Alvopetro Energy Ltd. Q1 2023 Earnings Call

Speaker 1: binder, we do have a floor which is the red solid line and a ceiling which is the green solid line embedded within our contract. And what you see here is that the forecast is to be at the ceiling within the contract out through to 2027 basically.

Speaker 1: that's almost equivalent to what we've included in our reserve NPDs when we published those a couple months ago. I think the important thing to note, you know we've talked about this a lot, but it really highlights the fact that we've got a lot less volatility in our realized gas pricing.

Speaker 2: So, just moving now onto our Q1 results. So, starting with our operating netback, which is this chart here, the green bar shows our operating netback, which is our profitability. We expressed it in barrels of oil equivalent. So, starting with our realized gas price, Corey just touched on our February 1st – or sorry, our realized price. Corey just touched on our gas price reset on February 1st, so our average realized price for our natural gas increased in the quarter to over $12 per MCS. So, that was a function of that February 1st price reset.

Speaker 2: and therefore despite the declining rent pricing on our condensate sales, we saw close to a $5 increase in our realized price per barrel of oil equivalent. From that we deduct off royalties which is the orange bar and then operating extensions which is the gray bar.

Speaker 2: operating expenses were relatively consistent to last quarter. Our royalties on natural gas are a function of Henry House, so our royalties actually decreased quite a bit in the quarter, so we had records operating that back in the period of

just under $67 and when we look at that as a percentage of the realized price, our net back margin which is that line at the top was another record in the quarter at 91% which is pretty remarkable at 3% from last quarter.

And then when we compare that to other peers that have released so far, so you know we show this chart all the time and it compares to other oil and gas companies operating in Brazil and other Latin American countries as well as in Canada and again elbow petrol is well above on the profitability perspective here we're at 91% which is over 40% higher than other peers.

other peers and it just shows the strong profitability of our operations and when you combine that with our low tax rate we generate very significant fund flow from operations which we'll go through next year. So again another record for elbow petro just under 15 million of funds flow in

And then similarly, net income also up quite a bit, over $12 million for the quarter in net income. Again, that higher fund flow contributed to that. And then also last quarter, we did have that impairment expense. So this quarter, we didn't have an impairment charge. So that was an improvement. And then...

partially offset by some higher taxes, both current and deferred tax with our higher income overall.

From a balance sheet perspective, I think you are all aware that we paid off our credit facility last September , so we no longer have that debt outstanding. We've been very successful in building our working capital balance, which is the green bar here.

We're up to just under 21 million as of March 31st, so we're well positioned here to execute on our capital program for the upcoming, over the rest of the year here.

All right, thank you, Alison. So this chart just shows our dividend history since we introduced the dividend in the third quarter of 2021. You can see we've now increased it 3 times most recently in the first quarter of this year.

we increased it up to US $0.14 per share. So that now represents a yield of just under 10% at current share prices. And of note, since inception of the dividend, we've already returned $22 million US to shareholders or the equivalent of $0.62 US per share.

stakeholder returns with organic growth in our business and our plan is always to reinvest roughly half of our cash flows in organic growth and return the other half to the stakeholders. So the chart on the left-hand side, the lines just show each quarter's funds spoken from operations. Allison just walked you through.

Q1 being close to $15 million and a new record for us. And then all of the different bars show how our cash was utilized during that period. So you can see earlier on when we first came on production, most of the focus was on repaying our outstanding credit facility that Dalles and highlighted.

And more recently, you can see we've been investing in our business and I think you're going to start to see the results of that as we progress through the year. If we look at it in total, since July of 2020 through to the end of the first quarter, you can see again the allocation. So just over a third.

to capital expenditures a little under half to returns to the various stakeholders that you see here. And then a big wedge related to growing that cash and working capital position that Allison highlighted. You can see the gap between the cash flow and the cash outlays in the current quarter.

that contributed to that big increase, bringing our working capital and cash position up to close to $21 million. One of the things of note here is that the cumulative funds flow from operations since we came on production here is $97 million. So in the month of April , we would have surpassed $100 million of

archaealon Kluber.

So moving on to our organic growth plan, our targets here, our vision has been pretty consistent. We've had a near-term goal of 18 million cubic feet a day, which is coincident with the capacity of our gas processing facility and a longer-term vision to basically double that. We did complete the expansion of our...

UPGN or gas plant in the middle part of last year up to that 18 million cubic feet a day plus level. We've also been working with our partner on expanding unit capacity at Cabaret.

I think we've got some plans to drill some development wells starting later this year. Most of the growth is planned to come from our Merica 2-2 asset. It sits immediately to the north of Cabaret. Adrian is going to walk you through that but we've got all the pieces in place now to execute a multi-well, multi-year development program here.

that's focused on converting reserves and resource to production and cash flows. I think we're going to have some exciting news from that as the months progress through this year. In addition, we started our work at Balnagar where we got up to two wells planned this year.

One of them is included in our 2P undeveloped reserves. It also has deeper exploration potential in two formations there. We spot that well in April , right at the end of April .

Lastly, on the exploration side of things, we did encounter some significant hydrocarbon columns in both of the exploration prospects that we drilled last year and we are still in the process of evaluating opportunities to enhance permeability from those zones to repair what we think could be near-well core damage caused by either the drilling.

existing production well. The main target here is our oil reserves and the Karu-Asu and the Gomo formations. We'll be extending it down to a deeper exploration target in the Agua Grande. As we've noted, we've initiated drilling here. We started at the end of April . We're currently at 1150 meters. We just finished the cementing job last week.

infrastructure. So initially when we started we drilled the 197.1 and the 183.1 well in the north and then we discovered Cabaret and we focused on that to build the infrastructure, signed our long-term gas sales agreement, built our UPGN and initiated production and cash flow from the Cabaret asset.

Now we're in a position where we can realize the value of the tight gas that we discovered a long time ago.

In 2022, we completed a 9 kilometer pipeline to the 183.1 location. This is where we built the production facility to manage production from the Merck to asset. We built another pipeline to 197.1. This is a shi-

the location looks like today. Currently we're in the process of just pressure testing the surface equipment you see here and then we'll initiate the diagnostic fracture test and then conduct the main stage on stage four today. So we've already completed the first three stages so this is the last or the top stage there on the logs on the left.

And then once that's done, we'll initiate the flowback period of the well and then just put it on production to our production facilities on the previous slide and then our PTM starts selling gas.

So we're looking forward to the multi-year development plan for this well. We've got a lot of.

prospects and opportunity here. So in 2023, we're going to start the production from 197.1 and then initiate drilling at the 183D1 location there, 183A2. So we've got up to two wells in 2023 to drill and complete, put those immediately on production.

And then the overall objectives to migrate this resource into production and reserves with this pad based drilling Idea and de-risk the production potential of up to 20 million standard cubic feet a day.

Thank you Adrian. Just to wrap up, again, we've talked about this before, but I continue to believe that Albo Petra offers an extremely attractive investment proposition no matter what your investing focus is. I think as demonstrated from our Q1 results and other records for us, we're delivering some pretty solid results.

We've got an attractive gas sales agreement, a clean balance sheet, and we're really well positioned to execute this organically funded capital program. For value investors, we're trading at roughly 1 pNPV, about half of our 2 pNPV. Our dividend yield is almost 10%, again paying quarterly dividends in US dollars.

and for growth investors, again, a very exciting organically funded capital program. And if you look at the potential value that we can create from that capital program, especially when you consider it relative to our current enterprise value, I think it's extremely exciting.

So with that, Alison, if we could start the question and answer period. Just a reminder, if you want to submit a question, just click on the Q&A button within the ribbon in Zoom to log your question.

Yes, we have quite a few questions and a lot of them are around the reduction in the production in April . So I'll combine some of those together. But the first ones are around our partner at cabaret and can you give more details regarding

your partner nominating for higher levels? Does your partner have priority over elbow pressure regarding nominations or is it just this case that both producers are nominating higher levels but demand is not there?

Yes, so the way so are to just to recap our partner when they produce gas, they sell it through a thermal power project when our gas gets produced and sold. We ship it down the transfer pipeline that Adrian highlighted.

process it through a gas plant and sell it to the HIA Gas. So the way our contract works is that both parties are entitled to their share of production but any production that's not being nominated for by the other party can be made available to the other party.

No, I wouldn't say there's priority, but what's happened in the past is that there wasn't any nominations or dispatch from the thermal power projects that our partner has, such that we had availability of all that production. It really is quite a unique thing. Although our production decreased, we had a lot of

We've talked about this before, but the way our agreement works is instead of sharing every molecule based on our working interest every day, we have basically piggy banks that contain our 2P reserves. When we produce down our pipeline...

we're taking reserves out of our piggy bank, and then the same thing happens for our partner when they're producing. So it just really changes the rate at which we're producing our...

our 2P reserves and as a result doesn't really have a significantly, there's some small PV impact, but it's not really a significant impact on our net present values.

Do you have a best guess for your share of cabaret productions as the remainder of the year? Well, again, that's going to be a function of what happens with our partner. Our strategy all along has been to make sure that we build a second production platform for natural gas that complements cabaret so that...

although there could be volatility within our cabaret production, at the end of the day, our plan is to try to produce consistently at our plant capacity, whether it's coming from Mercatito or Cabaret or various combinations, so that from an external shareholder perspective,

it looks as consistent as we had before. How low can our sales volumes go if our partner decides to take up all of its entitlement? What percentage of sales? Sorry, that's part one.

Yeah, I think that that's pretty consistent with the earlier question. Roughly the field capacity has been in and around the 600,000-650,000 cubic meter a day level and we're entitled to basically have that.

Can you comment at all on the percentage of sales reduction that was due to less demand by the HEAA gap?

It was kind of overlapping. I would characterize the Bahia gas portion as I think it's

You know, it was kind of overlapping I would characterize the Bahia gas portion as you know, I think it really

absent it was probably seven to ten days within that period that we were impacted just because of Bahia Gas and then we had kind of the coincident things happening at the same time. The main issue or the main message on Bahia Gas is they're basically back to you know asking for as much gas they could take from us. I think it was the unique...

component of our deliveries. So was there any specific reason or specific cause that the lower demand from Bahia Gas is attributable to that you are aware of? Yeah, Bahia Gas indicated a short-term reduction in demand but I think it was also just a function of how they had committed.

You know, that's something we could look at doing in the future, but again, it looks like we're back to the same as we've always been able to be you guys.

Are there any efforts to add a new off-take partner? And if so, would this be in Bahia without Bahia gas or in a new city or a new state?

We have a benefit that our infrastructure is tied directly into Bahia gas. It does create a net realized price advantage for Albo Petro. We're very happy with our relationship, but there is movement up front where there's more and more...

contracts being signed directly with end users. Our preference would be to continue our relationship with Bahia Gas, but there have been a lot of requests from other producers for access directly to our gas.

So it's certainly a possibility. Perfect. I think that's most of those questions on that particular issue. We did have a question on why the royalty rates declined so sharply from about 3% of sales when it was about 3% of sales in Q1 compared to 7% previously. So I'll answer that.

So, the bulk of our sales volumes are from natural gas and natural gas royalties in Brazil are based on our reference price.

which is linked to Henry Hub and it's more the value of the raw unprocessed gas. So we saw a decline in Henry Hub and an increase in our gas price under our contract. So therefore as a percentage of sales, our royalties came down. So going forward it's more a function of.

what you expect Henry's health to be compared to what our natural gas price is going to be and that percentage. But yeah, as of right now, the royalty rating Q1 is likely to persist in the short term anyway with current Henry health prices. We did have a question on bomb agar and.

I think slide six there is it's more evident on the map. I don't know if you want to comment on that at all. No, that's right. It's within the same base and just to the north of this.

or north of the map sheet that you saw for Capore in Markituku.

or north of the map sheet that you saw for Capore in Mercatoo.

Okay, the next question is on 197.1. What level of production would you expect once the well is on stream?

Yeah, I can comment on that. Our 2P estimate for the 1A71 is roughly 180 BoE per day. And that's something that as we finish our final stage of completion and put this thing on flowback, we'll refine and update.

Yeah, I can comment on that. Our 2P estimate for the 1A71 is roughly 180 BoE per day. And that's something that as we finish our final stage of completion and put this thing on flow back, we'll refine and update. You're whatever.

Yes, sorry, that's year one average. That's great. Okay, any details on the share buyback, when the share buyback will start and the quantum?

Well, that's something our board will continue to evaluate in the context of the overall stakeholder return portion of the pie, let's say, which is a balance between dividends and share buybacks.

We've indicated before we don't want to get into discussing what our trading strategies are or what the orders with our broker are, but we'll continue to evaluate that. So it's hard to give guidance on that.

Yeah, and just to confirm there's been no buybacks to date on that. Okay, a little bit more on the drilling. Are you having discussions with the drilling mud supplier and the drilling companies about the issues you've seen on the drilling?

recent wells including 183B and 182C. Did you have any similar problems on wells preceding these three wells?

Are you going to delay further development until you can overcome this problem? I think that's for Adrian. Yeah, thank you.

So we're certainly working through these problems. No, we're not delaying the drilling of our next projects. Of course, we're reviewing everything with our service providers, our mud providers. The products and the technology that we're using should be first class for the basin and globally for prevention of the mud.

include invasion and damage to the reservoir. It's just when the results aren't as expectations that Bud would investigate this so that's not something we've even concluded. But that's something we're working in parallel but we're not going to delay the other work due to development wells. They are in different formations.

So the GOMO sand in the Candeis is different than the formations we saw problems with 183B and 182C1. But

Yeah, hopefully we evolve the understanding of what happened in those two wells.

but it's not something we've seen in our other development wells in Cabaret or in the initial discovery wells for Merkata 2-2. Will you do a new reserve report after you drill the two additional development wells at Merkata 2-2 this year? Yeah, I think by the time we drill those and we get a little bit of production history where...

commitment to this year gap.

Right now we have 300,000 cubic meters a day which is

between 11 and 12 million cubic feet a day of firm and the rest of it's flexible. And would other prospective off takers accept a similar gas pricing formula as your current contract with Bahia Gas? Do you have thoughts on that? Most of the contracts are percentage of Brent based but from what we're seeing in the market I think it's

that's a good question. Um well, 11. One thing to point out there on that is if we look at the logs and the four stages that we're completing at our current well. To develop that with the horizontal multi stage isn't really applicable the way that the GOMO sands are overlaid on

we really need to go in there with the vertical multi-stage fracks and as we drill and log them, we've got to place those fracks specifically so it doesn't lend itself to a horizontal multi-stage development program at this point. You know, as we drill more wells, we might learn a bit more, but at this point, it's not really on the books as a troop comparator. Okay, and then the last, we have a couple more questions that are around the balance sheet and.

any acquisitions, that sort of thing.

Yeah, well, it's always impossible to comment on business development things if there's an inorganic way that we can create shareholder value. We would certainly evaluate that. But our primary focus is on organic growth from the assets that we reviewed today.

And we'll continue to evaluate that going forward. Okay, I think that is it for questions.

All right, well, thank you. If there's any follow up questions from anyone, feel free to reach out to us directly and we look forward to updating you in three months time.

Thanks everyone.