Canacol Energy Ltd (CNECCL.SN) Earnings Call Transcript & Summary

Good day, and welcome to the Canacol Energy First Quarter 2024 financial results. [Operator Instructions]. Please notice this event is being recorded. And now I would like to turn the program over to Carolina Orozco, the Vice President of Investor Relations. Please Go ahead, Carolina.

Good morning, and welcome to Canacol's First Quarter 2024 Financial Results Conference Call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charle Gamba, President and Chief Executive Officer; and Mr. Jason Bednar, Chief Financial Officer. Before we begin, it is 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 commitment as to future results nor take into account risks or 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 U.S. dollars. We will begin the presentation with our President and CEO, Mr. Charle Gamba, who will summarize highlights from our first quarter 2024 results. Mr. Jason Bednar, our CFO, will then discuss financial highlights. Mr. Gamba will close with a discussion of the corporation's outlook for the remainder of 2024. At the end, management will be responding to written questions received through the webcast. I will now turn the call over to Mr. Charle Gamba, President and CEO of Canacol Energy.

Thanks, Carolina, and welcome, everyone, to Canacol's First Quarter 2024 Conference Call. During the first quarter of 2024, we achieved historic record natural gas sales prices and netbacks. Canacol's gas sales prices have consistently increased quarter-over-quarter since mid-2021. In the first quarter of 2024, we realized prices 29% higher than the same period in 2023 and 9% higher than the previous quarter. This is due mainly to tighter supply and demand conditions in Colombia coming from declining rates in the country's main producing fields exacerbated by the recent El Nino phenomenon, which has led to increased demand from thermal generators, influencing prices in the interruptible market. Additionally, we reported a record quarterly netback of $4.90 per Mcf with an EBITDA of $61 million. Realized natural gas sales averaged 150 million standard cubic feet per day, marking an 11% decrease from the previous quarter. Our production capacity has, however, been recovering, thanks to successful drilling and workover activities during this year. As a result, our sales gas at the end of April were approximately 169 million standard cubic feet per day, and our current productive capacity stands at 177 million standard cubic feet per day. Regarding drilling activity, we have drilled 2 successful scenario exploration wells, Pomelo-1 and Chondaturo-1, which are located close to our Jobo gas treatment facilities and have been rapidly placed into permanent production. We also had success in infill drilling with the Clarinete-10 and Chontaduro-2 appraisal well, the latter of which tested at a rate of 12 million standard cubic feet per day and is also being tied into permanent production. With respect to capital expenditures, our accrued CapEx during the first quarter of 2024 was $36 million, 50% lower than the previous quarter and almost 25% lower than the same period in 2023 as we focus on enhancing efficiencies to reduce operational costs and capital expenditures. These improved efficiencies we're anticipating finishing the year with capital expenditure within the lower range of our initial guidance than even below it. This underscores our commitment to maintaining financial discipline while ensuring operational performance. I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our first quarter financials in more detail.

Thanks, Charle. The first quarter of 2024 was another very good quarter with strong record pricing and netbacks from our producing operations. Our realized gas price of $6.60 per Mcf for the 3 months ended March 31, 2024, was the highest we've ever achieved in a quarter and represents a 29% increase from the same period in 2023 and a 9% increase from the 3 months ended December 31, 2023. The increase in our realized gas prices due to a 19% increase in the average sales price of our firm fixed price take-or-pay contracts and higher interruptible prices. To refresh everyone's memory, most of our sales consist of 124 million standard cubic feet per day under fixed price take-or-pay contracts with an average price of $6.04 per Mcf as compared to the 2023 basket of $509 per Mcf. Driven by the strong pricing, we achieved record operating netback of $4.90 per Mcf in the first 3 months ended March 31, 2024, representing a 22% increase from the same period in 2023 and a 12% increase from Q4 2023. Our operating expenses for the 3 months ended March 31, 2024, were $0.45 per Mcf being $0.06 higher than the 2023 average operating costs. However, operating expenses for the first quarter of 2024 was $0.16 lower compared to the last quarter in 2023, given reduced maintenance and water treatment costs as well as the absence of a onetime service cost associated with the compressor unit at the Jobo gas processing facility. Gas royalties slightly increased to 18.9% of revenue, driven by higher production on the VIM-5 block, which is subject to higher royalties. Despite 19% lower realized natural gas sales volumes during the first quarter of 2024 compared to the Q1 of 2023. Total revenues, net of royalties and transportation expenses increased 5% to $77.7 million and adjusted EBITDAX increased slightly to $61 million, which was mainly attributed to higher average natural gas sales prices. With similar adjusted EBITDAX of $61 million for the Q1 compared to the same Q1 in 2023, adjusted funds from operations increased 29% to $42.2 million for the first 3 months compared to $32.7 million for the same period in 2023. This increase is mainly attributed to a reduction in current tax expense of approximately $9 million, resulting from the corporate restructuring previously disclosed. I'd also like to reiterate, despite recording $17.2 million of current income tax expense for Q1, the corporation still expects 2024 annual current tax expense to total approximately $35 million. The corporation realized a net income of $3.7 million for the 3 months ended March 31, 2024, compared to a net income of $16.9 million for the same period in 2023. The decrease in net income for Q1 is driven by a noncash deferred income tax expense of -- sorry, $0.5 million as compared to a deferred income tax recovery of $17.4 million in 2023. The 2023 recovery was FX related, whereas the Q1 2024 FX was essentially flat throughout the quarter. Net capital expenditures for the 3 months ended March 31, 2024, was $35.9 million compared to $47.1 million in Q1 of 2023 and compared to $72.2 million for Q4 of 2023. As Charle previously mentioned, the corporation has been focused on operational efficiencies with the objective of reducing costs and maintaining strong financial results. With respect to our low case guidance, CapEx budget of $138 million, I'd like to state that our current working model anticipates total CapEx of approximately $120 million for that same capital program, reflecting a reduction of $18 million. During this call, I'd like to address the short-term liquidity concerns that have surfaced in the markets. First of all, I want to emphasize that we are actively managing our liquidity position with prudence and foresight. Any speculation suggesting that we may not meet our next bond coupon payment is completely false, and we reaffirm that we are well positioned to meet all of our future financial obligations. As at March 31, 2024, our cash position was $25 million. Subsequently, on April 26, 2024, we announced the sale of over 60 million common shares of Aero exploration at a price of 18.5p per share for a total of USD 13.3 million net of fees. As at April 30, 2024, the corporation had a cash balance of approximately $30 million, not including these aero share sale proceeds as the trade settled on May 3. So effectively, an April 30 cash balance of $43 million. While speaking about April, I'm also pleased to state that April's EBITDA buoyed by high interruptible prices was approximately $26 million, which, of course, is $6 million higher than the average of January to March of roughly $20 million EBITDA each month. Of course, April revenues aren't received on April 30, but these additional amounts are not included in the $43 million cash balance I just discussed, once again affirming ample liquidity for bond coupon payments and future obligations. To comment solely on the Aero share sale, the holding of shares in a publicly traded oil company was obviously a noncore asset for us. $55 million of the $60 million share position we held was acquired in October 2021 upon their secondary aim listing at a cost basis of approximately USD 4.8 million, including associated warrants we later exercised. That position net at a fully tax sheltered gain of approximately $7.5 million once again in U.S. dollars. With respect to Canacol of November 2028 notes in February 2027 revolving credit facility, we are in compliance with all of our debt covenants. Our net debt-to-EBITDA leverage ratio was 2.9x, and interest coverage ratio was 4.65x at March 31, 2024. To refresh everyone's memory, our bond leverage covenant is at 3.25 incurrence-based and revolvers at 3.5x maintenance covenants. Our interest coverage covenant is a minimum of 2.5x as such, we're well inside those covenant restrictions. Further, and a point I have not previously discussed, the bond indenture allows for certain additional credit facility baskets, which effectively raises the leverage ratio allowed under that covenant. Given the cash balances and leverage ratios I just went through, I'd like to respond to rumors in the markets. I can unequivocally state Canacol has not hired a financial adviser, nor have we ever spoken to one at any time during 2024 and we have not ever contemplated a restructuring. I will now turn the presentation back to Charle.

Thanks, Jason. In our 2023, our exploration drilling activities met with limited success due to several factors. Primarily, our entire exploration portfolio was built upon opportunities identified from legacy 3D seismic data acquired approximately a decade ago with the most promising prospects having already been drilled years prior and yielding discoveries such as Nelson and Clarinete ages US and Pandora. This led to a diminished pool of large and/or low-risk drilling targets in the recent years with the last substantial discovery Adairs made in 2021. Additionally, the failure to reach the target of the high impact on Tier 1 exploration well on our SSJN 7 contract to mechanical issues contributed to setbacks experienced in 2023. Since 2022, we have invested approximately $70 million in the acquisition of 3 new large seismic programs, one located in our SSGN7 block, another in the northern part of the VIM-5 block and the last one at the west side of our PIM flock, which opens a whole new portfolio of exploration prospects. During the first half of 2024, we've been prioritizing smaller, low-risk exploration opportunities in the vicinity of our Jobo facilities identified from the legacy 3D Seismic data with a 100% exploration success rate with the discoveries of Pomelo and Chontaduro. Furthermore, in mid-summer, we are planning to drill the high-impact Cardomomo-1 exploration well, the first exploration well to be drilled off the new 3D seismic acquired in the northern part of our Win exploration contract in 2023. Success in this prospect could have substantial impact in reserve additions and potentially unlock a new producing area for Canacol. In summary, for the remainder of 2024, the corporation is focused on the following objectives. In line with maintaining and growing Canacol's reserves and production in its core gas assets in the Lower Magdalena Valley, the corporation is executing comprehensive development exploration programs. The corporation's aim is to optimize its production and increase reserves by drilling up to 5 development wells and 4 exploration wells, install new compression and processing facilities and work over operations on producing wells in the corporation's key gas fields. The corporation to date has completed the drilling of 2 successful exploration wells Pomelo-1 and Chondaturo-1 and 2 successful development wells, Clarinete-10 and Chontaduro-2. The Chontaduro-2 well was recently completed and tested at a rate of 12 million standard cubic feet per day and is currently producing into the Jobo gas treatment facility. Through these above-mentioned activities, the corporation managed to stabilize its gas sales at an average rate of 150 million standard cubic feet during Q1 of 2024 and lifted gas sales to approximately 169 million standard cubic feet by the end of April of 2024. As I mentioned earlier, our current gas production potential stands at approximately 177 million standard cubic feet per day. On the exploration front, the corporation expects to drill the high impact and potentially material Cardomomo-1 exploration well in mid-summer of 2024. Cardomomo-1 will be the first exploration well drilled of its newly acquired [indiscernible] 3D seismic survey acquired on the northern part of the VIM-5 E&P contract in 2023, where the corporation has identified 15 new gas prospects in the Senador sandstone reservoir. The same reservoir that produces 15 kilometers to set in the majority of the corporation's gas fields. The Cardomomo-1 prospect exhibits well-defined ABO, which is a direct indicator of gas within the prospect, identical to that exhibited by all of the corporation's major gas discoveries, such as Nelson, Clarinete, Pandereta and Aguada fields. Secondly, maintaining a low cost of capital, cash liquidity and balance sheet flexibility to invest for the long term. In a year of expected highly supportive gas market dynamics, the corporation has tactically prioritize investments in the Lower Mag Elena Valley and is, therefore, decided to postpone the drilling of the Pomelo-1 exploration while located in the middle of Mag Elena Valley to 2025. On April 26, 2024, the corporation sold its noncore investment in Aero for gross proceeds of $13.8 million to add additional liquidity. Thirdly, Bolivia achieved the government's approval of a 4P contract that covers an existing gas field reactivation to begin development operations with a view to adding reserves and production and commencing gas sales in 2025. And lastly, continue with the corporation's commitment to its environmental, social and governance strategy. I'm pleased to announce the release of our 2023 ESG integrated report in the coming weeks, highlighting our dedication to corporate responsibility and sustainable operations. Canacol's inclusion in the S&P Global Sustainability Yearbook, 2024 reflects our excellence in sustainable practices, particularly in corporate governments within the oil and gas upstream and integrated segment. The report will comply with the United Nations Global Compact Communication on Progress requirements, utilizing GRI standards and SASP indicators for the oil and gas sector. We'll also integrate metrics from the IPIECA, and will align with TCFD recommendations to you on Agenda 2030 and BSP's Global CSA. Canacol emphasizes the importance of integrating ESG strategies into our business model to meet shareholder and stakeholder expectations, striving for continuous improvement in ESG performance. And finally, with respect to Ecopetrol unfortunate statements concerning Canacol in their first quarter conference call held on May 8, I would like to formally state we have had no discussions whatsoever with Ecopetrol concerning a corporate transaction or any other transaction. Furthermore, we have had no discussions with any other company or any other banks regarding any corporate transaction or any other transaction whatsoever. Ecopetrol's public statements do, however, reflect the strategic importance and value of Canacol's role as the largest independent gas producer in Colombia as well as a critical shortage of gas reserves in this country. It's not unexpected that there is a great deal of interest in our gas users in Colombia, which are second only to those of Ecopetrol, and were recently evaluated by our third-party auditors as having a 2 PM10 after-tax value of USD 1.8 billion. We'll now respond to some questions sent via the platform.

Operator, can you please give the instructions to receive questions while we process any questions that were received.

[Operator Instructions]. Carolina, please go ahead.

We have one question from David Lee from Alliance Global Investors. Could you please speak to current trends in gas price realizations in April?

Yes. With respect to April, we saw very high interruptible gas pricing due to very severe El Nino effect, which is a very dry weather phenomenon. We were selling gas into the interruptible market at $17 an Mcf, up to 40 million cubic feet per day, all to thermal generators who are covering the shortfall of electricity in the market. So April was a very strong month, very dry month, very low levels of hydroelectric electrical generation and very high thermal generation.

Thank you, Charle. We have another question from Julio [indiscernible]. What is the current participation of contracted gas sales? And what is the projection towards year-end?

I can answer that, I guess, if I understand the question properly, and I did touch on the script. So we have our current take-or-pay baskets that runs until December 1, 2024, which is the start of a new contracting year annually in Colombia. The current basket is 124 million cubic feet a day at an average price of $6.04. I did also mention that compare, it's up 19% compared to the prices compared to 2023. And looking forward, of that 124 million cubic feet a day, only 12 million cubic feet a day drops off for next year, thus leaving the price relatively unchanged.

Please give us a couple of minutes and we are processing questions received. We have a question from Alejandra Andre from JPMorgan. With El Nino easing, are you seeing gas prices easing as well?

Yes, with El Nino starting to ease, there have been higher levels of rainfall and the reservoirs -- the hydroelectric reservoirs are starting to fill. So we've seen a decrease in gas demand, particularly in the coast as well as pricing. So it seems that we are coming out of the El Nino period now for the next 2 months, and we'll regress the sort of normal type conditions here in Colombia.

Please give us a couple of minutes again. We have a question from Albert Chan from Santander. What is modeled for Cardomomo-1 contribution to output?

Cardomomo-1 is a typical [indiscernible] target. It's a little deeper than our producing fields or 1,000 feet deeper. So we expect that the well, if successful, IP at a rate between 12 million and 15 million cubic feet per day. Given success at Cardomomo-1, there are 3 or 4 follow-up locations to drill in that field to develop as well.

Next question is from Diego [indiscernible] Pactual. What is the current average duration of your take-or-pay contract? Just to understand how contracted prices could be in the second half of 2024 when El Nino fade away?

Yes. The weighted average life of our take-or-pay contracts is 4.5 years. And once again, that's 124 million cubic feet a day. So it's roughly 75% of our total sales.

We are processing more questions. Please hold it up. We have one question from David Mirzai from SP Angel. How do you think about your capital structure and capital allocation policy ahead of taking on a higher risk exploration led strategy versus last year's infrastructure-led strategy?

I don't view the strategy as higher risk. The exploration has -- our exploration activities over the past 10 years have always been very consistent. As you know, we've enjoyed a very high rate of success, 82% chance success and this year's program is no different. We've already scored 2 for 2 on our first 2 exploration loss, and the remaining expirations from wells we drilled this year, we'll have a fairly high chance of success as well. So I don't view -- we've not shifted to anything higher risk. Last year, we spent quite a bit of money in infill drilling into the existing fields. So I think the strategy remains the same, particularly with respect to exploration, fairly conventional exploration risk that historically generated very high chances of success.

The next question comes from Daniel Guardiola. What is the expected CapEx associated with drilling the high-impact well Cardomomo-1 on exploration.

I'm sorry, could you repeat that question?

Yes, of course. What is the expected CapEx associated with the drilling of the high-impact well Cardomomo-1 exploration well?

It's a typical vertical exploration well. So it's about 1,000 feet deeper than our typical wells. So with respect to the civil works, we have to build a road into the location and our platform and the drilling of the well, we're out looking around $6 million as opposed to $4.5 million to $5 million for a typical exploration on...

We have one question from the Diego Espinosa from Banco Pactual. What price have you been renewing your contracts during this year?

As I mentioned, the contract year for long-term contracts is December 1. So typically, the contract renewals are in the fall and not during this time. So I'm unaware of any contracts that have been renegotiated or extended heading into next year is it's a little bit early.

We have one question from Daria Lima from Bloomberg Intelligence. Your funding position appears to be solid in second Q. Will you be looking at postponing some of the exploration program in the next year to improve your cash position in 3Q?

Our funding position, well, it is solid for the rest of the year, basically, and we're going to continue with our exploration programs in the Lower Mag Valley. So we're going to go ahead and drill, we're currently preparing the rig to mobilize the Cardomomo-1 location, which we anticipate studying in July, followed by another high-impact well in the fourth quarter. We did, as I announced -- as I mentioned a little earlier, we did the further drilling of the Pomelo-1 exploration well which we were planning to drill sooner rather than later in the middle mega line value, we're deferring that until next year so that we deploy our capital this year into the Lower Mag Valley where we can commercialize our reserves very quickly into the existing market. So we're continuing with our exploration programs against a very solid financial background.

We have a question from David Espinos from Batco Puntual. From where you expect the growth in research will come during 2024 considering the important decrease in CapEx for 2024?

We expect the 4 exploration wells we're drilling this year. The smaller ones we drilled Pomelo and Chondaturo, these reserve ads. We're looking at 5 to 10 Bcf each tonnes. And the 2 large ones, Cardomomo, and the second one we're going to be drilling in the latter half of the year or 60 Bcf targets. So we expect the return of the new seismic for those 2 big exploration wells are going to be drilled out a new 3D size and groupware. We expect to return to fairly robust replacement ratios well above 100%.

We have a question from Carloalberto Fraccaro from MainFirst. With import of gas from Venezuela put downward pressure on prices in Colombia, any idea on potential impact?

Any concept of importing gas from Venezuela is a fairly complicated one. But I suppose, aside from the issues of timing in that it will certainly not be happening anytime soon, certainly a 5-year-plus type of outlook in terms of timing. It all depends what the price of the gas is, I suppose. I don't know that there have been any formal discussions with anyone concerning the prices that exported benzene gas, I don't imagine pay [indiscernible] will be giving the gas away in the Colombian market, I think. But it's a very difficult question to answer. However, you're looking the outlook for any potential Venezuela gas to enter the Colombian market is in the 5-year plus time frame.

Next question is from Alex Maroto from Lord Abbett. Regarding new take-or-pay contracts, what is your expectation of prices for such?

Yes. This year -- well, going from 2023 to 2024, the average increase in our take-or-pay contracts was approximately 20%. We're now moving into -- moving out of El Nino, but we are, however, moving forward into a very tight supply scenario. Ecopetrol's fields continue to decline in terms of production. There are very few other operators adding significant reserves of any sort. So we expect supply to be increasingly tight going into 2025, which should drive pricing in a very positive way for us. The only other potential source of gas entering Colombia with the LNG through spec. So I expect that the ceiling for gas prices next year would be parity with landed gas in the $10 to $12 range would be sort of the absolute seen. But we do expect the tightness to increase in terms of supply, and that have a positive effect on our negotiating new contracts going into next year. So I would expect a 10% to 15% increase in terms of the outlook.

Next question is from Juan Cruz from Morgan Staley. Given the reduction in CapEx and the average production of 150 milliliter day in first quarter 2024. How confident are you that you will reach production guidance for the year?

Okay. So a couple of things in that. As I mentioned, the reduction in CapEx is for the exact same drilling program that was originally envisioned. So there's no change aside from efficiencies. Q1 was indeed 150 million cubic feet a day. But as Charle stated, our current productive capacity is 177 million cubic feet a day. As such, our guidance remains unchanged.

With this last question, we now conclude the first quarter 2024 conference call. Thanks, everyone, for joining us in this quarter, and we hope you join us again in the second quarter conference call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.