PetroTal Corp. (TAL) Earnings Call Transcript & Summary

Thank you for joining the PetroTal 2022 results webcast. Your presenters today will be Manolo Zuniga, CEO; and Douglas Urch, CFO. [Operator Instructions] I will now hand over to Manolo and Doug to start the webcast. Please take it away, Manolo.

Thank you so much, Jimmy, and good day, everyone, and thank you for joining the PetroTal Fourth quarter webcast, where we will provide a brief summary of our fourth quarter and full year 2022 operational and financial results. If anyone wants further information on the company, please see our website for additional materials. My name is Manolo Zuniga, and I am the President and CEO of PetroTal and I'm joined by my colleague, Douglas Urch, Executive VP and CFO. If you have click 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 you're having issues seeing them, please contact [email protected] 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. PetroTal is an onshore Peru focused company that in just 5 years has become Peru's largest crude oil producer. As you see in the front slide, we are located in the Puinahua channel next to the Pacaya Samiria reserves. As shown in Slide 2, the company is listed on London's AIM market, the Toronto Stock Exchange and the U.S. OTC, having a market cap of approximately USD 480 million as the last time I checked. 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 in late June 2022 and are currently producing over 20,000 barrels of oil per day for the past 30 days. Bretana field has 2022 year-end 2P reserve of 97 million barrels as an after-tax 2P NPV-10 per share of USD 1.75 and now has 14 producing wells and 3 water disposal wells capable of disposing approximately 50,000 barrels of water per day each of those water injection wells. The company has been drilling its next horizontal well, the 14H since February and is on track to have it on production in next month by mid-April. The 14H well is the longest horizontal well ever built in Peru to date. PetroTal sells oil via barges to 3 critical sales routes as seen in our 3D country map. Our priority sales route is via the Amazon River to a major terminal at the Port of Manaus, Brazil, where recently, we have oversized capacity to 20,000 barrels oil per day or 600,000 barrels per month with a barge fleet totaling 1.5 million barrels of capacity and normal river levels. This route currently delivers the strongest economics. We also sell oil to the nearby Iquitos refinery where we sell around 1,500 to 2,000 barrels of oil per day at contracted Brent prices. Lastly, we have barge to pipeline route to Bayovar via the Petroperu-operated ONP pipeline were up to 20,000 barrels of oil per day. Though this route has been offline for the last year due to maintenance and ongoing repairs and is not considered in our current 2023 guidance. We're very excited to communicate details of our fourth quarter and 2022 year-end and discuss our newly announced return of capital program and capital allocation plans for the remainder of the year. Slide 3 summarizes key and selected Q4 and full year 2022 highlights. From an operational perspective, during the fourth quarter, we delivered just over 10,370 barrels of oil per day with sales at around the same level. This Q4 production level was achieved despite only producing approximately 6,600 barrels of per day in October due to river blockade and abnormally low river levels that also impacted production in November and first half of December. Thanks to the arrival of 20-plus barges during the second half of December, we were able to average approximately 20,700 barrels of oil per day through that period that created an overweighting of barges transporting oil back to Brazil, all at once. Combined with lower river levels and slow river travel, the company's ability to sell oil through Brazil was further impacted in January and March or February 2023. When at the end of the month, we went back to producing 20,000 barrels oil per day and maintain that rate since day. During the Q4 2022, we invested approximately $32 million of CapEx focused on drilling and completing well 12H, along with other continuing infrastructure projects. Total CapEx in 2022 totaled $94 million and was approximately $6 million under the revised guidance. While 12H, which came on production in late 2022, was producing off-time at nearly 4,000 barrels of oil per day through January 2023. The well has seen us maintained a very strong level of production and has really paid out as of today after just 2 months online. The company's operating costs were consistent with Q3 2022 and demonstrated significant decreases since Q4 2021 from shipping to Brazil for most of the 2022 and not using a material amount of deal win in the business. The company anticipates a target of sub $10 per barrel operating costs, which include direct transportation and fixed lifting cost. And in Q4 2022, the company made this target for the second quarter in a row. The company is reiterating its full year guidance of between 14,000 barrels of oil per day to 15,000 barrels of oil per day with a capital program of $125 million. Based on March's production of a sustained 20,000 barrels of oil per day, we're confident that we can make that for the Q1 2023 lower volumes in Q2 2023. We expect Q1 2023 production to be around 12,200 barrels of oil per day. And in Q2 2023, to be approximately 17,000 barrels of oil per day. Note that we are still modeling a conservative price season in the second half of 2023, though we expect to provide an updated forecast during the next Q1 2023 results webcast in early May. The company is currently drilling a well 14H, that in the map in Slide 4, is shown as the northernmost well drilled at Bretana and which is estimated to be completed by mid-April. The well reached a total debt depth of 5,137 meters in 38 days and encountered excellent Vivian sands with over 840 meters of net pay. PetroTal expects as well to perform strong and in line with previously 3 wells, the company's next drilling location will be the 15H pad location that extends just waste from the 11H well. Due to the overwhelming demand for information about our well productivity, we're including Slides 5 and 6 into the webcast discussion. Slide 5 is an updated view of our wells' performance since the well 8H was drilled, showing max daily rates achieve normalized time on stream and other performance metrics. With approximately $82 million invested, the company has since recovered 3.2x the investment and recycling back into the business, underpinning its strong balance sheet position at year-end 2022. Slide 6 is an updated type curve profile that the company is asked about on a frequent basis. As you can see the company's actual time normalized average horizontal well performance is outperforming the estimated NSAI 2P profile and generating incredibly strong economic returns as shown in the well metrics table. With Slide 7, I would like to recognize a recent historical achievement in PetroTal's social trust. Here you'll see the formal publication of the supreme decree signed by Peru's president that authorizes Perupetro to execute the license contract amendment with PetroTal incorporating the 2.5% social trust to Block 95 license contract, is a reflection of the government support to this important initiative that we hope will not only allow us to continue developing the Bretana field but also find and develop a Block 95 oil potential, and also help other blocks to go on production once again. From a commercial perspective, in Slide 8, we show how the company was able to adjust terms in its Brazil and export contract to incentivize and mitigate fluctuations in barge availability with our trading partner. As measured in early Q1 2023, the company was able to expand its barging capacity to over $1.5 million and is now currently focused on reducing trip time between Block 95 and Manaus. We're also excited to mention a new sales record was set in March through the Brazilian route, expecting to surpass the 600,000 barrels goal. As per our prior guidance, sales forecast through Brazil would be expected to average about 430,000 barrels per month. Though the team is committed to do better than that, especially now that we have proven that we can export 600,000 barrels per month during the raining season and is planning to minimize the impact of the dry season. And now I will turn over the meeting to my counterpart, Doug Urch, our CFO, who will provide a brief financial update. Doug?

Thank you, Manolo. I'm Doug Urch, PetroTal CFO, and would like to start off highlighting a few select financial items from our recent press release and financial statements with visual support from Slide 9. From a balance sheet standpoint, PetroTal exited the year with over $120 million of total cash and is in a $74 million net surplus position considering other work working capital amounts, including short- and long-term debt. Despite constrained sales levels, the company still delivered solid financial performance in the quarter on the following P&L line items. Gross revenue of $359 million representing 74.71 per barrel, net revenue representing 66.51 per barrel. Royalties for the quarter were 6.08 per barrel and that includes the social trust provisions. OpEx of 9.92 per barrel and net operating income of $273 million, representing just over $50 per barrel. Adjusted EBITDA of 37.87 per barrel. Free funds flow before all debt service and changes in noncash working capital taking total 2022 free funds to $162 million for the year, which represents approximately 38% of the 2022 year end market cap and just under $34 per barrel. Net income for the quarter was $37.2 million and $189 million, representing $0.22 per share for the year, making it the 12th consecutive quarter of positive net income for the company. In summary, we reiterate our strong balance sheet and net cash flow surplus of $74 million at Q4 2022 at year end and an increase of approximately $130 million in the 2021 year end net debt position of $57 million. The company is also reiterating, on Slide 10, 2023 cash flow guidance of $220 million adjusted EBITDA, $125 million in CapEx and $55 million of free cash flow. Despite the 2023 budget based on an average of Brent price of $85 a barrel, the company is delaying a new Q2 to Q4 Brent price deck until some market stability is seen stemming from the recent US and global banking crisis. The expectation is that taxes in 2023 will be about $20 million less due to a deferred net operating loss carry forward adjustments. On Slide 11, PetroTal is thrilled to announce that its completely long-term debt free, having made the final payments to bondholders on March 24, 2023. This repayment now allows for the company to reinitiate a dividend program and begin a share buyback program, which is summarized at the bottom of Slide 11. First, the company has submitted an application to the TSX for a normal course issuer bid that allows PetroTal to buyback on either the TSX or AIM exchanges up to 10% of the free float of its issued and outstanding basic shares. The company estimates this number at approximately 60 million shares. However, based on share buyback volume restrictions, the actual allowable buybacks could be between 30 million and 35 million shares over the next 12 months. The company will keep investors updated on the status of the plan regularly throughout its execution. In conjunction with its share buyback plan, we are also enhancing shareholder returns by reinitiating a quarterly dividend of $1.05 per share payable in late Q2 2023 and based on Q1 2023 operating results. On an annualized basis, this is approximately $0.06 per share and nearly $60 million. Using a US share price of $0.43 per share, this represents an estimated yield of 13.9%. Combined with the annual buyback program, the company's returning close to 20% of its market capitalization with these two programs on an annualized basis. We will provide more information once the appropriate applications and approvals have been completed and believe these two programs are sustainable through Brent levels as low as $60 per barrel at production levels above 15,000 barrels of oil per day. I thank you for your continuing investor support. I will now turn the call back to Celicourt for the Q&A session.

First question, can you please give an update on the Pucallpa Refinery? What would be the time horizon to deliver first oil, the barrel per day opportunity challenge to not deliver all right there now? And are there commercial negotiations ongoing?

We are actually, as I mentioned in prior presentations, looking at a number of initiatives to have other routes for our oil exports, and Pucallpa is one of them. We're just having some discussions right now, keep in mind that that's an old refinery that's been idle for a long time. So we need to always be careful with expectations on that. But more important for us is that we are looking at other alternatives, some of which we have tried in the past. One time we actually took oil all the way to the port of Yurimaguas and then by truck to Bayovar. We are looking at that one seriously. And so we're looking at a number of opportunities.

Congratulations on the reinstatement of the dividend and announcing the buyback program. Going forward, can you elaborate on the dividend and the buyback program beyond full year 2023? Do you expect to keep up with the current dividend pace and level? Can we speak of a certain dividend policy that is now announced, assuming that average production in oil prices will be above 14,500 barrels per day and USD 75 to USD 85, respectively. Thanks in advance.

Yes, the goal would be to maintain the investment. In terms of our policy, our approach is to maintain a certain minimum liquidity for the company, which will be the guiding mechanism in our policy.

Please, can you explain why there is a $0.05 to $1.70 decrease in net back guidance of $85?

Slightly adjusted Brazilian contract is in exchange for a barging fleet expansion and these incentives to ship maximum volumes every month. This is a great trade for the company.

An investor in PetroTal has raised concerns about barging costs being overly high and that would be more cost efficient for PetroTal's purchase barges. Could management please address this?

Well, purchase in barges is something we continue to look at. We do not necessarily want to assume the additional liabilities associated with moving barges, 2,000 kilometers down the Amazon River, and for the sake of avoiding a huge capital outlay with cost of capital be, right now, we feel we're in a very good spot from a commercial margin perspective. We also benefit from getting paid at FOB Bretana as the oil has picked up with the current arrangements.

And something to keep in mind is that half of the cost of the barging transport is the fuel. So people need to do the proper math.

Please, can you explain how 4,000 barrels of oil per day capacity can be added via Manaus?

We have mentioned in the past how we're trying to optimize the one fleet. Instead of 60 days, we crop that to 50 days, you do the math quickly and there you have another 4,000 barrels per day. And the team is very focused on that. So don't forget we started in the first shipment via Brazil was in December 2020 with 140,000 barrels only. And we had committed that time that we will do much better in the future eventually reaching 450, and our ultimate goal was 600,000 per month. I'm very happy that in March we have accomplished that. So now the key for us is to optimize things even more, not only do the 18,000, 19,000, 20,000 but maybe some more and that's what the time going back and forth is so important.

Please, can you explain how tax planning can add $20 million to the base case budget?

Yes. It essentially represents a higher net operating losses at our existing and our in Peru's legal entity, and that weren't required for the 2022 year-end filings, so that will get carried forward into 2022.

Any further progress possibility of using barges going to Pump Station 5 of the pipeline?

Indeed, that's one of the initiatives that we've been looking at. Petroperu continues to do all of their designs with expectation that one can go straight to Pump Station 5, because the concept is that the northern blocks that are owned by Petroperu should be put on production hopefully later this year, especially Block 192. So the oil is going to go through to Pump Station 5. So the more throughput they can have there better for everybody. And usually, the section from Pump Station 5 to by over usually not impacted but also it'd be very efficient, I believe, but let's wait and see. But that's one of the many initiatives we're looking at.

How many shares can accompany buyback in this round? Will the company be doing both the buybacks in London and Toronto?

Yes. The buyback program will run for 12 months starting sometime in Q2 2023. Buybacks can be executed on both the AIM and TSX exchanges. We're capped on how many shares we can buy back and following the TSX rules. And initially, we'll start the program slowly and ramp up as additional cash permits.

Please, can you give an update on the repair work at the ONP and the situation with the local people?

Well, the pipeline, as I mentioned in the presentation, still down. Petroperu continues to make the repairs, the social situation along the pipeline, especially in the first section between Saramuro and Pump Station 5 is difficult. I have recommended to Petroperu that they should implement something similar to what we are doing in Bretana, that could bring peace. But, Petroperu needs to take care of that. So unfortunately, I cannot provide any more details. That's why, for our guidance this year, we assume no pipe.

What was the reason for the lower shipments in January and February of this year?

Well, as I've mentioned also earlier in our last year at the end of the third quarter, fourth quarter, the Amazon River levels were amazingly low, with barges trended. Eventually when the rains started to come in, a lot of the barges that had not been able to navigate they show up in Bretana, we fill them up, we went back to 20,000 for about a half of month and then they all went back. And so for the first six weeks of the year, we did not have sufficient barges. The concept here is to have a pipeline of barges going back and forth very evenly. And now we have been able to reestablish that modus operandi and that's why since the last week of February to now we've been producing 20,000 again. And that's the expectation. Now, the team is very focused on being able to maintain those high levels of production during the dry season. We're waiting to see what's going to happen on that. There's talk that there will not be the same drought conditions as last year, so that maybe -- could allow us to do much better than our production guidance.

To confirm, with the $0.015 quarterly dividend, are you saying you could maintain this level of dividend distribution for an oil price as low $65 a barrel?

Yes. And unlike many oil companies, the goal would be to maintain our dividend through -- even through lower Brent prices, the company has a very flexible capital program and could slow the pace of development and/or facility building to make up for the lower revenues with a lower Brent price. The company was able to service debt in a much lower oil price environment and is treating the dividend in a similar way.

In February, Reuters reported that Peru Petro was offering new oil and gas blocks and that PetroTal had submitted request to sign technical agreements. Please can you tell us a bit more about this?

Yes. That's TEA as they are known, the technical evaluation agreement basically gives you a first option, a 2-year option for a license contract. We selected an area that we have always been very intrigued because it's close to logistics, roads and lots of oil shows on oil seeds. And we thought it would be good, for us to analyze that see something good for us and for the future. No commitment for investments, anything. It's just you have that option, and we'll just evaluate the available information.

[Operator Instructions] I don't believe we have any further questions at this time, so I will hand back to Manolo for closing remarks.

Well, thank you, Jim, and I would like to thank everybody for the support. We're very excited with the news that we put out earlier today, and we're committed to continue growing the company and doing better than our guidance this year that we're extremely happy with everything we're doing. Thank you so much.