Q2 2024 Alvopetro Energy Ltd Earnings Call

Good morning, everyone. Thank you for joining us this morning. Just a few administrative points before we start.

We will be recording today's webcast and there will be a replay available on our website later on this afternoon. All attendees are in listening-only mode for the duration of the webcast this morning, but we will be hosting a Q&A session at the end of our presentation. So you can use the Q&A button on your screen to submit any questions and we'll get to those at the end of the presentation. Alternatively, if you're dialing in, you can send any questions you have to socialmedia at alvopetro.com and we will also get to those questions.

Speaker Change: And lastly, just a friendly reminder that we do go through various non-GAAP measures throughout this presentation, as well as make various forward-looking statements, so please review all of the cautionary statements and other disclosures that you can find at the end of our presentation.

that's posted on our website.

Alison: Thank you, Alison.

Speaker Change: So, just to start with production here. So, since we came on production from our Cabaret project on July 5th of 2020,

I think we've posted some pretty good results here. Just a reminder, our first couple of quarters we came on production roughly at our pre-commercialization expectation levels, which were

Speaker Change: Equal to our firm volumes within our BEA gas contract and also equal to our share of unit, our working interest share of unit production for several quarters after that.

Speaker Change: Our partner wasn't nominating for gas, and we were able to sell all that access to Bahia Gas on a flexible or interruptible basis.

Speaker Change: some pretty significant production increases through this period of time.

Speaker Change: We also expanded our gas plant, our gas processing facility in the third quarter of 2022.

Speaker Change: and had an increase there as well.

Speaker Change: And then in the in the second quarter of last year, our partners started nominating for more gas and we also saw

Speaker Change: Some demand impacts in the state of Bahia that resulted in lower nominations from Bahia Gas than what we had seen previously.

Speaker Change: We went through this period of time, and then last month, as we announced yesterday, we had a nice increase in the month of July .

Speaker Change: We agreed to review the pricing on just our flexible volumes within our contract on a monthly basis.

Speaker Change: and the result was a 49% increase when you compare that to the 1,629 barrels of oil equivalent that we produced in the second quarter to the 2,432 barrels of oil equivalent that we produced and sold in the month of July .

Speaker Change: So,

Speaker Change: Our strategy continues to be adding more 100% working interest production from our Merica 2-2 project. I think we've got some exciting results.

Adrian: that we should be announcing here over the coming month and then Adrian will walk through that with you later in the presentation. But our objective is to be at our, with the addition of some of those volumes, to be approaching our near-term 3,000 barrel of oil equivalent per day goal.

Speaker Change: We talked about the redetermination in our last call. I think one or two days after that, we announced the result of our emergency arbitration.

Adrian: proceeding as well. So just to recap for people though, we did have a positive result as a result of the redetermination process.

Adrian: It became effective on June 1st, with our interest, working interest in the unit increasing to just over 56%, and that transition of unit operatorship to Alvopetro is also underway.

Speaker Change: We have previously advised that our partner is disputing that. Like I said, right after our last call, we announced that we got an emergency arbitration order that grants the interim effectiveness of the expert decision until a long-form arbitration can be completed.

Speaker Change: And to be clear, our UA does dictate that expert decisions and this redetermination process, such as this redetermination process, is to be binding.

Speaker Change: So we also, in our release yesterday, announced our latest semi-annual price update under our gas sales agreement.

Speaker Change: Just a reminder how this works. We've got a long term gas sales agreement with Bahia Gas. The prices are calculated based on three international benchmark prices. So you can see them in the various gray dashed lines.

Speaker Change: This lower one is U.S. Henry up gas prices. This upper one is U.K. NBP gas prices.

Speaker Change: and the middle one that you see here is Brent oil equivalent prices. So you blend those together, average them over a period of time and it calculates Alvopetro's price in the block.

Speaker Change: You can see we've been roughly at the ceiling. We do have a ceiling and a floor within the contract, which is the green and the red. Both of those escalate based on U.S. inflation.

Speaker Change: So we just announced our latest reset here. On a Brazilian REI basis, the price was virtually unchanged from the last price that we saw.

Speaker Change: But because we have had some devaluation of the Brazilian currency, we did see a U.S. dollar denominated a slight decrease in our price to just under U.S. $11 per MCF.

Speaker Change: And you can see we're just slightly below the ceiling price within our contract. And then if we use the forward strip or forward curves in the market as of yesterday, which is to the right of this line for each of those three different benchmark prices,

Speaker Change: You can see the calculated price that's just slightly below our ceiling here for the duration of this chart that you see.

Speaker Change: So, just jumping into the results that we released yesterday, starting off with our operating net back. That is one of the non-GAAP measures that.

Speaker Change: that we look to that is basically our operating profitability per re-expression barrel of oil equivalent.

Speaker Change: And just as a reminder, we compute that. It's the realized sales price, which are the numbers at the very top of the stacking bar chart. And we deduct off royalties in orange and production expenses in the gray bar. And that gets us the operating net back, which is the green bar there. So in the second quarter, we did see a reduction in our realized sales down to just below $72 per BOE.

Speaker Change: That was mainly due to a reduction in our expected U.S. dollar realized price on our natural gas sales. That went from $12.57 for MCF in the first quarter to $11.83 in the second quarter.

Speaker Change: Royalties were relatively consistent this quarter with last quarter effective royalty rate of about 2.7% on our realized price.

Speaker Change: Just as a reminder, our statutory royalty rate in Brazil is between 5.5% and 11%, but with royalties on natural gas, it's based on more of a raw, unprocessed value of that natural gas. Thank you. Thank you.

Speaker Change: It's closer to a Henry Hub equivalent that the royalties get paid on, so that results in a lower effective rate.

Speaker Change: And then on the production expenses side, we did have a reduction in volumes this quarter, and a lot of our operating expenses are fixed in nature, but despite that, we did have a reduction of

Speaker Change: over $2 per BOE compared to last quarter it was about $351,000.

Speaker Change: Lower than Q1, and that was mainly due to some historical tax credits that we were able to get this in Q2, to recognize in Q2. So overall, that reduced our operating expenses this quarter and results in a lower cost per BOE.

Speaker Change: and that gave us a net back of $64.30 for the quarter, down about $186.00.

Speaker Change: from last quarter. Again, that's mostly due to the pricing.

Speaker Change: Still, relative to our realized price, we're looking at a margin of 89%.

Speaker Change: And, you know, we went through this in past quarters, that's really, you know, top tier operating net box when you compare it to other South American companies or companies operating in Canada and the US.

Speaker Change: And when we layer into that, you know, we have a nice tax incentive in Brazil that really reduces our tax rate to about 15%. So that helps us generate significant funds flow even in periods like this quarter where our production was down about 4% from last quarter. So moving on to funds

Speaker Change: So again, this is one of the non-GAAP measures that we look at and it's basically cash flow from operating activities, but before changes in working capital. So we did see about a $600,000 decrease in our funds flow compared to Q1.

Speaker Change: compared to Q1. Most of that was due to the lower sales volumes and lower realized prices.

Speaker Change: G&A was a little bit higher, and then offsetting that was that lower production expenses that I referred to, and lower current tax, and so we ended the quarter with a fund flow of $7.9 million.

Speaker Change: On the net income side, similarly, that was impacted as well by lower operating net back with the lower pricing and lower sales volumes in the period.

Speaker Change: But the biggest significant adjustment here on net income was foreign exchange losses. So.

Speaker Change: Any of the U.S. dollar denominated liabilities of our Brazilian subsidiary. Those result in a foreign exchange on court exchange loss on the local books that gets picked up.

Speaker Change: on our U.S. dollar statement. So we did see with the devaluation of the Brazilian rail in

Speaker Change: From March 31st to June 30th.

Speaker Change: increased losses in our Brazilian subsidiary on that. So foreign exchange losses were the biggest contributor there in that $2.2 million reduction in net income. Partially offsetting that was lower current tax, which I already mentioned, and then also lower deferred tax and depletion and depreciation.

This balanced capital allocation model that we talked about this is something we introduced quite some time ago.

The model is debatable.

Half of our cash flows and reinvest that in organic growth and take the other half and return it to stakeholders. So if you look at the chart on the left hand side. This is since we came on production all of the different funds flow that we've generated by quarter. The black dots in the Green line that you see here most recently the $7 $9 million of funds.

Paul that Allison referred to.

And then each of the stack.

That's the cash inflows per quarter and Theyre, all the stacking borrowers of the cash outflows quarterly basis.

<unk>.

Broken down by type. So you can see early on virtually all the catheter went to building cash and working capital land or.

Repaid.

In midstream infrastructure to sell up.

Even gas with our existing transfer client or existing.

Gaslog seem facilities and the connection to the local gas distribution company, which as you guys.

Corey mentioned earlier in the presentation, we had positive re determined redetermination results, increasing our working interest production from this cabaret or units.

Increasing our production.

49% to 56, 2% of production capacity.

Currently this year, we're going through the capital development program up units or collaborate with additional wells and.

Unit compression or field compression of that facility and that will enable us to continue our production levels to Peggy Gazprom the asset here.

The other main asset that we're focused on here in 'twenty 'twenty four is there a mercury two two so that's our 100% working interest asset just north of cap rate.

We've got the existing infrastructure built.

To produce up to 7 million standard cubic feet of gas.

Sales from that from that asset with the transfer pipeline and.

The hopper central.

Processing facility at the at the 183 one location.

Yes.

That location also has 183% <unk> well, but currently we're going through re completion operations at that location to Recompete <unk> zones in both <unk>, one and the 180 383 well bores.

Work is currently ongoing the benefit of that is both those wells are currently tied into our infrastructure. So as soon as we're done.

The completion operations.

Speaker Change: Got it.

Gotcha.

Speaker Change: We expect to see the results of these capital investments.

Speaker Change: Next quarter here.

Speaker Change: Following this we have a multiyear development opportunity and Merck.

Speaker Change: With existing.

Speaker Change: Location is constructed for follow up wells Pentagon.

Speaker Change: The work were doing here in this quarter and as highlighted in the reserve both reserve and to.

Speaker Change: Contingent.

Speaker Change: Resource part, we have a lot of growth.

Speaker Change: And running room for the Mercury two assets, so lots to look forward to that.

Speaker Change: Okay.

Adrian: Alright, Thank you Adrian.

Speaker Change: So just in summary, I do draw.

Speaker Change: Lead us to believe there are ample Crawford.

Speaker Change: Through proposition no matter what your focus is.

Speaker Change: I think you can see from the results they speak for themselves.

Speaker Change: We benefit from a very attractive price.

Speaker Change: Please.

Speaker Change: We've got a clean balance sheet and very strong free cash flow generation capacity and all of that to get our help support our balanced stakeholder return model for value investors were trading at about a third of our <unk>.

Speaker Change: For <unk>.

Speaker Change: Our our dividend translates into over a 10% dividend yield at current prices with dividends paid quarterly in U S dollars and then for growth investors.

Speaker Change: Again, if we funded capital program.

Speaker Change: Yes.

Speaker Change: Potential when you're comparing versus market cap or enterprise value and we got to I think some exciting results coming out over the next literally 30 days here.

Speaker Change: So with that we'll turn it over to question and answer period.

Speaker Change: <unk> quickly stop hearing screen.

Speaker Change: Yes, let me have a few questions that came in.

Speaker Change: Social media.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: The volumes that are sold in that first liens under the current contract what gas price do you expect to achieve and how much face density of demand are you seeing.

Speaker Change: Okay.

Speaker Change: Well.

Speaker Change: That's the whole reason why.

Speaker Change: We went through a phase where some of the demand impacts Bahia gas were seeing were temporary and then it became clear that some of them were actually more permanent so that was kind of an evolution.

Speaker Change: And.

Speaker Change: I think some of the market is responding to that similar lead to how we are responding.

Speaker Change: But overall the price adjustments, we're talking about aren't overly material, but the production increase that we have seen is quite material. So.

Adrian: We will continue to review the situation monthly.

Adrian: I think more importantly.

Speaker Change: We've talked about this before but basically what happens to the higher gas projected at demand forecast out for two years and filled up their.

Speaker Change: Gas supply as well as their transportation commitments for basically all of 2023 and 2024. So as we exit 2024, our expectation is that gas is going to adjust their overall portfolio so that it.

Speaker Change: Recalibrates things down this new.

Speaker Change: Demand reality and as a result, we wouldn't see that.

Adrian: Type of fluctuation that we've seen in the past.

Adrian: Whereas production capacity at <unk>.

Speaker Change: When do you expect to reach the near term near term goal of 18 million cubic feet a day.

Speaker Change: Yes, the production capacity I would say is limited by our UPN, which is roughly 18 million standard cubic feet, a day or 533 and three a day.

Speaker Change: So we can easily sell up to that.

Speaker Change: If we have the capacity at the field some part of our capital program at right now is to increase the rates for Merck Q2, So we try and achieve that goal. So.

Speaker Change: Yes, it's a little bit of a function of the amount of production that we're taking from the unit as well as the results from this upcoming activity. So I think we will be.

Speaker Change: In a better position to answer that.

Speaker Change: A month's time hopefully.

Speaker Change: So when would you start we do have a few questions on queue.

Speaker Change: Is the aim to reach over 5 million cubic feet a day premiere <unk> in 2025.

Speaker Change: Okay.

Speaker Change: Yes, sure sorry, Adrian just so the plan really is to take what we're doing with these re completions and then apply the learnings from that to our capital program going forward. So.

Speaker Change: We want to get those results and then position ourselves to start executing our long term development program. So.

Speaker Change: Certainly directionally, we think that asset can still deliver on our longer term objectives.

Speaker Change: The timing of that May shift a little bit based on when we start the drilling program, but I think we're really well positioned because we've got three drilling pads to drill multiple development wells from that are all pipeline connected so we're uniquely positioned to quickly convert natural gas drilling successes into into production and cash flow.

Speaker Change: And then as we develop that resource in the southern portion of our merger to two project, we can get out in front of that and start to build with well pads.

Speaker Change: And additional field pipelines.

Speaker Change: Back to our our 183 one facility.

Speaker Change: Each has an initial capacity but.

Speaker Change: As Adrian mentioned up about 7 million cubic feet a day, but based on results that can be easily expanded.

Speaker Change: So there was a follow up question to that you've already answered most of it.

Speaker Change: The timing of drilling the new wells on <unk>.

Speaker Change: Capex in the second half of this year in 2025.

Speaker Change: Thank you Larry answered that the new wells are dependent on the results of this program that we're undertaking right now it will be the capex for that would be dependent on that as well and the timing for that.

Speaker Change: The second half of this year there'll be completions that we have.

Speaker Change: Plank here on when 83, one and <unk> hundred <unk>.

Speaker Change: That's at an estimated cost of roughly $3 million and that should mostly be in the third quarter.

Speaker Change: Sure.

Speaker Change: Round out that question.

Speaker Change:

Speaker Change: Another question on Merck Q2, how are you developing are you permitted to frac.

Speaker Change: Okay.

Speaker Change: Yes so.

Speaker Change: Yes, we're in the.

Speaker Change: We're in the phase of actually getting a development permit for.

Speaker Change: Yeah.

Speaker Change: For the field license, there's a natural transition period out of the exploration phase and into the development phase.

Speaker Change: And our expectation and plan will be to.

Speaker Change: Use stimulation technology.

Speaker Change: Our current plan as we develop the field.

Speaker Change: It's the result.

Speaker Change: The three existing wells and the programs we have planned there.

Speaker Change: Thank you our meaningful will elbow Petro dealer reserve at peak.

Speaker Change: Okay.

Speaker Change: What I.

Speaker Change: Yes, I think practically speaking.

Speaker Change: The time, we get we'll get some initial results here hopefully by the end of August.

Speaker Change:

Speaker Change: One is we'll see a couple of months of that will be pretty close to a normal reserve update season anyway.

Speaker Change: So my guess is we would probably wait but.

Speaker Change: Yes.

Speaker Change: Exactly.

Speaker Change: Oh.

Speaker Change: Okay, a little bit more on the production side thoughts on why there was a jump in sales in July and is it a trend.

Speaker Change: Any specific reason why they see a gas nominated ignore.

Speaker Change: Yes, I touched on this through the presentation, it's pretty much entirely due to reviewing our flexible pricing.

Speaker Change: On a monthly basis, we did the same for August we expect production to be similar in August.

Speaker Change: And our hope is our expectation is that we can continue that through the rest of this year and then with the annual contract renewal we're evaluating.

Speaker Change: New firm production levels that will help secure at least a nice higher base of <unk>.

Maria: <unk> and then complement that as we add Maria if you <unk>.

Speaker Change: Over the next 18 months.

Speaker Change: And are you providing specific production.

Speaker Change: Silver production guidance for the second half of 2024 can we expect it to remain at July levels.

Speaker Change: Well again.

Speaker Change: So we're kind of unique.

Speaker Change: Our production guidance.

Speaker Change: What's happening with our gas.

Speaker Change: Gas so.

Speaker Change: Our current expectation is to stay at similar levels.

Speaker Change: No we don't typically provide quarterly production guidance.

Speaker Change: There is another question where are you focusing your development program.

Speaker Change: Yes, if you can comment on that as I noted on the organic growth slide earlier, we've got a development program at the unit, where we're drilling five wells.

Speaker Change: I think I mentioned, we're kind of start to drill those in Q4 of this year and it's going to go into 2025, we are developing that field field compression that will be installed and commissioned in the fourth quarter.

Speaker Change: So that's one chunk of our development program and then the other aspect is Ms Merkel to which we've been talking about where we are focusing our efforts on these re completions that we're doing right now putting those wells online.

Speaker Change: Taking the re completion learnings that we're doing that to.

Speaker Change: Incorporating into the future development and drilling programs in 2025.

Speaker Change: Yeah.

Speaker Change: Smoothing system corporate question, how long do you expect.

Speaker Change: Peaceful review to take.

Speaker Change: These are hard questions to answer because every every process is different but I think this is sufficiently complex are based on the advice that we're getting as it is.

Speaker Change: A multiyear process.

Speaker Change: On the NCI V. There is a question.

Speaker Change: If we expect to actually use the MTB this time.

Speaker Change: Especially kid reward more longer time shareholders long term shareholders.

Speaker Change: Yes, our intention is to.

Speaker Change: B using this we expect to get approvals hopefully within the next couple of weeks.

Speaker Change: And we put certain initial budget and our expectation that we can definitely continue the results that.

Speaker Change: Production levels like we've seen in July would generate I think we will certainly be able to complement.

Speaker Change: Complement that budget related to share repurchases moving forward.

Speaker Change: Will there be a priority to continue to grow the dividend where it was prior to the tax can we expect consistent annual dividend growth earnings growth.

Speaker Change: Yes, no thats a good question, it's something that we talk about at the board level every quarter.

Speaker Change: I think I would say.

Speaker Change: And obviously this is subject to the board decision every quarter, but it is certainly in the near term. The plan is to take the excess above that base dividend and allocated to share repurchases.

Speaker Change: Based on results, we will evaluate that mix between additional dividends or additional share repurchases on a really on a quarterly basis.

Speaker Change: And we have no further questions at this time.

Speaker Change: Alright, well I want to thank everyone for joining again today, we look forward to updating you over the next month and certainly see you again on the next quarterly call. If you have any questions feel free to reach out to any one of us and thank you for all the support.

Speaker Change: Thanks, everyone.