Q3 2022 Alvopetro Energy Ltd Earnings Call
It shows how our gas pricing mechanism within our gas sales agreement works.
Gray dashed lines are the three benchmark prices.
In the forecast period.
The right hand side of this started blind the futures prices are based on the.
Futures market.
On November 11th and then to the left of that Red Dot Aligner the historical prices.
Dark Black line that you see as the calculus is the outflow actual realized price and it overlays the green line here. So what that means is that our price based.
Based on these price projections is forecast to stay at the ceiling within our contract for the for the foreseeable future here.
The ceiling as you recall does inflate based on U S inflation. So we would expect increases based on that.
Another thing to point out is that dark blue line the distance between that dark Blue line and the Black line is something of note in the.
The Blue line represents it had we not had this feeling within our contract that's the theoretical price calculations. So what it means is that there's a gap represents the amount with R. R.
Futures prices or commodity prices can drop.
Four we start to see a reduction in our sales price. So it really is an effective hedge.
Underpins the strong results that Allison is going to walk you through here shortly.
So yes.
Following up on that corium is talking about with our realized price.
Strong quarter, as our operating network, which measures our profitability.
On the express 10 barrel of oil equivalent to about the height of the Green bar there. So just under $60 in Q3.
One is a bit of a decrease from Q2 of <unk>.
Just over $4 per Boe.
Joining me on our realized pricing for the various pop number you can see there we went from.
$73 54 to 68 59.
Our natural gas price.
The same price in local currency devaluation in the period compared to Q2, the realized price in U S dollars with slightly lower that's a bit offset by lower production expenses, which you see in the gray bar anybody else who's the relatively consistent so.
Overall this just shows the strength of our operations and our profitability the express that as our operating netback margin, which is 87%.
The netback.
As a percentage of the realized price in a few months to the next slide.
We have seen before again.
Compared with alcohol Petro two other carriers operating in Latin America and also.
Planning gas companies operating in Canada, and again, we're best in class here compared to.
Other companies average netback of 65% were over 33% higher and when you combine that with.
Our very low tax rate, obviously, that's before tax, but I think I have a very low tax rate in Brazil, as we benefit from <unk> tax incentive and bringing our tax rate to 15%. So as we looked at this after tax it just shows the strength of the fiscal regime that we are operating here and in Brazil.
And that leads to another record quarter of funds flow. So.
Those are strong volume are higher volumes in the period, even with a slightly lower lower realized price.
Ended Q3 with over 900000 higher funds flow from operations, which is our cash flow from operating activities.
Before working capital and again this is another quarter Carnival Petro another record quarter for all types of things.
And then similarly on the net income with 17 funnel for our net income was higher in the quarter.
In addition to the higher operating income are foreign exchange losses were lower in the period compared to last quarter. So we had losses of about $7 million this quarter versus three.
$3 million or sorry Q2.
$2 3 million last quarter, so our sorry, $2 $3 million lower this quarter compared to last quarter. So that concludes our <unk>.
Net income and partially offset by deferred tax on those foreign exchange losses again, most of that is virtually all of that is non cash and the largest portion of that relates to accounting for our intercompany loans between Canada, and our Brazil subsidiary.
There was improvements were partially offset in addition to the deferred comp higher deferred tax with higher depletion and depreciation mainly due to higher production levels in the quarter.
I'm sure everyone saw that we repaid our credit facility in September . So we are now fully debt free as of.
September 30th collapsed that Orange line that you see there.
It was two zero as of now which is excellent.
And are the Green bar there is our working capital that increased also in the period to $12 2 million and strong cash position.
Ending the quarter at $17 4 million.
Thank you Alex So I think many of you saw in our press release.
Just walked through our dividend history we.
We started the program about six months ahead of plan after two quarters of dividends at <unk> <unk> per share we increased that by a third and then there are announcements yesterday. The board has approved another 50% increase in our dividend from <unk> to <unk>.
Up to 12 cents per share.
In addition to that all started before I move on.
That does represent an annualized yield.
Just based on the current share price when I look just a few moments before the call around 10%.
In addition, just to increase our flexibility with respect to our.
Our returns to stakeholders the board also approved.
Us to perfect pursue.
Our normal course issuer bid and we will complete the applications for that in short order.
So just to talk about that our disciplined capital allocation model again, we're roughly looking to take half of our cash flows and return it to stakeholders. The other half reinvesting in our organic growth. So.
The chart on the left hand side that you see Youre just track since we came on production our funds flow from operations is in the <unk>.
Black dotted line. There you can see we had another record quarter as I also pointed out at $13 $3 million of funds flow from operations, but you can also see during each quarter of how we.
Allocated those funds out to stakeholders and or invested so at the very beginning part of the projects I think everyone knows we aggressively repay debt.
As Alison pointed out we are now debt free. We then start up the dividends on top of that which is in the dark green wedge.
On top of that in the third quarter of last year.
The yellow representatives of the investment in our organic growth you can see that was quite low while we work repaying debt at the beginning and then it has increased more recently.
We thought it would be useful to show this pie chart on the right hand side.
That represents since we came on production from our temporary project on July five 2020, we allocated those funds.
Just curious.
Spot. So if you look at the various shadings of Green you can see about 51% of that has been returned to stakeholders through either share repurchases dividends interest debt repayments under our capital lease and then about just over a third of that has been invested in organic growth.
There is a fairly significant wedge there represented 14%.
That represents that balance sheet strength that Alison showed you in our increasing working capital position, that's certainly positions us well for future flexibility.
So just to update you on our organic growth plan I think we're closing in nicely on our near term goal of 18 million cubic feet a day.
To reiterate we do have a longer term vision to basically double that.
And our plan is to do that from three different places basically there is our core assets as we mentioned we've already expanded the gas plants.
With our partner we are also thrilled to new unit wells. So our hope is that we can continue to expand our unit capacity and then recently we've announced obviously we successfully drilled two are two exploration prospects that we had planned for this year and I'm going to walk you through that as a reminder.
<unk> did assess those prospects in advance of drilling them and have signed on risk perspective recoverable best estimate resorts of four six and $5 9 million barrels of oil equivalent. So these have the potential to be quite significant for us.
I'll walk you through where we're at with the testing, but that did commence here in October .
And then the third piece is our merger to go more projects.
And I'll walk you through how that looks today.
Again, Doj datasets this asset as well and assigned the combination of <unk> reserves risked and contingent.
There is a contingent and prospective resource.
To that asset.
So like I said, we successfully drilled our two exploration prospects to remind you we drilled these.
Into the pre rent formations these with the deeper formations in the basically in this part of the basin into two umbrella fault blocks, we have multi zone discoveries in both of the wells and what I wanted to do is review.
And the results from the wells side by side with the open hole logs and I know the scale is quite small, but I'm just trying to put it in perspective. In contrast, the two wells. So the first zone Linda will talk about is the lower most known with certainty formation.
In the last 10 wells that you see here is a 183 b one well this was actually a picture of that.
The equipment on site conducting the testing operations from our field trip yesterday.
Did announced from the 37 five meters of pay that we identified here.
72 hour production test result, where we recovered close to 60 barrels of light oil.
And the reason that we're excited about this is if you contrast that over here.
The disparity in the 182 C two well, where we actually drilled through the whole <unk> section through.
Through the basin and we have already demonstrated this with this year.
These section tends to be about 220 meters thick. So this is a massive massive amount of resource to put that in perspective.
220 meters is about a 65 story office tower, if you think about that so.
The one thing we only drilled through the efforts to review with the first well in our next well test.
We've got about 121 meters of Nexsan here with a 6% cut off with a more conventional cutoff for oil that we found in the certainty in the <unk> one well, we still got 83 meters of net stand in this well. So between this we think we've got a big resource on our hands. There is an awful lot amount of <unk>.
<unk> that can be jammed into a very small area. When you are talking about hydrocarbon columns. This this thick and we think with some good engineering on the drilling side, the completion side and what the stimulations. We think this has the opportunity to be very significant for us.
If we move a whole this was the zone that we're just about to task during the process of testing now in the Agua Grande formation in this well we've got 11.
Almost 11 five meters of potential net pay with average processes of close to 12% Similarly thick zone, indicating when ATC to well with prosthesis of about 9%.
And then the last thing to talk about in the World. We're on testing right now we've got this bonus zone at the top of the well in the <unk> formation.
Five three meters of net pay where the porosity up to almost 16%.
If you look also one other thing to note about the some of our testing right now.
Is at the very top of this the zone.
Three meters section that also has over 17% cross at each store.
It looks like we've got some good reservoir quality and we're looking forward to being able to announce some results on these two zones over the coming coming weeks.
Okay.
So I caught up we do something a little bit different on this call just talk through our Mercury two pure gold project in the context of kind of how we built our natural gas business in Brazil is going to use some Google Earth images here of the progress that we've made so a reminder, if you go way back in time in the first two wells, we drilled in Brazil.
<unk> the 197, one and 183 one wells.
We encountered.
That's what it looked like a very nice gas resource here and then we embarked on a major.
Cabaret discovery, which is in the blue outline that you see right here.
As you recall, we completed a utilization process for that and then that set the stage, where we could build a commercial solution and a midstream solution to monetize all of this gap. So as everyone knows that included an 11 kilometers transfer pipeline from the unit over to the west.
To the north of the municipality and matches the stucco and Thats, what we built the cap rate gas gas plant. The picture that you saw earlier.
In the presentation.
And again that infrastructure now provides the platform for us to unlock the rest of the natural gas potential in the area that sits immediately north of these assets.
So that we can talk about this today, what we've done this year as we did a 90 kilometer pipeline extension from the unit hub area.
A little bit to the east, but mostly straight nor its about nine kilometers in total.
Tie into 183, one well, we built a surface production facilities here for this and we've also completed the three kilometer tie in of the 197 to one well pads. So this was really the start of our global development plan.
Picture a recent picture here of our 183 one facility.
It's a pretty simple facility, but it allows us to process up to about 300000 cubic meters of gas a day you can see the 183, well us take rate in this location and we brought this well on production in the month of October .
So that takes us to our multiyear development plan for the global now that we've got all of these assets in place in our plan and next is to tie in our 197, well complete the 197, one well and bring it on production through our facility and then we've got a plan to thrill deviated wells.
Directional wells off centrally located pads that you see in the white squares, the bottom hole locations for the wells are those little white.
Circles with the block circle inside.
And you can see this is this is again a much.
The year plan and the objective is to convert.
Reserves contingent in production.
Respective resource into production and cash flow over the coming years.
In addition, you can see the two exploration wells that we drilled off these pads immediately to the west of this.
With success on testing, we've got a plan to tie those wells.
Got natural gas to tie those wells back down almost directly sell directly into <unk>.
We have oil production, we can truck that and monetize it pretty quickly. So we're pretty happy with how our business is evolving and we're looking forward to the next steps here.
So in summary.
Fiscal <unk>, but maybe more than ever I think Alamo petrol really offers an attractive investment proposition no matter, what youre investing focus is.
I think our results speak for themselves. We continue to deliver production results ahead of pre commercialization pre commercialization expectations.
Third quarter was another record quarter for us in terms of production and cash flow October as we start it was another solid months of production for US we've got attractive to gas prices as Alison pointed out industry, leading operating margins or profitability per unit of production.
Strong balance sheet with no debt and great free cash flow generation capacity, which all of that together really underpins our balanced reinvestment and stakeholder return model for value investors were trading at a significant discount to our net asset value for yield investors with the increased yields that.
We just announced yesterday at the close.
RFS the trading price before this call again at about just over 10% yields.
Lastly for growth investors the things that we're investing in these exploration prospects in our global development plan when you compare that to our market capitalization.
I think our investors get a lot of leverage to some relatively low cost but high impact.
Opportunities still.
Look forward to updating everyone on those and I think we're probably ready to open open up for questions. Just a reminder, you can hit the Q&A button on the bottom of your screen to ask questions.
Perfect.
We do have a quick question you already know that the capacity expansion of the gas processing facility.
At the end of July how much would be available 500000 cubic meters per day capacity is being utilized and either any constraints on processing at that meeting.
Such as gas production from current low demand from local market et cetera.
Yes.
Yes, so we've been producing between the four 440 and a little over 500000 cubic meters a day mark.
Depending on the day, we test the facility October over 500000.
So that's probably a good range right now I would say.
The constraint.
Robley going forward is going to be the pace at which we can bring new production on.
Our partner to the extent they get dispatch through their thermal power project that does have an email or has a potential impact on our production levels, but thats why we are investing in these new projects from a marketing perspective in our meetings with our off taker. They continue to request as much gas as we can.
Possibly deliver them, so I don't see that as a key constraint breakdown.
And do you have any timing as to when it will take to reach that kind of consistent basis to $18 million a day.
Yes.
We've reached pretty.
Pretty close here, but.
And day out.
Probably want to add.
Two or three more wells to that and that I think no matter what happens with our dispatch we can probably.
Be more consistently at that level those are that would be the near term solution along with a potential success at the unit Seawell those are the things that could add.
Add production quicker.
The successes from our exploration discoveries have a lead time associated with them just because we would need to finish the permitting and installation of that pipeline that I showed each so that's probably about a year out.
From from the proxy test.
So on <unk>, we have no initial output on the 183, one when it was brought on production is that is there a concern on that well the production level ramp up.
Well to be very low relative to the very high deliverability with wells that we have in the cap rate.
It's actually fairly close close to expectations. The one thing I would say is.
During the first months of production here.
Were still managing.
Some commissioning items through the plant. So the one thing we could improve as having much better on stream factors than we do today, but regardless remember we put a very small stimulation into that well because we had an offsetting well our plan with the 197 to one well would be to put a much larger stimulation.
And that well is along with our future development wells.
Okay. Thank you and this quarter capital expenditures represented an increase in spending on I think.
<unk> basis going forward or does anything abnormal drilling.
Pending.
$8 million to $9 million a quarter expected going forward.
I would say right now no because the drilling rig that we had.
<unk> just so we can finish this.
Testing get organized for a more continuous program with to just get caught up on some permitting.
So that I would say is a higher quarter, just because we had drilling going on at the same time as well testing.
And when we finalize our capital plan for next year at Pall in the testing of these two wells, we can probably give some some better guidance on the pace of those expenditures.
And just speaking of the capital expenditures in the quarter. There was a question about the current liabilities this quarter in FY <unk>.
$2 5 million from June and that was mainly due to increased capital spending in the quarter and then also our lease liability at current collection of that playing out as we had.
That facility expansion can get to that sounds to me that at least for accounting purposes, and consequently are.
Current liabilities down a little bit higher there.
Back in the exploration, while how long will it take for all the testing to be done will that be done next year or will that be into 2023.
Our objective here is to get both of those wells tested this year.
Yeah.
With new wells, having a higher oil content will that add to the btu adjustments and the gas prices are you seeing mechanism or of a liquid be extracted and sold separately.
Yes, yes, probably differentiate between a few different types of liquids here. So we're talking about conventional oil production.
Like the light oil that we test it out of the <unk> <unk> zone.
That that type of production just getting sold into basically into a refinery directly.
I think you were referring.
Referring to the Btu content of the gas and maybe how much Carla.
Condensate yields we get.
Certainly with the expansions we've made to the plant.
We're in a better position to handle richer gas.
Our America two two project basically so not only are we able to manage that at a higher level, we can manage it more effectively.
We can capture more condensate out of that process, we have an upper limit on the beta used within our gas. So there is.
We can only sell gas thats so hot.
Rest of that energy effectively to simplify it comes out as condensate and we show that separately again.
By trucking it.
Consumers.
And we had a few questions on the recent election results.
Any insight regarding.
Regarding the dividends election and potential co Smith at.
These are sort of becoming a property of the people and.
With Columbia, putting in non deductibility of royalties and higher taxes can meet the new government is moving in that same way.
So I think I'll turn that over to Brad to give you the local perspective on that and if there's anything to add I'll do so.
Okay.
Thank you Corey.
So could you give actual laws.
Mexico as you reach free.
As a result of DSO.
Okay.
Congress.
Sure.
For example, we have on the 19.
And Keith again, 3%.
A&P spending in Q4.
Yes, I mean.
But Sam.
With each of them with Paypal and.
Ebay flexible sections.
Moving to seize these element for the DG completely made analysis.
Hi.
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Cause all of the expense scandal.
Right not to make mistakes.
Good morning.
Globally the brand.
Cool.
Excellent.
Alumina is non disclosure piece globally.
So with all these things.
<unk>, a bulk intangible related to the oil and gas.
But David.
Steve.
<unk> highlighted some points.
Maybe the East Africa.
<unk>.
<unk> integrated energy company.
Looking at the in the Ethernet leadership in Italy, because without the need to develop new projects.
Projects in natural gas.
Biofuels.
Campbell A&D.
These areas of God and Cassandra.
What exactly the data there.
A couple of vessels.
Go ahead.
Okay.
And it's almost part of Hulu.
International now and national self sufficient.
In oilfield and everything.
It is only <unk> financing.
And all of those.
They pulled the trigger.
So that's quite a nearby investments being finally.
We will no longer take place.
We also can management.
We got the market while waiting for the executive.
Alright.
And would you have to be happening soon we believe.
Because I'm pointing to Luna.
Thanks.
Right.
Hey, Adam.
Again national level.
Right.
But we need to wait.
The clinical development plan.
Lucy.
Maintaining itself dealt with this change.
Yeah. Thanks, Thanks for Graco.
To summarize it.
I don't see the situation that's happening in Colombia of repeating itself here I think there's a recognition that there is a strong desire for the new government to invest in social programs.
Certainly the oil industry and the economy in general is very important to be able to do that so thats what frederico meant by.
Be very careful with the economic policies.
And I think one of the other things that hasnt been recognized as in an attempt to fund some of the activity. There is a desire to create public private partnerships to facilitate those types of investments in things like roads and highway.
<unk> airports.
If you are creating an environment, that's not investor friendly. It is kind of contrary to that so I think the general sense.
As you know.
I think it shows up in the in the currency.
I don't think the rate of change is going to be that fast, especially given the low levels of support like Fred said in that.
In the two houses of the government.
Yeah.
Okay, and then last few questions. We have here around the NCI b, if we kept it a little bit more description on how we expect that to work.
But our overall in Canada.
<unk> with the NCI and the size and timing of the share buybacks.
Yes, so probably too much detail to be able to provide quite frankly, but next steps are we will get this approved by the <unk> like any other CIB.
And then I really look at this as another tool in our toolbox when we're looking at the stakeholder returns.
Our capital allocation model so.
I think.
At least I think our initial vision is to try to make sure. We don't have anomalies happening in the market like we saw over the last several weeks like cost. It makes no sense that our stock was big.
Behaving in that way given the results that we've kind of manifest but I guess in that we're in the announcement that we had yesterday. So I think to start with it's probably something more up for opportunistic and it will be balanced in the context of our overall mandate.
And then with that that does it.
Thank you.
Alright.
Thank you again to everyone for their support and we're here to answer questions. After the call as well.
Look forward to updating you in future quarters. Thank you again.
Okay.
Okay.