Q2 2023 Alvopetro Energy Ltd Earnings Call
And once again I'm joined by Alison Howard, Our Chief Financial Officer, and Adrian the debt, our vice President of asset management.
Good morning, everyone. Just a couple of administrative matters before we begin.
We are recording this webcast today and there will be a copy of the available on our website.
Later on this afternoon.
We are hosting a Q&A session. So if you are participating via zoom.
On your computer or your phone you can submit your questions through the Q&A button on zoom and we will get to that at the end of our presentation. If youre dialing in you can submit your questions to social media elbow type of show Dot com.
And lastly, we will be going through some non-GAAP measures and forward looking statements. So I encourage you to review all of our cautionary statements at the end of our corporate presentation, which is available on our website.
Alright, Thank you Allison.
So just talk a little bit about our production.
Since coming on production on July five 2020, I think we posted some pretty strong results you can see our first couple of quarters are coming on production at our most recent few months, we've been pretty much right in line with the pre commercialization and expectations that we set.
Which was equal to the firm sales volumes within our Bahia gas sales contract and also equal to our share of the cap rate of unit production.
At roughly 1800 barrels of oil equivalent per day.
The period in between there you can see we were able to significantly.
Exceed those production levels, just because we were able to cut to nominate for more than our working interest share of production from the cap or a unit.
We also expanded our gas plant last year, so that allowed us to increase our production further there so going forward.
On this a little bit of a strategy is to add more 100% working interest production.
From our near term capital program. So that we can maximize the throughput through our gas plant and really get back up to up to and hopefully above the levels that you saw.
Some of the more recent quarters there.
We're looking to add 100% working interest natural gas production from our Mercury two two project as well as an oil component from our recent bond mcgarr success that we'll talk about later in the presentation.
Okay.
Just to talk again about our gas sales agreement, we just had a recent price reset under our agreement.
Minder It gets reset every twice a year every February one and August one.
Our price Formula is based on three different international benchmark prices and those are the gray dash line that you see on this graph. So there's Henry hub natural gas in the U S and BP natural gas in the U K and Brent oil equivalent and you kind of blend those together and average them over a period of time and then.
Net effect is our realized price, which is the darker thicker black line that you see there. We also have a floor and a ceiling within our contract that's the red and the Green lines that you see there and both of those escalate based on U S inflation. So.
Left of the Red Dash line that you see there is all the historical pricing and right of that is the forecast pricing.
Using inflate.
Inflation estimates for this year of 3% in the U S and 2% thereafter.
The benchmark price forecast that you see right at that line are based on the August 7th the future strip pricing and the net effect of all of that as you can see the black line were expected to remain at the ceiling within our contracts out through too.
Well into 2026 that you see there so.
Just talk about our realized price in the second quarter, we realized an average over the quarter of $12 86 per Mcf and with that most recent.
Price Redetermination effective August 1st of this year, our price reset up to U S $13 25 per Mcf.
So yes, just building off of what Corey was speaking to there and we had our highest highest realized sales price in the quarter.
Each of that.
Our gas price being at the ceiling price in our contracts so that $12 86 per Mcf overall, our realized sales price increased to $77 41, an increase of.
Almost 450 on a per barrel of oil equivalent.
And then what you see is our operating netback, which is the green bar that measures our operating profitability per barrel of oil equivalent.
With a record again this quarter at $69 61, which is $3 above what we achieved in Q1.
So that's attributable to that higher price that.
That we realized in the quarter.
Our royalties remained low at $1 97 per <unk>.
About two 5%.
Our realized sales price or operating costs or production expenses in the range at 583 of those were higher this quarter on the majority of our costs are fixed in nature. So with that reduction in production. In Q2, you saw our cost per BOE a lot, but despite that we still achieved.
Achieved record net backs in Q2 and from a profitability profit margin perspective, again that 90% of our realized sales price is profit there.
On the operating netback, which is.
Which is quite remarkable and what we like to stay best in class among other entities and we show that here.
So we're comparing to other Latin American energy producers and some north American natural gas weighted companies that ultimately Q2, the average netback margin among those is 60% and petro at 90% about 50%.
Better and that translates into very high.
Profit overall on this production.
And the reason, we're in Brazil and.
The strength of the fiscal regime, there, especially when you consider the low tax rate that we have.
Until 2030 of 15, 5% on our natural gas profit.
And then moving on to funds flow. So yes, we did see a decrease in our funds flow from QQ, that's mainly because of that 29% reduction in production in the period, despite those higher prices.
Our sales volumes were down.
Partially offset by lower royalties and lower current tax on overall funds flow just talk of $11 million and in the quarter, which is still.
Quite amazing for forever patch on that production.
Similarly on the net income with lower funds flow or net income also decreased in the period, but that was partially offset by some.
Ricky depletion depreciation expenses.
And then lower current and deferred tax and then also higher foreign exchange gains in the period. So overall net income of just under $10 million in Q2.
From a balance sheet perspective, we continue to have a very strong balance sheet again, we are debt free as of last September .
Our working capital we did see a slight decrease from Q1, we did have more capital spending in the period.
But still very strong at just over $18 million as of June 30th.
Okay.
Alright, Thank you Allison.
So just talk about our dividend we did introduce the dividend back in the third quarter of 2021, you can see that we've been able to increase that three times now and we're paying currently 14 U S per share quarterly that translates into a current yield of <unk>.
Around seven 4%.
And we're pretty proud that we can say that we've already returned $27 million U S to shareholders or the equivalent of the U S 76 per share back to our shareholders over this period of time.
So one of the things we always talk about and this is something we developed many years ago long before we even came on production.
Stakeholder return model, where we're looking to reinvest roughly half of our cash flows.
And growing our business and returning the other 50% to stakeholders. So if you focus on the bar chart on the on the top left what you see there is our cash inflows are the green line with the black dots like Allison said in the second quarter of 2023, we had cash flow of $11 million and then each of the individual stack.
The bar charts, there represents our cash flow cash outflow was during each quarter. So you can see in the first.
Kind of year or 15 months of production and we really were focused on prioritizing our debt repayment that Alison showed you. That's the Green Cross hatch bars that you see there and very little in the yellow so not much capital expenditures and we're able to do that because we pre invested all the capital in our cap or a project and we.
Didn't have a lot of need to be spending any.
Any money during that period of time.
The strong results that you've seen did allow us to start the dividend I think ahead of what we originally would have expected and that sit in the dark green bars that you see there.
Starting in Q3 of 2021, and then more recently you can see more investment happening in our organic growth.
The yellow bars that you see on there on.
On the Pie chart on the top right. This now measures exactly almost exactly three years of being on production from our from our project you can see about 38%.
The cash flow has been been reinvested.
Almost exactly or just shy of 50% is gone out to stakeholders in the various forms that you see.
Green and over the first three years of operations.
I actually have funds flow from operations of $109 million U S sales so.
Pretty proud of this.
Okay.
Speeding up the yellow borrowers that you saw in that chart, we're really quite focused on our next phase of growth here. We've got a near term goal of getting to the 18 million cubic foot equivalent per day level.
Roughly 3000 barrels of oil equivalent per day.
The growth is planned to come from a combination of areas.
From our core existing base of operations like we said we expanded the gas plant last year, our goal with that target is to get that.
Full and then that ultimately with the goal of doubling that again.
In addition at the unit, we are looking to drill some additional development wells this year and further expand the unit productive capacity, which has been performing quite well.
Our two main growth assets, the first of which is our Merck of 202 project to get to 100% working interest. This is a project that sits immediately north of our core cap rate.
Asset based.
All of all of the infrastructure is now in place to really start a multiyear development program that we've got plan for this asset we did complete the stimulation of the 197, one well and brought that on production in May we talked about that in some detail on our last earnings call.
And I think that was a pretty big milestone for us and we're now in a position that we can start drilling fit for purpose wells.
Spud our first one of those the 183, a three well we just spud that in July so looking forward to.
Results on that.
And then we also recently announced an exciting results from our BL six well on our <unk> block.
We're just in the process of getting ready to complete and test in <unk>.
Britain that well on production here.
Adrianne can talk a little bit more about what we've what we found here.
Thanks Kurt.
So this bundled our six well we're quite excited about it.
The results you can see on the screen here.
Higher Crosby and higher net pay than we were expecting going into this project.
We're looking to begin testing and then put this well on production to our existing production facility here.
In the third quarter.
As we get those results, we'll be planning for communications to be up 7% from the existing circus location.
And keep you updated.
Thank you Adrian.
So just in summary, we certainly think elbow petrol continues to offer a pretty attractive investment proposition no matter, what youre investing focus as we've been delivering the strong results, we've got attractive gas pricing and leaving operating profit margins.
Our clean balance sheet and free cash flow generation capacity really helps underpin our more balanced and disciplined stakeholder return model that we talked about for value investors were trading at a boat.
Three quarters of our two P M.
NAV.
For yield investors, a yield over 7% with dividends.
Dividends paid in U S dollars quarterly and for growth investors I think we are in the middle of implementing a pretty exciting and organically funded capital program and if you look at the potential.
What we're targeting there relative to our current enterprise value I think it becomes even more exciting so.
With that I think we're ready to start the question and answer period.
Sure. So the first question is with respect to production expectation, what our production expectations for the second half of 2023 do you expect to partner nomination to continue at the same level.
Yes, so just given the nature of our company, we don't typically give out production guidance per se, but what I can say is we are working with our partner to increase those nomination levels, but we are planning our budget.
Our cash budget based on assuming that we are staying at these production levels with our strategy of adding 100% working interest natural gas production from Mercury, two and 100% working interest oil production from from our bundle of our property.
So.
Our expectation is.
To try to get back up to our near term goal of that 18 million cubic foot equivalent.
Over over the next.
A few quarters.
And do you have specific guidance on what production contribution is expected from Merck <unk> and bomb lager.
Yeah.
Yeah.
Again, we've got in our corporate presentation kind of a typical type well for our Mercury two wells. We are looking forward to the completion of our next well here because we're doing it in a way that we can really optimize the stimulations and maximize the results from that so I think we'd like to kind of be able to show what that.
It looks like and then hopefully that's a model for the kind of the base going forward and frankly, it's always a continuous improvement type process for these types of opportunities.
For our <unk> well again, we're just about to complete that and put that on production. So we're going to have actual news pretty soon.
Only thing will probably we can provide guidance on is what our reserve evaluate or is assumed in there too.
Reserve forecast the first year of production from that well from these formations they had assumed.
200 barrels a day average for for the first year.
Absolutely.
What is the second half of 2023, capex expected to be and how will that be allocated.
Yeah. So the main projects that we have.
It will really depend on the pace of drilling and completions, but at our current pace.
We would expect similar expense spending levels going forward. So that's the focus.
Right now is on drilling the 180, 383, well and completing the BLS <unk> well.
We'll have our current plan is to drill a follow up well off of the same $183 three well pad for a second.
Gomel well.
And then depending on the timing of that we may start an additional well closer to the end of the year. So that's kind of how it's balanced.
The other thing we didn't talk about is the $183 <unk> three well is also targeting some shallow exploration potential in the tariff suite formation. So that's the same formation that is the main producer from our cap rate unit.
So if we have success there it's quite possible that we shift our capital program around as well. So it's really dependent on the results that we see over the over the coming quarters.
In February the gas sales agreement that gas prices at $11 88 per Mcf or approximately $71 28 per BOE. This quarter as realized price was 70 over $77 does the higher pricing reflects higher btu content or is there another.
Explanation.
Yes.
Gulfport.
So yes, when we publish our expected natural gas price recall that it's that's locally in local currency.
So we do disclose an estimated.
Equivalent to U S dollars.
That's based on that natural gas contracted price, but it takes into account an estimated foreign exchange rate I think the 11 88, what was disclosed prior to the sales tax credits that we also get so that's why it ended up being like closer to $13. So that was part of it is their sales tax.
Credit, which increases our overall realized price and then the other component is the foreign exchange so the Brazilian currency that hey, I appreciate it.
In comparison to that the time that we would have disclosed the fed I think we what it is.
February January 31st spot spot price or the February average price in determining that Mcf amount. So the currency appreciated relative to that so in equivalent in U S dollars, our realized price of the tire hopefully that makes sense, but I think on the heat content basis, it's been in line with expectations at around.
The 7% Adrian yes, yes.
The book contract yes.
Would you explain the decline in royalty costs again, and it's $2 per Boe a good rate can expect going forward.
I can take that one again so.
Our royalty rate.
Generally speaking on most of our fields is about eight 5%.
In Brazil of our of our.
Of our production, but in Brazil, they natural gas volumes.
The royalties are based on the value of the raw unprocessed natural gas, so and they use our reference price for that and it's closer to Henry hub. So it's more dependent on what you expect Henry hub to be relative to what we think are what our contracted prices or our forecasted <unk>.
<unk> priced at the ceiling.
I think our ceiling price is $10 60 something per M N Btu.
Henry Hub was I think 2016 Gram and Btu on average in Q2 I think.
Poster at over $2 50, now I didn't haven't looked in the last few days, but.
So it's more a function of that taking into account our eight 5%. So hopefully that makes sense. So yeah, if henry hub stays at these levels and our royalty rate could be yes.
Q five 3% on an effective basis of our realized sales price, but it just really depends on how our contracted price moves and how Henry hub news on the natural gas on our oil and condensate.
Based on the sales the sales price on it more tied to Frank.
From that perspective.
And when do you expect to get production to near the capacity of the 18 million cubic.
Feet per day.
Yes, I think we answered that question earlier with with this really just a function of the timing of drilling the wells and completing them and in what order we drilled the wells so.
I think.
Yes.
So we have a couple of questions kind of in line with that when do you have any timelines on when you expect to double the gas plant or build a second processing plant.
Yes.
So again I think we let us get a couple of more wells drilled and into our go more project here or Mercury two project, we do show in the corporate presentation kind of indicative Lee.
Call. It a four year development plan that would target the <unk> reserves in the contingent and prospective resource that we have.
We paced that in a way that we feel that could be organically funded and if we can achieve those types of results that gives you a sense on the ramp up of that asset alone. So that gives you a good sense and what it shows you is that over that kind of three to four year period.
Earlier than the fourth year, but within that time period that asset alone has the potential of delivering 18 million cubic feet. A day, so that layer that on top of whatever we're producing from the cap rate unit.
And we do disclose that as Mcf equivalent so hopefully we've got some exciting results from our bond with our oil project to layer in there as well so.
When will the 182 C and 183 B have a re stimulation or stimulation.
Yes, no. We're just continuing the evaluation of that and evaluating what the best.
Enhancement is and then we will schedule that in within the context of all of our other activity in our rig availability et cetera. So.
Particularly speaking, it's probably something.
Later this year.
You have a lot on your plate. This year does this mean any M&A is not a priority at this time.
Well.
We don't typically comment on M&A I think if there's the right opportunity, we'll obviously pursue it.
I think from a shareholder.
Value perspective, I think if we can fund these capital programs organically and there are as effective as we hope that they're going to be I think we have the ability to add a lot of shareholder value by just focusing on the opportunities we have in front of us.
And that is.
Oh, we have right now.
Alright, so once again, thank you everyone for joining in and if you have any questions. After the call feel free to reach out to any one of us and again. Thank you for your support and we look forward to updating you next quarter.