Q1 2022 Alvopetro Energy Ltd Earnings Call
This is kind of the amount that the combination of these three benchmark prices could decline by before we would actually realize a reduction in our gas sales price.
So with that I'll turn it over to Allison.
Thanks, Corey and good morning, everyone. So with those strong gas prices that Cory gets referred to as of February one.
So two months in the first quarter, our operating netback.
Increased significantly close to over $17 per barrel of oil equivalent from Q4. So the operating netback is our operating profitability per unit of production and we use a 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 sales 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.
Should see an even further improvement in that in in.
Q2, but going forward when we have a full quarter at those higher prices.
Our production expenses, we've maintained below $4. Since we 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 Margaret for Gen eight.
87% being the highest to date here 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.
Improve 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 there are production, we've been able to maintain close or right around this 2500 barrels barrels per day barrels of oil equivalent per day, and that's at the higher priced and then little bit lower G&A compared to.
Q4.
Was very strong funds flow from operations this quarter.
Similarly, net income increased as a result of those.
Higher.
Huntsville 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> nine.
$9 million. So so a swing of six close to $6 million and our net income most of that is on our intercompany loan balances. They went into this a little bit last quarter, but.
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 we'll see.
Continue to see fluctuations in net income for the for foreign exchange, but most of that if you look at our cash flow is adjusted 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 with the increased spend slowing and 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 the 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.
Exceeding our credit facility balance 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 did notify our lender that would we would repay an additional.
$2 $5 million as of its 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 these at these cash flow levels that you know well under one month of cash flow.
Okay.
Thank you Allison.
Obviously, the record production and the higher gas prices made Q <unk> strongest quarter to date.
Funds flow from operations is awesome I highlighted.
Increased.
68% quarter over quarter, and 149% year over year up to close to $11 million in the first quarter alone.
You can see here on this graph just kind of where we've been allocating our capital resources. Since we came on production you can see during the first year of operations.
I had a big chunk allocated towards prepaying. The credit facility is Allison highlighted relatively low amounts in yellow related to capital expenditures.
Because of the strong results, we were able to start our dividend.
Program about six months ahead of original plan starting in the third quarter.
You can see that in the Greenway merges here 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 impact.
<unk> of that.
To put this in perspective, the first seven quarters of production since July 5th we came on production for Merck operated project you can see we've had funds flow from operations in excess of $43 million.
Close to a quarter thats going to capital investments.
A little over a quarter of its credit facility and interest payments and about 16% of that.
Two dividends.
Yeah.
So.
Well, 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 and be roughly 50% of the city gate.
That's just great 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 that 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 cavalry asset continues to perform very well along with our partner there we do plan to drill 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 are producing from today, so that could further expand the productive capability of the cap rate field.
And then we've got our 100% of projects that we're investing in our 2022 capital program.
Just finished drilling the first of two conventional exploration wells and announced our success based on logs there at <unk> one location.
The rig is now on the 183, one location and we should start drilling that shortly.
As you recall.
Jay It independently assessed both of these prospects at four 6% and $5 91 billion barrels of oil perspective resource.
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$47 40.
Yes.
34% chance of success.
Our plan here with the successes would be.
Hi, these in directly to our gas plant directly to the south so that it will involve building a new pipeline.
And then lastly, our America couture a global product.
It sits immediately north of our cavalry.
The asset.
Thank you through what the capital plan looks like here, but I think well positioned to implement our broader scale a global development plan.
We're very excited about our 2022 capital program.
So.
Just to talk about our two C. One results.
We drilled a nice.
Sorry, So we reached total depth here in April this was a multi zone prospects. So we were targeting the Agua Grande uncertainty 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 expand about 25 meters.
That you can see on the right hand side meets our net.
Cutoff thresholds, but it is a nice fit continue with ascend that we've got here the well logs show average water saturation of about 34% and average cross the.
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.
Formation, which was the second target in this well.
What happens is after we get our well logs, we go back and recalibrate, our seismic and all the time desk relationships.
And once you have a well result, you can promote to better correlate the individuals.
Seismic sequences are in the seismic character character to the actual reservoirs that you 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. The first objective is to help better define the lateral extent of our aqua garnering.
Discovery, we don't see any water later or anything on the logs. So we will need to drill further to the east to really to 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 happen as you get these cementation effects that can occur post default. So we think as we move further away from default to the east that will get more typical Agua Grande property that we see in the analog fields all around us.
And then the third objective obviously is we still expect to encounter the <unk> formation in that more easterly location when we drill the boardwalk world.
So obviously pretty exciting to the drill.
First exploration well and have a success here when 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.
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This is another 100% working interest prospect.
It sits immediately to the northeast up to 180 <unk> locations. So you can see the fault block that we drilled into for the 182 C. One. This is our fault block immediately to the east that you see here and on trend with the analog <unk>.
Again, it's a multi zone pre rift prospect targeting the same Agua Grande and <unk> fans on the on the cross section on the left here you can see the prospective reservoir offense stacked up against basement on the other side of the bounding fault.
Again this was evaluated by TLJ at $5 9 million barrels of oil equivalent best estimate perspective resources with a 44%.
Chance of discovery.
Yeah.
So moving on to our Global America Q2 project again, the cap rate field sits within those blue outline here. This was a richer 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.
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% to 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 mobile development wells off of these pads.
The 2022 capital program that you see here targets the development of our <unk> reserves. So on the production chart here, it's the lower light Green color when the capital chart on the bottom right. It's the capital that we've allocated in the reserve report.
<unk> thousand 22.
We don't have a multiyear development plan here targeting the contingent and prospective resource that sits.
To the North and you can see on risks a best estimate basis with success here. This asset 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 our own again chart to give you a sense.
The <unk> 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 a follow up well.
During that same period of time, but we expect our joint.
Unit wells to be drilled with our partner here.
On the America to do projects like I said, we're very close to having the 183, one well tied in and then subject to permitting the rest of this activity that I talked about what will fall 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.
But as 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 Alamo Petro off rate offers.
Active 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 Q.
Q1 was obviously, a new record for production and cash flow for us.
Our attack or gas prices are obviously very attractive, but Allison also walked through our operating net back 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 and an extremely.
Good position.
Helps underpinned underpin our balanced.
And our reinvestment in stakeholder return model that we've talked about for some time.
<unk> 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 funds flow from operations. So certainly I think that we're extremely attractively valued right now for yield investors, obviously, delivering a dividend yield over seven 5% paying dividends quarterly paid in U S dollars and then for growth investors obviously.
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.
So 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 the Q&A button.
And within zoom.
Okay great.
I'll start with a few questions maybe I will start with.
The 182 C one well.
For a while that we just drilled where the lat calculations and that pay on one ADT one comparable to other wells producing in that formation.
Yes so.
The thickness was actually probably at the very high end of the range that we would've expected.
I would say the ferocity is certainly lower than what we expected, but still especially for gas split within a good range and I think on a combined basis certainly within our range of expectations for the Doc where Grande and I think we get electric highlighted we still expect to also encountered the certainty we do just to <unk>.
Iterate do think as we move further east from the fault that we're going to get the more typical Agua Grande processes Thats team.
The analysis pools.
To the north.
Eased in the northwest of Us.
And when do you anticipate completion work on one ADT Stephen to begin 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 100, HTC, one well as a producer or do you need to drill development wells before bringing this field on production.
What we need to test it first but yes, no it can be a producer.
Because we have a pipeline that project between permitting and construction.
Roughly.
A year.
Between now and when the pipelines committed are completed we can drill a falloff of delineation and development wells and bring on hopefully.
Chunky production base, but step one we need to test the well.
And then the follow up well on block one into queue and appraisal or is there another interval you're now chasing.
So again just to kind of reiterate what we've reviewed on that slide is it's kind of we're drilling that for three reasons, because we've 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 hydrocarbons 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 bulk and then the third objective.
To your question is yes, we absolutely still expect to encounter the certainty formation.
And that's why we need to drill further to the east because we cross default rate below but below the Agua Grande formation. If we just move over will encounter the <unk> San.
Stands on the on the eastern side of the ball.
And has the success at 180 <unk> de risk the chance of success at your second exploration well on block 183, which is our <unk> model.
Yes, certainly certainly.
I feel great about it but I think technically they are all independent prospects.
Part of the reason <unk> signed a 44% to 47% chance of success in this area as we do have an analog tools that show that these faults have good ceiling capacity, we talked about that before we drilled the well.
I think this just adds one more data point to Peru that these faults 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.
And can you review your drilling plans after 180 <unk> one.
Yeah.
So yes, we might have answered a couple of these questions.
As we went through but I think this slide does a good job of walking through the catalysts and the drilling timing.
Honestly these things are always a little bit in flux in the America to do 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 level, which we're 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 move that rig to our.
Our Mercury two project drilled the first of two <unk>.
<unk> development wells fit for purpose development wells into our go home <unk> asset here.
The unit well will be drilled with a different rig to be happening in parallel with this other productivity is our expectation.
Okay, and then how is the upgrade to the gas so to say.
Can you give us 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'll have some commissioning work.
So we're preparing the production facilities in May here.
The 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 as the 183, one well on America, QQ tied into the pipeline and producing.
So the <unk>, one well is tight in that that pipeline is complete.
We're just in the fundamental phases of the production facility.
Being constructed so that is the last step once that's done we're ready to turn the well on production. So we expect to have that to happen here by the end of this quarter.
Okay, and then shifting to I'm sorry.
Sorry, maybe I'll just one other point to make here the merger one location that we would have located here.
Dislocation would actually be drilled off that same service production.
Low lease so when we drill that.
It would be immediately tied and tied into the EPS the <unk>.
<unk> hundred 97 to one well involves stimulating the well and building another roughly two kilometer pipeline. Once that's done that pipeline route is right on the Mers one location so thats why.
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 <unk>.
Financial related questions production expense per BOE, we increased a bit versus the previous quarter, whereas the causes behind the increase and what are your expectations for future quarters I can take that one yes.
Our production 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, but.
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 production allocations and we actually took a 100% of the <unk>.
Gas production from the unit.
In Q1, 2022 compared to only 81% in Q1 2021, and so that's part of it we do pay and the addition of some additional fees right now for us.
Capacity above the nameplate.
Processing capacity at the at the new PGN.
When we complete this facility expansion that <unk> is working on right now that will shift to a capital lease will actually come out of our operating expense.
But that's part of the reason for the increase 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.
We're still targeting to be in that $4.
Hum.
<unk> range at.
These production levels and will.
The impact of the a little bit by foreign exchange, obviously, and then and then whether or not.
It takes their share of the gas, but overall that prior target is $4 going forward.
And again reiterating on our net back this was only two months at this at this higher price. So we are expecting to see an improvement in our net back in Q2 for example, potentially over $60 per Boe and our netback just with two months at this higher price, assuming we can keep well keep piece.
<unk> costs, where they are in and with that royalty Amendment B. We discussed previously which is actually the next question was asking about the royalty rates.
But just to be clear sorry, we're talking about 16 or 17% increase.
It's still very level, yes, but yes at a marginal increase but it's all very well.
And then yes again, our royalty we did get that royalty amendment that was another question. We did we do have that effective for me production going forward.
Uh huh.
Okay.
Alright.
Give me 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.
But before we even came on production, we said look take roughly half of our cash flows reinvest adding organic growth the other half to stakeholders in.
Honestly I pointed out our first priority was to repay the project financing loan that's almost complete so I think once that's completed it sets a stage more for that discussion. So obviously the bucket that's allocated to stakeholders with the desk stakeholder gone.
The 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.
In the coming quarters. 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 I'll take that one yeah, obviously, our cash taxes is very low.
With Q4.
We had a large increase in our funds flow from operations and that's due to we are eligible for the <unk> benefit in Brazil and then in addition.
Exploration costs are deductible when competing current tax so 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.
I think relative to most jurisdictions with the benefit of this of the CEO Danny.
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, 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.
One of the things about operating internationally as we've always had to manage.
Projects.
Reasonably long durations, good planning all of them all.
Obviously those are keys to success things like Youre hearing this everywhere like tubular for drilling wells et cetera.
Our lead times are certainly longer than those are just things that we have on organic chart.
Notably 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 is 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.
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 <unk> been in very large clusters that was recently announced one of the other the other and final cluster within our basin.
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.
And I think longer term, that's going to continue to open the door for more more of that type of activity obviously for us if.
If we can add shareholder value organically from the capital that we're spending this year and leverage off that the strategic infrastructure that we've got in place we can add a lot of value for shareholders with success there.
Just going back to 182 C. One in the discovery there.
What is the length 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'll depend on what happens what happens with <unk> two <unk> three <unk> as well.
We go all the way to that location is 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 cabaret 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 Marc asks from Alba Petro I E past 18 million cubic feet a day, yes.
From everything they told us they would be.
I'll be pleased to take as much gases as possible like 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 a high 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.