Q3 2023 Alvopetro Energy Ltd Earnings Call
Results webcast I'm, Cory return, President and CEO, and I'm joined by Alex and Howard, our CFO and Adrian <unk>, our VP asset management.
Good morning, everyone.
Joining just 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 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 our production in the third quarter was just shy of 1700 barrels of oil equivalent per day that was previously announced it was impacted by the temporary demand.
The decrease that we saw in the state of it here 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.
Our 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.
Yes.
Yes.
Or just an update on our gas sales agreement based on some more recent futures pricing in the market just a reminder to everyone. Our.
Natural gas sales contract.
Yes, the price gets reset.
He's a year. So every February one and August one the 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.
U S. Henry hub natural gas prices, Brent oil equivalent prices and UK MBP prices.
Those get blended together and it calculates our.
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.
See there 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.
Would expect to stay at the ceiling with our within our contract for the foreseeable future here.
So moving onto the 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 we start with our realized price, which you can.
C at the very top of the chart. There. So we were just under $79 <unk> per Boe in Q3 and that.
Including our realized.
Cap 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 $1 50 increase from Q2 to $79 and we subtract off our royalties which are orange.
And our operating expenses, which are great in the gray bar, there too to determine 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.
Value, 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.
Realized sales price our operating expenses, we did have lower production this quarter a large portion of our operating expenses are fixed in nature. So our operating expense per BOE 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, they're high netback margin of 89%, which is really best in class and we like to show that this slide here Max or for any other.
Latin American.
Producers and North American natural gas weighted producers that have released Q3, when you compare our netback.
Similar to past quarters, when we've shown that 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 just recall that we benefit from.
Low income tax rate on our natural gas profits in Brazil due.
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 and if 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 to that reduction in sales volumes, but still at $9 $69 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.
<unk>.
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.
Right.
Recall that we did pay all of our debt off.
Don't read a year ago now so.
So we are debt free so so no debt on our balance sheets.
And strong working capital that we did see a bit of a decrease from from June of over 6 million.
From June 30 that was we did have some capital capital expenditures in the period, and then lower funds flow, but still very strong.
<unk> financial position and so well positioned to execute on our long term plan.
Okay.
Alright, Thank you Allison.
Just a recap on our dividend track record here, we did introduce that back in the third quarter of 2021, 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 cents.
U S to shareholders since we came up production.
Key project.
So just talk about 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 of the cash inflows to the 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 represent.
The cash flows or cash outflows from each quarter. So you can see at the beginning just a reminder.
As also noted we took 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 thats the green.
Green Cross action here.
<unk> solid green at the top of these bars is the dividend.
Again, it was introduced in the third quarter of 2021, and then you can see more recently in yellow.
Now started to focus on the capital investment side of our business.
We will 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.
44% of its went to capital expenditures.
Almost exactly just shy of 50%, 49% has gone to the various form of stakeholder returns and the remaining 7% switch here is the part that's built up cash and working capital for future financial flexibility.
So.
Our organic growth plan.
Again, we've got a near term goal here getting to 80 million cubic foot 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 unit, which you can see in the center of the map sheet here.
We did expand the gas plant.
Last year up to $18 million cubic feet a day plant.
<unk>, 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 with our partner.
The second part of this is really this key asset that we have immediately to the north of that which is our mercury two project.
We've already pipeline connected that in and put all the production 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.
And contingent and prospective resource assigned to that and it's important to remind people that that just relates to the global formation and its something more recently that we're quite excited about is the result that we have with our $183 eight three well retreat, where it 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 terrorists who exploration potential. So when you look at the result.
12 meters of net pay that we see in that well relates to the gomel, 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 facilities. So with success, we can get that tied in right away and this has the potential again with success to be a really good.
Important part of our plan.
Going forward it could be quite important for us and our shareholders.
Yes, so as Corey mentioned we.
We finished drilling our 183 to 83 well last month.
100% working interest.
Well into the merger.
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 through section. So at this point, we're mobilizing the equipment and we will go through it.
And complete each of these zones.
We'll come onto production.
Nintendo products into this thing.
<unk> by the end of the year.
He said, we pre invested in the infrastructure here. So this should be tied in.
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 at Merck to twos, we're right in the middle of <unk>.
George will cross section of a seismic section there.
And well in this structure is down dip of the cap rate field, which is our main producing asset.
Down dip across the fault here.
The other field to the North <unk>, which is one of the larger gas producing fields in the basin.
The south is another large historical field culture, we pay so we're really looking forward to time as well as putting it on production and continuing the reservoir exploitation here.
The cost structure.
Alright. Thank you Adrian so just in summary, I think Noel Petro certainly continues to offer offer a pretty attractive investment proposition no matter what your focus is.
We are delivering some pretty strong results.
We see very attractive gas pricing industry, leading operating margins, we've 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.
We're trading at about two thirds of our <unk> again, none of this <unk> potential that Adrian reviewed as reflected in any of our reserves our reserves reports for yield investors, 9% dividend yield paid quarterly in U S dollars and then for growth investors, we've 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 keep 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.
Right now.
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, we'd be able to be selling all of that so our expectation is that this was 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.
Okay.
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, no. So that's 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 that 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 biggie gas has been taken all of that we've had this 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.
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 the ability step one to be at this 3000 Boe a.
818 million cubic foot a day rates. So once we get enough all of that capacity in place then we can be in a position to increase our firm nominations within our contract.
Up to 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 with Bahia 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.
Some extra flexibility around exploring alternative market. So we are.
Few hundred meters away from the main tag connection in the basin. There are some other off take ideas that are out there.
Realized 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 perfect here gas. So I think it's in everyone's interest to Mac.
<unk> 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 in 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.
Yes, 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 are lingering capital commitments are mostly associated with completing the 180 383 well.
And then Youll 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.
Particularly speaking that probably doesn't happen until that earliest later in the first quarter.
The next question is around the results from 180 383, 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.
Yes, so if you look at the porosity of this.
So first of all the wells at that cap rate or a highly productive. They 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.
Porosity is up to 15% so.
We're optimistic.
Not going to put out a bunch of where we're at.
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.
But the appraisal plan is complete.
Complete these zones put it on production.
We can map the resource over on seismic over.
Yes.
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.
And then we're in the middle of permitting a new drilling pad location that would allow us to access all of the up dip location. So what 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 care of Sue there is room for it to go up another 100.
20 meters, so even just from that well to the uptick crest of the structure by default.
There is almost 300 acres of <unk>.
Land in there at 120 meters up yet.
So that in itself could be material and then the various <unk> 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.
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.
When I was discussing the accounting results we did have.
Gas take or pays kick in in the month of September because they were below the firm volumes.
Lee just a prepayment of gap gap. So what happens is it does not get reflected as.
Until.
The volumes actually get delivered so we get effectively the cash from Becky aghast 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 get a reduction in their invoice for the portion that supply it 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 <unk> are there still plans for a follow up development, while <unk> seven at Schlumberger.
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 that.
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 for 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 tests.
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.
Could you use that to map out our capital program for next year, so that that will impact the timing but.
Again dependent on both those wells the well results.
I'm not sure where the $5 million of date target came from but.
We think this can be along with the go more 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.
During 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.