PetroTal Corp. (TAL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining the PetroTal reserves update webcast. Your speakers today will be Manolo Zuniga, CEO; and Doug Urch, CFO of PetroTal. Following the presentation, there will be a Q&A session. So if you have a question, please don't hesitate to ask it by the platform and the team will do their best to answer as many as possible in the time provided. I will now hand over to Manolo to start the presentation.

Thank you, Jimmy, and good day, everyone, and thank you for joining the PetroTal 2022 Year-end Reserves Update Conference Call, where we will provide a brief summary of our latest reserves profile. If anyone wants further information on the company, please see our website for additional materials. My name is Manolo Zuniga, and I'm the President and CEO of PetroTal. If you have clicked on the link in last evening's press release, you should hopefully have signed up to the webcast, so you may see the slides on your screen. But if you are having issues seeing them, please contact petrotal@celicort.uk, and they will be able to assist you. Before I begin, I need to mention that there are some disclaimers towards the end of the presentation, which I would urge you to read at your own leisure. As shown in Slide 2, PetroTal is an onshore Peru-focused oil company and Peru's largest crude oil producer. The company is listed on London's AIM market, the Toronto Venture Stock Exchange and soon to be the Toronto Stock Exchange and the U.S. OTC, having a market cap of approximately USD 475 million before the historic. We have 100% working interest in the Bretana oil field, which we have expanded from minimal production to over 25,000 barrels of oil per day capacity in late June 2022, with our estimated 2023 production guidance set at a conservative range of 14,000 to 15,000 barrels of oil per day to account for river levels and margin downtime throughout the year. The Bretana field has produced over 11.5 million barrels of oil since inception and has now 14 producing oil wells and a third water disposal well currently being drilled and completed. PetroTal sells oil via barges to 3 critical sales routes as seen in our 3D country map, 2 of which are operating with the pipeline assumed being active throughout 2023. Our first sales priority route is via the Amazon River to the major terminal at Manaus, Brazil, which currently has a capacity of up to 16,000 barrels of oil per day with a full barge fleet and normal river levels. This route currently delivers the strongest economics. Second is our route to the nearby Iquitos refinery, where we sell around 1,500 barrels of oil per day. As you will see in the upcoming slides, the Bretana field continues to deliver significant reserve growth to shareholders with the company's current valuation only recognizing the value from the producing wells leaving all other reserve categories as upside available to shareholders for free. Slide 3 summarizes some key assumptions changes since the 2021 year-end reserve report. 2P and 3P well counts have increased by 7 each taking total 2P locations to 29 and 3P locations to 36, providing the company another 2 to 5 years of additional drilling inventory depending on development pace. In addition, there was significant growth in the before and after tax NPV-10 cash flows now ranging from USD 800 million to USD 3.8 billion. On a per share basis, material increases were seen in every category with the company's current valuation only reflecting a blowdown value with no new additional drilling. Included in this year's reserve report our additional cost for the 2.5% social trust, the 5% employee profit sharing tax and additional erosion control and abandonment CapEx due to higher well counts. Slide 4 highlights key areas of growth and corresponding metrics. 2P reserves increased by 24% to 96.7 million barrels and had a 2022 reserve replacement ratio of 418%, including past production, the field's estimated ultimate recovery, or EUR, is now over 108 million barrels from a 2P perspective and it's only in the sixth year of operation. The initial 2P estimates were just over 37 million barrels in 2017, which demonstrates the robust variability from this asset by our management team. 1P and 3P reserves also grew to over 45 million and 168 million barrels, representing an increase of 22% and 14%, respectively. The growth in 3P reserves give us an opportunity to continue growing 2P reserves some more. As I have mentioned in the past, eventually the spread between the 1P and 3P volumes should narrow towards the 2P category. The NSAI production profile now has a 3P peak production estimate of 37,000 barrels of oil per day with a development option to flatten peak production to optimize future facilities investment. The 2P case generates a peak production profile near 25,000 barrels of oil per day from 2024 until 2028 with CapEx well under 100 million per year during this time. As stated in prior updates, PetroTal is a free cash flowing machine in the long run with the 3P production profile now over 10,000 barrels of oil per day to near license expiry in 2041. 2P recovery factor increased from 22% to 24% due to the continued and strong demonstrated natural aquifer support conditions providing a significant natural waterflood sweep and their primary development. This, in turn, helped generate an after-tax NPV-10 of $1.5 billion in the 2P development case. Finally, the company has F&D per barrel metrics under $5 per barrel in all 3 reserve cases, which include abandonment additional erosion control and require water handling and disposal infrastructure needed to accommodate a peak production profile. Using a $45 per barrel netback, the company generates recycle ratios in excess of 10x in our 2P case. Slide 5 shows the updated Bretana structure map at the top of the Vivian formation, showing the location of all existing producers in black, cut or proof and developed locations in white, P2 or probable locations in red and P3 or possible locations in purple. As explained in the past, we took a conservative approach of delineating the field a step at a time, always drilling PUD locations, proving up the P2 and upgrading the P3 locations. A chart showing the historical growth in the reserves demonstrates that this was the correct approach, especially as initially we did not have capital to spare. We are now completing the 4WD well, which was also core and will then start the 14H well later this month. Some of you may remember that our initial 2P recovery factor was set at 11.5%. We always knew we could more than double it. So now that the latest recovery stands at 24%, the team is focused in surpassing the 30% recovery factor mark. Slide 6 shows the price deck that was used, which is based on the average of 3 accredited Canadian reserve evaluators. On the forward 6-year average, the company is using a price deck that was $10 per barrel higher than the prior year, a material contributor to the higher NPV-10 value seen in this latest reserve report. Slide 7 provides a summary of the reserves, including the associated costs and resulting NPV-10 by category for the past 3 years. The reserve report showcases how PetroTal continues to perform exceptionally well, while navigating somewhat unique operating challenges. The reserve cases assume a fully functioning ONP or pipeline, which we continue working towards with Petroperu to have it fully functional. We're very happy to have Bretana surpass the 100 million 2P UR mark, and I can assure you that the team will strive to continue increasing Bretana's ultimate recovery and achieving the valuation shown in the 2P net present value in categories. I would like to thank you for your continued investor support. I will now turn it back to Celicourt for the Q&A session. Thank you.

Thank you, Manolo. Just a reminder to people, please submit your questions via the platform, and we'll get those asked for you. First question, can you tell us what amount the dividend will be and when it will be initiated?

Subject to cash availability and full bond repayment, we are aiming for a declaration in Q1 2023 with payment in early to mid-April.

G&A expenses are expected to increase from $20 million last year to $34 million in 2023. Both overhead expenses and community projects has substantially increased. What are the reasons for this?

We have many additional G&A costs in 2023. First, our commitment to the community has increased by 4 million to 5 million with the bulk of the costs being related to erosion control for the community. We may potentially try to recap some of the investment from the government, but we are not counting on it. In addition, we converted some contractors to full-time employees as it was actually more economical to do so. These costs have shifted from OpEx and our CapEx to G&A this year. Finally, we are investing in a new ERP system, which are onetime dollars invested for 2023.

What would be the production capacity of the field after the drilling of 3 wells in 2023 and before taking into account eventual disruptions due to social unrest and low water levels?

We expect the field to still have a capacity of about 26,000 barrels of oil per day.

Thank you. Could you provide further details about the following investments in 2023, the L2 West Platform, additional production and water handling equipment and what is the rationale for these investments?

Well, on the L2 West Platform, it will allow us to continue really, of course, always drilling the pad locations and proving up the probable locations. We have now -- we're renting out space on the existing L2 platform that was set up many years ago by Gran Tierra before we came in. And now with the well count growing, we are having to build this new L2 West Platform that is inside the cap. About the water handling capacity, keep in mind that I have always indicated the key concept in Bretana, like any other strong aquifer support field is the handling of fluids. The larger the factory to process fluids, the more we can recover and more we can produce. So therefore, through time, we're going to have to add additional water injection wells and water handling facilities.

Can you provide more clarity on the social trust percentage? 2.5% has been mentioned today and in prior press releases, the 2023 free cash flow guidance provided for a 5% social trust.

The 2.5% is the social trust amount as announced in late 2021. The 5% relates to an employee profit sharing tax that is split between local employees at PetroTal and the government. It is triggered when the company reaches a certain taxability status. So until now, we have not had to pay that 5% profit sharing. The law in Peru and it's only for the employees in Peru, you can receive up to 18 salaries and any remaining money go to the government. So it makes sense sort of a tax.

Were there any conversations held with CNPC Peru in the past?

No. We have not had conversations with CNPC.

When do you expect to repay the bond?

We expect to repay the bond in Q1 2023, as mentioned in our presentations, subject to cash balances and collection of receivables along the way.

Please comment on the Peru rights and political system and how likely this comes to a peaceful conclusion about installing a far left government or a new constitution.

Well, I imagine that everybody has seen on TV some of the riots caused by extreme left groups in the southern part of Peru, mostly supported as the -- even the president herself saying, supported by the Narcos and illegal miners, we're expecting that this will eventually reach a settlement. The big push is to accelerate the elections, now set for next April 2024. And the idea is to have those elections in -- by the end of 2023. They are asking also for the resignation of the president. The president, keep in mind, used to be the partner of Castillo, the ex-president that was kicked out by Congress. And the extreme left feel like they -- she's a traitor to their cause. They always talk about changing the constitution. The constitution is well [ serve ] in Peru. And right now, there's a big debate in Congress about how to manage that. I don't expect any of that will have an impact on our operations.

What is causing the additional required spend on riverbank erosion control?