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

Good morning, ladies and gentlemen. My name is John Wright. I'm Chairman of the Board of Directors Alvopetro. I joined our Board management today in welcoming all of you during Alvopetro's Annual Meeting. We sincerely appreciate your interest. We're pleased to host the meeting in person today. For shareholders not able to attend in person, we're also hosting the meeting via live webcast. However, shareholders are not able to vote any shares through the webcast format. Please be advised that we're recording the meeting, and it will be available for viewing on our website at a later time. I officially call the meeting to order and appoint Alison Howard to act as Secretary of the meeting; and Patricia Selby of TSX Trust Company back to act as scrutineer of the meeting. Today's meeting will be divided into 2 parts. We'll begin with the formal business of the meeting. After completing the formal business requirements, members of Alvopetro's executive team will deliver a corporate presentation to provide an overview of our operations and outlook. Following this corporate presentation, we'll offer a question-and-answer period. I'd first like to thank each member of our Board of Directors, Firoz Talakshi, Geir Ytreland, Kenneth McKinnon, Roderick Fraser and Corey C. Ruttan, our CEO, who will be presenting in the second portion of the meeting of this afternoon. Thank you, gentlemen. I received confirmation from TSX Trust that all the materials in respect of the meeting were mailed to shareholders in compliance with applicable security requirements. I direct that the affidavit, together with copies of the document mailed to shareholders be kept by the secretary with the minutes of this meeting. The reading of the notice of meeting will be dispensed with. In order for this meeting to be properly constituted, there must be a quorum. Under Alvopetro's bylaws, the quorum is met if 2 or more people holding at least 10% of the shares entitled to vote at the meeting are present in person or represented by proxy. Based on the report of the scrutineers on attendance, I can confirm that a quorum is present. I direct that a copy of the scrutineers' report be kept by the secretary with the minutes of this meeting. As notice has been duly given and quorum is present, I declare this meeting properly called regularly constituted for the transaction of business. I'll now commence the formal business of the meeting. The business of the meeting is described in the management information circular dated May 3, 2023, which accompanied the notice of meeting. Voting on the resolution will be by ballot with the exception of the appointment of auditors. Those of you who are registered shareholders or duly appointed proxy holder for a registered shareholder should have received and completed a ballot before you entered the room. If you're a registered shareholder or proxy holder entitled to vote and you did not complete a ballot before you entered the room, please return to the registration table and a representative of TSX Trust Company will provide [indiscernible]. Okay. I see there aren't any. If you're a registered shareholder or proxy holder and have previously voted or if you hold your shares in a brokerage firm, no further action is required. Please note that we will not be taking questions during the formal portion of the meeting other than questions from registered shareholders and appointed proxy holders in attendance here today and only to the extent that such questions or comments relate to the motions before the meeting. However, all attendees may ask questions during the informal portion of the meeting, and these will be addressed at the conclusion of the presentation, and we encourage your participation in that part of the meeting. As the first item of business, I'd like to place before the meeting the audited consolidated financial statements of Alvopetro for the year -- for the year ended December 31, 2022, and the auditor's report thereon. A copy of these materials will be mailed to each registered shareholder who elected to receive such materials. The next item of business is the election of directors of Alvopetro, each of whom will hold office until the next Annual Meeting of Shareholders or until their successors are earlier elected or appointed. The Board of Directors have fixed the number of directors to be elected at this meeting at 6. In the proxy materials, 6 nominees for election as directors of Alvopetro been proposed. These 6 nominees are: Corey C. Ruttan, Firoz Talakshi, Geir Ytreland, John D. Wright, Kenneth R. McKinnon, and Roderick L. Fraser. I ask for a motion to elect each of the nominees as directors of Alvopetro.

I nominate the following individuals to serve as Directors of Alvopetro, and to hold office until the next Annual Meeting of Shareholders, or until their successors are earlier elected or appointed: Corey C. Ruttan, Firoz Talakshi, Geir Ytreland, John D. Wright, Kenneth R. McKinnon, and Roderick L. Fraser.

Thank you, Nanna. The Board of Directors of Alvopetro's adopted an advanced notice bylaw, which provides a procedure to be followed for the nomination of directors at shareholders' meetings and allows the corporation and the shareholders to evaluate the proposed nominees' qualifications and suitability as directors, helping shareholders cast an informed vote for the election of directors. As there were no other nominees received or nominations received within the requirements of the advance notice bylaw, I declare the nomination closed. As indicated previously, the vote on the election of the directors will be made by ballot. I have been advised by the scrutineer that the motion to appoint those nominees as directors of the corporations have received more votes in favor than those withheld. I declare the motion carried and each of the 6 nominees will be elected to the Board of Directors of Alvopetro. The next item of business is the appointment of the auditors of Alvopetro. I ask for a motion to appoint KPMG LLP Chartered Professional Accountants as auditors of Alvopetro for the ensuing year and to authorize the Board of Directors to fix their remuneration. May I have a motion? Thank you, Heather. Thank you, Patricia. All those in favor, raise your hands? Contrary? I declare the motion carried. The next item of business is the reapproval of Alvopetro's share-based compensation plan being the Omnibus Incentive Plan and the approval of grants of awards under the plan pursuant to the ordinary resolution described in further detail in the information circular. May I have a motion? Thank you, [ Tung. ] Thank you, Heather. Voting on this motion has been conducted by way of ballot. I've been advised by the scrutineer that the motion has been approved by a majority of the votes cast. I declare the motion carried. As there's no further business to be brought before the meeting, I ask for a motion that this meeting be terminated. Thank you, Patricia and Heather. All those in favor, please signify by a show of hands? Contrary, if any? I declare the motion carried and declare the meeting terminated. This concludes the formal portion of the meeting. Thank you all. We thank you all for your attendance of this annual shareholders meeting wish you all the best. And I'd now like to turn the meeting over to Corey Ruttan, our President and Chief Executive Officer.

All right. Thank you, John. Good morning, and welcome. So it's certainly a privilege to be able to address our shareholders annually at these meetings, and I really genuinely appreciate all the support that we've got from our shareholders over the many, many years here and look forward to updating you. I'd also like to thank our Board of Directors for their invaluable insights and contributions. They certainly do a great job of representing the interest of all of our shareholders. And then I'd also like to acknowledge and thank all of our staff, not only in Calgary, but also in Brazil. There's a lot of hard work and perseverance that went in to making this project a reality. And on behalf of the Board and all of our shareholders, I just want to say thank you again to all of them. As John noted, there will be a question-and-answer period at the end of the presentation for those of you attending virtually. You can hit the Q&A button at any time during the presentation, but we'll address all the questions at the end. And for those of you attending via telephone, you can also submit your questions by e-mail to social [email protected], and we'll address those at the end of the presentation. So we're almost exactly at our 3-year anniversary of starting production from our Cabure project. It was July 5, 2020, pretty important milestone because at that time, Alvopetro became the very first company, independent company in Brazil to deliver sales specified natural gas into the local distribution network in Brazil. So I think that's a pretty huge accomplishment for a company our size. And one of the nice things that came out of that whole project or has come out of that is that -- and I think it's quite unique for a company our size is that we have 100% control over the strategic midstream portion of our business. I think you'll see we've been delivering some pretty strong results. We've got best-in-class operating profit margins, strong free cash flow generation capacity, and we've now got a perfectly clean balance sheet. And all of that together helps support our more balanced and disciplined stakeholder return and reinvestment model, where we're roughly looking to reinvest about half of our cash flows and organic growth and take the other half and return that to stakeholders. I think you'll see and hopefully agree that we're implementing a pretty exciting capital program this year. and I'll walk you through that. I think because of that infrastructure position that we invested in early, the other unique thing is that relative to all of our peers, we're able to much more quickly convert natural gas successes into production and cash flow. On the ESG side, I think we've always had a very strong commitment. It certainly goes well beyond the local requirements, and we're delivering clean and more affordable energy into the local market. And then lastly, our team, our local team in Brazil has been operating in our basin for over 15 years. Our track record in Latin America with John Wright, our Chairman; first at Pacalta Resources in Ecuador in the late '90s. And then with Petrominerales in Colombia through the 2000s, where we became one of the leading exploration companies there. We were able to grow both those companies from nothing to over 40,000 barrels a day and managed exits on behalf of stakeholders totaling about $2.8 billion. So I truly believe that Alvopetro continues to offer very attractive investment proposition, whether you look at it on a value yield or growth basis. Like I said, we've been delivering some pretty strong results and have a clean balance sheet. We actually had $21 million of cash and working capital on hand at the end of the first quarter and no debt outstanding. Our last annual reserves update, we were able to increase our 2P NPVs by 17%, up to close to $350 million. And you can see the chart on the top right-hand side here. The green bars represent the reserve value associated with our core project, Cabure. The orange bars there represent the potential value associated with our Murucututu project. So it's a combination of reserve perspective and contingent resource as of the end of last year. And our goal with this year's capital program is to migrate all that resource value into production and reserves and cash flow. But you can see the accumulation of all that, we're targeting potential growth totaling over $800 million. So when you compare that to our enterprise value, which sits in the black dash line that you see there at just under $250 million. There's certainly a lot of potential relative to our core value. On a value basis, you can see relative to the 2P value edge, we're trading at about 70% of our 2P NPVs right now. On the dividends, on the bottom right-hand side, you can see since introducing the dividend in the third quarter of 2021. We've been able to increase at 3 separate times, most recently in the first quarter of this year, up 17%, up to USD 0.14 per share. And we just announced the most recent quarterly dividend here last week. Last point on this slide is insiders on a basic basis on almost 11% of the stock. So I can assure you, we're very focused on delivering shareholder returns, and we're very much aligned with our shareholders. Like I said, a lot of effort went into making this project a reality. And if you go back in time to 2018, we completed the first ever mandatory unitization process between 2 independent parties in Brazil. That was a huge milestone for us and really was like the starter's pistol in a race for us. You can see almost immediately within a month we signed our long-term gas sales agreement, the first-ever long-term gas sales agreement with a local distribution company in Brazil with an independent company. We then entered into a strategic relationship with Enerflex, which is a really important milestone for us was not only a key effective source of financing, but it really helped derisk the whole construction and operations aspect of our gas plant that we built together. We also secured the final pieces of project financing with a little bit of equity and some project debt. We were able to get our development permits within a year of submitting them, which I think is pretty good, and that all culminated in first gas on July 5, 2020. Since then, like I said, we started the dividends in the third quarter of 2021. We completely repaid all of our project debt by September of 2022. Our project is already cash flowed well over $100 million. And most recently, you can see we announced the results from our 197(1) well, which is kind of a key milestone in executing our Murucututu development plan, which is our goal of unlocking all those orange wedges on the graph that I showed you a couple of slides ago. So yes, I think we've accomplished an awful lot, but it really does feel like we're on the cusp of unlocking the next significant wedge of value for the company, both in terms of production and [ BBs ] here. So before I talk about Brazil, just talk a little bit about our approach. We've always tried to look for the best combinations of geological prospectivity and fiscal regime. We certainly think we have that in Brazil, and we're operating in a proven hydrocarbon basin and we'll -- you'll see that this is one of the best fiscal regimes out there. The other thing we're trying to do is look to lead -- to apply leading-edge technologies to areas where those technologies maybe haven't been applied. And I'll give you a couple of examples of that as we go through the presentation. Speaking about Brazil, I think it's pretty well recognized that a big oil producer, big oil exporter but what's underappreciated is that they're still importing a large proportion of their natural gas. And that really sets the stage for some strong fundamentals for our onshore natural gas business model. Like I said, great fiscal regime, the royalties in Brazil range between 5.5% and 11%. Our Cabure project is 8.5% royalties, and we qualify for a 15% income tax rate. One of the other unique things that's happening in Brazil or it has happened in Brazil is Petrobras, the state oil company, has been in the process of selling virtually its entire portfolio onshore oil and gas assets. So it's -- the market is really opening up, and we think that's going to create a lot of opportunities for Alvopetro. Last point to make, you can see the black box on the map here. We're operating in the Northeast part of the country in the state of Bahia. So this is the oldest producing basin in Brazil, the Reconcavo Basin. First wells were drilled in the late '30s. It's a pretty well-developed area. You can see on the map sheet here. There's an extensive network of oil and gas fields, there's high-line power. You can see all the pipelines. We've got 2 highways that kind of straddle our operating area. And if you look at this the main city on the bottom right-hand side here, Salvador, City of almost 3 million people. As you look off -- way, way off in the distance to the north, where you drive through the city, then you drive through this major industrial complex that you see right here called Camacari. So the vast majority of the natural gas in the State of Bahia gets consumed just 15 to 20 kilometers to the south of our operating area. So our key operating areas, the yellow lands, the southernmost one being our Cabure project and then the land is just immediately north of that or the growth acreage that I'll talk to you about with respect to our Murucututu project. So we're in a great location in the heart of the basin, close to industrial demand. And the other nice thing is I'll walk you through this with our infrastructure, but because we're tied directly into the local distribution company, and we're not accessing into these not main national pipelines, we have a significant price advantage and netback advantage as a result of that. It's almost a $2 per Mcf advantage. So this is our initial asset, Cabure is the focus of our early development. Like I said, we did complete a unitization process here. We're 49% working interest. The unit consists of 8 wells, all the production facilities are in place. We basically predeveloped this asset before it came on production. It's quite well delineated. You can see an example of the 3D seismic that Nanna has reprocessed here on the bottom right. There's a main bounding fault in black that runs roughly north south through the block and the vast majority of the resource sits on the eastern side of that main bounding fault in this Caruaçu formation that you see in the red outline on the cross-section here. So the field has been well delineated. It's been performing quite well. We already increased the productive capacity with our partner by 1/3 up to on a gross basis, 21 million cubic feet a day. And you can also -- if you haven't already seen it for all our shareholders, you really should look at the YouTube video link that we have on the bottom of this, and it's a virtual field tour of what we've installed. So now I'll talk about the midstream and infrastructure solution that we brought to bear here. This is a 100% Alvopetro solution. What we did is we constructed an 11-kilometer pipeline from the Cabure unit straight West basically, where we built, along with Enerflex, this gas processing facility that you see on the bottom left-hand side. So the way this works, the gas comes in on the left-hand side of the lease here. It goes through a mechanical refrigeration process, the condensate from the process goes into the tanks and then the gas gets delivered on the right-hand side of the lease where Bahia Gas has constructed a new city gate right at our physical location. So yes, commercially, we signed this agreement with Bahia Gas but the other nice thing about that is what they did is they had a preexisting City Gate in the industrial complex of Camacari. As part of the project, they extended their distribution pipeline network by 15 kilometers to the north and built that brand new city gate. So city gate's just a receiving point where they can accept gas and that was their contribution. The other nice thing is off the back of our Cabure -- our initial Cabure project, that's helped underpin all of these investments. So it's really key because now we have all this infrastructure in place that really helps provide the platform for unlocking the rest of the natural gas potential that's embedded within our asset base on a very low cost and accelerated basis. So this is a busy chart, but it shows how our gas pricing mechanism works with our offtaker, Bahia Gas in this case. It's based on 3 different international benchmark prices. So those are all in the gray dashed lines that you see here. It's Henry Hub natural gas U.K. NBP gas and Brent oil equivalent. So you kind of average those together with a weighting effect over time, which in itself creates kind of a natural hedging effect. Then in addition to that, we have a floor and a ceiling within our contract. So that's the red and the green lines that you see there. They both escalate based on U.S. inflation. And then the net effect of all that is the dark black line. That's the price that we received. Everything to the left of the vertical red dash line is the historical. Everything to the right is projected forward. The gray dash lines in this forecast are based on the futures pricing as of end close, I think, on Friday, and you can see the net effect is we're forecast to stay at the ceiling within our contract through to 2026. And our price in our most recently reported quarter sits at over USD 12 per Mcf. So certainly, we think it's a great contract. Certainly, a lot less volatility than what our peers would be exposed to. And you can see that all that volatility on the left-hand side of that red dash line. So just talking about our results. I think since starting production in July of 2020, we posted some pretty strong production results. To put it in perspective, the first couple of quarters that we came on production in the last couple of months that we announced, those were pretty much exactly in line actually above kind of the pre-commercialization expectations that we set what we had said is basically roughly 1,800 barrels of oil equivalent per day, and that was based on the firm component of our sales to Bahia Gas as well as our unit interest working into a share of production from the Cabure unit. So that's how we kind of came up with that. And what you see is all those periods in between, we were actually able to significantly effectively overlift from the Cabure unit because our partner wasn't nominating for gas. So we've got a unique gas balancing agreement there that allowed us to produce more. In the third quarter of last year, we also were able to increase the capacity of our gas plants. So we posted some pretty strong quarters through there. Our strategy now is that no matter what's happening with the nominations from our partner at the Cabure unit. Our goal is to add new 100% working interest production so that no matter what they're nominating for were at least the 3,000 barrels of oil equivalent per day level. So that's our near-term goal, and I'll show you how we're going to get to that. So from an operating netback perspective, this is a measure of our profitability per unit of production expressed on a per BOE basis. If you look at the height of the bars there, the sales price is at the top of the bar, then we deduct off in orange, the royalties in gray our operating costs and the net effect is our operating netback per BOE expressed in the green bar there. Like I said, our price based on our last price reset in February, was just over USD 12 per Mcf in the first quarter. And then when you include condensate that price is at a premium to Brent, the net effect was a realized price of almost $73 per BOE in the first quarter. Our royalty rates, because they're basically linked to Henry Hub natural gas prices. Our effective royalty rate in the first quarter was just over 3% and then our operating costs have continued to be at a pretty attractive and low level below the $4 mark. The net effect was over $66 netbacks. And then if you take the green bar divided by the total height of the bars, that's our operating netback margin, which, in our case, is 91%. So this next chart just shows how that stacks up against a bunch of our Latin American peers. We've also included a couple of very natural gas-weighted peers in North America, both the United States and Canada for comparison. They're much larger than us, but they're in there regardless. And you can see we're leading the pack and much above the average of 66% there. So on top of that, when you consider that we only have a 15% income tax rate and many of these peers have tax rates that vary probably between 30% and as high as 50% or 55%, it gets even more compelling. So it really shows the strength of the fiscal regime and the value of our barrels of oil equivalent production. So this slide just tries to highlight our more balanced capital allocation model and stakeholder return model. Again, we developed this long before we even came on production. So I think we've been doing a pretty good job of sticking to it. If you can focus on the graph on the upper left-hand side, first, the lines, so the green lines with the black dots, that's our cash inflow. So our cash flow from operations per quarter. You can see that's been growing pretty steadily, and we got to almost $15 million in the first quarter. And then the stacking bar chart below that is the cash outflows basically. So where did that cash in each individual quarter go. You can see in the first year of coming on production, we had very little yellow. So the yellow is the reinvestment portion of our business. And because we pre-invested all that capital in those wells and production facilities and all that. We didn't really have much capital that we had to invest when we -- after we first came on production, which was nice. And that allowed us to focus almost entirely on repaying our project financing that we got in place on an accelerated basis. That's the green crosshatching that you see there. And then it also allowed us to introduce our dividend, I think, ahead of probably what everyone thought would have been our original schedule in the third quarter of 2021. That's the dark green that you see there. And then more recently, in yellow, you can see us investing more balanced in our capital expenditures as well. So on the -- in the pie, what you see is all of that cash flow from when we came on production to the end of the first quarter. So it was $97 million of cash flow to that point. We're well over $100 million now. And you can see about 47% of that's gone to stakeholders between share repurchases, dividends, debt and interest payments and capital lease payments. Just over 1/3 has gone to capital expenditures and about just shy of 20% has gone to building that cash and working capital position that I talked about earlier, which certainly gives us a lot of flexibility as we move forward. So with that, we're now going to talk about the organic growth plan and where we're going to be investing in that capital going forward. Like I said earlier, I do think we've established a very strong platform for growth here. And our focus is firmly set on these next growth objectives to put -- to quantify in our near-term goal is to get to that 18 million cubic foot a day equivalent level, that's the 3,000 barrels of oil equivalent per day that I talked about earlier -- and then with a longer-term vision of basically doubling that. So we've got kind of 4 main categories here. There's our base core existing assets at Cabure. Our gas plant expansion, we already completed the first expansion last year, and we'll look to do further expansions as required. We are looking to drill a couple of development wells with our partner to further expand the productive capacity at the unit. And then pretty significantly is our Murucututu project. So this is 100% Alvopetro project I'm going to walk through it in some level of detail. And again, our goal is to migrate those. That orange value that's sitting in mostly in contingent and prospective right now and migrate that into reserves, production and cash flow with a multiyear development program here. Our Bom Lugar property sits to the very northern block there in yellow is oil field where we're drilling kind of a development well right now. And then the last bucket is we did drill a couple of exploration [indiscernible] wells last year that encountered a significant hydrocarbon column, and we're going to do some work this year to try and enhance the permeability that we see in those 2 wells. And then based on those results, we can roll out a development plan. So our Murucututu project, again, this is a 100% Alvopetro project, Deep Basin gas play targeting what's called the Gomo formation. Another example of the reprocessed 3D seismic here. So this is one of the technologies that we brought to bear, Nanna Eliuk, our Exploration Manager, one of the first things she did was take all the available 3D seismic in the Reconcavo Basin, merge that and reprocess it to more of a North American high-quality standard. And we think we have a significant competitive advantage and a much better image of the subsurface. As a result of that, these were the first 2 wells that we drilled in Brazil, the 197(1) well and the 183(1) well that you see in the side with the green is the is the gamma ray or log from the well. The red star is where we're producing gas from in both those wells now. And what you can see is Nanna can map that sequence. So it's between the yellow and red sequence foundries at the bottom, she can map that over basically 8.5 square miles. So 5,500 acres of land you can see that as the red kind of outline the upper one on the map that you see here. And we're just -- we're targeting an awful lot of upside with this place. If you look at 2P plus the best estimate risk contingent prospective resource, that adds up to about 20 million barrels of oil equivalent. So that's more than 3x our core Cabure reserves today. And from a value perspective, that adds up to close to $450 million. So that's almost double our current enterprise value. So we're pretty excited about this. One of the things I like to do is go back in time using these Google Earth images to give you a sense for how our business evolves. So like I said, the 2 white squares that you see there, 197(1} and 183(1) locations. Those are the first wells that we drilled in Brazil. We were actually looking for oil, and we ended up finding gas. So we're like interesting, that's great. It's easier probably to recover the natural gas out of these rocks -- but the challenge is no one's ever commercialized natural gas in Brazil before. So we're like, okay, well, we need a conventional project to help underpin getting a gas sales agreement and all this infrastructure. So we moved down to the south, drilled a couple of wells at Cabure. Like I said, we unitize that blue area that you see there. That's the Cabure project. And then that helped us get this infrastructure in place. So the red pipeline that you see running to the west and then where the other white and black square is, I guess, that's where our gas plant sits. So that's where we were at, and we're like, okay, great. Now we can start to unlock the rest of this gas potential. What we did over the last 12 to 18 months, I guess, as we extended the pipeline network up to 183(1), built the pipeline to tie in the 197(1) well, and we built a field production facility that you see here just a small separator, again, tanks to capture the condensate and if we do produce any water, the gas gets shipped out to the left-hand side of the lease and down the pipeline ultimately to the gas plant. So -- you can see the 183(1) well in the center of the lease here. This facility has an initial capacity of 11 million cubic feet a day. So then the next thing we did was we went back -- this is the most recent better news is we went back to our 197(1) well and we completed a stimulation here, again, using some technologies that have been applied in North America doing a slickwater frac in 4 different intervals, you can see them on the log there. We were able to successfully place 125 tonnes of proppant and we put the well on production at 1.3 million cubic feet a day. And then if you add the condensate, it totals up to about 226 barrels of oil equivalent per day. So our plan going forward is to apply some additional technology to our development wells to really enhance the future development and improve the efficiency of completing these stimulations and allowing them to be much more targeted and cost-effective. This is what the single well economics look like. This was evaluated by GLJ, our independent reserve evaluators. If you look at it on a 2P basis, so [ proof ] plus probable or P50 basis, you can see our finding and development costs on a BOE basis $6.50, and this is just on a well basis. But if you look at that compared to our netback at over $6 that translates into what we refer to as a recycle ratio of over 10x. So what that means is for every dollar you invest, over time, you get $10 back. So no matter how long it takes you to get to $10, I can assure you that's a good investment. You can see our payouts are less than 1 year and our IRRs are 87% based on that type well. So the good news, we have a lot of these to drill. The charts on the right-hand side just show again, the GLJ assessment of both what the capital that was included in those reports on the bottom right. So we purposely phased that in a way that we could do that entirely organically from cash flow, in our opinion. And then the production chart on the top right just shows on an unrisked basis the fact that this asset has the potential to deliver over 20 million cubic feet a day from this asset on a stand-alone basis. And our plan here is to drill deviated wells from centrally located well pads. The well pads are in the white squares that you see and the bottom hole locations are the black and white circles. So there's 13 wells in this development plan, and we think there's actually potentially quite a few more of these wells to drill. Moving on to our oil property, Bom Lugar. Again, this is a 100% working interest Alvopetro project. We are currently drilling this development well, the first 1 there. We're getting fairly close to TD now. It is a step-out location from an existing well that had produced 300,000 barrels, and we also have some deeper exploration potential in this well. With success, we certainly have -- I think we have the potential to drill a much larger development here. So just switching gears back to ESG. We've always had a strong commitment to ESG. We did publish our first sustainability report last year, and we expect to do the same fairly soon here for 2022. Our commitment, certainly to social responsibility goes well beyond the already stringent regulations in Brazil. And I think our team works particularly hard to try to minimize our impact we pay, I think, special attention to trying to preserve biodiversity and to prevent erosion. A good example is that Murucututu pipeline extension that I talked about, we were able to design that in a way that 90% of the route either followed existing rates of way or we use directional boring to try to minimize our impact. And the net effect of that was we were able to remove 65% fewer trees than what our permit allowed for. And for those trees we've removed, we replanted more than 20x that number. From an emission standpoint, our emissions intensity at 4.7 kilograms of CO2 equivalent per BOE of energy produced is probably about 4x lower than what a typical U.S. producer would be. So this is very good. And then when you combine that from an end-user perspective, if you switch from fuel oil to burning natural gas, and it translates into roughly 53% less greenhouse gas emissions. From a safety perspective, I think we take a very proactive approach to this. The net effect is we've had 0 lost time incidents since coming on production and implementing this project. We've got a very strong commitment to our communities as well. You can see we're allocating a budget per unit of production produced. I'm going to walk you through what those programs look like. But we're really trying to contribute to the long-term sustainability of the 7 communities in our indirect and direct areas of influence. Lastly, on the governance side, basically, all of our governance systems carry over from Petrominerales when we were a much larger company. So I think they're pretty strong, and they're all built off of Alvopetro's value system that helps govern all of our interactions. So like I said, a big part of our voluntary social investments are really to make sure that we leave a positive lasting impact on the communities where we operate. I think we've built some very strong relationships with those communities, both through our daily operations and interactions, but also through these social programs. So the main programs are highlighted here, but the main areas are basically focused on education and capacity building, small business development and then conservation and biodiversity. So just a couple of things. The 2 programs on the top left, those programs are really focused on trying to keep it focused and motivated on school and trying to motivate them through music and sports. And then another program I'd like to highlight is the one on the top right there, translates into [ sow and grow ], and it really promotes sustainable farming practices. It includes the installation of gray water and soil treatment systems as well as training and then soil and crop monitoring. And I had the pleasure of visiting this location here when I was in Brazil last time. And I can tell you the beneficiary, she was just very proud of what she's been able to transform her backyard into. Not only is she now feeding our entire family healthy from this she's actually producing enough produce now that she can take it to the farmers market and help generate additional income for the family. So I think it's been a huge success and super emotional about the whole thing. So just to recap, it is our Annual General Meeting. So I'm going to take the time to just recap on another record year for Alvopetro in 2022. Our 2P production replacement ratio from our reserve additions was 132%. Our 2P NPVs went up 17% to almost $350 million. Our production was up 8% year-over-year to over 2,500 barrels of oil equivalent per day. Our sales were up 82% up to over $63 million. Our funds flow from operations more than doubled up to almost $50 million. Like I said, we repaid all of our debt effective September 2022. Our dividends declared year-over-year went up 213%. We paid out almost USD 13 million to shareholders last year. Our share price was up 75% as of the closing 2022 and it's up another 30% so far this year. So just in conclusion, I really do think Alvopetro continues to offer an attractive investment proposition no matter what your investing focus is. For yield investors 7.6% yield with quarterly dividends paid in U.S. dollars. For value investors, we're trading at just 70% of our 2P NPVs. And for growth investors, I think we're implementing a very exciting capital program that has the potential to add significant value, especially when you consider it relative to our existing enterprise value. So with that, I think we can start the question-and-answer period.

With the liquids [indiscernible] ethane, propane and butane [indiscernible] a plant, you have to do that with the gas price?

Yes. So the main thing is we have to meet the sales specification as per Brazilian requirements, and it's a methane requirement. There's a heat -- there's a bunch of different things, but the main thing is methane and the heat content. We basically just strip out the condensate with our existing process. We were waiting to get the additional gas specs on a long-term basis from our Gomo project to really design what the next phase of expansion at the plant looks like, which might have included -- or still could include getting the propane out as well. But the unique thing is for us, because we're selling gas at $12 and we get heat adjustment in the gas, compared to what's happening in North America, where you've got $2 gas price versus $70 oil prices or condensate prices, we can actually extract a good amount of that value even if it's embedded within the heat of the gas stream.

[indiscernible]?

Sure. No, that's a great question. And I realize for those on the webcast, I should have repeated the questions. So the first question was just about, do we have the ability or desire or need, I think, to be stripping more than just the condensate out of the gas stream, which I answered that. This question is it just about political risk of Brazil and contrasting that to be it Canada or other places in Latin America. So it's a good question these days. I think one -- a couple of things that I'd like to highlight is the fact that we got our development permits for this project in a year. And this is the first project of its kind ever done in Brazil basically by someone other than Petrobras. So I think that's a good sign. Like we've got a regulator that's trying to work with us. The A&P has introduced a whole bunch of pro oil and gas industry policies to help encourage foreign direct investment. So I think that's all positive. There was a recent election, and I think there were some questions about, okay, the policy is going to change. I think the consensus is that the new government is trying to take a very step-by-step approach and being very cautious about the policies that they introduced, they want to kind of repair their image, if you will. And the other thing that's happened in Brazil is that you've got the lower house and the upper house within the government system, the President doesn't really have control of those 2 bodies. So it's really a consensus building exercise. So if there's anything too radical done, it gets voted down. So those things are all the positives. The fiscal regime, it shows up in the profitability. I think that speaks for itself. The other thing, since this government has been elected, a good -- for me, a good barometer of what the market thinks is what's happening to the currency. And there's a whole bunch of other things that affect that as well. But the bottom line is the currency has appreciated quite significantly. It's been one of the stronger currencies in the globe over the last probably 6 months. And that was the time when the new government came in. So I think that is a good litmus test. As for contrast, I think anyone operating in Canada, I think would probably say it's been more difficult to get things done. And we've got lots of noise out of governments about policies that are really not constructive for the energy industry at a time when the globe needs more energy. So we can park that discussion for after the meeting, but I'll leave it at that. And then yes, you've seen a lot of countries in Latin America where we've had governments be less than supportive to the energy industry. So the bottom line is a very important industry for Brazil and it's going to continue to be an important industry. So hopefully, that helps. But it's a good place to operate. If you -- even from a more localized perspective, like I walked through the kind of the dynamics of the area where we're operating with the major industrial complex. The land kind of where we're developed, it's kind of a rural farming land, but there's a long history of oil and gas activity there. So relative certainly to where we were operating in Ecuador and Colombia, it's a pretty it's a much easier place from a social impact perspective to operate. And also the royalty regime where we operate, 1% of the royalty goes back to the surface land owner. So that's a good system as well. It really, I think, plus you have to be a good citizen as well, and I think we're doing a good job with that. So Sorry, that was a long answer to your question. Any questions from here, more questions from here before we take the ones from online? Did you want to come up or -- to read them just so that I don't -- so we'll get Alison to read them. Alison Howard, our CFO.

Hi, everyone. Thanks for joining us today. The first question is back to our production. April and May sales volumes had decreased significantly from 2022 and from early 2023. Can we expect that to continue throughout the rest of the year until you're able to add more production from Murucututu? Or do you have any comments on that?

Yes. So certainly, when our partner is not nominating, we still have the ability to take more gas. We are kind of planning our business around having a base level of production at that lower level. And if we can produce at a higher rate, that's great. But our plan is to very quickly regardless of whether our partners nominating for gas or not, that we can be able to deliver at that 3,000 barrels of oil equivalent per day plus range. Hopefully, we've got that plus an oil leg on top of that.

So that goes to the next question. If Bom Lugar is successful, will that be placed on production immediately? Is there additional infrastructure to be completed? Can you comment on that?

Yes. No, we have an existing production facility there. We're making some -- just doing some maintenance on that right now. The plan would be to finish drilling a log at move the drilling rig off, complete the well and then we'd start production through a test production facility. And then our plan is to migrate that virtually continuously into the permanent production facility.

Okay. And that's actually it on the Q&A, unless there's anything else in here.

All right. Well, thank you again for your attendance, both in person and online. And if you have any questions afterwards, we're always available, and then please reach out. And again, thank you for your time, and thank you for your support.