Q2 2025 Canacol Energy Ltd Earnings Call
Speaker #3: Good day and welcome to the Canacol Energy second quarter 2025 financial results conference call. All participants will be in listen-only mode. Should you need assistance, audio participants may signal a conference specialist by pressing the star key followed by zero.
Speaker #3: You may submit questions today throughout the event by clicking in the 'Submit a Question' box on your screen. Questions will be addressed after the formal presentation has ended.
Speaker #3: Please note that this event is also being recorded. I would now like to hand the call over to Carolina Orozco, Vice President of Investor Relations.
Speaker #3: Please go ahead.
Speaker #4: Good morning and welcome to Canacol second quarter financial results conference call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charlie Gamba, President and Chief Executive Officer, and Mr. Jason Bednar, Chief Financial Officer.
Speaker #4: Before we begin, it's important to mention that the comments on this call by Canacol Senior Management can include projections of the corporation's future performance.
Speaker #4: These projections may constitute any commitment as to future results nor take into account risks or uncertainties that could materialize. If a result Canacol assumes no responsibility in the event that future results are different from the projections shared on this conference call.
Speaker #4: Please note that all finance figures on this call are denominated in US dollars. We will begin the presentation with our President and CEO, Mr. Charlie Gamba, who will summarize highlights from the corporation for the second quarter 2025.
Speaker #4: Mr. Jason Bednar, our CFO, will then discuss financial highlights. Mr. Gamba will close with a discussion of the corporation's outlook for the remainder of 2025.
Speaker #4: At the end, we will have a Q&A session. I will now turn over the call to Mr. Charlie Gamba, President and CEO of Canacol Energy.
Speaker #5: Thanks, Carolina, and welcome everyone to Canacol's second quarter of 2025 conference call. We're reporting on another profitable quarter with realized natural gas prices, net of transportation, of $6.77 per MCF, given the favorable commodity pricing environment.
Speaker #5: Field operating costs held at $0.54 per MCF, generating robust natural gas operating net backs of $5.11 per MCF, with robust and stable operating margins of roughly 75%.
Speaker #5: Strong margins translated into adjusted funds from operations of $36.9 million, adjusted EDACs of $47.4 million, and a net income of $13.9 million. This last figure marks our fourth consecutive profitable quarter and a sharp turnaround from the net loss recorded in Q2 of 2024.
Speaker #5: Total natural gas and oil sales during the quarter were $127 million standard cubic feet equivalent per day, with $119 million standard cubic feet per day corresponding to realized natural gas sales and $1,382 barrels of oil per day.
Speaker #5: With strong pricing and industry-leading netbacks, Canacol remains well-positioned to continue generating attractive results for the remainder of 2025. Operationally, during the second quarter, we drilled a total of four successful wells.
Speaker #5: Consisting of two appraisal and two expiration wells, extending our track record of operational delivery and disciplined execution across our near-field and rapid commercialization strategy in the lower Magdalena Valley Basin.
Speaker #5: We drilled the CQ3 appraisal well, which encountered 200 feet of high-quality CDO pay and the press of four appraisal well, which encountered 122 feet of gas charge CDO sandstones.
Speaker #5: On the expiration front, the Samia 1 and Borgo 1 were also successful, encountering 32 and 157 feet of CDO pay, respectively. These wells further add to our inventory of commercial opportunities.
Speaker #5: Even though we drilled a total of four successful wells during this period, from a production standpoint, only CQ3, which sputtered on April 7th, reached first gas within the quarter and contributed to mitigating the natural decline from base fields.
Speaker #5: The other wells, Samia 1, Bourbon 1, and Fresa 4, were all sputtered by a quarter end but did not contribute to production volumes during Q2, as completions and tie-ins extended into July.
Speaker #5: As a result, quarterly average production was lower than in Q1, reflecting the combined effect of natural base field decline and the timing the new wells coming online post-quarter.
Speaker #5: I'd like to provide additional context on our illing activities in the Sucre Norte area. Drilling operations at Samia 1, Borgo 1, and Palomino 1 experienced temporary delays due to restricted site access caused by local unrest.
Speaker #5: Once access was restored, our teams mobilized quickly to continue the drilling activity in this area without further disruptions. Had these delays not occurred, production from these wells would likely have come online during Q2, as originally planned.
Speaker #5: That said, I'm pleased to report that Samia 1, Borgo 1, and Fresa 4 are now tied in and flowing, bringing current gas sales to approximately 137 million standard cubic feet per day.
Speaker #5: And the Tier 2, the rig has been released as a forward plan. It's being prepared to drill a new in the Tier 3 well, targeting the gas charge sandstones encountered in the very side tracks up in the Tier 2 well.
Speaker #5: The new drilling plan will incorporate drilling techniques to address the difficulty in running production line or across the over-pressured gas charge sands encountered in the Puerto formation.
Speaker #5: I'm also pleased to announce that during the second quarter of 2025, we published our 2024 Integrated ESG and TCFD reports. We believe that strong ESG principles are essential to building a cleaner, more equitable, and accountable energy future.
Speaker #5: We invite you to read our full reports, which are available on our website. I'll now turn over the presentation to Jason Bednar, our CFO, will discuss 2025 second quarter results in more detail.
Speaker #6: Thanks, Charlie. The second quarter 2025 was highlighted by resilient EBITDA generation, strong net backs, and positive net income. Average realized natural gas prices net of transportation was $6.77 per MCF, with royalties and field operating costs at $1.12 and $0.54 per MCF, respectively, resulting in operating net backs of $5.11 per MCF.
Speaker #6: These strong unit economics generated revenues net of transportation of $76.2 million, adjusted EBITDA of $47.4 million, adjusted funds from operations of $36.9 million, and operating cash flow of $33.4 million, supported by positive net income of $13.9 million for the quarter.
Speaker #6: That said, several financial metrics softened compared to the first quarter of 2025 and the second quarter of 2024. As Charlie noted, this variance is particularly partially explained by the timing of our drilling activities as production from our Sucre Norte wells Samia 1 and Bourbon and potentially Palomino 1 was delayed following local localized short unrest that impacted site access.
Speaker #6: Had those wells come on stream as scheduled, the year-over-year volume shortfall would have likely been significantly lower. Even so, firm pricing and disciplined cost control protected our margins and overall profitability, and with the Sucre Norte cluster now online, we expect both its volumes and financial contributions to strengthen throughout the remainder of the year.
Speaker #6: The second quarter was capital intensive with $57 million in capital expenditures, $11.8 million in cash tax payments, and the scheduled $14 million semiannual bond coupon payments.
Speaker #6: As a , cash and cash equivalent stood at $37 million as at June 30th. Capital expenditures during the quarter were fully funded from operating cash flow and existing cash on hand.
Speaker #6: I'd like note the capital expenditures were weighted towards the front half of the year, as the bulk of the high-cost in the Tier 2 exploration well was absorbed in the first half spending.
Speaker #6: Looking ahead, while we intend to maintain an active drilling program in the second half, capital intensity is expected to ease. On the tax side, current tax expense was $9.3 million for the first quarter and $23.9 million for the first half of 2025.
Speaker #6: Both lower than prior year periods. On a cash basis, tax payments were significantly lower at $11.8 million for the quarter, representing an 85% reduction year over year.
Speaker #6: We continue to meet all financial covenants with Ample Headroom. As of June 30th, our consolidated leverage ratio was 2.7 times below the 3.25 in current and 3.5 times maintenance threshold.
Speaker #6: Our interest coverage ratio stood at 4.49 times, nearly double the 2.5 times minimum requirements. Meanwhile, the current ratio was 1.14 times, keeping us above the one-time minimum level under the Macquarie loan agreement.
Speaker #6: I'd like to note that due to average realized contractual natural gas and oil sales, volumes falling below $130 million cubic feet equivalent per day for two consecutive months, and accelerated amortization clause in our credit agreement with Macquarie was triggered.
Speaker #6: Consequently, the $50 million term loan is scheduled to amortize in six equal monthly installments beginning September 15th, 2025, unless a waiver is secured. The impact of the accelerated amortization clause is that the loan will be amortized in six months instead of 12 months.
Speaker #6: Nonetheless, as part of our continued liability management strategy, we are currently engaged in discussions with two separate banking groups, looking to amend our non-bond debt to better match our loan repayments with anticipated future cash flows over the course of 2026 to 2028.
Speaker #6: While we can't share specifics at this stage, we expect the finalized agreements this September. We will make a public announcement once an amendment has been executed.
Speaker #6: That concludes my comments. Back to you, Charlie.
Speaker #5: Thanks, Jason. Looking ahead to the remainder of this year, our priorities remain firstly, a mitment to sustaining and growing Canacol's EBITDA and reserves base through a combination of commercial strategy, maximizing market pricing opportunities, and a disciplined capital program that challenges investment towards high-return drilling and workovers.
Speaker #5: Secondly, we will keep advancing with our program of high-impact gas expiration prospects across the lower and middle Magdalena Valleys, which have the potential to add significant reserves and production capacity in the long term.
Speaker #5: For the remainder of the year, aside from drilling some smaller appraisal and exploitation wells in and around Hobo that can be quickly monetized and contribute to production and cash flow, we will be drilling a high-impact exploration well, Valiente 1, targeting potentially material gas and condensate reserves.
Speaker #5: The Valiente prospect is located on the VMM 10-21 contract, situated in the Middle Magdalena Basin, where Canacol holds a 100% operative working interest. The Valiente prospect is a large shallow structure located approximately five kilometers deep into the south of the Opon gas field.
Speaker #5: Discovered in 1965 by City Service and later developed and produced by Amico, in 1997. Valiente 1 will be targeting the same productive sandstones of the La Paz formation that were productive at Opon, but at significantly shallower depths of approximately 6,000 feet.
Speaker #5: The corporation anticipates splitting the well in October of this year with results before year-end of this year. Thirdly, we are layering sorry. Thirdly, we are laying the operational and commercial groundwork required to commence activities in Bolivia in 2026, positioning Canacol to replicate its Colombian gas success in a new prospective and profitable gas market.
Speaker #5: In Bolivia, the corporation is awaiting ratification and formalization by Congress of three expiration contracts: Aranales, Opai, and Florida Este, and one field redevelopment contract.
Speaker #5: Tita. In order to establish the effective date of all four contracts, the corporation is currently preparing to apply for the environmental permit for Tita, along with formulating development plans in order to commence field activity, field reactivation activities in 2026.
Speaker #5: Fourthly, we are focused on maintaining a strong and flexible capital structure to support long-term growth and resilience, and finally, we continue with our commitment to leading ESG practices aimed at every molecule of natural gas we produce being delivered responsibly and sustainably.
Speaker #5: Thank you for your attention. We look forward to keeping you updated on our progress in the coming months, and we're now ready to take questions.
Speaker #3: We will now begin the question and answer session. You may submit questions by clicking in the submit a question box on your screen. Questions will be addressed in the order that they are received.
Speaker #3: At this time, I will now turn the call back over to Carolina Orozco for the question and answer session.
Speaker #4: Thank you. The first question comes from Stefan Schilling, can we expect high-impact drilling to take place this year if positive? Can you provide tentative calendar wells or any correspondent potential?
Speaker #5: Yes, I mentioned in the presentation the Valiente 1 expiration well in the middle Magdalena Valley of Colombia that has the potential to add material gas and condensate reserves prior to year-end.
Speaker #5: We're also drilling a fairly extensive program in the lower Magdalena Valley, consisting of the typical types of wells we've been illing this year. That would include the Palomino 1 well, which we're just finishing drilling on the Sucre Norte area.
Speaker #5: That will be followed by the Fresa 5 appraisal well, which we expect to be on production mid-September, which will be followed by the Mariner 1 expiration well which is expected to on production in mid-October.
Speaker #5: Likewise, we're drilling a development well in Clarinete in Clarinete 12. Splitting that well early September, we expect that well to be on in early October.
Speaker #5: Valiente, we will sputter sometime in October of this year, with results by year-end.
Speaker #3: Thank you, Charlie. The next question comes from Peter Bowley from Jeffries. Can you confirm CapEx expected for the third queue and fourth queue of 2025?
Speaker #6: Sorry, Carolina, can you repeat that question, please?
Speaker #3: Yes. This question comes from Peter Bowley from Jeffries. Can you please confirm CapEx expected for third queue and fourth queue of 2025?
Speaker #6: Oh, okay. Thank ou. The guidance or annual guidance released in February was between $143 million and $160 million. Of CapEx. I expect to be closer near the upper end of that at 160.
Speaker #6: Q1 was 50. Q2 was 57. That would mean there's roughly, what, 53 million left to go to hit the 160. You know, once in, my expectation is that'll be the range we're .
Speaker #6: With its slightly weighted towards Q3, the remaining 53 towards Q3 as opposed to Q4.
Speaker #4: Thanks, Jason. The xt question comes from Fabio Rodriguez from Fiber Investments. The question is, what's the roadmap for Netia 3?
Speaker #7: Netia 3 we're currently just finally finalizing the drilling program integrating the results of the Tier 2 well and their side tracks thereof to optimize the drilling program to try and better deal with some of the wellboring stability we encountered the Puerto and the Tier 2.
Speaker #7: So once we finalize the drilling program, we'll be looking to approve the AFE internally and looking to drill that well early in 2026.
Speaker #3: Thank you. The next question is from Alexander Emery from S&P Global Platz. Can you provide us with more color on the work to be done in Bolivia next year and when you believe you might obtain the congressional approvals?
Speaker #7: Yes. As I mentioned in the introduction, in my words, we're currently waiting for the contracts to be ratified by Congress. That's expected to occur after the elections later this month.
Speaker #7: So, sometime in late Q3 or early Q4 of this year, we are simultaneously elaborating the environmental permits for the Tita field reactivation. We expect these permits to be granted in early to mid-2026.
Speaker #7: And with those environmental permits in hand, we will commence the reentry and workover of some existing shut-in gas wells in the Tita field to bring those back onto production and production test those.
Speaker #7: And with positive results, from those workovers, we will proceed to start to construct some facilities and start to commercialize the field in early 2027.
Speaker #3: Thank you, Charlie. The next question is from Bill Newman from Research Capital. Can you clarify the 5 million cubic feet per day difference between produced gas, which was 124 million cubic feet per day, and realized contractual sales, which were 119 million cubic feet per day in Q2?
Speaker #3: Was this due to line pack inventory build or under-delivered take-or-pay volumes? And if so, should we expect some of these volumes to flow through as incremental sales in Q3?
Speaker #7: The difference between the gas production and gas sales in all quarters is related to the amount of gas we consume in compression.
Speaker #3: Thank you, Charlie. Please give us a brief moment while we continue to assemble the roster. Okay, the next question comes from Joshua Nenser from Nine Left Capital.
Speaker #3: Can you provide some color around what went wrong with Netia 2? What will be done differently with Netia 3 cost and timeline? What gives the team confidence that Netia 3 will work given challenges and costs with Netia 2?
Speaker #8: Netia 2 encountered some wellboring stability issues in the Puerto. So we managed to drill the well without much difficulty, drill new formation, that is.
Speaker #8: And we did encounter five or six gas charged sands in each of the side tracks we drilled in the Tia 2. So in the Tia 2 did prove up the gas potential within the Puerto.
Speaker #8: However, the problem we ran into was wellboring stability after drilling the well. Impeded our ability to run production casing. So even though we drilled successfully, we were not able to run production line or successfully across those gas charge sands in order to production test them.
Speaker #8: Netia 3 has been designed, primarily, to deal with running production casing more easily. And towards that end, we will drill a wider diameter of wellboring through the Puerto and run a narrower casing through the Puerto in order to maximize the success of running casing and production testing those Puerto sandstones.
Speaker #8: So on the one hand, Netia 2 confirmed a significant accumulation of gas within the Puerto. On the other hand, we had difficulties casing the Puerto due to instability and resulting in Netia 3, which will address those concerns.
Speaker #3: Thank you, Charlie. The next question is from Alejandro Andrade from JP Morgan. Can you please confirm? Can you please comment on the taxes you paid and the amount in the second quarter?
Speaker #3: What is the expectation for the second half of 2025?
Speaker #6: Yeah. Thank you. We are down to essentially just the monthly withholding taxes off our monthly revenue checks that I've discussed many times in the range of historically 1.2 or 1.3 million a th.
Speaker #6: The government just increased that withholding by a couple of percent, so it could be, you know, up to approximately $2 million a month. But that would be it.
Speaker #6: And of course, that is to the credit of our prepaid tax account.
Speaker #3: Thank you, Jason. We have a question from Benjamin Rojas from Beteje Pactual. Do you have any liquidity source in a stress period?
Speaker #6: Thanks. You know, I think the most obvious one that comes to mind is our recent wells that have come on production, which Charlie has gone extensively over here: Samia, Bourbon, and Fresa.
Speaker #6: You know, whether it's the press release or the MDNA discusses those wells coming on for an additional $25 million cubic feet a day. Palomino, which the press release and MDNA outlook section discusses with an expectation of 10 to 12 million cubic feet a day.
Speaker #6: So that would total up to $37 million. But if I just did simple math on adding $30 million cubic feet a day, to pick a round number of $12 and 50 cents in MCF and sales price because these are sold above or over and above our take or pay volumes, that $12.50 net of royalties and net of operating expenses would approximate, $10 in MCF net back.
Speaker #6: So $30 million cubic feet a day at a 10 net back would be about, $300,000 a day. 30 days, that'd be about $9 million a month in additional, cash flow and EBITDA.
Speaker #6: So that would be, you know, the most obvious source of additional, liquidity.
Speaker #3: Thank you, Jason. please give us a brief moment again while we assemble the roster. Once in, if you would like to submit a question, you may submit questions by clicking in the submit a question box on your screen.
Speaker #3: Okay. Carolina, you may continue.
Speaker #4: Oh, apologies. with this, we finish our Q&A session. We don't have any more questions for today. Thank you all for participating in Canacol second quarter conference call, and we hope you'll have a good day today.
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