Q3 2023 Alvopetro Energy Ltd Earnings Call
I'm, Cory Reed, President and CEO I'm joined by Alison Howard, our CFO and Adrian <unk>, our VP asset management.
Good morning, everyone.
For joining.
Before we begin a couple of administrative points, we will be recording today's webcast and there will be a replay on our website shortly after the call today.
In addition, all participants are in listen listen only mode, but we will have a Q&A session.
At the end of the presentation and you can start entering your questions now through the zoom Q&A.
Button, there and we will get to those at the end of the presentation. If you are dialing in you can send any questions to social media Algo Petro Dot com.
Lastly, we will be going through some non-GAAP measures and some forward looking statements will be made in this presentation. Today. So just please when you get a chance to read through our cautionary statements and other disclosure.
Those are at the end of our corporate presentation, which is on our website and with that I'll turn it over to Corey.
Alright, Thank you Allison so.
Production in the third quarter was just shy of 1700 barrels of oil equivalent per day that was previously announced it was.
<unk>.
By the temporary demand.
The decrease that we saw in the state of Bahia in the month of September you can see in October that's reversed.
We posted production of 839 barrels of oil equivalent per day in October and that's continued to be strong in November.
Strategy will focus on this later is to really focus on adding 100% working interest natural gas production from our near term capital projects. So that we can maximize the throughput through our gas plant.
And ultimately as we move towards our near term goal of 3000 barrels of oil equivalent per day.
Okay.
Sure.
Just an update on our gas sales agreement.
Just on some more of a recent futures pricing in the market just a reminder to everyone.
Sure.
Natural gas sales contract.
The price gets reset at least a year. So every February 1st and August one.
Price is calculated based on three international benchmark prices. So left of this red dotted line is the historical pricing and to the right is the future projected period. The three different benchmark prices are in the gray dashed lines that you see here.
<unk>.
U S. Henry hub natural gas prices, Brent oil equivalent prices and UK MBP prices.
Those get blended together and it calculates our.
Natural gas price, which is the dark black line, which is also subject to a floor and a ceiling within our contracts. So that's the red and the Green lines, respectively. You can see they're slowly ticking up here, because they're indexed to U S inflation. So.
What you see here is based on the futures pricing as of November 7th for those three commodities.
We would expect to stay at the ceiling with our within our contract for the foreseeable future here.
So moving on to results from Q3, and specifically our operating Netback, which just a reminder is our net operating income expressed on a per barrel of oil equivalent basis, so to calculate that.
Art with our realized price, which you can see at the very top of the chart. There. So we were just under $79 <unk> per Boe in Q3 and that.
Including our realize that.
GAAP price of just over $13 per Mcf and then with.
Condensate sales at a premium to Brent we were able to see just over just under a $1 50 increase from Q2 to $79 and we subtract off our royal teams with Orange.
And our operating expenses, which are great in the gray bar there too.
Determined our operating netback, which was just over $70.
Per Boe, which is a record for our Petro so on the royalty side, we do pay royalties.
Between generally between eight and a half around eight 5% plus some GOR overriding royalties bucks for natural gas our royalties are based on.
<unk>, which is more tied to Henry hub like the raw unprocessed natural gas so with Henry hub pricing coming down this year, our royalty rates as a percentage of sales has come down so in the quarter. It was $2, which was about two 6% of that's realized sales price our operating expenses.
Did have lower production this quarter, a large portion of our operating expenses are fixed in nature. So our operating expense per BOE, We did go up.
But still we were able to generate record net box of over $70 and when you compare that to our realized price of $79. We're looking at a profit margin there a netback margin of 89%, which is really best in class and we like to show that this slide here Max so for any of.
Latin American producers and North American natural gas producers that have released Q3, we compare our netback.
Similar to past quarters, when we've shown that even though we're at 89% netback margin compared to an average of 61% so around 45% higher than the peers and you know this is all before income tax and district call that we benefit from.
Low income tax rate on our natural gas profits in Brazil due to the <unk> tax incentive that were eligible for until 2030, and that's 15%. So some of these other operators will be in the 30% 40% range. So on an after tax basis. It just shows the value of this production in it.
We move on to our funds flow from operations, which is after tax.
We did see a bit of a decreased $1 4 million from last quarter due.
Due to that reduction in sales volumes, but still at $9 6 million $9 6 million you asked that very strong.
<unk> in the quarter.
Similarly, net income also impacted due to that reduction in our funds flow and then also.
There was a swing in our foreign exchange.
We did have a loss in Q3 compared to a gain in Q2 of foreign exchange recall that most of that is on our intercompany loans and it's all noncash, but it's an accounting thing that we have to present on our income statements. So.
With the reduction in our operating netback and that.
That change in FX that overall loss in the period offset by some reduction in taxes, we did see a decrease in net income of 4 million this quarter.
Going to the balance sheet side.
Right.
Just recall that we did pay all of our debts off just over a year ago now.
So we are debt free so so no debt on our balance sheets.
Strong working capital that we did see a bit of a decrease from from June of <unk>.
<unk> 6 million.
From June 30, Yes that was we did have some capital capital expenditures in the period, and then lower funds flow, but still very strong financial.
Position and still well positioned to execute on our long term plan.
Alright, Thank you Allison.
Just to recap on our dividend track record here, we did introduce stepped back in the third quarter of 2021 and you can see it was increased three separate times and for the last three quarters, we've been paying U S 14.
Per quarter translates into a yield at current share prices of about 9% and you can see we've already returned 90.
U S to shareholders since we came on production.
Perfect.
So just talk about are our disciplined capital allocation model. If you recall, we established is quite a long time ago, even before we came on production, where we're roughly looking at targeting to reinvest about half of our cash flows and organic growth through capital expenditures and take the other half in return.
That to stakeholders in its various forms. So this graph kind of shows what that looks like the green line with the black dots here represents all the cash inflows and cash flow from operations that Alison walked through earlier again in the third quarter that was $9 $6 million each of the stacking bar charts represents.
The cash flows or cash outflows from each quarter. So you can see at the beginning just a reminder.
As I also noted.
A lot of those cash flows at the beginning and really.
Focus goes on their own on repaying our project financing loan that we got in place and paying that off in a rapid fashion that stuff.
Driving cross hatching gear.
Dark solid green at the top of these bars is the dividend.
Reviewed again it was introduced in the third quarter of 2021, and then you can see more recently in yellow.
We've now started to focus on the capital investments are excited of our business and we'll talk a little bit about what that looks like and what that looks like going forward.
In total since we came on production.
In the third quarter of 2020, you can see how this has been split so in total we've now had funds flow from operations of $118 million U S.
<unk>, 44% of its went to capital expenditures.
Almost exactly just shy of 50%, 49%, it's gone to the various form of stakeholder returns and the remaining 7%, which here is the part that's built up cash and working capital for our future financial flexibility.
So.
Our organic growth plan.
Again, we've got a near term goal a year ago of getting to 80 million cubic feet equivalent a day or 3000 barrels of oil equivalent per day with a longer term vision of basically doubling.
The gross plan to come from really a couple of key areas, but we've got our existing platform.
Our producing assets with our cap rate.
Which you can see in the center of the map sheet here.
We did expand the gas plant.
Last year up to 80 million cubic feet a day.
Depending on the gas specification that we're putting through there.
And we are looking to further expand the unit production capacity here as we drill some additional wells next year with our partner.
The second part of this.
Really this key asset that we have immediately to the north of that which is our mercury two project.
We've already pipeline connected data and put all of that.
The facilities in place so that we can now crystallize the value associated with this asset.
And one of the things we've always talked about this is as a global formation opportunity and we've got some reserves in <unk>.
And contingent and prospective resource assigned to that and it's important to remind people that that just relates to the go more formation and something more recently that we're quite excited about as a result that we had with our 180 383, well, which Adrian is going to walk you through.
But it's important to recognize that that was drilled as a global development well, but it also had this <unk> exploration potential. So when you look at the result.
<unk> 12 meters of net pay that we see and that will all relates to the global but a 116 meters. The potential net pay relates to this <unk>. So we're really excited about that it's on the same well pad is our production facility. So with success, we can get that tied in right away and this has the potential again with success to be a really.
Part of our plan.
Going forward it could be quite important for us and our shareholders.
Yes, so as Corey mentioned, we finished drilling our $183 three well last month.
100% working interest.
Well into the field and we were quite excited to see the 116 meters of net pay and the crew is too so the log here on the screen and we see.
The number of net pay.
Sections within the cures, who section so at this point, we're mobilizing equipment and we will go through.
And complete each of these zones.
We built them onto production.
With the intent of having this thing on production by the end of the year.
<unk> said, we pre invested in the infrastructure here. So this should be tied in 10 meters away from the pipeline and we will start to crystallize the value here as well.
This gives us a regional overview of the <unk> and where it lies within the context of the other producing wells in the basin. So our well we're talking about here Q2s right in the middle of it.
Geological Cross sections of a seismic section there.
And this well and the structure is down dip of the cap rate deal, which is our main producing asset.
Down dip across this fault here.
The other field to the North is <unk>, which is one of the larger gas producing fields in the basin.
The south is another large historical field culture repay so.
Looking forward to.
Time, as well and putting it on production and continuing the reservoir exploitation here.
And of course your structure.
Alright. Thank you Adrian so just in summary, I think you'll we'll petro certainly continues to offer offer a pretty attractive investment proposition no matter what your focus is.
We are delivering some pretty strong results, obviously very attractive gas pricing industry, leading operating margins.
Got a clean balance sheet with strong free cash flow generation capacity and that will help support. This supports this disciplined capital allocation model that we've got to balance reinvestment in organic growth and stakeholder returns for value.
Investors were trading at about two thirds of our <unk> again, none of this <unk> potential that Adrian reviewed as reflected in any of our reserves and resource reports for yield investors, 9% dividend yield paid quarterly in the U S dollar.
And then for growth investors.
Got a pretty exciting organically funded capital program with a lot of potential, especially when you consider it relative to our existing market cap and enterprise value. So with that I think we will start the question and answer period.
Sure the first question.
<unk> sales volume sales volumes were much lower in Q3 that seem to have come up in October can we expect the rest of Q4 and early 2024 acute continue at similar rates to October.
Yes so.
Really this is a function of the demand in the basin and how our off takers managing their portfolio of gas.
Now <unk>.
<unk> gas has been asking for as much gas as we can basically give them. So I think if we had our 180 383 well on production today.
Be able to be selling all of that so our expectation is that this was a.
A temporary thing thats not to say it couldn't happen again, but our expectation is that.
It will be able to sell all of them.
How often is the Bahia gas contract renewed or adjusted for demand are there any options available to sell our export to additional buyers in the event that he it doesn't increase our volume.
Yes, so thats a good question.
Typically Bahia gas is looking at commitments on a on an annual basis in their portfolio from a firm perspective.
The firm component of our supply.
Does if we were ever going to have an issue with a well or or a facility. It can attract supply failure penalties. So.
The way, we've been managing that as having a component of firm and a component of flexible or interruptible gas that gives us more flexibility.
Typically <unk> gas has been taken all of that we've had this one exception.
In the month of September effectively so that's something we'll look at we have the ability to increase so from a strategic perspective, what we're doing is we want to add as much 100% working interest production as we can so that no matter whats happening with the production from the unit cap rate we have to date.
Ability step one to be at this 3000 Boe a.
18 million cubic foot a day rates. So once we get enough all that capacity in place then we can be in a position to increase our firm nominations within our contract.
Up to that level, so that would increase kind of the insurance or base level at which we would get paid because also in our contract is a mechanism where there is take or pay payments that happen would be a gas. So in the event that they took less than the threshold within our contract we get paid for that regardless so.
Again strategically that's the plan build enough capacity increase our firm volumes and then in addition to that build some extra flexibility around exploring alternative market. So we are a few hundred meters away from the main tag connection in the basin. There are some other offtake ideas that are out there.
That could realize some attractive net backs as well so we're pursuing all of that but in fairness. We've got this strategic connection directly into the Bahia gas distribution network right at our plant site and that creates a big advantage for the end consumers and for our Petro FERC Bahia gaps. So I think it's in everyone's interest.
To maximize the amount of locally produced gas that goes through that city gate as opposed to the alternative is importing it from LNG importing it from Bolivia.
Bringing it from the offshore offshore pre salt and Theres, a bunch of transportation and other costs that get embedded effectively in the gas price when that happens so.
We think we're well positioned.
The next question what is the expected Capex for Q4 of this year and where is that.
Okay.
We don't really provide capex dollar guidance, but our activity levels.
After our Cologuard result.
We decided the rig had a commitment with another provider so the rigs moving in the process of moving to do that commitment.
So really our lingering capital commitments are mostly associated with completing the $183 three well.
And then you'll see a drop in capital expenditures here, while we digest those results and get ready to restart.
The drilling portion, which is the most capital intensive portion of our capital program.
Practically speaking that probably doesn't happen until that earliest later in the first quarter.
The next question is around the results from 183 to 83 and the positive surprises that we're seeing in the <unk> do you want to comment on that further and what are the plans to replace that.
Yeah. So if you look at the porosity of this.
So first of all the wells at cabaret are highly productive day. It is a bit shallower. So we would expect better permeability the shallower depths, but this is quite a prolific formation. The logs looked quite good we've got some of those intervals that Adrian pointed to that we're going to complete.
Have porosity is up to 15% so.
We're optimistic we're not going to put out a bunch of we're on the cusp of testing. This so we're not going to put out guidance on what we think it might be I think we're just going to ask people to be patient and we're going to get that news news quite quickly.
The appraisal plan is complete.
Complete these zones put it on production.
We can map the resource over on seismic over.
Okay.
A pretty nice area here it has the potential to be quite material for us but.
One step at a time, we need to we need to test it produce it will evaluate those results and then we're in the middle of permitting and new drilling pad location that would allow us to access all the up dip location. So.
Adrian didn't talk about but it was on that that slice of <unk> seismic you can see between default and where we drilled the well into the carrier assumed there is room for to go up another 120 meter so even just from that well to the up dip.
Crested the structure by default.
There is almost 300 acres.
Land in there at a 120 meters up yet.
So that in itself could be material and then the various sands probably have different aerial extent, but thats something that would be delineated with additional drilling. The other nice thing is a big chunk of the wells that we had planned to target the go more development.
A good portion of those drill right through the carriers, who as well so it's nice to be able to have multi zone targets.
Okay.
The next question just shifting gears a bit can you take us through the accounting of the BCA gas take or pay shortfall going forward. So yes, I didn't comment on this earlier, we did have one.
I was discussing the accounting results we did have.
Can you I guess take or pays kick in in the month of September because they were below the firm volumes and that basically just a prepayment of gap gap. So what happens is it does not get reflected as <unk>.
<unk> and <unk>.
The volume is actually get delivered so we get effectively the cash from Bahia Gast and that's offset with.
We call it other liabilities, but it's essentially unearned revenue and then as the gap gets delivered the revenue gets recognized at that point and then they had a reduction in their invoice for the portion that's applied against that prepayments.
So it's relatively straightforward.
With production at these rates, we do expect that that.
That September amount will get recovered.
Rather quickly.
And yes, I think I answered that but if you had any further questions on that just maybe shoot me offline and we can help through that.
The next question is around Baum with or are there still plans for a follow up development, while <unk> seven at <unk> pharma DAC.
Quite frankly, we werent happy with the results from that so right now there is no plans, but we are going to continue to evaluate.
The production from that well, we're going to look at alternatives potentially stimulated.
But the capital plans are on hold right now.
Back to America Q2 are there still plans to get to 5 million cubic feet. A day in 2024 are the plants still on track for that and what is the timing or further formal development model.
Yes so.
A lot of that is.
Good chunk of that is actually a function of the test results that we get from this upcoming test and that will help define a little bit better on a per well basis, what we might expect from drilling new wells.
We then would expect.
To use that to map out our capital program for next year, so that that will impact the timing but.
Again dependent on those wells the well results.
Im not sure where the $5 million a day target came from but.
We think this can be along with the global a big part of our growth story going forward.
And then the next couple of questions are around the share.
Buyback has has it started and given.
Considering the capital program to date.
Corporate discount to PV 10, and increasing share share counts are we anticipating a reallocation of some 2024 capital spending towards share repurchase.
Yes. So the short answer is no. We haven't used it I think you saw from the Pi since inception, we've been pretty good about.
Almost allocating the entire 50% as originally envisioned to the stakeholder return bucket.
Going forward.
We want to get this well test result, because that can help define what our capital portion of the equation looks like it helps define what our our cash flow projections going forward will look like and then we can balance that 50% of the pot.
As deemed prudent between dividends and share buybacks.
Okay and with that there are no further questions.
Alright, well as usual.
Feel free to call us at any time, and we're happy to talk to you and answer any additional questions you might have and thank you for joining US today, we look forward to updating you after our Q4 results.
Thank you. Thank you.
Okay.