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 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's second quarter financial results conference call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charle 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's 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 events 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. Charle Gamba, who will summarize highlights from the corporation for the second quarter of 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. Charle 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 another profitable quarter with realized natural average 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 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 net backs, 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 ck 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 a press of four appraisal ell, which encountered 122 feet of gas charge CDO sandstones.
Speaker #5: On the expiration front, Zamiya 1 and Bourbon 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 7, reached first gas within the quarter and contributed to mitigating the natural decline from base fields.
Speaker #5: The wells, Zamiya 1, Bourbon 1, and Press of Four, 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 of the new wells coming online post-quarter.
Speaker #5: I'd like to provide additional context on our drilling activities in the Super Norte area. Drilling operations at Zamiya 1, Bourbon 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 with 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 Zamiya 1, Bourbon 1, and press of four are now tied in and flowing, bringing current gas sales to approximately 137 million standard cubic feet per day.
Speaker #5: At Netia 2, the rig has been released as a forward plan. It's being prepared to drill a new Netia 3 well, targeting the gas charge sandstones encountered in the very side tracks of the Netia 2 well.
Speaker #5: The new drilling plan will incorporate drilling techniques to address the difficulty in running production lines across the over-pressured gas charge sands encountered in the Porquero formation.
Speaker #5: I'm also pleased to announce that during the second quarter 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 ou to read our full reports, which are available on our website. I'll now turn over the ation to Jason Bednar, our CFO, who will discuss 2025 second quarter results in more detail.
Speaker #6: Thanks, Charle. The second quarter of 2025 was highlighted by resilient EBITDAX 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 EBITDAX 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 2025 and the second quarter of 2024. As Charle noted, this variance is particularly partially explained by the timing of our drilling activities as production from our Super Norte wells Zamiya 1 and Bourbon and potentially Palomino 1 was delayed following 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 Super 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 result, cash and cash equivalents 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 to note the capital expenditures were weighted towards the front half of the year as the bulk of the high-cost Netia 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 Apple 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. While the current ratio was 1.14 times, keeping us above the one-time minimum level under the Macquarie loan agreement.
Speaker #6: I'd ike 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 15, 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 twelve 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 to finalize agreements this September. We will make a public announcement once an amendment has been executed.
Speaker #6: That concludes my comments. Back to you, Charle.
Speaker #5: Thanks, Jason. Looking ahead to the remainder of this year, our priorities remain, firstly, a commitment to sustaining and growing Canacol's EBITDAX 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 ential 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 located 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 up deep into the south of the opine gas field.
Speaker #5: Discovered in 1965 by City Service and later developed and produced by Amaco, in 1997. Valiente 1 will be targeting the same productive sandstones of the La Paz formation that were productive at opine but at significantly shallower depths approximately 6,000 feet.
Speaker #5: The corporation anticipates sputting 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 to commence field activity and field reactivation activities in 2026.
Speaker #5: Fourthly, we are focused on maintaining a strong and lexible 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 ention. We look forward to keeping ou updated on our progress in the coming months, and we're now ready to take
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 Schelling: can we expect high-impact drilling to take place this year if positive? Can you provide tentative calendar wells or any corresponding potential?
Speaker #5: Yes, I mentioned in the questions. 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 drilling this year. That would include the Palomino 1 well, which we're just finishing drilling in the Super Norte area.
Speaker #5: That will be followed by the press of five 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 be on production in mid-October.
Speaker #5: Likewise, we're drilling a development well in Clarinete in Clarinete 12. Sputting that well early September, we expect that well to be on in early October.
Speaker #5: Valiente, we will sput sometime in October of this year, with results by year-end.
Speaker #3: Thank you, Charle. The next questions come from Peter Bowley from Jefferies. 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 again, my expectation is that'll be the range we're at.
Speaker #6: With its slightly weighted towards Q3, the remaining 53 towards Q3 as opposed to Q4.
Speaker #3: Thanks, Jason. The next 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 finalizing the drilling program, integrating the results of the Netia 2 well and their side tracks to optimize the drilling program to try and better deal with some of the wellbore instability we encountered in the Porquero and Netia 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. Simultaneously, we're elaborating the environmental permits for the Tita field reactivation. Which we expect to be granted early to mid-year in 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 on to 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, Charle. 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 feet per day, and realized contractual sales, which were $119 million 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 ou, Charle. 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 well-borne stability issues in the Porquero, so we managed to drill the well without much difficulty. Drill new formation, that is.
Speaker #8: We encountered five or six gas-charged sands in each of the side tracks we drilled in the Tia 2. So, in the Tia 2, it did prove the gas potential within the Porquero; however, the problem we ran into was wellbore instability after drilling the well, which impeded our ability to run production casing.
Speaker #8: 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 is being designed, primarily, to deal with running production casing more easily. And towards that end, we will drill a wider diameter of well-borne through the Porquero and run a narrower casing through the Porquero in order to maximize the success of running casing and production testing those Porquero sandstones.
Speaker #8: So, on the one hand, Netia 2 confirmed a significant accumulation of gas within the Porquero. On the other hand, we had difficulties casing the Porquero due to instability, resulting in the Tia 3, which we'll address those concerns.
Speaker #3: Thank you, Charle. The next question is from Alejandro Andrade from JP Morgan. Can you please confirm, can you please comment on taxes you paid a significant amount in the second queue?
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 month.
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 th. 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 Charle has gone through extensively here being Zamiya, Bourbon, and Pressa.
Speaker #6: You know, whether it’s the press release or the MD&A, it discusses those wells coming on for an additional 25 million cubic feet a day. Palomino, which the press release and MD&A outlook section discusses, has 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 30 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. Over 30 days, that would amount to approximately $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 again, if you would like to submit a estion, 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's second quarter conference call, and we hope you'll have good day today.