Q3 2024 Alvopetro Energy Ltd Earnings Call
sales prices, which I talked about earlier, and then also the higher production expenses.
Similarly, net income, we saw a $4.8 million increase in net income compared to Q2.
last quarter 3.2 million so we did see a big adjustment for that and offsetting those increases were additional depletion and depreciation due to increased production levels and then also higher deferred tax.
Mainly, foreign exchange gains and losses recognized by our Brazilian subsidiary on U.S. dollar amounts. So it's U.S. dollar intercompany loans between the Canadian parent company and the Brazilian subsidiary, and then also U.S. dollar capital lease.
in Brazil. So, although overall the average rate in Q3, the average AI had depreciated relative to the US dollar compared to Q2.
which is used to determine, you know, the foreign exchange that goes through the income statement on those U.S. dollar amounts. There was an improvement as of September 30th compared to June 30th, so we did have a gain in this period.
and we had cash of $24.5 million on our balance sheet at that time. And a reminder, we are debt-free and have been for over two years now. We repaid our credit facility, fully repaid it in September of 2022.
Speaker Change: All right. Thank you, Alison. Just to walk through the dividends, we did introduce this back in the third quarter of 2021. We've paid nine cents U.S. per quarter each of the quarter so far in 2024. That translates into a current yield of over 10 percent based on our share price.
and in total since inception, this represents over U.S. $47 million that's been paid out to shareholders, or U.S. $1.31 per share.
Tanya Bowney
Speaker Change: So again, this graph that we show each quarter demonstrates our balanced and disciplined capital allocation and stakeholder return model that we've been following. As a reminder, that model looks to reinvest roughly half of our cash flows in organic growth.
and return the other half to stakeholders. So you can see the chart on the left each quarter since we came on production from our cabaret project. The lines with the black dots
are the funds sold from operations each quarter. Alison walked you through that, 9.9 million this quarter, which was up about 25% from the prior quarter.
Speaker Change: And then each of the stacking bars shows where that cash flow, or basically the cash outflows. So the red represents the amounts reinvested in our business.
and then the various shades of green are the returns to stakeholders.
Speaker Change: which in the third quarter amounted to 42% and then because the stacking, the height of the stacking bar is below the dot
Speaker Change: The Share Buy Back program that we introduced late in August, and most of those purchases happened in September, totals about a quarter of a million dollars, the U.S. in the budget.
Speaker Change: in the third quarter and has been continuing here into the fourth quarter.
Speaker Change: The pie chart that you see here just represents, since coming on production, in total you can see that we've now had cumulative funds flow from operations totaling $156 million. Of that, 43% has been reinvested.
Speaker Change: and 48% of it has been returned to stakeholders with the remaining 9% building that cash and working capital position to really help preserve financial flexibility for us as we move forward.
So, just talking about our Organic Growth Program moving forward.
Speaker Change: I think we've established a pretty strong platform to build on, to reiterate our near-term goal is to get to 18 million cubic feet a day or 3,000 barrels of oil equivalent per day, and that would fill, or depending on the gas specification going through our plant, come close to filling our current capacity within the facility.
Speaker Change: We do have a five-well development program here. Our best guess on that would be that that would start sometime early next year.
Speaker Change: And then, in addition to that, just sitting immediately north of Cabaret, which sits here, as a reminder, is our Murakatutu project. This is a 100% working interest project.
We did announce recently a very positive result at our 183-83 well, and Adrian will walk you through our growth plans here. But we're really looking to migrate all of the reserves and contingent and prospective resource that we've got booked on this asset into production and cash flow over the coming months and years.
Speaker Change: We're quite excited about the result that we have at 183.83.
Speaker Change: So, our Merca-2-2 gas resource, this is, as Corey pointed out, our 100% working interest asset, and this sits directly north of the cabaret unit.
Speaker Change: So this is connected to our midstream infrastructure and connected to our sales point.
Speaker Change: This represents 4.6 million BOE of 2P reserves, so this has got a lot of opportunity for growth for alfalfa show.
Speaker Change: and we we made some strong advances in the third quarter at Merica 2-2 we now have 183 A3 on production.
Speaker Change: As Corey pointed out, we saw in our sales numbers, we brought this online and we had 1.8 million standard cubic feet average in October for this wellbore. In this completion, we did put
Speaker Change: five first sorry six of the zones you see on the log on the right we brought those online those are all QRSU production
Speaker Change: and we have those online and we're quite quite excited about their initial results we see in the career pursuit portion of this asset.
Speaker Change: If you look at the plot in the middle, where you get the contour plot, you can see the well board that we brought online, which is 18383.
Speaker Change: So we're currently planning a well bore directly to the south of that uptip in structure and we'll be looking forward to initiating that drilling program at the end of 2024 as a follow-up to our current results.
Speaker Change: The picture on the bottom right shows an aerial photo of this asset. The wellbore that we brought online is where the mouse is there on the bottom right.
Speaker Change: processing facility or the, sorry, the field facility and its pipeline connected to the processing facility. The pad in the in that same picture in the top left is where we'll be drilling our follow-up well which will be uptip and structure.
Speaker Change: And you can see that there's some other locations and room for growth as follow-ups to our other reserves in that field. So we look forward to the development here.
Speaker Change: All right, and just to conclude, you know, I really still feel very strongly that Petra offers a very attractive investment proposition, no matter what your focus is.
Speaker Change: I hope everyone agrees we've been delivering some pretty strong results off the back of industry-leading operating netbacks.
that really helps underpin that balance and discipline.
and for growth investors.
Speaker Change: I think we've got a very exciting organically funded capital program that has the potential to unlock an awful lot of value here over the near term, especially when you compare it to our current enterprise value. And I think we've demonstrated some of that potential with the recent 183A3 success that Adrian talked about. And we certainly look forward to following that up with another well here starting later this year.
Speaker Change: And with that, I think we'll start the question and answer period. I'll stop sharing the presentation.
Speaker Change: Do you expect the repurchase plan to eventually reduce the shares outstanding after employee stock plan issuances, etc.?
Aw, great.
Aloha
Well, yeah, again, we're we're allocating
Speaker Change: The portion of our stakeholder return payments, I guess the 50% of cashflow to the extent that our capital lease and our current dividend or the dividend that we pay in the future is less than that, we're taking that money and allocating it to the issuer. So the answer depends on the results and the pace at which we're repurchasing shares.
Speaker Change: Okay and then in follow-up to that there's a question, in 2024 it appears you've been distributing less than 50% to shareholders despite the strong balance sheet. Is there a plan to get it back up to 50% and is this through buybacks or higher dividends?
Speaker Change: Yeah, I think from inception we're still pretty close, and that's not written in stone, to be clear, but we're trying to use the 50% as a pretty close figure.
guideline. I think since inception we've been almost at that.
Speaker Change: Q3 was a little bit lower than that, partly because the results were so strong and the budget that we allocated to the issuer bid didn't necessarily, we only had one month worth of issuer bid.
Speaker Change: Timing, meaning the share repurchase program, so that budget is effectively there for the share repurchases that will happen through the duration of that program, which lasts all the way through till...
Speaker Change: August of next year and we're hopefully off the back of some continued positive results be able to add to that bucket.
Perfect.
Speaker Change: Could you provide some details on the CapEx spend for the quarter along with guidance for Q4 and 2025 if possible? I can maybe comment.
on that.
Speaker Change: So in the quarter we had $4.7 million of capital expenditures. The main projects this quarter were the completions at 183A3 and 183A1 on our Merck 2-2 field.
Speaker Change: So that was roughly $3.5 million of expenditures total overall on the Merck 2-2 field, or $3.8 million with capitalized G&A.
Speaker Change: and then the other big project we are doing that facilities upgrade for compression at our at our cabaret field so there was approximately 0.6 million in spending on that and then those were the main projects this quarter.
Speaker Change: Moving on to kind of upcoming projects, we're still working on our, you know, 2025 plan, but the main projects which we've talked about are the unit development,
Speaker Change: Welles at the unit, our cost for that is forecasted to be about $7 million and then also we will be finishing up this facilities upgrade at Cabaret as well, that's another approximately $1 million.
Speaker Change: And then going forward, the next big plan, what Adrian was talking about is our new well on Merica Q2. We are still finalizing the well design on that, so we haven't finalized the capital spending amount for that yet, but it will be similar to what was in our reserve.
Speaker Change: report previously, and those are the main projects that are coming up from a CAVX perspective.
Joe, that's great.
All right.
Any guidance on bahiagas nominations for Q4?
Thank you as well.
So we've got October already announced.
Speaker Change: Any update on the arbitration surrounding the redetermination of the cabaret working interest?
Speaker Change: No, just that it's in the full kind of arbitration process. So we're still in the finalization of the arbitrators. I think that should be completed here over the next month. But these processes tend to be quite slow in Brazil.
Well, not only Brazil, everywhere.
Speaker Change: Just shifting to Brazil overall, given that Brazil's hydro output for power has been affected in the last month, it appears that Brazil is moving to fossil energy as seen in record coal imports. Do you see any increase in gas demand?
Speaker Change: Yeah, so this is a seasonal thing in Brazil for sure. I think about 93% of Brazil's energy comes from either hydroelectric or renewable sources, wind and solar mainly.
Speaker Change: But even with that, obviously the hydro component is affected a little bit, or a lot, by how much it's raining. So we went through a drier phase.
Speaker Change: that did result in more dispatch of the thermal electrical generation capacity within the country.
Speaker Change: The rains have started, the demand or pressures on that have decreased. There's a system for kind of going red, yellow, green as it pertains to the water levels in the reservoirs, and I think we're now back down to a yellow level.
Speaker Change: The other phenomenon though that's changed because there's so much of the base electrical supply coming from those renewable sources the challenge with these things is
Speaker Change: The, you know, natural gas and the thermal power component is going to be, I think, continue to play a key role, you know, to meet that dispatchable energy demand requirement.
Speaker Change: What would be the catalyst to ramp up drilling activity in Maricatutu? Would you consider debt financing to implement a significant multi-well program?
Speaker Change: Yeah, obviously a little bit of this depends on results and also, you know, we have to marry that with...
Speaker Change: permitting and equipment and also with with our capacity within our plant so
Speaker Change: The one thing that we have with Mercatutu is the gas is richer or hotter than our Cabaret gas. So right now we've been managing the mix of production between Mercatutu.
Speaker Change: and the unit, such that roughly a quarter of our production is coming from Merca-2-2 and the current design of the gas plant
Speaker Change: seems to be working quite well at that mix. If we add more Merca 2.2 production...
Speaker Change: We will be looking at making some minor facility modifications to account for that. So there are some things that have to happen in parallel.
Speaker Change: I think over the near term, or certainly as you look into next year, with the amount of cash that we have on the balance sheet and the cash flow generation capacity we have,
Speaker Change: and just the practical realities of executing the capital program. I think we're well positioned to execute that organically without any additional debt capital, but we certainly have a lot of flexibility to do that based on results if we want to ramp that up.
Speaker Change: So just following up on a related matter with respect to the mix between Cabaret and Merck 2-2, is the plan for 2025 to increase Merck 2-2 production given it's 100% elbow petrol at the expense of Cabaret?
Speaker Change: Well, our plan, to be clear, is to increase both. So we're adding compression at the unit, we're drilling five wells at the unit, and the plan is to be able to grow the productive capacity and extend the productive capacity of that field.
Speaker Change: but to complement that obviously we want to add more 100% working interest production at Cabaret and then we'll manage the facilities to accommodate that new gas but you know right now
Speaker Change: I wouldn't characterize it necessarily at the expense, the reality is most of our sales has been driven more off the nominations that we're getting from Bahia Gas.
Speaker Change: And strategically, what we're trying to do is make sure we have sufficient productive capacity available over our whole portfolio of assets so that we can increase the firm
Speaker Change: volumes that we're committing to with Bahia Gas so that even if there are demand adjustments, we've secured then a higher base level of production and cash flow, and we're just working through that process with Bahia Gas as we speak.
Speaker Change: Jumping back into the share repurchases in our normal course issuer bid, what is the limiting factor on the rate of share repurchases? Is it limited by factors in the market, such as a requirement to be less than an average daily price, or a certain percentage of total volumes?
Yeah, so...
Speaker Change: Right now it's based on the general budget that we've allocated on on a daily basis, but there are also regulations on the percentage limits on
how you buy, how the shares can be bought.
Speaker Change: limitations on how much can be bought in any individual day. But what we're trying to do is take the budget that we've allocated to it and spread it out over a period of time. And you know, that for now, that's the pace that we're operating at. And hopefully we can add budget to that as the year progresses.
Speaker Change: Just jumping back to MERCA 2.2, when you announced the 183A3 well, you noted that production was 2.1 million cubic feet a day, but it seems that October was below that. Is that due to well declines?
Speaker Change: Yeah, the announced production at 2.1 was during our initial production testing. So we're doing that at steady choke settings and a steady period of time. In the October average of 1.8, that was
Speaker Change: Right now, the well is at or above what we've announced previously, so we're looking forward to what November is going to be for that well.
Speaker Change: Can you give us a timeline of when you expect to hit your goal of 3,000 BOE per day?
Speaker Change: Yeah, so our objective there is to make sure as we go through our capital program next year is to have that level of productive capacity and then make sure we've got the plant tuned so that it can
Speaker Change: It can accommodate a flexible range of gas from Merica 2-2 or Cabaret and then marry that with our gas sales. So, honestly, I think our ability to average that
Speaker Change: through the year is probably going to be driven more from the demand side from Bahia Gas and probably less to do with with our productive capacity based on our current plans.
Speaker Change: Given the healthy cash position, would it make sense from a cost of financing to buy out the lease on the gas plant?
Yeah, it could. I do think...
You know, that was a pretty
Speaker Change: reasonable bit of financial and operational engineering that we did at an important time for the company. I still think it's a good use of capital to have that capital lease there and at the end of the term the plant reverts back to us.
Speaker Change: you know, it's something we could do, but I think having that cash available for growth opportunities probably makes a bit more sense.
Speaker Change: Great, and there are no more questions, so that is it for the Q&A. All right, well, thank you, everyone, again, for participating. If you've got any questions after the fact, feel free to give us a call, and we look forward to updating you on our progress through Q4 here.