.
<unk> per BOE range at at these.
<unk> levels.
Well the impact of the a little bit by foreign exchange, obviously, and then and then whether or not our partner takes their share of the gas, but overall, that's our target is $4 going forward and again reiterating on our netback. This was only two months at this at this higher price. So we are expecting to see an improvement in our <unk>.
Back in Q2 pardon me of that.
Essentially it's over $60 per Boe and our netback just.
With two months of this higher price, assuming we can keep we'll keep these production costs, where they are in and with that royalty and then B. We discussed previously which is actually the next question was asking about the royalty rates and but just to be clear. So we're talking about 16 or 17 spent increase yes.
It's still very low, but yes, a marginal increase but still very low.
And then yes again, our royalty we could get that royalty amendment that was another question. We did we do have that effective for me production going forward.
Okay.
I'm sorry.
One second here with that almost repaid free cash flow rising in the dividend already increased sharply when will the board start to consider a share repurchase program.
Okay.
Yes, so I guess the way we look at this like I said our plan we've talked about this for a long time I think there's a lot of companies out there doing it now.
Four we even came on production, we said look take roughly half of our cash flows reinvest that into organic growth the other half to stakeholders in <unk>.
Obviously I pointed out our first priority was to repay the project financing loan that's almost complete so I think once that's complete it it sets a stage more for that discussion. So obviously the bucket that's allocated to stakeholders with the desk stakeholder gone.
Biggest stakeholder remaining as our shareholders and then how we allocate that capital to shareholders whether it's.
Dividends or buybacks, that's a decision the board will have to make.
The coming quarter. So, we're certainly not committing to that but it's obviously another tool in the toolkit that we can use to deliver returns to stakeholders.
Another question here, what are your expectations with regards to cash tax payments this year.
Take that one yeah, obviously, our cash taxes very low consistent with Q4.
But we had a large increase in our funds flow from operations and that's due to you.
We are eligible for the <unk> benefit in Brazil, and then in addition exploration costs are deductible when competing current tax.
All of that that we benefit from a low lower current tax we don't provide guidance but.
Overall, we are expecting current tax too to increase in the future, but but still be very low.
Relative to most jurisdictions with the benefit of this of the Sydney.
15% tax rate that we benefit from right now and obviously, we have tax pools et cetera, we're always managing that to keep our current taxes lowest possible that yes.
Yes, we do expect that there will be we will see a bit of an increase.
Later, this year and into next year.
The next question is impact what is the impact on cost cost inflation globally and service availability in terms of your exploration and development plan.
Yes.
So I think one of the things about operating internationally as we've always had to manage.
Projects with.
Reasonably long durations good planning.
All in all obviously that those are keys to success things like Youre hearing this everywhere like tubular for drilling wells et cetera.
Lead times are certainly longer than those are just things that we have on our Gantt chart.
Probably earlier than we might have otherwise.
But I think we're well equipped to adapt to those things we are seeing some.
Certainly cost and cost inflation inflation in Brazil as well.
Above 10%, so that will get reflected in kind of the overall labor environment in Brazil, We obviously have a foreign currency effect.
That impacts that as well.
Yeah.
And then what are your views on the state of the energy M&A market in Brazil.
Yes, so so far the energy M&A market has been dominated by Petrobras divesting of its virtually his entire onshore upstream inventory of assets. They have been in very large clusters that was recently announced one of the other the other and final cluster within our base.
And.
Just looks like it's in the process of being sold for $1 $4 billion.
So the good news is the industry is opening up.
Petrobras is influence on our sector is continuing to be to reduce debt.
Think longer term, that's going to continue to open the door for more more of that type of activity obviously for us.
If we can add shareholder value organically from the capital that we're spending this year and leverage offset the strategic infrastructure that we've got in place we can add a lot of value for shareholders with some success there.
Okay.
Just going back to 182 C. One in the discovery there.
What is the link of that pipeline to connect to your existing gas processing facility and do you have any estimates of costs.
From the <unk>, one, yes, yes, sorry, yes, so it will depend what happens what happens with <unk> two <unk> three <unk> one as well.
We go all the way to that location its closer to.
15 kilometers, it's about 13 kilometers from the existing discovery that we've got.
The answer to the capital costs.
It will depend on how big the diameter of the pipeline is but if we use kind of our cavalry experience. It's in the probably forward.
On the bigger end of the expectations for pipeline diameter, it's probably closer to $4 million to $5 million.
And I think our last question is how open is the gas utility to buying more guests from Alba Petro I E past 18 million cubic feet a day.
From everything they've told us they would be.
I'll be pleased to take as much gas as as possible I keep in mind the marginal.
Marginal gas molecule, that's being consumed in Brazil has to be important with LNG and you saw the MVP prices, which is maybe a bit of a proxy for LNG, but it landed LNG prices are.
Probably double what our prices so there is.
The amount of interest in us increasing our production.
And there are no further questions at this time.
Alright, well, a very exciting quarter for us. Thank you to everyone for joining and look forward to updating you in three months time. If you have questions in the meantime don't hesitate, calling all center myself and thank you again for all your support yes. Thanks, everyone.