Canacol Energy Ltd

Good morning and welcome to Canacol's first quarter 2021 financial results conference call. This is Carolina Orozco, Director of Investor Relations.

I am with Mr. Charle Gamba, President and Chief Executive Officer; and Mr.

Jason Bednar, Chief Financial Officer. 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.

These projections neither constitute any commitments as to future results nor take into account risks and uncertainties that could materialize. As a result, Canacol assumes no responsibility in the event that future results are different from the projections shared on this conference call.

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 cover the operational highlights for the first quarter. Mr.

Jason Bednar, our CFO, will then discuss financial highlights and Mr. Gamba will close with a discussion of the corporation's outlook for the remainder 2021.

At the end, we will have a Q&A session. Charle is joining us today from the line - from Bogota and Jason is joining us on the line from Calgary.

I will now turn the call over to Mr. Charle Gamba, President and CEO of Canacol Energy.

Thank you, Carolina. Good morning or good afternoon and welcome to Canacol's first quarter 2021 conference call.

In the first quarter of 2021, we realized natural gas sales of 178 million standard cubic feet per day, the highest level achieved since the COVID pandemic began [technical difficulty] gas demand in Colombia, in late Q1 of 2020. This is also above the midpoint of our guidance for the full year of 2021 for 153 million to 190 million standard cubic feet per day.

We also reported a 14% return on capital employed, as well as a strong and stable operating margin of 77%. Realized natural gas sales during Q1 were 178 million standard cubic feet per day, a 12% decrease from the same period in 2020, but a 5% increase from the fourth quarter of 2020.

Realized gas sales have continued to recover from a low point of 136 million standard cubic feet per day in April of 2020. Gas demand in Colombia fluctuates depending on several variables such as hydrology, as well as various restrictions on people [technical difficulty] to go about their normal business, whether that is due to COVID and public health measures or recent public protests in Colombia.

Our sales volumes may also fluctuate as we balance our desire to grow our market share with ensuring that we're not negatively impacting market price or discounting the value of the resource we produce. In April of 2021, we provided a new resource estimate for our gas exploration blocks, located in the Lower and Middle Medellin basins, showing an unrisked mean prospective resource potential of 5.7 trillion cubic feet net to Canacol, and a risked mean prospective resource of 1.7 trillion cubic feet, estimated by GaffneyCline in their audited report as of April 2021.

Those volumes represents an increase of 21% in risked mean prospective resource over the last resource report. With over 188 prospects and leads identified for drilling over the next 10 years, we expect to continue to see our exploration programs deliver on transferring these prospective resources into commercial reserves.

On the drilling front, we have completed four of the 12 wells planned for 2021 drilling program, with each being completed on time and budget, which is not an insignificant achievement given the complexities of operating - drilling operations, while the effects of COVID linger, as well as the civil unrest we're currently experiencing. I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our first quarter financials in more detail.

When he is done, I'll provide a detail on the outlook for 2021.

Thanks Charle. We continue to execute our plan and develop our growing natural gas business in Q1 of 2021.

We reported the following key results for the first quarter; $59 million of production revenue, net of royalties and transportation, which represented a 16% decrease from Q1 of 2020. $38 million in funds from operations, which also represents a 16% decrease from the same period in 2020, and an EBITDAX of $47 million, which represented a 21% decrease from the same period in 2020.

Keep in mind that in Q1 of 2020, we reported natural gas sales of over 200 million cubic feet a day as the COVID pandemic had yet to impact demand in any meaningful way. This quarter's natural gas sales of 178 million cubic feet a day represent the third consecutive quarter of sales growth, since demand bottomed out in April of 2020 at a 136 million cubic feet a day, with Q2 of 2020 averaging reported 152 million cubic feet of gas sales.

Correspondingly, we see the funds from operations and EBITDAX was steadily recovering from the lows seen in Q2 2020 at the height of the COVID first wave in Colombia. Funds from operations have steadily increased quarter-over-quarter from $31 million in the second quarter of 2020, due $38 million in the most recent quarter.

And EBITDAX, similarly increased from $40 million in the second quarter of 2020 to $47 million in this most recent quarter. We also had $10 million in free cash flow before interest during this first quarter of 2021.

We reported a net loss of $3.1 million or $0.02 per share for Q1 2021, which was due to the non-cash deferred tax expense of $11.3 million, which is primarily due to the effect of the reduction in the Colombian peso exchange rates, on the value of unused tax losses and cost pools. In the event that the peso strengthened against the US dollar in the future, the Corporation would realize a deferred tax income recovery for the period.

I'm going to briefly comment on the approximately $6.3 million in gas trading revenues and gas trading purchase cost. And this is the first time this particular activity is shown up in our financial statements.

I'd like to note that the $6.3 million of revenues is not included in the $59.5 million of net production revenues, that I just presented for Q1 of 2021. Very simply we employed a gas swap to fulfill one particular contract and this reporting is required by IFRS accounting.

Although this arrangement is modestly profitable, I'd like to stress that Canacol does not speculate in the gas market and these activities are solely related to this particular contract for a portion of 2021. With a cash position of over $70 million, a working capital surplus of over $65 million and undrawn credit facility availability amounting to almost a $100 million, Canacol has a lot of financial flexibility to adjust our investment plans when we find good reasons to do so.

Our operating netback was $3.36 per Mcf in the three months ended March 31, 2021, which is 7% lower in the same period in 2020 and 6% lower than the prior quarter. Our realized gas price was slightly above the midpoint of our guidance for the 2021 year of 4/10th of 450 per Mcf.

Recall that the majority of our guidance is based on sales under fixed price take or pay contracts, with an average fixed price of 450 per Mcf, net of transportation. Our realized netback of $3.36 per Mcf was similarly slightly above the midpoint of our guidance of $3.20 to $3.50 netbacks.

Our operating margin at 77% for the quarter was effectively unchanged from the prior quarter, again demonstrating the remarkable stability and high margin nature of our business. To further highlight the strength and stability of our natural gas business, as well as the growth that we see in our business and financial results, we want to again highlight the return on capital employed and implied by our financial statements over the last nine quarters.

Our return on capital employed remains high by E&P industry standards at 14% in Q1 of 2021 and slightly higher than that on a 12-month trailing basis. In closing, our Q1 financial results were strong and relatively stable, despite the challenges that the Coronavirus pandemic continued to present.

At this point, I'll hand it back to Charle. Thank you, everyone.

Thanks Jason. For the remainder of 2021, despite the impacts of COVID lingering the short-term, we expect to continue delivering results within our previously stated guidance, which will allow us to continue operating from a position of financial strength, while returning capital to shareholders and also investing for growth.

As many of you are aware, the past two weeks in Colombia have been marked by widespread civil disturbance, both in the major population centers, such as Bogota, Cali and Medellin, as well on the countryside. In particular, it has a times being difficult to mobilize [technical difficulty] in the field, due to the many blockades organized by the local communities all over the country, particularly within the main oil producing regions of Casanare [indiscernible].

At the moment, our operations are running relatively smoothly. We are progressing our drilling program to continue drilling up to eight remaining exploration wells during 2021.

In combination with our seismic program, this year's ongoing 2021 investment program has a significant focus on exploration to support long-term growth. We are also working diligently to progress important strategic projects that will support increased transportation capacity and demand for our gas, such as the Medellin pipeline project and the El Tesorito power plant.

And of course, in order to build a sustainable business, we will seek further continuous strategy and execution as it relates to ESG matters. I'd like to thank the entire Canacol team as well as our contractors, partners and clients for the continued support and hard work.

We are now ready to take questions that you might have.

This is in [Natez] from UBS. Thank you for taking my questions.

First on the ongoing situation Colombia. Can you provide a bit more detail on the impacts from the protest and blockades, if you had any impact on production or sales or in the exploratory campaign.

And also if you're forecasting or seeing any potential impacts from the bills in legislations that are being considered right now? My second question on capital allocation, we would like to understand how Canacol intends to allocate its capital for the remainder of the year and looking forward.

Other than the exploratory campaigns and the global pipeline project, what can you expect from silage dividends or share buybacks or potential new acquisitions? Those are my questions.

Thank you.

Thanks, Luiz. I'll let Jason discussed the second question around capital allocation.

But with respect to the first set of questions, how of the protests and blockades affected our operations as well as the legislation that is currently being discussed. The protests and blockades have been largely directed towards the main population centers, Cali, Bogota, Medellin, Barranquilla, as well as transportation in the countryside, primarily in the Casanare and Putumayo areas.

So, our operations have not - our operations in the field have not been impacted. We've been able to continue operations smoothly with respect to production.

We have a very self-contained production base of course with all of our gas flowing through pipelines. So, there is no exposure to blockades of course with respect to that.

Our drilling operations, with respect to mobilizations have been a little slower times mobilizing equipment [technical difficulty] to get all the equipment out to sites. And I - the main impact is probably been with respect to the COVID related quarantines that have been rolling through the major population centers Bogota, Medellin, Barranquilla, Cartagena et cetera, which have seen a number of severe lockdowns related to COVID outbreaks and to control those COVID outbreaks as it relates to the number of intensive care units in the hospitals in those cities.

And that of course impacts gas demand of course. So, we've seen a little bit of fluctuation with respect to interruptible gas sales as a result of those rolling quarantines primarily through April.

In May, those quarantines have been lifted. So there are no quarantines in any of the major cities and interruptible sales have been relatively smooth and certainly on budget.

To the legislation, it's obvious that the initial tax reform as it was laid out would have impacted primarily corporative - corporations and high wealth individuals with respect to additional taxes. There was an attempt to push the EVA out to a variety of consumable products and that of course has been revealed - repealed, I should say.

The discussions right now center around how to raise taxes and primarily that will focus probably on corporations as well as the high wealth tax bracket here in the country, and I expect that we will see, for example, a delay in the previously legislate corporate reduction of 2% over the next three years. We will probably see that delayed in terms of corporate taxes, Jason, I'll leave it to you to discuss the capital allocation for the rest of this year.

Sure, no problem. So, our guidance, which was put out in December of 2020 was for up to 12 wells and $140 million CapEx program.

So, as you properly point out, the any excess cash or existing cash could be used for dividends, for share buybacks or debt reduction. So, as some of you may have received from us, we did send out an investor survey targeting our larger shareholders and, you know, as to what kind of split they would like with respect to dividends, buybacks, debt reduction.

As you can imagine, different people will have different views on that. And currently, the Board is contemplating the appropriate split.

I do not have a definitive answer on what that will look like going forward, but I would anticipate that we would deal with that relatively shortly.

Thanks for taking my question. Great complementary materials.

I have first one question regarding the mix between spot and take or pay volumes from your sales, if you could give us some information on the mix for the quarter, it would be great.

Yeah, I can answer that. So, our guidance for 2020 once - 2021 rather, once again released in December of 2020, stated that our long-term fixed price take a pay contracts with average 153 million cubic feet a day, net of downtime.

Every contract has approximately 6% downtime for plant turnarounds, et cetera. So, very simply this quarter, we would have had that $153 million of long-term take a pay contracts at an average price of $4.50 per Mcf, and given that we did 178 million for the quarter that would have left, approximately 25 million cubic feet a day in interruptibles.

Awesome, awesome. Thank you.

And just one follow-up on the CapEx side. So, you are sticking to drill the remaining eight wells and sticking to the $140 million for the year, right?

That is our current guidance and unchanged. Now, we did - that particular press release stating our guidance for 2021, gave a range of possible production and with that we allowed ourselves some flexibility as to potentially decrease or even potentially increase well count.

They currently, we're still targeting up to the 12 wells current.

Thank you all for participating in Canacol's first quarter conference call. This is all for today.

Hope you all have a great day.

Thank you, everyone.