Q3 2022 Alvopetro Energy Ltd Earnings Call
See we had another very strong month in October with sales up to over 2700 barrels of oil equivalent per day.
So just wanted to show this slide again, we've shown it in past calls.
Shows how our gas pricing mechanism within our gas sales agreement works.
Gray dashed lines are the three benchmark prices in.
In the forecast period.
The right hand side of this started blind the futures prices are based on the.
Featured market.
November 11th and then to the left of that Red Dot is the line of the historical prices.
Dark Black line that you see as the calculus is the outflow petrol 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 the dark blue line the distance between that dark Blue line and the Black line is something of note in the.
Blue line represents it had we not had this feeling within our contract that's the theoretical price calculation. So what it means is that there is a gap represents the amount or the futures prices or commodity prices can drop before we start to see a reduction in our sale.
As price so it really isn't effective had hedge and it underpins the strong results that Allison is going to walk you through here shortly.
So yes.
Following up on that point, if you're talking about with our realized price we had another strong quarter as our operating net profits measures our profitability.
Expressed it in Berlin, while 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.
Just over $4 per Boe.
Mainly on our realized pricing for the various pop number you see there we went from.
$73 54 to 68 59.
Our natural gas price.
Was the same price in local currency devaluation in the period compared to Q2, the realized price in U S dollars with with slightly lower that's a bit offset by lower production expenses with Chiesi and integrated bar anybody else's, they're 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% which is the netback.
As a percentage of the realized price in a few months to the next slide.
We haven't seen before again.
Comparative Alco Petro two other carriers operating in Latin America and also.
Planning App 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, the forecast, but I think I have a very low tax rate into Brazil, as we benefit from the estimated tax incentives on bringing our tax rate to 15%. So as we look 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 planned wells pillow.
Our strong volumes are higher volumes in the period, even with our 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 alphabet subsidiary.
And then similarly on the net income with 17 funds 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, that's very cute.
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$3 million last quarter, so im 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 noncash and the largest portion of that relates to accounting for our intercompany loans between Canada, and our Brazil subsidiary.
Those improvements were partially offset in addition to the deferred higher deferred tax with higher depletion and depreciation.
Due to higher production levels in the quarter.
Yeah.
I'm sure everyone saw that we maintained our credit facility in September . So we are now fully debt free at the <unk>.
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 Allison So I think as many of you saw in our press release.
Just walked through our dividend history.
We started the program about six months ahead of plan after two quarters of dividends of six cents per share we increased that by a third and then there are announcement yesterday. The board has approved another 50% increase our dividend from <unk> to <unk>.
Up to 12% <unk> 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 pursue.
On a normal course issuer bid and we'll complete the applications for that in short order.
So just to talk about our disciplined capital allocation model again, we were roughly looking to.
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, you see Youre just track since we came on production our funds flow from operations is in the.
Black dotted line. There you can see we had another record quarter as also pointed out that $13 $3 million of funds flow from operations, but you can also see during each quarter how we.
Allocated those funds out to stakeholders <unk> 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.
On top of that in the third quarter of last year.
The yellow represent the investment in our organic growth you can see that was quite low while we work repay 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.
These various.
Spots. So if you look at the various shades of Green you can see about 51% of that has been returned to stakeholders through either share repurchases dividends interest debt repayments and our capital lease and then about just over a third of that has been invested in organic growth.
There is a C.
Fairly significant wedge there represented 14%.
That represents that balance sheet strength that Alison showed you in our increasing working capital position.
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, GM.
<unk> did assess those prospects and expanse of drilling them and had assigned 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's it.
Thats 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, TLJ 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 or formations each of 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 reviewing the results from the wells side by side with the open hole logs that I know the scale is quite small.
Im just trying to put it in perspective in contrast, the two wells. So the first zone Linda will talk about is the lower most stone the certainty formation.
In the last 10 wells that you see here the 180, <unk>, one well, which is actually a picture of that.
The equipment on site conducting the testing operations from our field trip yesterday.
We did announce from the 37 five meters of pay that we identify here a 72 hour production test result, where we recovered close to 60 barrels of light oil.
And the reason that we're excited about it.
Contrast that over here.
To the <unk> in the 182 C two well, where we actually drilled through the whole <unk> section.
Through the basin.
Administrative this with this year.
Certainly section tends to be about 220 meters thick. So this is a massive massive amount of resources 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 upper certainty with the first well in our next well test.
We've got about 121 meters of Nexsan here with the 6% cut off with a more conventional cutoff for oil that we found in the certainty and the <unk> one well we've 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 of amount of <unk>.
<unk> that can be jammed into a very small area. When you are talking about hydrocarbon columns.
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 is 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.
12%, Similarly, thick zone, indicating when ATC to well with prostheses above 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 that is some of our testing right now.
Is at the very top of this the zone.
There is a <unk>.
Three meter section that also has over 17% cross city so it.
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.
Yes.
So I thought we'd do something a little bit different on this call just talk through our merger with <unk> Global project in the context of kind of how we built our natural gas business in Brazil.
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, where the 197, one and 183 one wells.
Countered.
It looked like a very nice gas resource here and then we embarked on a we may.
Cabaret discovery, which is in the blue outline that you see right here.
As you recall, we can see the 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 <unk> 11 kilometers transfer pipeline from the unit.
Over to the West just to the north of the municipality and Matt to the channel and Thats, where we don't be cap rate gas to gas plant. The picture that you saw earlier in.
In the presentation.
And again that 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 straightened or it's about nine kilometers in total.
To 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 is 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 signal right 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 amount that we've got all of these assets in place or planned 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.
<unk>.
The bottom hole locations for the wells that are those little white.
Circles with the Black circle inside.
And you can see this is this is again.
Multiyear plan and the objective is to convert.
Reserves contingent them production prospective 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.
Rest of this.
With success on testing, we've got a plan to tie those wells, we've got natural gas to tie those wells back down almost directly sell directly into our UPN.
If 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.
Chet fiscal <unk>, but maybe more than ever I think Alamo Petro really offers an attractive investment proposition no matter, what youre investing focuses.
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 is installed another solid months of production for us we've got attractive with gas prices as Alison pointed out industry, leading operating margins or profitability per unit of production.
<unk> 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 do.
Just announced yesterday.
Clothes RFS the trading price before this call again about a just over a 10% yield so.
Lastly for growth investors.
Things that we're investing in these exploration prospects in our global development plan.
Compare that to our market capitalization.
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.
I have a quick question you already know that the capacity expansion epic that gas processing facility at the end of July how much would be available 500000 cubic meters per day capacity <unk> lines and either any constraints on processing at that means tight capacity such as gas production.
Current MAU.
Demand from local market et cetera.
Yes.
Yes, so we get them 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 constrained probably going forward is going to be the pace at which we can bring new production on.
Our partner to the extent they get dispatched through their thermal power project.
<unk> has a potential impact on our production levels, but that's why we're 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 it.
Pretty close here, but.
<unk> out, we probably want to add.
Two or three or 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 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 from <unk>.
<unk> test.
So on <unk> can we handle initial output on the 183, one well when it was brought on production and 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 any cap rate.
It's actually fairly close close to expectations I would the one thing I would say is <unk>.
During the first month 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 it.
<unk> basis going forward or does that include abnormal drilling but spending is.
$8 million to $9 million a quarter expected going forward.
Yes.
I would say right now no because the drilling rigs that we had.
Let go just so we can finish the testing get organized for a more continuous program with 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 following 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 question at that point out as we had.
That facility expansion can still get to that sounds to me that at least for accounting purposes, and consequently are.
That liability down a little bit higher there.
Back in the exploration, while how long will it take for all the testing to be done and will that be done next year or will that be into 2023.
Our objective here is to get both those wells tested this year.
Okay.
With new wells, having a higher oil content will that add to the btu adjustments in the gas price. How do you think mechanism or will the liquids extracted and sold separately.
Yes, yes.
Probably differentiate between a few different types of liquids here. So if we are talking about conventional oil production.
Like the light oil that we tested 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 to the Btu content of the gas and maybe how much Carla.
Condensate yield we get.
Certainly with the expansions we 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, but so hot.
The rest of that energy effectively to simplify it comes out as condensate and we've shown that separately again bye.
By trucking it.
Consumers.
And we've had a few questions on the recent election results.
Any insight and opinion regarding the elect that election and potential subsequent brings document is becoming a property of the people.
And with.
With Columbia, putting in non deductibility of royalties and higher taxes, if you need to be.
In government moving in that same way.
So I think I'll turn it over to Brad to give you the local perspective on that and if there's anything to add I'll do so again.
Okay, making required.
So the actual award.
Thanks.
Okay.
As a result of these Google has a little different about <unk>.
Congress.
Looking at all of them for example, we have 119.
Keith.
Sam.
A&P kidney in the half.
These statements.
But Sam.
With each of them will seek out of law and B E.
You guys are flexible.
Sure.
Moving to seize these element for the Digi previously.
We have made.
By implication because all of the expense scandal.
Try not to make mistakes.
And I'm wondering is.
Globally the brand Smartwater.
Thanks.
Lulu Nondisclosure.
Globally.
So little bit.
This savings above.
<unk> Gainesville related to the oil and gas.
But David.
We can highlight some points.
It is easier to put behind us.
Via an integrated energy company, focusing a bit in the Ethernet lesion easily.
It needs to be balanced view.
The natural gas quite alive.
And we didn't Gamble A&D.
These areas.
It's adequately.
When exactly the data out there.
<unk> assets.
<unk>.
Okay.
And it's almost back up Lulu, claiming the international now a national self sufficient.
Any noise at the end.
In Italy, the sand expansion of maybe finding a buyer.
Okay.
Okay.
So.
And then buying back <unk> findings.
No longer.
Thanks.
We also we also can't imagine that we are.
We got the market too.
And for the key central Black box.
And would you have.
Soon we believe.
Because I'm going to remove the acute back mode.
Thank you Brad.
Hey, Adam.
I think a national level.
Right.
But we need to wait.
Okay.
Its clinical development plan and you'll see.
When you think of itself dealt with this change.
Yeah. Thanks, Thanks for Graco.
To summarize it.
I don't see the situation that's happening in Colombia 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.
Being very careful with the economic policies.
And I think one of the other things that has 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 highways.
<unk> airports.
If you are creating an environment, that's not investor friendly.
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.
The two houses of the government.
Okay, and then last few questions. We have here around the NCI V. So if we could get a little bit more description on how we expect that to work.
But our overall in cabinets.
<unk> with the NCI and the size and timing of the share buybacks.
Yes.
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 in CIB.
And then I really look at this this is 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 constant it makes no sense.
That our stock was.
And that way given the results that we've kind of manifest that I guess in that we're in the announcement that we had yesterday. So I think to start with it's probably something more opportunistic than it will be balanced in the context of our overall mandate.
And with that benefit.
Good question.
Alright, well. Thank you again to everyone for their support and we are here to answer questions. After the call as well and look forward to updating you in future quarters. Thank you again.
Okay.
Yes.
Okay.