Alvopetro Energy Ltd. (ALV) Earnings Call Transcript & Summary

All right. Good morning, and welcome to Alvopetro very first earnings webcast following the announcement of our Q1 results yesterday. We thought we'd try a bit more of a unique platform for the event, and I want to thank you for joining us today. I'm also joined by Alison Howard, our Chief Financial Officer. I want to remind you that there'll be a question-and-answer session at the end of the call, and you can see on the banner on the bottom of the screen. If you could submit your questions to [email protected]. With that, I'll turn it over to Alison Howard, to discuss our Q1 results.

Thanks, Corey, and good morning, everyone. Thank you for joining us today. Just to start off with some cautionary statements. These are detailed in our corporate presentation online, so you can review them in detail there. But specifically, I wanted to draw your attention to a few items within here, our forward-looking statements statement there. We do have forward-looking information that we will be discussing today. So just keep that in mind that those are subject to management estimates and assumptions, and those can change over time. In addition, I'll be going through some non-GAAP measures, including operating netback, funds flow, net debt, et cetera. Those calculations are more detailed in our MD&A that we just published yesterday for the first quarter. And Corey will be going through some of our reserves and resources information. All of that has been evaluated by GLJ and details are in our AIF. And last but not least, our -- any currency items that we present are in U.S. dollars. So with that, just going forward, looking at our sales volume since we came on production at the beginning of July of last year, we've seen a steady increase over time. And Q1 that we announced yesterday, that was our record level of quarterly production at 2,175 barrels of oil equivalent. That was an 11.5% increase from Q4, which is great. And we've actually already released our April results, and those are on track as well at actually over 2,300 BOEs per day. Most of that, as you can see in the green bar, is from natural gas sales and the remainder from associated condensate sales. Moving on to our operating netbacks. Again, Q1 was our highest operating netback at $28.52 per BOE. That was up $0.60 from Q4, and that's all attributable to an increase in our realized pricing. So our natural gas price was reset effective February 1, and we averaged $5.68 per Mcf in Q1 compared to $5.36 in Q4. And our condensate sales, which are actually sold at a premium to Brent, went up to a realized price of over $64 versus $47 in Q4. So that was a function of increased Brent and then combined with the premium that we get. You'll see our royalties are a little bit higher as a percentage of sales in Q1. Our royalties on our natural gas are based on reference price published by the ANP, and that's linked to Henry Hub. And with those price spikes we saw, especially in February, our royalties were a bit higher in Q1. And lastly, our production expenses, those have been relatively consistent. Q1 was marginally higher than Q4 but lower than Q3. So kind of on track compared to our average in the second half of 2020. Moving on to our funds flow from operations. We, once again, as you can see, saw an increase in Q1 in record funds flow of $4.8 million. That was an increase of $0.5 million from Q4. That is all attributable to our revenues, which went up by $1 million from $5.9 million in Q4 to $6.9 million in Q1. And about 50% of that revenue increase was due to the realized price increase that I talked about on the last slide and the other 50% was due to our increasing volumes. And if you look at our orange bars there, that is our spending on CapEx. And you can see in this -- in really the last few quarters has been very minimal, especially in the second half of 2020. We did see a bit of an increase in 2021 with spending on our exploration wells, preliminary spending on that in the first quarter here. But relative to our funds flow, it's still very low. We're at 18% in 2021. So really, we'll see our capital expenditures increase in 2021 here. Most of our spending is planned for later in the year with those exploration wells and our pipeline to connect our Gomo project to our Cabure pipeline. And this reflects our net debt, an improving net debt. So here, we see the bars going down. Our net debt has reduced to $7.3 million as of March 31. Our net debt is computed based on our credit facility balance outstanding and then adjusted for any working capital surplus. So our credit facility, we actually repaid $2.5 million in the first quarter, so our balance reduced to $13 million as of March 31. And then we had cash on hand of $5 million and additional noncash working capital of $0.8 million. So overall, our net debt improved $2.6 million from December to $7.3 million. And those -- that orange line there is showing our net debt as -- over our annualized EBITDA. So we can see that in the first quarter, we're below 0.4. We're actually at 0.38, I believe, if we look at our annualized EBITDA for the first quarter relative to this net debt balance. So that's great and really attractive and very low, I would say. And then last but not least, we did have a credit facility amendment that we entered into, and that's going to reduce our interest costs going forward. We did have a 3% additional interest that had -- was accruing on our amounts outstanding and paid at maturity. That has been eliminated effective April 15, and our credit facility has also been extended by 1 year and now matures in October of 2023.

All right. Thank you, Alison, for that. I think, obviously, during a very challenging time globally not only did we bring our project on stream, but I think we posted some very impressive results. And I think they're well ahead of what there was for initial expectations. I think to try to put this in perspective, we came on production July 5 of last year. So in the first 9 months of coming on production, our funds flow from operations has been nearly USD 13 million. And over that same period of time, we've only spent $1.4 million, so that's only about 11% of our funds flow. At the end of the day, that helps. We've built a tremendous amount of financial flexibility and financial capability. And it really positions us well for the balanced reinvestment and stakeholder return plan that we've always had. The first part of this -- I'm going to talk about the first part of that equation being our reinvestment plan and, in particular, our 2021 capital program. To be very clear, our objective is to get to 18 million cubic feet a day. That would allow us to maximize the utilization of our strategic infrastructure that we've constructed as well as the sales through our gas processing or our gas sales agreement. The first prong of our capital program here is our conventional exploration program. You can see the 182-C1 and 183-B1 prospects that sit immediately north of our UPGN location. UPGN is our gas processing facility. And we've done the early permitting work for the either 9- to 15-kilometer pipeline tie-in that would be required here to really help, on a success case basis, minimize the time from success to production and cash flow. The second part of our plan relates to our Gomo asset. We've declared commerciality on this. As you saw, we completed a test of our 183(1) well earlier in the year, and we plan to tie that well in through a 9-kilometer pipeline tie-in. And the field work is going to commence here shortly. We expect to have that well tied back into our existing pipeline by the end of this year, and then that would set the stage for a broader development starting next year, which I'll show you what that looks like. So on the conventional exploration side, both of our locations are ready. We're just finalizing our rig acceptance, but we expect to be in a position to spud the first of the 2 wells, the 183-B1 location here in late June. Just to show you a little bit about just the first prospect that we're going to drill here, the 183-B1 location. It's a 3,100 meter depth, 100% working interest location. It's a multi-zone pre-rift prospect, so pre-rift being before the continent separated. The vast majority of the production and reserves in the basin come from these pre-rift sands. And what you're seeing here is a seismic cross-section, it runs through 2 of our kind of closer analog pools, Biriba to the north, Sussuarana to the west of our 183 prospect that you see here. On the seismic section, you can see Biriba on the left. Sussuarana in the center, and then our location drilling into this fault block here. So all the different black lines you see on the seismic are the different faults as well as on this cross-section here. So here, you get a sense from all the wells and the pools in this area. Pretty much all of these fault blocks are productive. So it just demonstrates that the faults here have very good ceiling capacity. As a result, GLJ has independently assessed the chance of success here at 44%. And they've independently assessed the unrisked prospective resource at close to 6 million barrels of oil equivalent. Moving on to our Gomo project. Again, this is the 2021 program, which is really focused on tying in the 183 well through the pipeline extension. Gas would flow down our existing pipeline then and get processed at our gas processing facility. This is an indicative development plan going forward. The next phase would be the tie-in of our 197(1) well along with the stimulation of that existing well. And then we would embark in a multi-well fit-for-purpose development drilling program off of existing pad locations. So starting off our existing pad at 183, and then we would drill additional wells off new pads, tie those pads back into 183 and continue the exploitation of the reserves and resource that we have defined here. This is a slide from our corporate presentation. And it, I think, does a really good job of summarizing that phase development that I showed on the earlier slides. And it really is a multiyear organic growth plan. You can see the stacking production charts on the left-hand side. And on a success case basis, on an unrisked basis, even without considering our existing production or considering any potential exploration success, it shows that this asset on its own has the ability to meet our medium-term -- or short to medium-term objective of getting to 18 million cubic feet a day and then filling our gas processing capability. One of the other things that we did, we announced this actually in March, is our annual update of our reserves. We did announce a 21% increase in our reserves year-over-year. But the other thing we did is we had GLJ independently assess our 2021 exploration program as well as our Gomo asset. And I think this is a good chart to just put in perspective with success what the size of these future opportunities could be relative to our core Cabure project. So Cabure on its own, on a 2P basis, 6 million barrels of oil equivalent of reserves with USD 147 million of 2P NPV. Our exploration prospects here on an unrisked basis, 5.9 million barrels and 4.6 million barrels of oil equivalent, respectively. So on -- even with the success from just 1 of those 2 locations, we would come close to doubling our core kind of Cabure reserves. On a global basis, we have the resource split between 3 categories. It's a combination of 2P reserves at 3.3 million barrels, Gomo risk contingent at 3.5 million and then risk prospective at 12 million. So on a success case basis, we have the potential there to be relative -- on a relative basis, about 3x larger than Cabure. So with that, it turns us to the second half of our disciplined reinvestment and shareholder return model or stakeholder return model. I think the strong operating and financial results that we've demonstrated really position us well for this. I did also want to point out that, as you may know, our gas price under our gas sales agreement gets redetermined every 6 months. So the next redetermination happens on August 1 of this year. And that will be the first time that the benchmark prices from the first half of this year get incorporated into our price. And obviously, there's been some pretty big increases in those benchmark prices. So on a local currency basis, we expect roughly 15% to 20% increase in our sales price starting August 1. Alison mentioned our debt refinancing, extending our maturity, lowering the coupon on the facility, obviously further improves our financial flexibility and really was a prerequisite to our dividend program. We've always said that we had an active strategy to accelerate that program. And yesterday, we announced that we firmly expect to commence that program in the first quarter of 2022. In connection with that, we've also announced that we're going to complete a small lot share buyback. And we do have a number of smaller international investors as the legacy of our spin-out from Petrominerales. So it's quite remarkable if you look at -- even if we were to buy back all of the share positions of less than 1,000 shares, we would be buying back about 1% of our stock, but we would be reducing our shareholder count by about 70%. And with that, we'll turn it over to the question-and-answer period, I want to remind you, if you could submit your questions to socialmedia@alvopetro com. And we'll endeavor to get to all of your questions. All right. I'll just add Alison back in.

Thanks. Yes. I will go through the questions that we've received thus far. Corey, the first question is, "Assuming no drilling exploration success or acquisitions, can you give us an idea of what size of dividend Alvopetro could afford to pay in 2022?"

Yes. So we're not providing actual guidance on the quantum of the dividend yet. But I think the main point is with or without exploration success, I think we're in a very solid position now to start the dividend. Once we establish our 2022 capital program later this year, we would also expect to provide better guidance on the quantum of the dividend starting in the first quarter.

Okay. And the next question from one of our viewers is, "Why would you buy back shares versus debt repayment considering the reserves of the company are relatively moderate? Why not use it for exploration?"

Yes. I think the main thing is we've come out -- for a long time, we've been talking about creating more balance and balancing reinvestment and stakeholder returns. And the reason we did this is we certainly felt like E&P companies historically have overinvested and underdelivered returns to stakeholders. So this was meant to bring more discipline to those capital allocation decisions. And the good news is I think we've demonstrated this. We can do all these things. We've already repaid some debt. We were kicking off an exploration program this year. And we're going to be, I think, in a very good position to have a sustainable dividend going forward.

The next question from one of our viewers is, "Is Alvopetro actively pursuing acquisition opportunities to help diversify its production base? Or are you more focused on securing third-party processing revenues to help fill up your natural gas plant and focus on exploration to diversify production?"

Yes. No. Thank you. So we -- there's an active series of dispositions from Petrobras that have been happening locally in Brazil. They're relatively large packages, I think the prices that have been paid are at very high metrics. Certainly, there's interesting assets out there. I do think there'll be a phase of follow-on A&D activity that we'll be well positioned for. We were really focused on getting our project on stream. So the answer is we're interested in both. I think we've built some highly strategic infrastructure right in the heart of the basin. With our organic plans that I laid out here, we do have a plan to maximize the utilization of that facility on our own, but we are pursuing third-party processing opportunities. And we are starting the process to evaluate how we -- if we need to, and hopefully, this will be the case, how we can cost effectively expand the capacity at our plant.

Okay. So switching focus here to those exploration projects planned for 2021. What do you expect the time line for results from those exploration wells to be?

Yes. So the time line is to start the first well later in June. We would have about 40 to 45 days before we have results. So that would be early August. We would then have roughly 7 days to move the rig and hopefully spud the second well, call it, mid-August and then about another 40 days before we have results from the second well. So that would put it close to the end of the third quarter for results from the second well.

And then following on, on that, what is the time line -- if there is successful results, what is the time line to actually bring those on production?

Yes. I think, to be practical, we're getting a permit and then constructing the pipeline. We're probably -- our goal would be to have those on production by the end of 2022.

Okay. And then one last question on those exploration wells. "Is it expected that the natural gas, assuming a success, would be sold under the existing contract with Bahia Gas? Or would a new contract be required?"

Yes. The answer depends on how big a success and how big the production platform is, but we do have capacity under our existing agreement to go up to 0.5 million cubic meters a day, which is basically that short- to medium-term goal that we have of getting to 18 million cubic feet a day.

Great. And on Cabure, you have been selling more gas from the Cabure project than originally anticipated. Do you expect this to continue in the future?

Yes. So to be clear, we have a firm volume of 300,000 cubic meters a day. We've been selling between kind of 360,000 and just over 400,000 cubic meters a day. Of late, it's been around the 360,000 cubic meters a day. So as it looks right now, our expectation is that we would continue at that level, but we make all of our financial planning based on the kind of lower level of production.

Great. One more question that just came in on the share buyback. "Are you proceeding with the share buyback just to make paying the dividend to the rest of the shareholders more efficient and cost effective?"

Yes. It's twofold. We had a question earlier about pursuing buybacks versus dividends versus reinvestment. So I think this is a limited way to actually buy back some shares, and that, I think, in itself is accretive. But probably the biggest factor is to make the dividend payment process more efficient and more cost-effective and make it more likely to justify a quarterly dividend plan, which, again, the timing and frequency of those payments will get determined later this year, but...

Great. On the Gomo project, we -- you have talked about Gomo for quite some time. With these plans that you presented here to proceed on the stage development, when do we think we can expect to see positive cash flows?

Yes. So the good news, we'll have some cash flows, albeit on a smaller relative basis than Cabure starting the end of this year with the 183 well. If we go back in time, what happened here is we drilled these tight -- deeper, tight gas reservoirs with the original wells we drilled in Brazil. And we didn't really have a way to monetize or capture the potential that existed there. So we embarked on a conventional exploration program. We found the Cabure field. We installed a pipeline. We got a gas sales agreement. We built a gas plant. We all -- now have all the pieces in place where we can unlock the rest of the gas potential that's in our inventory. And not only the Gomo, these exploration wells we've had in inventory for a while, we just haven't had the infrastructure or, frankly, the cash flow to dedicate capital to those. So we're very excited to get back to the kind of organic growth phase of our business plan.

Great. And I think that's all we have for questions so far. But as Corey mentioned and as you can see on the banner there, if you had any additional questions that didn't get answered, please feel free to e-mail them in and we'll get back to you with any answers.

Yes. So that concludes today's webcast. I want to thank you again for joining us. I also want to encourage you in the link to the video at the bottom, there'll be a link to a field tour that we completed recently. The link is also available on our YouTube channel. It's also available on our website. So really encourage shareholders to have a look at that and see what we've constructed. So with that, thank you again for joining us today. And if you have any other questions, like Alison said, feel free to e-mail the website or contact Alison or me directly. Thank you again.

Thanks.