Alvopetro Energy Ltd.

This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear.

The machine-assisted output provided is partly edited and is designed as a guide.:

00:13 Good morning. Welcome to our third quarter earnings call.

I'm joined today by Alison Howard our Chief Financial Officer, and we will be having a question and answer session following the presentation. So, I encourage you to log your questions into the Zoom platform using the Q and A button or alternatively you can e-mail your to social media at alvopetro.com.

00:39 I'll, let you read our cautionary statements at your leisure. So, the third quarter was another great quarter for us.

It was a record quarter, both operationally and financially. Our results are really underpinned by our strong production performance to date.

Third quarter, we average twenty four hundred and fifty nine barrels of oil equivalent per day. That's up thirty nine percent year over year, and up four percent quarter over quarter.

01:07 We had just a slight decrease in October that you can see just shy of twenty four hundred BOEs a day, but again excellent production performance. 01:17 With that, I'll turn it over to Alison.

01:19 Thanks and good morning, everyone. I'll jump right into some financial highlights starting with our operating netback.

Our operating netback is our overall profitability per a barrel of oil equivalent. 01:34 That's reflected in the green bars, and you can see a steady increase, kind of similar to production and a steady increase in our operating netback since we commenced operations last July.

01:47 At the top of the bar is our realized sales price, so you can see Q3 was our record realized sales price per BOE as well, at forty four dollars, just over forty four dollars per BOE so that was up close to six dollars from last quarter, and that explains the mean increase in our operating netbacks this quarter as well. 02:09 Our gas sales increased just over a dollar per Mcf, which was about seventeen percent compared to Q2.

And that was as a result of our natural gas sales price redetermination on August first and condensate with us as well. Our production expenses are reflected in yellow bars there and that was fairly consistent and overall it's been under four dollars per BOE since started production.

02:40 And royalties were up marginally this quarter just because our royalties for natural gas our tied to Henry Hub and with increasing Henry Hub prices, our royalties as a percentage of sales has gone up. 02:54 Moving on to funds flow from operations, which is the green bar here., our funds flow from operations is our cash flow from operating activity before adjusting for working capital and similar to our operating netbacks, we've seen a large steady increase in that as well.

This quarter is up two point five million dollars, a walk through the details of that on the next slide, but just touching briefly on capital expenditures, which we've just shown here just to show the percentage of our capital expenditures, our percentage of our funds flow spent on capital. 03:32 This quarter was just under one point three million dollars, the bulk of that is for our [indiscernible] Merck due to high end pipeline that we're building right now.

But overall, as a percentage of funds flow, we've been fairly low at roughly seventeen percent year to date and sixteen percent this quarter. 03:55 So, moving on to funds flow, we saw, as you saw in that previous chart, we saw an increase of two point five million dollars in our funds flow from operations.

That's mainly due to increased revenues of one point eight million with about eighty percent of that due to that realized price increase that I spoke about earlier. 04:17 As I mentioned royalties were marginally higher this quarter, production and G and A were fairly consistent.

We did see a lower current tax expense in Q3. As we noted in our Q3 financials, we did receive approval for the [indiscernible] tax incentive, which is of the [PSC] [ph] tax incentive on our natural gas process, and it reduces our inherent tax from the thirty four percent tax free rate in Brazil to fifteen point two five percent.

04:51 So, overall year to date our current tax is just under four million and is quite low relative to the earnings that we've reported, which is great. The other item impacting funds flow was we did have recognition of just over nine hundred thousand of other income in the quarter.

05:12 A large portion of that is non-recurring and relates to retroactive tax legislation change, that improved some tax credits that we are eligible for. So, there was a bit of an increase there compared to a large increase there compared to last quarter.

05:32 Just thought, I would explain our net income in a bit more detail because despite that improved funds flow, we did see a decrease in our net income, and virtually all of that you can see there is due to foreign exchange. 05:48 We do have some larger foreign exchange gains and losses that go through our income statement.

And it's all basically, sort of an accounting phenomenon relating to intercompany loans. And if you look at our statement of cash flows, you'll see that the bulk of any foreign exchange loss or gain is generally adjusted out from a cash position.

06:10 So, it just has to do with accounting for intercompany loans because our subsidiary in Brazil or was that U.S. Dollar funds, there's an inherent foreign exchange fluctuation on that despite the fact that those eliminate on consolidation and non-cash, but that's the main reason for kind the fluctuating net income that you see in our statement.

06:36 The other item was our depreciation and depletion did increase a bit this quarter with increased production levels. So, that explains that there.

06:49 And then the other thing is turning to our balance sheet and our overall leverage position. So, this chart here, the height of the orange bars reflects our net debt, and we define net debt as our credit facility balance less any working capital surplus.

06:36 So, you can see last year as of September thirty, we had net debt up thirteen point one million and what’s happened as of September thirty, this year our working capital surplus of six point eight million actually exceeded our credit facility balance. So, we end up with our recovery there of three hundred thousand, you can think of that as net cash.

07:30 Overall, our actual cash balance has been increasing. We ended the quarter with eight point one million.

We have nine million dollars of our credit facility balance and brought that outstanding to six point five million as of September thirty. And as I mentioned, our working capital at six point eight million is after some pretty significant adjustments in Q3 for our share repurchase, which we spent one point one million on and then we declared our first dividend that was another two million and despite all of that, our working capital surplus, we're still above that credit facility balance, which is great.

08:12 Excellent thank you, Alison. So, we had our most recent semi-annual price, gas price happen on August first of twenty twenty one.

Our price increased about twenty four percent to over seven dollars U.S. per mcf.

So, obviously, our third quarter results included two months of that new price in Q4, we'll have a full three months and then looking forward on February one of next year, so just less than three months away, we expect another much larger price increase about forty six percent, so that will bring us up, we're expecting over ten dollars U.S. per mcf.

08:52 So, in February, that will be the first time our price formula uses the benchmark prices from the second half of this year and obviously, we've had pretty significant appreciations in all three of the benchmarks that are used in our price formula being Henry Hub Gas, UK NBP Gas, and Brent oil equivalent. 09:14 If we use our independent evaluators price forecast as of September 30, you can see in the dark black line going forward, we have several periods of pricing at our ceiling and it compares quite favorably to the price in brown that you can see below that, which was the price forecast used in our last reserve evaluation effective the end of last year.

So, we've had certainly a nice uptick there. 09:45 Moving on to our capital program, as Alison outlined, we've had a pretty great first fifteen months of production and cash flow.

We’re now extremely well positioned to execute our organically funded growth plan and to be clear our next objective is to completely fill our midstream assets and take us up to a new production plateau of eighteen million cubic feet per day. 10:10 It's kind of a multi-pronged program first.

We have given notice to increase our gas plant capacity up to eighteen million cubic feet a day or zero point five million cubic meters a day, which is about a twenty five percent increase from the current capacity. 10:25 On the conventional exploration side, we're getting close to spotting our first two exploration wells starting with the 182-C1 location and then followed by the 183-B1 location and as you can see, those almost immediately north of our UPGN cap rate, which is our gas plant and with success we would tie that in through a new pipeline connecting directly to the plant.

10:51 Next on our [indiscernible] Q2 development plan, this is our Gomo project the red pipeline that you see on the eastern side of the map connecting from the hub area within the cap rate unit area to tie in the one hundred and eighty three well is well underway. We expect that along with the surface production facilities to be in place to allow that well to be tied in early next year, and then we really have the infrastructure in place to start a broader development plan starting with the one ninety seven one stimulation and tie-in through that orange pipeline that you see there.

11:31 And then following that, we have a plan to drill our first fit for purpose Gomo development well with the [indiscernible] one location, which the well pad fits just to the south of one hundred and eighty three one. It's right along the pipeline right away.

The well will be drilled in a deviated fashion almost straight. 11:48 So, and the nice thing about this location is we have some pretty interesting uphold conventional exploration potential that we drill through on the way through to the Gomo target.

So well, the other nice thing is because it's along the right way as we can tie it in pretty much immediately. 12:08 So, just in summary, obviously, we've delivered some pretty strong results since coming on production.

I think certainly well ahead of expectations. Our funds flow from operations in the first fifteen months has been twenty six million dollars U.S.

Obviously, our third quarter was our best quarter yet with funds flow from operations of close to eight million dollars. 12:30 On the debt side, not only did we extend the maturity, we lowered the cost of that facility, and we've been really aggressively repaying getting our first year of operations.

As Alison noted, as of the end of the quarter, we actually flipped over into effectively a net cash position. 12:49 So, despite having declared a dividend, despite doing our share buyback, we've been able to basically eliminate our debt.

As of the end of the quarter. So, pretty strong balance sheet.

13:00 As for the share restructuring, not only was that I think, an accretive transaction for us. It really helped pave the way for a much more cost effective dividend plan.

We only bought back about one point three percent of our stock, but it eliminated close to I think eighty percent of our shareholder accounts. 13:19 All this together allowed us to start our dividend program, about six months ahead of schedule in the third quarter at zero point zero six dollars U.S.

per share, which is a current yield of just over six percent. We're certainly looking forward to our next price redetermination in just under three months’ time.

13:37 Like I said, we're really well positioned to start the second part of our balanced capital allocation model. As Alison noted, we've been significantly under investing in the capital part of our business and doing a lot on returns to stakeholders focused on debt, primarily and now shareholders, but we really I think not only have a lot of strong catalysts in the very near term, but we've really created a unique yield plus growth investment opportunity for our shareholders.

14:07 So, with that, we're going to turn it over to the question and answer. And just to remind you, you can click on the Q and A button or alternatively email your questions into social media at alvopetro.com.

14:31 Okay. The first question is related to the Enterprise expansion notice what does that entail and when will it be on stream?

14:39 Yes. So, very simply it just involves, you know, this is something we had envisioned in our original contract, so it's one extra compressor.

There's also an overhead compressor and a [dual Thompson valve] [ph] that very simply expands the plant capacity up to half a million cubic meters a day. 15:00 The fee is another thirty five thousand dollars U.S.

per month under our pre-existing agreement, and we expect that to be on stream by June first of next year.

15:13 Can you give an update on the drilling status of the new Gomo wells?

15:19 Yes. So, in order what I talked about there, the 183 well has already been drilled.

Obviously, the pipeline is getting very close to completion and then we have some surface production facilities that we’re installing as well. So, that's well on track to be onstream in the first quarter.

15:37 The 197 well is also a preexisting well that we've drilled and then once we have that infrastructure in place, we're then positioned, we need to get a permit for the additional pipeline, which is underway and then we would stimulate that well and tie that in. Our target would be to have that happen sometime probably later in the first half of next year.

And at the same time, we have an application in to drill and stimulate the [Mers one location] [ph]. 16:09 So, it's subject to permitting, but ideally, we would be spudding that well sometime mid-next year.

16:19 And then when would you expect the volumes to come on?

16:23 Yes. So, the volumes from 183-1 in the first quarter ideally, we would have the volumes for 197-1 for the second half of the year, and then the volumes for the [Mers one location] [ph], again, all this is subject to the permitting timing, but we're hoping to have that on for the fourth quarter.

16:45 What sales price do you see for Alvopetro in twenty twenty two?

16:50 Yes. So, right now based on our – and keep in mind, the benchmark pricing the way it works is, we use historical blender average.

We're almost all the way through. We're five, what four and a half months through the second half of the year here.

So, we’ve only got one point five months left of actual prices that will then dictate our February one price. So, that's almost been determined and as you can see it's pretty much, it's at the ceiling within our contract.

17:21 If you use our reserve evaluators price forecast that you saw in that prior slide, we would expect to continue at the ceiling price through the entire period of twenty twenty two. Sorry, to be clear, that's the price above ten dollars U.S.

per Mcf.

16:50 Right. Please expand on the volume and pricing?

Both have been gradually increasing, is the increasing in volume due to demand or capacity? Does this have numerous [indiscernible]?

17:56 Okay. Thank you.

Yes. So, keep in mind, we originally had a gas sales agreement with – and I'll have to pick units here, but roughly five million cubic feet a day was our initial firm capacity.

So, we negotiated that up to basically eleven million cubic feet a day, that's been the firm volume within our gas contract. 18:20 But we do have a price advantage relative to Petrobras and there's been strong demand on the electricity thermal power generation side, as well as overall demand.

And all that together has allowed us to deliver not only firm volumes to gas our [indiscernible], but flexible or interruptible volumes as well. 18:42 And then in parallel, you know, our initial capacity with Enerflex under our gas processing facility was actually a similar level.

So, the eleven million cubic feet a day. What we did earlier in the year is we did a higher rate test and this is partly because of our gas composition and partly because the plant is performing I think quite well.

19:03 We were able to, despite that contractual limit, we were able to test the facility up to eleven or just over eleven million cubic feet a day of capacity. So, that's allowed us to increase that to go further, obviously, we need this plant expansion that we're talking about.

19:23 So, the limit lately has really been our gas plant capacity, but it's been pretty coincident with I think what works well for our gas sales agreement today, as well as from a unit production perspective, you know I would say the units actually been, you know our partners also been dispatched into their thermal power project. 19:41 So together with our partner, we've actually been able to produce well above the original planned production plateau from the unit.

So, it's really those three things altogether.

19:53 And with the ramp up to five hundred thousand cubic meters a day, at the Enerflex facility, will that occur discreetly all at the same time or increase in steps from now and until mid-twenty twenty two?

20:06 No, it should be all in one big step on June first.

20:12 Great. The next question is the total amount of dollar sales from condensate in the quarter.

20:20 And I'll answer that one. So, we had just under ten million of total revenues in the quarter and just under eight hundred thousand of that, so seven hundred and seventy nine thousand came from our condensate sales.

20:37 The next question is, are you currently selling gas at a slower price due to the changing variables, FX rates etcetera, can you provide the current ceiling prices as of October or September months end? And I think that you went through that in the slide, and we expect to be at the ceiling early next year.

21:02 Yes. Starting February first, based on GLJ’s price forecast, the ceiling price actually extends past the end of twenty twenty two.

So, encourage you to look back at that slide. And if you have any remaining questions certainly feel free to reach out to Alison or myself.

21:23 With your improved balance sheet and strong cash flow, do you see any M and A activity as possible in twenty twenty two?

21:31 Yes. I think M and A activity is always possible, but it's something that we don't talk about it until it's done.

21:39 To be fair, there's has been some very large Petrobras packages that have been selling at very high prices. So, I would expect certainly in the onshore industry in Brazil is going to be, you know it's changing rapidly, that all of a sudden you're going to have all independent parties no Petrobras involvement.

22:00 I, you know, this will be a slow process, but over time, I think you're going to start to see much more activity than you have historically. So, something that's hard to comment on.

22:13 We did have a question about our [buttons] [ph].

22:16 And in Canada, it is remembrance day tomorrow November eleven, and in November, we wear poppies in remembrance of Veterans that served on behalf of our country. So that is what these are.

22:31 And we actually have no further questions.

22:35 Excellent. Well, thank you everyone for attending.

Look forward to our next call and if you think of any questions afterwards, certainly again, reach out to Alison or myself and thanks again for your attendance.